Aug 11, 2023 · 1h 3m · news
DEBATE: State of Seed Investing w/ Jason Lemkin, Sam Lessin, Frank Rotman & Harry Stebbings | E1047 · 20VC with Harry Stebbings
Sam Lessin · 21m spoken Frank Rotman · 16m spoken Jason Lemkin · 14m spoken Harry Stebbings · 4m spoken
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this 20VC panel debate hosted by Harry Stebbings, top venture capitalists Sam Lessin, Frank Rotman, and Jason Lemkin dissect the dramatic shifts in early-stage venture capital. The experts clash over the death of the seed "factory model," the critical need for capital efficiency, and the future outlook for LP fundraising and IPO markets.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 7.5% of the talking time here. How this is scored →
Harry as informed peer 2.4 Guest teaching 3.5 Guest disagreement 3.5 Harry pushing back 2.3
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 57:34 Sam interrupts Harry on LP market reality
Sam aggressively rejects Harry's claim that LP behavior has not changed, citing documented fund cuts and combined vehicles as clear evidence of an LP pullback.
Hardest push from Harry ▶ 22:26 Harry challenges Sam's seed fund mathHarry directly refuses Sam's logic on small fund sizing, laying out mathematical constraints regarding check sizes, diversification, and portfolio reserves.
Biggest teaching moment ▶ 57:46 Sam educates Harry on LP pullback dynamicsSam corrects Harry's belief that mega-funds face no LP friction by citing real-world reporting and market data on fund downsizings and LP consolidation.
Harry holds his own ▶ 10:17 Harry challenges the claim of seed price correctionHarry uses his own front-line market observations regarding multi-stage funds and wealthy tech angels to push back against the guest assertion that seed valuations have normalized.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Hook: Why Nobody Cares About Moderate Growth | 2 | 3 | 4 | 2 | Sam opens with a spicy take on growth and AI, then outlines his thesis on the death of the factory seed model. Harry prompts Sam to explain his quote on systematic thematic seed funds without offering heavy pushback. | |
| Frank Rotman on Stage-by-Stage De-risking and Failure Rates | 1 | 4 | 2 | 1 | Jason redirects to Frank, asking if current market conditions are truly worse than 2017-2019. Frank outlines the four stages of de-risking and explains why historical failure rates between seed and Series A must re-emerge. | |
| Bespoke vs. Factory Seed and the LP Narrative Dilemma | 0 | 5 | 5 | 0 | Jason describes packaging seed deals for VCs, which Sam bluntly dismisses as investment banking. Sam explains that their best seed returns came from off-theme, hard-to-package deals rather than factory-line startups. | |
| The Reality of Seed Pricing and Downstream No-Bids | 5 | 3 | 3 | 6 | Harry directly challenges the premise that seed pricing is correcting, pointing to multi-stage funds aggressively bidding and rich tech exec angels inflating valuations. Frank responds by detailing how pricing corrections trickle down slowly from public markets. | |
| Do Founders Care About Valuations? The Investor Perspective on Pricing | 1 | 3 | 3 | 1 | Jason argues founders ignore VC warnings about high seed valuations creating downstream Series A friction. Sam and Frank discuss capital efficiency, small-TAM successes like Muckrack, and the trap of assuming infinite TAM. | |
| Capital Efficiency: De-risking vs. Reaching Profitability | 0 | 4 | 3 | 0 | Frank emphasizes that inserting capital before cracking the code destroys returns. Sam argues seed capital should be used to build a cash-flowing business rather than just de-risking a thesis for the next round, while Jason brings up The Trade Desk as the classic seed ideal. | |
| Debating Fund Size and Diversification in Seed | 6 | 3 | 4 | 7 | Harry presses Sam on fund construction, arguing that a fifty million dollar fund cannot achieve sufficient diversification at current check sizes. Frank later presents Crunchbase statistics showing only single-digit percentages of startups reach IPO. | |
| First Base vs. Home Run Mentality: Building Good Companies First | 1 | 3 | 3 | 1 | Jason questions Sam's focus on downside mitigation over hunting for giant returners. Sam and Frank contend that great companies are built on top of good, capital-efficient businesses rather than swinging for home runs from day one. | |
| The Founder Mentality and Respect for Capital | 3 | 2 | 4 | 2 | Jason shares an anecdote about a founder who lacked respect for capital when asked for funds back, prompting Harry to chime in with a sharp retort. Sam points out that founders who retain equity in profitable businesses lead better lives than those owning 10 percent of overcapitalized unicorns. | |
| The Fallacy of the Lifestyle SaaS Business | 0 | 4 | 5 | 0 | Jason warns that bootstrapped software companies fall behind competitively without venture capital. Sam poses a provocative question asking whether SaaS is even a viable space for venture returns anymore. | |
| Analyzing Proof vs. Anti-Proof in Startups | 0 | 5 | 2 | 0 | Frank breaks down the operational concepts of proof versus anti-proof, criticizing peak-market behavior where top-line ARR growth was funded regardless of deteriorating go-to-market unit economics. | |
| The YC Playbook and the End of the Accelerator Factory | 4 | 2 | 3 | 3 | Harry sets up a debate around Y Combinator and party rounds by contrasting Sam's public writings against Jason's view on angel proliferation. Sam reiterates that YC represents ground zero for the declining startup factory model. | |
| Frank Rotman on YC and Undoing the Demo Day Damage | 3 | 3 | 3 | 2 | Frank criticizes YC companies for manufacturing unscalable growth metrics for Demo Day that VCs later have to fix. Jason offers a defense of YC as an effective filter for founder drive and high IQ. | |
| Party Rounds, Cap Table Crowding, and VC Value-Add Jabs | 4 | 2 | 2 | 3 | Frank voices preference for cap tables dominated by active institutional investors over passive party rounds. Harry asks whether Series A investors actually care if a graduating seed company has a party round or institutional lead. | |
| Do Seed VCs Actually Help Founders? Active vs. Hands-Off Investing | 4 | 3 | 4 | 3 | Sam states that Slow Ventures tells founders they do nothing to help them, arguing that strong founders do not need hands-holding. Frank counters that specialized sector domain expertise allows investors to add concrete operational value. | |
| The Recruiting Challenge: How VCs Can Help Hire Executives | 0 | 4 | 4 | 0 | Jason argues VC platform teams fail at executive recruiting, asserting that helping founders hire key executives is where real value is created. Sam counters that early-stage sales hires are notoriously difficult and anti-correlated with traditional sales profiles. | |
| The IPO Market Bet: Will the Floodgates Open in 2024? | 5 | 2 | 5 | 7 | Harry calls out Jason's prediction of a 2024 IPO floodgate as batshit crazy and highlights their financial bet. Sam sides with Harry, arguing public markets care about mega-cap AI plays rather than moderate two hundred million ARR software companies. | |
| Frank Rotman and Jason Lemkin on the Timing of IPO Recovery | 1 | 3 | 4 | 1 | Frank agrees with Jason's directional analysis on company readiness but argues the timing is overly optimistic. Jason defends his optimism by pointing to public SaaS comps rebounding off historic bottoms. | |
| Megadons and the Scale of IPO Potential Across Sectors | 4 | 8 | 6 | 5 | Harry claims LP behavior is unchanged and mega-funds will continue raising without issue. Sam forcefully interrupts and corrects Harry, citing widespread fund size cuts, combined vehicles, and a severe LP pullback across the ecosystem. | |
| Frank Rotman's Fundraising Insights: LPs Are Consolidating | 3 | 3 | 2 | 2 | Frank shares recent fundraising observations from speaking to 150 LPs, confirming consolidation away from mid-tier funds. Harry conducts a rapid-fire question round to wrap up the interview. |
Statements from this episode (55)
Lessin: Public markets ignore $200M revenue companies with 30% margins
“No one gives a shit about a company that does two hundred million in top line and grows with 30% margins, right? No one cares.”
Lessin: The most obvious AI bets are Facebook, Amazon, and Microsoft
“It's like, you want to bet on AI? Bet on Facebook. Bet on Amazon. Bet on Microsoft. It's so obvious.”
Lessin: The factory model of seed investing is dead and won't return
“My view when I say Seed is dead is that I think the factory model of Seed, which supported massive scaling of it, is dead. And we're kind of back to where we have been historically, which is Seed is a bespoke It's a bespoke thing. Some people can do it well. I…”
Frank Rotman predicts 20-30% failure rates between early venture stages
“You will have 20 to 30% failure between seed and A. You will have 20 to 30% failure between A and B.”
Lessin: Slow Ventures' top seed returns came from non-consensus, cheap deals
“When I look at our seed portfolio over a long period of time now, my own personal investing longer, you know, the seed deals that have mattered have always been the ones that were hardest to package. They were not on the factory line. The places we've made ser…”
Lessin: Exceptionally low startup mortality rates will inevitably rise
“We've looked at our portfolios recently and it's comical how low the mortality rates are. That's obviously shifting in real time, right? And will go up.”
Rotman: Venture pricing has corrected across stages, except at seed
“Pricing has slowly started to correct, but it still hasn't corrected at the seed stage.”
Rotman: VCs prefer no-bids over down rounds for overvalued seed startups
“And if pricing doesn't correct at the earliest stage you're going to have a lot of no bids, you know, at the Series A because they wouldn't have gone far enough, fast enough for a Series A investor to come in and say they've earned their way into a significant…”
Lemkin: Seed founders are ignoring VC warnings and maintaining high valuation expectations
“I don't think any founders are listening to these terrific insights on Twitter, and I don't think that they are ratcheting back their valuation expectations, and I think very few are worried that when they do their seed at 30 post, that that will impact an A, …”
Lessin: I personally invest in deals Slow Ventures deems too expensive
“There are places like, you know, in history, there have been a few instances, my partners are like, we like the deal, it's too expensive. I'm like, ah, fuck it. I'll put in a few personal dollars because like, who cares? It's so little money, right?”
Lessin: Muck Rack Raised Zero VC Money Until Late Private Equity Round
“By far, the most successful company come out of that is a company called Muckrack, right? Unbelievable success, right? And it was a team in the corner that actually took zero dollars of VC, Right? Until very, very late in the game when they did a private equit…”
Frank Rotman: Non-Unlimited TAM Startups Must Achieve Low-Scale Profitability
“Companies need to learn to make money at low levels of scale, right? Either you're in an unlimited TAM market where you can justify putting capital into the business and continuing to pour capital into the business. I think some SaaS companies Like, the TAMs a…”
Rotman: QED's 100x+ wins de-risked their business models on minimal capital
“If I look at the history of our 20 X pluses and we have a few hundred X pluses, like these were businesses that for very limited amounts of money were able to de-risk the business so that you knew that you were on, on a path to something very big.”
Rotman: Investing heavy capital before cracking unit economics destroys returns
“So I think the sloppiness was inserting a lot of capital into companies before you had cracked the code, right? And that almost de facto ruins returns.”
Lemkin: Classic high-ownership seed deals yielding multi-billion outcomes are dead
“And my bigger concern is that I think those are deadish in seed. Right. Owning one percent is, is still good. One percent of forty billion is good, but that's the classic seed that I think we're griping about. Like, can we do trade desks today?”
Lessin: Slow Ventures made a 1,000x return on its Solana seed
“Like, I made a thousand X on our Solana seed, right?”
Lessin: TeamShares reached nearly $1B valuation after $4M post seed check
“I have a company called TeamShares, which we put in our first check at four posts that is now touching a billion and is a real company with hundreds of millions of revenue.”
Lessin: Seed fund math breaks down for mega seed funds
“If you have a 50, even a hundred million dollar fund, you can make seed math work. But these mega seed funds, like, and all of a sudden, oh my god, your two billion dollar return is only a three x. Like, the math won't work, right?”
Stebbings: $50M to $100M funds are too small to lead seed rounds
“Say if you have a fifty million dollar fund size, you've got forty million investable, you want to do seed today with the average seed being three to four, you can't lead seed rounds with that and have enough diversification. You got twenty two million dollar …”
Lessin: VC's worst outcome is picking a winner without equity upside
“You know, I think the most depressing thing in the world is not being wrong. It's being right and not making money. You know, being right to the tune of, like, having these epic outcomes and being like, ah, fuck, that was a one-ex returner of the fund, right? …”
Rotman: Only 2% to 4% of venture-backed startups go public
“If you go back the past 20 years or so, it's a single digit number, right? And in fact, for some vintages, that number is two percent, for some it's three, some it's four. But it's not eight percent or 10% of companies end up becoming public companies.”
Lessin: Future of VC is $3M capital-efficient, profitable startups
“I think the future is in these companies. There are a lot of companies you can put three million dollars into and get to a place where like, you're pretty sure it's profitable. It's going to be worth, it's worth a 102 hundred, and you have an option on somethi…”
Rotman: Generating 12x early investor returns on $300M exit requires under $30M raised
“In order to do that with a three hundred million dollar outcome, it means you have to have invested less than thirty million dollars of capital to get to that point.”
Lemkin: Seed capital overabundance permanently ruined modern founders' respect for capital
“This farmification has changed the mentality of founders forever. Whether we're going back to forums or not, I don't think founders think the same way they used to. I don't think there's respect for capital.”
Lessin: Founders will prefer 80% of a $50M business over VC scale
“I actually am very optimistic that there's gonna be a whole generation of people like, oh shit, I would, you know, I, it is a much better life to own 80% of a business that has fifty million top line than on 10% of a business that does 500, right? With a bunch…”
Lessin: I will not fund Stanford graduates trying to be Elon Musk
“So yeah, of course, like the kids coming out of Stanford who like have this, like, I want to be Elon Musk thing. Like, I'm not gonna fund those people, right? Like, you know, every once in a while, I'll miss one because like, I love the founders fund guys. The…”
Lemkin: Venture capital was abused to fund unnecessary startup overhiring
“I think venture has been abused the last few years, right? It has been abused to fund over hiring and massive teams that are not required”
Lemkin: Bootstrapped SaaS startups risk falling behind venture-backed rivals
“Maybe it's not even until after five or ten million where if you don't have capital, you can't all be Atlassian or Qualtrics. Or, and they fall behind competitively. And I think that's the trap of the fallacy of the lifestyle-esque business, right? Where media…”
Lemkin: My Talkdesk investment memo capped its potential valuation at $150M
“I remember my first Decacorn talk desk, I wrote in the investment memo, this will never be worth more than a hundred and fifty million.”
Lessin: Slow Ventures is stepping back from SaaS investments
“I'm not spending a lot of time on SaaS these days, I think partially for the dynamics you're talking about, right?”
Rotman: Doubling revenue at higher cost generates anti-proof for startups
“But if it was harder to get that doubling than you thought, or it costs you more to get that doubling than you thought, or your manufacturing costs went up, or the margins weren't there, you know, in that doubling, you're actually generating anti-proof of the …”
Lessin: Slow Ventures avoids Y Combinator deals because they lack signal
“As an investor, you know, we've stayed away from it for a long time, partially because there's no signal in it because everything comes off the factory line looking exactly the same, packaged properly.”
Rotman: YC encourages artificial growth for Demo Day, causing VCs to overpay
“A lot of the growth trajectory was in unscalable things in order to get the up and to the right, 45 degree chart so that you can package it for demo day. You know, so there are a lot of artificial things done in order to package it, like you know, to Sam's poi…”
Lemkin: I am giving up on investing in Y Combinator startups
“I kind of have to give up on YC, not because I won't pay or don't love the signal, If there's 84 people in the round, there's no point in me putting a hundred grand in a 20 post.”
Rotman: Startups Struggle When Cap Tables Are Dominated by Passive Investors
“I like to see as much money on the cap table in the hands of active investors as possible. And when a lot of the money is in the hands of passive investors, it's very hard.”
Lemkin: Mega-Cap Tech CEOs Give Founders Better Feedback Than VCs
“That, that, you know, a 10 or a hundred billion dollar company CEO will actually respond thoughtfully. More than many VCs, frankly, who's just saying, good job.”
Lessin: Founders who ask VCs for help are weak
“Because I, if you're coming to me for help, my view is you're almost by definition, or you're saying, I need help or whatever I want help. I think you're a weak founder.”
Frank Rotman: QED Investors acts as hands-on employees for portfolio companies
“I mean, we almost become employees of the company. In the early days to help them accelerate their path.”
Lemkin: All venture firm talent arms have failed
“See, in fact, I think that, like, all venture firms have failed with their talent arms.”
Lessin: I never successfully hired sales talent during my founder career
“I would actually argue in my life as an entrepreneur, I've like never successfully hired sales.”
Lessin: Willingness to join early startups anti-correlates with sales talent quality
“I think sales is incredibly hard to hire at startups, specifically because the whole nature of sales is like the people who want to go early are like anti correlated with the good people, right?”
Lemkin: SaaStr fund has five portfolio companies exceeding $200M in revenue
“And I have, even me, I have five investments I've made North of two hundred million in revenue growing 30% or faster that are now efficient.”
Lemkin predicts 26 tech companies will IPO in H2 2024
“And I may have the timing all wrong. I'm too optimistic, but I think there's 26 of them, which is one a week. I think there's 26 good companies at 200 that can IPO in 26 weeks in the back average.”
Lessin: Good tech businesses are worth less today, but great ones command higher premiums
“The good businesses aren't worth as much as people thought they were. The great businesses are worth more.”
Rotman: Tech IPO window will reopen late 2024 or 2025
“I don't think it's going to be one a week in the back half of next year. I think it will open up in the half of next year and maybe the year after.”
Lemkin: 2008 financial crisis was vastly worse for founders than 2023
“I think 08 09 as a founder was like 50 trillion times worse than today. 50. The world was ending in, you know, eight, oh nine.”
Lemkin: Atlassian and MongoDB are bouncing off business bottoms
“When I look at what Atlassian is saying, like, they're bouncing off the bottom, and Mongo's bouncing off the bottom, and other folks are seeing things improve.”
Rotman: QED Has Another 6 to 12 Potential IPOs in Portfolio
“We see the potential in our own portfolio for, you know, another half dozen or dozen like IPOs that are kind of orienting themselves and getting ready when they get to sufficient scale”
Lessin: VC funds are cutting target sizes amid LP pullback
“They're funds, they're cutting fund sizes left and right, and they're combining funds to bulk them up.”
Lemkin: SaaS companies going public in 2019 absorbed $390M on average
“In 2019, the average SaaS company that went public absorbed just shy of four hundred million in capital, three hundred ninety million in capital before they went public.”
Lemkin: Tech companies will absorb $400M per IPO when markets recover
“When the engine revolves, we will absorb four hundred million again per IPO.”
Rotman: Middling VC funds and emerging managers will struggle to raise capital
“For a number of years, like if you were a Middling fund, you know, or an emerging manager, you're going to have problems raising capital.”
Rotman: Startups can no longer raise Series A rounds on narrative alone
“Narrative is going to stop at the seed when it used to flow through to the series A and even into the series B. So I think the trend is you can raise on narrative at seed, and then it's results starting in series A.”
Lessin: Slow Ventures will target sub-$5M valuation, self-sustaining seed deals
“I am very excited to fund a bunch of companies at five and under in weird things that are coming to you because no one else will give them money that are going to be highly profitable on the way up and create option value down the line. Right. So it's kind of …”
Shorts cut from this episode
▶ The Best Founders All Have One Thing in Common · 20VC with (@44:17)
▶ How VC Firms Make BILLIONS Investing in Startups · 20VC with (@7:26)
▶ VCs Have FAILED at Recruiting · 20VC with Harry Stebbings (@47:06)
▶ The Trend Every VC is Missing Right Now 👀 · 20VC with Harry (@15:38)
▶ Make Money at Low Levels of Scale -- Frank Rotman · 20VC wit (@15:38)
▶ Most of the World’s Business are Small Businesses · 20VC wit (@17:38)