SPEAKER_00: venture capitalists to get rich, you need big company exits for founders to get rich. You have equity in one company. There's one way for founders to get rich, which is big company exits. And so those paths were aligned, right? When founders got rich, venture capitalists got rich. And more importantly than that, it was kind of the only way to get rich. It's not to say that investors and founders now have opposite incentives, right? It's not like your failure leads to my success and they're perverse incentives. It's just more to call out the outcome is irrelevant. And now it's how can I maximize my AUM? How can I maximize my deployed dollars? But that part of it can lead to sub optimal outcomes and experiences for founders. And we can talk about like, Hey, how can these incentives of just deploy, deploy, deploy, how can that lead to outcomes for founders? And what are the implications for founders that they

SPEAKER_05: might not necessarily be thinking about before going into a fundraising process?

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SPEAKER_12: claconnect.com slash tech. Hey, everybody. Welcome back to this week in startups. My name is Alex, and today we are going to talk about venture incentives. Now, this is an engine that the startup

SPEAKER_15: world runs on and having the incentives be aligned is very, very important. However, it does seem that as venture capital has grown, some of the incentives that we have depended on to understand the industry have also changed. One investor put together a post that absolutely blew up over on social media and around the world of venture chatter. So I told myself, hey, let's get Jammin Ball to come here and tell us what's going on. And if you don't know Jammin, he was an investment banker. Then he worked at Redpoint for about a half decade, and now he is an investor over at Altimeter. Jammin, hey, how are you? And how does it feel to be a celebrity blogger inside of our micro niche?

SPEAKER_17: Well, I'm not sure if I'm quite a celebrity yet, but it's certainly fun. And thanks for having me here. I mean, I kind of view blogging as almost a personal journal that I can make public, which it forces all of us and it forces me to really refine my ideas. But thanks for having me.

SPEAKER_12: Yeah. And just so everyone knows, it's cloudedjudgment.substack.com if they want to read your work

SPEAKER_15: and today we're going to rewind the clock to late October when you wrote about venture incentives. Now, if you're listening to this and you're already going, oh my gosh, that sounds incredibly boring. Keep in mind that Benchmarks Bill Gurley said that this post from Jammin could quote, perhaps be the single most important issue for the entire venture capital landscape. So Jammin, let's talk about two things. One, traditional incentives in venture. And then I want to work into what's changed, but breakdown for me, the importance of the two in 20 model and how back

SPEAKER_16: in the day, VCs tended to eat well when founders did. Sure. So I think, yeah, first is defining,

SPEAKER_23: defining the incentives, right? Or said another way, how to venture capitalists make money. I think a lot

SPEAKER_00: of people have heard about the two in 20, but what does that, what does that actually mean? There's, there's predominantly two ways venture capitalists make money. There's a guaranteed portion, and then there's a variable portion. The guaranteed portion is what we call the two, the 2%. So venture capitalists will raise a fund and they will charge a percentage of that on an annual basis, which is called the

SPEAKER_17: management fee. It's usually around 2%. It varies over time and it steps down as you go, but call it roughly 2% on average. And those dollars are used to pay salaries, pay rent, pay legal fees, all of that. Think about it as funding the operating expenses of, uh, of the venture funds. And then in tandem to that, there's the carry the 20%, and this is the firm's share of profits. And so when we make investments,

SPEAKER_00: you know, you hope, right, that those return multiples of the capital that you invested, and there's a share of the profits that the venture firms receive, that's 20%. So maybe let's

SPEAKER_03: make this concrete. Traditionally. Traditionally. That number is variable. Okay. And it's variable, right? It's, it's sometimes it's 25%, sometimes it's 30%, sometimes it's 15%, but I would say it's, you know, sidebar it's interesting how fixed the, uh, the incentive pool or the, the price

SPEAKER_00: of venture capital product has stayed given how much bigger it's gotten. You know, you'd think as an asset class expands, as the supply of it expands, you'd think that would lead to pricing pressure. What's been interesting is it hasn't at all, which I think just speaks to the demand

SPEAKER_03: for the asset class, but you know, maybe that's something we could put off to the side and revisit, but maybe to make this concrete, let's talk about a hundred million dollar fund that, uh, that returns a three X and that fund every year, the fund will collect 2%. So, uh, 2 million, 2% of, of a hundred. And that is on an annual basis, kind of independent of the investments made. And it, it usually lasts for

SPEAKER_00: about a 10 year period. Sometimes that can get extended, but typical life is 10 years. Now that hundred million dollar fund is three X. So we've turned a hundred million into 300 million, which means we've generated 200 million of profits. And so 20% of those profits is 40. And so 40 million would go back to the fund, which is then kind of allocated based on who owns what percentage of carry within the venture fund from kind of your partners down to your, your junior most folks. But if you think about that model, there's a guaranteed portion of the compensation, which comes from the management fee. And then there's a variable portion, which comes from,

SPEAKER_17: you know, did you make good investments or bad investments? Not that long ago, funds were

David Friedberg: significantly smaller. And so that much, much smaller, much smaller. So that guaranteed portion

SPEAKER_03: wasn't enough to, you know, really make you rich, right? I think the term that I used in the blog

SPEAKER_00: post was, was get rich, right? It's harder to get rich on 2% of a small number. And so as, as venture capitalists, like, how did you really make money? How did you get rich? Well, it's, you maximize the carry, you maximize that 20%. And what does that mean? It means for venture capitalists to get rich, you need big company exits for founders to get rich, you have equity in one company, there's one way for founders to get rich, which is big company exits. And so those paths were aligned, right? When founders got rich, venture capitalists got rich. And more importantly than that, it was kind

SPEAKER_03: of the only way to get rich, right? And so there was a lot of incentive alignment, right? Funds have

SPEAKER_35: gotten significantly. The aligned incentives here are pretty clear, because if a venture capitalist cannot

SPEAKER_15: get rich off of their management fees, the only way to do well was to have their founders really, really excel. And if you're listening to this and you're thinking, you know, $2 million a year, that's a lot of money. Why couldn't you get rich off of that? Well, keep in mind that business class tickets to France are not cheap. And also you do have staff and there's a lot of legal work that goes into this as well. So you can burn through that money pretty quickly, just on operating costs to run a complex financial instrument, like a venture capital fund. So don't think that that $2 million in our example is a lot of money, it's cut up a lot of ways. And there are expenses too. So not profit, certainly kind of a gross revenue figure. Now jamming, things have changed and funds have gotten bigger. And that's where your argument comes in, that the aligned incentives between VCs doing well, when founders doing well, do well, it has essentially broken.

SPEAKER_00: Yes. Yeah. And the purpose of all this too, is not necessarily to highlight that there's bad behavior in the venture markets. Like I think there is good behavior of funds that are large, but it's the highlight for founders that the incentives are different. And I think it's

SPEAKER_42: important for them to realize that as they're deciding which funds to partner with over their

SPEAKER_43: 10 year journey. Okay. So let's take your example and let's 10 exit. So instead of a $100 million fund,

SPEAKER_44: let's talk about a $1 billion fund to show people how the numbers kind of shift.

SPEAKER_00: Yeah. Yeah. Yeah. So in that billion dollar fund, you're collecting 20 million a year. And I think, again, the thing to keep in mind is this is guaranteed for a 10 year period, right? You know, people love SaaS businesses because they're recurring revenue, but you could churn in a year, you know, you can't think about this as almost a customer you sign that can't churn for 10 years. Right. And so in that example, that's 20 million a year in fees. And let's say you 3X the fund. I mean, okay, those numbers also get significantly bigger. Now you're talking about 400 million of carry,

SPEAKER_03: but you know, a reality exists where that 20 million is a lot of money now. And yes, it's still split a lot of ways, but it's, it's now a lot of money and it's guaranteed, right? 3Xing a fund is really hard, right? That almost certainly puts you in the top quartile kind of friendly vintage class. And so there's now an easy button to kind of get rich, which is raise as much money as possible. And you

SPEAKER_00: can get rich off that 2% off your, off your feet. That's not to say you can't get rich off the carry. You certainly still can. I mean, the numbers are still huge, but there is a path to getting rich,

SPEAKER_03: where the, uh, the outcome of the underlying companies in a fund don't matter and it's guaranteed. Right. And so I would say, uh, it's economically rational to go maximize the guaranteed portion of your income stream versus the harder variable portion. And so what does that lead to? It leads to kind of what we talk about is, are you a 2% firm or a 20% firm, right? Are you a firm

SPEAKER_00: that's looking to optimize the 2% or optimize the 20%. And that's where the incentive alignment matters because again, it's not to say that investors and founders now have opposite incentives, right? It's not like your failure leads to my success and their perverse incentives. It's just more to call out the outcome is irrelevant. And now it's how can I maximize my AUM? How can I maximize my deployed dollars? But that part of it can lead to suboptimal outcomes and experiences for founders who are offered too much money at too high of evaluation, which is obviously negative. It can be negative for their business. And then maybe final thing, look, we did our fair share of overvaluing and over capitalizing businesses in 21. Like, I don't want this to be jamming, standing on his high horse, right? Like yelling down at the masses as if I have this kind of crystal ball. You know, we are always trying to learn and better ourselves. And, you know, we raised a larger fund in 21 and then raised a smaller fund. And we can talk about like, Hey, how can these incentives of just deploy, deploy, deploy, how can that lead to outcomes for founders? And what are the implications

SPEAKER_05: for founders that they might not necessarily be thinking about before going into a fundraising

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SPEAKER_16: and conditions do apply. I want to talk about that in particular, because I want to help people understand where they should look and what type of fund they might profile to pitch just so they can know what they're getting into. But the thing that kind of confused me about the current state of affairs is twofold. One, the amount of capital that has flown, that has flowed into venture capital has, has gone up dramatically in the last, let's say five years compared to historical norms. And I'm very curious about why all that capital came to play inside of venture, because if it was

SPEAKER_15: entirely predicated on low interest rates or ZERP as we like to call it, then to me, it would imply that the era of these multi-billion dollar venture funds is behind us. Doesn't seem to be the case. So let's start with, you know, why has there been so much more demand for venture capital allocation than there was historically? Because that does seem to be one of the driving factors behind

SPEAKER_00: the incentive shift that you're describing. Yeah. I think the ZERP period just accelerated a trend that was already in motion, which was venture capital. And this is not a phrase that I came up with, right? It has moved from, and is moving from a high margin cottage industry to a lower margin mainstream industry. 15, 20 years ago, the venture asset class was much smaller. Funds were smaller and returns were pretty amazing, right? To be in one of a top 50%, let alone a top 25% fund, the returns were great. And so what did that mean? You know, anytime you have an asset class that is yielding a, you know, a really high return that creates demand for that asset class and more dollars flow into it. And I'd say that was a trend that was happening for quite some time. And at the same time, you had a sophistication of the LP base. So people who give us money increased. And not just that, you had a globalization of the LP base. You had, you know, the emergence of single family offices, multifamily offices, rich individuals. You have the emergence of private wealth platforms from big banks, right? You have individual people, you have international sovereign funds, right? You just had this rush of people who really didn't have a lot of exposure to the venture asset class prior to 2015,

SPEAKER_03: 2016, 2017, kind of all say at that point in time, Hey, we need more venture. We want more venture. They started standing up venture teams, venture practices, venture programs to get into these funds, but they never could. The funds were too small, right? If you're going from a $500 million fund to a $550 million fund, you're largely new room. Yeah. Yeah. You're largely just re-upping with your

SPEAKER_00: existing folks. And so the access to it was hard. So all of a sudden, what happened in this ZERP

SPEAKER_03: period was you already had a lot of latent demand that all of a sudden now found a home, right? Because if you're going from a fund that's size X to a fund that's size 3X, you might be able to get there by having all of your existing LPs 3X their commitments. More likely than not, you're going to new investors, right? Who didn't historically have access. And that's not to say it was all new. It

SPEAKER_00: certainly wasn't. You certainly had all the existing LPs also up their allocations, kind of up their size because their public portfolios bloomed balloons, they got liquidity. You know, there's just a lot of money in the system. And naturally when you have lower interest rates, dollars move further and further out the risk curve. And I'd say venture is far out on the risk curve. And so kind of benefited

SPEAKER_03: from that environment. But yeah, what's been interesting is as we've moved out of that phase, there's still a lot of demand, right? Like I don't see that trend shifting, at least not in a big way. Uh, large funds have been able to raise larger funds. I'd say what's happened is that smaller funds

SPEAKER_05: have had trouble. First time funds have had trouble raising second time funds.

SPEAKER_68: Here's where I get a little confused there, Jamin, because if you listen to your history of

SPEAKER_16: venture, which to be clear tracks with my understanding as well, you and I weren't around in the, uh, the earliest days of venture capital, because we were little babies, but like, you know, we know the history and small funds, big bets, you know, you, you hit a Google, you do fantastically

SPEAKER_15: well. And the returns were incredibly impressive compared to say public markets, but as these funds have gotten larger to me, like, it feels like the returns profile by definition has to come down. That to me would incentivize people putting money into smaller funds, but you're saying here, and I've heard this from other folks as well, smaller funds are really struggling. So to me, it feels like there's a crowding into the funds that probably have lower IRR targets or kind of rate of return targets, just given their scale. And that feels bonkers to me. So help me understand

SPEAKER_16: why small funds, huge returns are not doing better in this market than the big kind of more, uh, PE-ish

SPEAKER_00: funds. Yeah, man. Okay. Lots to unpack there. Um, just a couple of points off the top. One, a lot of LPs have gotten a lot bigger as well. Right. And they just need to write a hundred million dollar check. You can't write a hundred million dollar check into a $400 million fund. You're just never going to be 25% of a funds LP base. And so you just have to hunt larger funds. And so you have the emergence of LPs who only want to write really large checks because they just need to move a gross tonnage of dollars. Then I'd say, you know, there's another thing, which is there is this whole, I mean, the state private for longer trend has been going for a while. And like when, what does that

SPEAKER_03: mean? It means you have world-class companies who are appreciating significantly in the private

SPEAKER_05: markets, right? It wasn't that long ago that a world-class IPO, a Twilio, a Mongo, a HubSpot, a Zendesk was a billion dollars, right? And those companies exited or entered into the public markets

SPEAKER_00: at a billion dollars in valuation. And I think they all, I might be wrong, but you can check me after, but you know, they all appreciated from like a billion to where they are today in the public markets.

SPEAKER_44: Right. Even if it was 5 billion, the appreciation would still be incredibly material. Whereas now I, I, I can see a series C for 2 billion, you know, so the numbers certainly have changed.

SPEAKER_00: And not even just that you're seeing companies like Stripe, like open AI, like data bricks, like Canva, like others that, you know, don't just get to four, five, six, they get to 20, 30,

SPEAKER_03: 40, 50, 60, 150 in billion. And so what does that mean? It means there are world-class companies in the private markets that can absorb really large investments and still appreciate in value.

SPEAKER_00: The downside of that is that's not available to your everyday retail investors, right? That's only available to, to venture capitalists and ultimately the investors in those venture capital funds. But I do think that there, there is a world when you can invest at the growth stage in a very

SPEAKER_03: profitable way. It just has to be very concentrated into those few companies that, that truly matter.

SPEAKER_00: Because the way I think about it, you know, ultimately venture will always be a power law game, no matter if you're a seed fund or a pre IPO fund, the only way you're going to have top quartile returns is if you have power law outcomes. So the question you have to ask yourself is like, how can I generate power law outcomes at different stages? Here's why I think about it. It's seed stage. There's maybe this many companies that could, you know, give you a power law outcome. Sure is a, this many, B, this many, C, you know, it goes down. There's a smaller, smaller number of companies that can generate a power law outcome as you get later and later stage. And so I do think you can pitch a fund that is a large fund that will be extremely concentrated. It won't be diverse, right? It's not this, Hey, let's go build a basket of 30 companies. It's let's go build a basket of seven and put hundreds of millions of dollars into every single one of those investments. And that is the way that we are going to drive alpha above kind of the median returns. I don't necessarily think that's how most large funds are approaching the market. And so I think what naturally happens is you get bigger and bigger. You just build more of an index.

SPEAKER_03: And what happens when you build an index, you start to hug the median. And so I think it gets

SPEAKER_00: harder to generate outlier returns at scale in venture funds, unless you are more concentrated just because naturally you'll hug the index. But I do also think you have a class of LPs who that's the product they want to buy, right? When you're putting a $300 million check to work, you're not necessarily expecting that to 10 X, you know, you'd be happy if you hugged the index and was slightly better. Right. And so that's kind of the promise. And so like, and what does that mean? It means as the world has now moved again, back to this ZERP period, people move out the risk curve as ZERP reverses, you move in the risk curve.

SPEAKER_03: The challenge was second time funds, third time funds, everyone knows, Hey, smaller funds are more likely to get you that power law outcome. You're investing in risk, your businesses, right? But

SPEAKER_00: with more risk comes a greater potential return. But the challenge is if, you know, you're raising fund too, you just don't have data. All right. Where are you good? You know, the companies in fund one, you've, you know, have two years of marinating and we just don't know. And there's just this, Hey, this big fund. And I think it's also important to call out, you know, big funds only have the right

SPEAKER_03: to get big if they have a history of success, right? You had a history of success over a decade, two decade, three decade period that gave you the right to raise a lot of money.

SPEAKER_00: And so you have made money for LPs in the past. You're a known commodity. That is the safer place. You know, of course the natural question is you made money in a smaller fund setting. Can you also make money in a larger fund setting? But the question, a lot of folks are asking themselves who are investing in these funds is what's more likely someone who I know has made money some way, but is now trying to make money a different way, but there's lots of parallels or someone who like, there's just maybe not as much data on. Yeah, that's riskier, right? You know, and who's not having trouble raising a second time fund or first time fund, right? It's folks who maybe were at one of these large funds and then kind of broke off to start their own fund that had a personal track record and a personal history. And just, you know, they were personally underwritable by LPs, but I do think there was just this, you know, whooshing coming out of the venture market of, of maybe some of the fast money that entered in 2021. That wasn't quite sure. I think when you invest in venture from an LP standpoint, you really have to, you know, smooth your vintages, right? You can't just pick, I want to invest in 2024 and this one fund, you should say, I want to invest in venture. I picked this manager as the manager that I want to back, and I'm going to back them in 24 and 26 and 28 and 30, because just like funds are driven by power law outcomes. I think funds over a period of funds are, are driven by individual power law funds, right? And so across five funds, you might have one fund that makes your investment in those five

SPEAKER_03: funds worth it. Like it's all, it's all kind of a power law game. We switched to beehive and it has

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SPEAKER_16: to the fact, I think it was like top 25 podcasts get like half of all downloads or something like that. Power laws, if you don't know what we're talking about, Google it and learn because it's incredibly important, but to summarize companies are staying private longer, overall demand for venture allocation went up. And because funds that were already at scale had earned that right because of a track record, they're able to absorb more capital and returns expectations have come down.

SPEAKER_15: Okay. That explains the capital wave that we're describing. Now let's turn to the founders. One thing that you said was the old model kept venture capitalists and the founders they backed in line or aligned because they were together for 10 years. Now with a faster fundraising cadence and a faster deployment cadence and more of an index approach, as you mentioned earlier, founders can get a big check and then be effectively left in the lurch if they aren't one of those absolute outlier companies. Tell us about that dynamic. And then if you could jam in, how often do you hear from founders who have been essentially left by the side of the road by their

SPEAKER_00: prior backers? Yeah. I mean, I think, I think that kind of happens all the time. And again, that's probably like a trend that was just made stronger in the 2021 period. But it is, it is an issue, right? Like there was kind of the, you know, the, the cottage industry days of venture capital, where you were a true partner through thick and through thin, and you had eight boards that you were on and you spent a very real amount of time with every company that you were on the board of. And that was a real responsibility to work with companies at a board level. You know, now as funds gotten bigger, there's just a reality that you just have to make a certain number of investments. Like the only way to deploy that dollars, again, I think unless you're deploying it in this really concentrated growth strategy, you just have to make a lot of investments and there's just like limits of time, right? If you're sitting on 30 boards, like there's just no way you can spend a lot of time with every individual company. You know, the model becomes more of find company, invest in company, then find the next company.

SPEAKER_05: And it's more about deploying the net new dollar versus optimizing the existing dollars that have

SPEAKER_102: already been spent, right? Or invested. Spent sounds too transactional.

SPEAKER_00: But I think that's just a reality, right? Where at the end of the day, again, from a purely rational standpoint, if there's going to be a few things that really matter, you should spend all your time on those few things. Yeah. But that leads to suboptimal outcomes for founders, because at the end of the day, like if your company is crushing it, probably don't. I mean, not that you ever need your venture

SPEAKER_03: capitalist, but like, you know, you need them less. You probably have less questions for them. You probably have less challenges that you have to deal with less one off things that come up and you're kind of on, you know, you're not on cruise control. You're doing a ton of work, but like, you're just, you're operating well, absent your board, right? You don't need training wheels.

SPEAKER_106: If you're already going really fast, cause you've got good momentum. Yeah. When companies are

SPEAKER_00: struggling, it's when you, again, air quotes, need, right? More of that, that board. It's how do we handle the future of this company? Should we sell it? How should we go about selling it? Should we shut it down? What are the implications? You know, like, there's just a lot of other questions that I think the benefit of, of an investor board member can be quite helpful, but you know, again, that's probably the time you're less likely to, to get that attention and time. Um, just given the nature of,

SPEAKER_107: you're on so many boards and there's only so much you can individually do.

SPEAKER_105: So I want to ask about like what this means for, for founders today who are going out and

SPEAKER_16: approaching the market. Now fundraising is always difficult unless you're incredibly lucky and doing incredibly well, at which point none of this advice applies to you anyway. So put those aside, but if you're a founder out there and you're looking to raise capital, let's say seed through series B and you're looking at funds and firms that are a variety of sizes. What advice do you give to founders in terms of sizing up what type of firm is the right fit for their company and their approach?

SPEAKER_00: Yeah. Look, I would say I don't want the takeaway to be, the takeaway to be like big fund equals bad, right? It's just more about like, what are you getting from your partner? It's not just the firm, it's the partner who's at that firm, like how committed to your success are they? And there's lots of different ways to answer that question. There are a few important things to also consider, right? Again, let's think back to one of the incentives of large funds is to deploy them. So you could raise the next big fund, right? You kind of become a machine.

SPEAKER_16: And to go back to why that matters. If you raise another billion dollar fund while you start another 20 million dollar a year, 10 year timer, you get a couple of those going and suddenly you're just flying on your jet and chilling and doesn't really matter what the stock market's doing. Back to you.

SPEAKER_00: Sure. Yeah. If you're, yeah, I mean, these funds stack fees, right? When you're, when you raise fund three, you are still collecting fees on fund one and fund two, those don't stop. Um, and so the more you raise, right, the more fees you generate. So what does that lead to? It can lead to situations where your primary KPI is deployment. Hey, I don't want to deploy 50. I want to deploy a hundred. Yes. You've seen round sizes balloon, you know, are companies growing faster than they ever had? Yes. Are they growing headcount faster than they ever had? Yes. Could they then absorb more capital than they ever have? Yes. But I would say the magnitude of which rounds have increased as far outpaced the, I'd say maybe the, the trajectory of, of kind of company growth. And so you might set out raising a $25 million series B, but you'll get $50 million series B offers. Now, why is that? Is it actually good for your company? You might say, wow, great. It's more money. Yes. Um, at a higher valuation. Yes. This firm has the deepest conviction in me, but the reality is, is their incentives might be just to deploy more money. And it's not necessarily that they have all that more in a power law outcome. It doesn't matter if I pay 100 or 200, because if this is a $20 billion company, that's a power law outcome. I just need to deploy more money. Right. But you know, again, and what lesson have I learned? There's gosh, there's, there's, there's a lot to unpack coming up here, coming out of 21, like over capitalizing and over valuing a business really can create risk.

SPEAKER_03: Um, what are the benefits of it? It might be less. The founder because people might think, oh my gosh,

SPEAKER_78: more capital, more capability, more flexibility, more time, but higher valuations that come with

SPEAKER_16: larger checks come with their own expectations and you can end up essentially stuck. And my, my

SPEAKER_15: re-jamming is that some companies that may have done better, essentially were over capitalized to the point in which they kind of like kind of choked on their own spit. I'll give you a couple examples,

SPEAKER_00: right? Which is generally what I like companies to do is raise a round, hit milestones, raise the next round, hit milestones, raise the next round. Oh yeah. By raising a lot of money at a much higher valuation, what you end up creating is this structure of raise a round, hit four milestones, raise the next round, right? Because ultimately you may be able to raise off of hype and you may, you know, the good times may keep rolling, but you know, at some point it might shift and then you'll need kind of underlying business momentum and fundamentals to justify an up round. Startups are hard, right? They're fraught with risk. They're fraught with challenges and kind of stacking four milestones in a row is hard. You might hit a road bump at milestone two or three. It might take you longer. It oftentimes does. But when that happens, if kind of you're staring down the barrel of like a really high valuation, you know, you're not worth today, just kind of creates existential questions for the execs, for the employees. Hey, are we ever going to grow into this valuation? Oh my gosh, like we're not a rocket ship anymore. What's going, I got to get off. And it just kind of, when you raise these big rounds at big prices over and over and over again, it kind of creates, I don't want to call it an illusion, but it creates an illusion that, hey, this is a just, it's going to the moon and companies move from hiring missionaries in the early days, people who deeply believe in what the company is doing, the problem they're solving the product to mercenaries. Hey, this company is a rocket ship and I'm going to make money on my equity. The challenge is you hire a lot of people who that's why they join when you then hit a road bump or two or three, and you will, then people start to question, oh, wait a second. We were raising at three X markups every six months, every year. And now all of a sudden we're not like, maybe I was wrong, right? I didn't join the company with deep conviction, which means I'm going to leave the company with loose conviction. And then you hired all these people, you trained them up, people leaving, those attitudes are infectious. There's inertia to it, you know, Jammin leaves. And I talked to Alex, oh, hey, Alex, like, you know, I was reading Jammin's cloud of judgment and he says, software companies are only with eight times revenue. If we apply that multiple to our business, you know, we're at 80% discount to our private, we're never making money. Like we got to go, it becomes infectious. And you hire all these people for the wrong reason, who then leave. And it's just, it creates a lot of turmoil that you have to come out of.

SPEAKER_128: All right, everybody. Welcome back to the program. Steven Estes is with us again. He's

SPEAKER_131: a principal at CLA, our professional services provider. They specialize in CPA, tax consulting, and wealth advisory. His areas of expertise lie in VC backed startups, VC funds, high growth startups with complex tax issues in multi-state and international filings. Welcome back to the program, Steven. Hey, thanks, Jason. Appreciate it. The last couple of years, it's been a little bit rocky in startup land after the bubble burst, post-zerk. Tell me, what are founders sweating right now? What's keeping them up at night?

SPEAKER_136: I'll take the low-hanging fruit here and say funding. Before the pandemic, VCs were just printing money. And the last four years after the pandemic have been a bit of a roller coaster in terms of capital availability. And I think things tightened up right after. And then in 2022, 23, capital seemed to open back up. Now we've got inflation and interest rates are higher. So we're kind of back in a position where money's tightened up because investors can get a good return someplace else. Gone are the days when an Ivy League degree and an idea on the back of a bar napkin would get 10 VCs lined up to invest in a seed round. Absolutely. They're being asked to do more with less and anything they can do to defer the need to raise again for as long as possible because the valuations out there just aren't what they used to be.

SPEAKER_128: All right. You need a trusted advisor, taxes, accounting. You don't want to play games with

SPEAKER_131: this stuff. Get it right. Get a great partner like CLA, go to CLA connect.com slash tech and let them know your boy, Jake Al sent you once again, CLA connect.com slash tech.

SPEAKER_00: You know, and this is always a conversation I have with everyone, which is when you raise a round of venture capital, you're implicitly committing to something. And what I mean by that is generally like raising rounds and especially raising big rounds, it closes a path for an exit, right? Let's say you raise a hundred million dollars as a series A company. The way cap tables work is venture dollars

SPEAKER_03: invested going to primary shares, which means primary shareholders get paid back first on their investment prior to everyone else in the cap table. That's founder shares, that's common shares, that's everything. So if you raise a hundred million dollars pre-product market fit, that means if the company sells for less than a hundred million dollars, nothing will flow through to anyone who's not a preferred shareholder, which means you have closed that exit path. The counter is if you're a

SPEAKER_00: founder, you might own 30%, 40% of your business at series A. If you sell that for a hundred million dollars, that could be a $40 million payday. Like that's life changing. That's massive. But that path is no longer on the table. If you raise a hundred million dollars, you have to, you are, you are implicitly committing to the next big outcome. And one of my big challenges with the big fund dynamic big funds are driven by power laws. What matters to my fund, what matters to all funds are, are you a home run or are you a zero? That's really all that matters. And even the in-betweens don't really matter. Here's the irony of venture funds. If I run a fund that gets to a three X return, if I have an individual investment in the fund that returns a three X, that individual investment is actually irrelevant because I guarantee you, if that three X investment was a zero, the fund would still be a three X because the fund got to a three X because of the 30 X deal, the 40 X deal. And so the middle outcomes, again, I don't want to say they're irrelevant. They can all be accretive, but they don't matter in my ultimate goal of, of kind of delivering a top quartile fund. But that's important to call out because the middle ground outcomes can be especially meaningful to founders and employees. Yes. But this is just this world where these big rounds, again, it is shutting a lot of those middle ground doors. And I don't think oftentimes founders realize that, Hey, we have just implicitly shut that exit path door. And now we're playing the same game as the venture capitalists as boom or bust. The difference is as a founder, I have one bet I get to make it's my company. You know,

SPEAKER_129: venture capitalists get to build a portfolio. And they're getting the 2% the entire time.

SPEAKER_16: But I want to take what you just said and apply it to a, a theme we've been talking about on the show a lot, which is the startup M and a dearth, or just the lack of access that we've been seeing. And you mentioned IPOs being delayed and that's a known phenomena, but there's been a lot of commentary in the, in the venture world, startup world about kind of who's to blame for the lack of M and a essentially. And I know a lot of people have perspectives on Lena Kahn and so forth,

SPEAKER_15: but it seems also that venture is partially to blame because if they are putting too much money into these companies too early closing off doors, well, there go the singles and doubles to use the classic baseball analogy that some people in the venture world really seem to, to, to care, carry, care about or covet. So, you know, as part of the lack of exits, just venture capitalists over

SPEAKER_69: capitalizing early stage companies. It can be. And it has, um, it has two impacts here.

SPEAKER_00: Like first let's talk IPO markets. Second, let's talk M and a markets. Um, you know, everyone likes to say, are M and a markets open or are they closed? Like I kind of take a different perspective. They're always open. The market clearing price just varies. And like, you're either willing to take the market clearing price or you're not. One challenge is all of these companies are, you know, again, of all the unicorns, you know, there's maybe a 1300, I can, I saw, read some article, you know, 1300 private unicorns. Yeah. Yeah. Like, you know, I'd probably wager 5% or less of those unicorns. Like we'll ever actually like exit at a price greater than like what they raised in a ZERP round, right? Like it's a really small number that will, what's one reason people think that the IPO markets are closed. You raise around at five, $6 billion, but you're public, you know, if you were public today, you were $2 billion. You're like, I don't want to do that. Maybe your board doesn't want you to do it, right? Your board doesn't want to take that mark. Your investors don't want to take that head. Hey, just keep growing. Eventually you'll be worth more. You'll grow into it. But if your last round was a billion dollars, maybe you go public at $2 billion. You could double your last round price. There's no employee hit. There's no morale issues. You just doubled your valuation in an IPO. But if you raise it $6 billion, you don't want to go public at $2 billion. That's a down round. Yeah. Your investors might not want that. You know, there's It looks bad for everybody involved. It looks bad. There's momentum issues. And so, you know, I think one of the reasons you don't see a lot of these IPOs is that

SPEAKER_03: there's just a market clearing price people don't want to accept because you can raise it 30 times revenue in the private markets and five times in the public markets. And there's just a big valuation gap there. Um, and that'll change, right? I think today the public markets are placing a premium on platforms, right? It's a, have you proven you have hit escape velocity and you have staying power

SPEAKER_00: versus are you a point solution that might have a zero terminal value five to 10 years from now, because you're disrupted. So you have large companies that are successful companies,

SPEAKER_03: like a confluent or a braze or rubric, or, you know, I'm just trying to think of other IPOs, like, you know, solid, very good companies that just don't trade at big multiples. Right. And so for

SPEAKER_20: every, uh, I mean, I, I, you know, off the top of my head, I think they all trade at less than 10 times revenue. Um, I might be wrong, but I, you know, I think they're all less than 10 times.

SPEAKER_44: That feels right. Especially braze, which was a 20, 2022 IPO. It was very, that was very recently.

SPEAKER_00: Yeah. Yeah. And so it's like, you have, you have really good companies that are growing well at scale, but they're not a billion dollars of revenue plus. Yeah. And I think there's just this question and, you know, the public markets today are placing a premium on large companies. What are startups, right? They're, they're not going to be a billion dollars of revenue. They might have 200. So the market clearing price today for a sub scale software company. Yeah. It's just a huge Delta between what you were able to raise that in the private markets. And so that's a

SPEAKER_105: really tough pill to swallow that no one wants to, but, but how have we ended up still here? Because

SPEAKER_15: it, I feel like everything you're describing right now is not newly true. Like this has been a, a multi-year situation in which we've been staring at the same gap between public multiples and private valuation. Yeah. And I'm just sitting around going, surely, eventually people are going to have to bite the bullet, swallow the poison, take the market clearing price and get out. And it turns out the answer is, uh, no, not really because we're just sitting here. So Jim, when does, is, does there come a point when things break and then the log jam does release or do we just keep adding tension to the

SPEAKER_48: spring until it explodes? I mean, I don't know. I, I think there was probably a normal amount of like

SPEAKER_00: startup liquidity that, you know, if you were to graph it over time, you know, it was probably going up. Um, but the reality is, is that it wasn't going to ex exponentially change. And so we started funding companies as if the exit environment would fundamentally change. And I think the reality is, is we're just reverting to the mean. Yeah. And I don't think the log jam ever breaks. I think, look, like rates are going down, markets will come back. Maybe there's a new regime on the government and M and a picks back up, but like, we're not exponentially picking up. And so I just think the reality is, is there were a lot of companies that were overfunded that shouldn't have been. And there was a lot of money that was lit on fire that we're not going to see back.

SPEAKER_16: Right. But, but, but go back to our point about how large funds with brand names can absorb a lot of capital and are staying large. Yeah. And the fact that we are overcapitalizing startups and ending up with valuations that are often unpalatable to public markets.

SPEAKER_15: Yeah. To me, that just seems like a recipe for more of the same. And so I, I wonder why isn't there a movement? And I know the answer to this, but this is rhetorical. Why isn't there a movement among VCs to build smaller funds that can do better,

SPEAKER_46: not only for themselves on an IRR basis, but also to help founders capitalize correctly and have exits. And the answer is essentially fees to your original point, but it drives me nuts.

SPEAKER_79: It's incentives. And I mean, just think about it. Like, yes, let's say you had a big multi-billion dollar fund. You could get smaller, but you're gonna have to lay off a bunch of people.

SPEAKER_00: You're gonna have to deal with reputational damage. Like it's the same reason it's hard for

SPEAKER_79: companies to take down. I mean, this is so funny, you know, venture capitalists are always like,

SPEAKER_00: oh, take the down round, take your medicine. Like, it's not a big deal. And they're like, but it is a big deal. It's the same thing for venture funds. Like there's just, you know, imagine the headline, like, oh, you know, this fund raised at like 20% of the last fund size. Like the appearances you're losing momentum, the appearances you couldn't raise, like, even if you chose that, there's just an appearance of it. And then the reality is, is, you know, if you raise a fund that's, you know, a fifth the size, like you don't need the huge team that you had to deploy the fund five X is big. And so you're gonna have to lay people off and that's hard. And so like, there's just inertia. And when the inertia allows it to continue, if you're able to raise it, you know, you, I think bill said this, it's like, it's hard to point to like one individual constituent to say, like, this person was at fault. Was it LPs? Was it founders? Was it GPs? Was it someone else? Was it the fed? Like it's hard to point to one individual constituent. Yeah. Yeah, we all just kind of got here. Right. And now that you're here, then the question is, what do you want to do? Right? Do you want to take your medicine and it's painful? Like, or do you just kind of want to stay the course?

SPEAKER_59: So essentially the same problem that we have with these, uh, unicorns that are stuck somewhere at a,

SPEAKER_15: really, let's say a fraction of their theoretical worth and venture capital firms that have become very large and are used to eating well off of a creative AUM. They both are not really incentivized to change the status quo. So we're going to end up with, oh, okay. That's, but yeah,

SPEAKER_00: I mean, it's, it's even different, right? It's like, there's not a doubt. I mean, the downside for the companies is like, you're in a zombie March, right? And you're like slowly going

SPEAKER_184: to zero, but you have a lot of runway really bad. Like, no, no, no, this is what I'm saying.

SPEAKER_00: That's bad, but like there, that doesn't happen. That doesn't exist for venture funds.

SPEAKER_12: Oh, right. Oh, I see. So it's more painful for the founders.

SPEAKER_79: It's more painful. Yeah. And so like, there's actually, you know, like if you,

SPEAKER_00: you know, this term zombie gets used a lot. Like if you're like a zombie growth stage software company, like you're not able to raise more money. You just can't, no one wants to, or they will,

SPEAKER_03: but at a massive discount or with tons of structure, as we've kind of said earlier,

SPEAKER_00: there's still a lot of demand for large venture funds. And so like, there isn't a zombie venture fund.

SPEAKER_59: No, no one's going out there and saying, we're going to back the companies that are only growing at

SPEAKER_00: 17% a year. Yeah. Like there's just like everyone still wants, you know, again, I say this holistically, it's, it's not this black and white, but like, there's still a lot of demand for very large funds, you know, and because it is this power law, because companies are staying private longer, because there is more value to be captured in the private markets than there ever has been before. Now, individual firms might take different approaches to that, which either put them in line or out of line with founders incentives, um, or with LPs desires for returns. But right. The LP environment is also changing. You have a whole new class of LPs that have different return expectations that have a different cost of capital. And so like the, you know, the checkers game has become chess, right? And in some ways, but yeah, it's, I don't know. It's, it's hard to know, like, what's the forcing function to this changing? I don't know. I have one, I have one idea. And I know

SPEAKER_16: that if you are a partner in a venture capital fund, you are expected to put some of your own capital into that vehicle, skin in the game, again, aligned incentives. If your own money is in the fund,

SPEAKER_15: you're going to be more careful with it. Yeah. So I'm curious if the percentage of AUM on a perf, but just percentage of new fund that partners put in has changed. And if so, has it gone down? And if

SPEAKER_00: so, by how much? Yeah. I, you know, I honestly don't have tons of insight into this, maybe just for the audience, what Alex is talking about, it's what's called the GP commit, which, you know, typically says, you know, if you raise a fund of size X, the GPS, right? So the investors in the fund will contribute one to 2% of that. And that's, I think historically what it's been, it's about one to 2%. So let's go back to that a hundred million dollar fund. The investors at the fund are going to, of that a hundred million are going to contribute one to 2 million. And oftentimes that is split proportionally amongst the different kind of seniorities of the venture fund. But again, let's go back, right? That used to be very significant. Now you have a lot of folks who have made a lot of money. And so while yes, the dollar value of that GP commit has gone up, so has the net worth of the people putting it in, right? And so it's like on a relative basis, it might actually be a smaller percentage of their net worth, right? Because again, historically, like there are financial products, it's like cap call lines, right? Like you go to, you know, a bank and you have to take out a line of credit to fund your cap call. Like that's, you know, like that's very committed. Like you're literally taking out a loan to fund your capital commitment to the fund, right? Like you better hope those investments work out because now you have a loan. Whereas now it's just a little different. I think everyone is, the industry has gotten bigger, the industry has gotten richer. And I don't know if the percents have changed. Again, I don't have tons of insight, um, but they've certainly lowered as a percentage of

SPEAKER_59: net worth. And so. Well, then I think to solve, then we just need to tune that up.

SPEAKER_16: Because, because the more of a fund that a VC owns, the more likely I think they're going to be willing to put time in to save companies that might not be that grand slam that you're looking

SPEAKER_00: for, but might be a triple. And you certainly do. You certainly have funds that have a larger portion of the GP commit. But what I go back to is like, who's going to mandate that obviously the LPs want that. But again, let's think about a rational actor. Why not put $0 at work and guarantee a ton of money, like pure economic capitalist animal, right? That is probably the preferred path, but who's going to mandate that, you know, back to this supply demand, there's such a wall of demand for the venture asset class. You as an LP might say, Hey, you know what, jam in 5%, GP commit needs to be 5%. I'm not investing unless you put in 5%. I say, okay, that's fine. I got 10 other people who are willing to do it at 2%. And like, that's just supply, you know, it's the supply demand curve. Like there's just a demand that is willing to absorb all the supply at the price venture is

SPEAKER_17: selling, which is two and 20 with this, you know, maybe call it the GP commit as a, as a,

SPEAKER_16: as a component of that. Okay. I figured it out. So the, the, the question of who's to blame,

SPEAKER_15: the answer is effectively nobody. It's two things. I think one of that start and one at the end, big wall of capital wanting to get into venture capital funds. It's rational for VC funds to raise money and then deploy. We both agree. The problem is there's just not enough outlier companies built each year to absorb that amount of money. So as long as the demand stays high, VCs will be rational and there will be distortion on the founder side and delayed exits and so forth, as you've discussed, but until you can tune up the number then of breakout outlier home run power law companies to back, we're going to end up, I think still here. So then the question jamming becomes what changes first. Do we get more outlier companies first, or do we get a decrease in the wall of demand for venture allocation? That may be the right question to ask.

SPEAKER_79: And look, this is why it's so hard to answer. Like I think, especially with this wave of AI,

SPEAKER_00: like companies like let's talk about open AI, like however many billions of revenue they've got to in like a couple of years, like that is mind blowing that you can have a company scale that quickly. Like that's just, it's mind blowing, but you're seeing companies grow faster than they've ever grown. The size of the prize is probably bigger than it ever has been. I mean, again, go back. It wasn't that long ago where a blockbuster IPO on the software side was a billion dollars. And so all of that is true, but it's still true that maybe the number of companies that are outlier isn't greater, but the size of the prize, if you're in one of them is far greater. And so then it just leads to this interesting question of, again, back to like that funnel I draw, there's just a decreasing number of companies that are outliers at every stage. If you have a huge fund that's going to be balanced, you would just have to absorb companies that aren't outliers because let's say you're a series D fund and I don't know, I'm going to make up numbers. Maybe there are six companies a year that really matter at that stage. If you have to invest in 15 companies, it's like you could have a hundred percent hit rate and get every single company that matters. But like every incremental company you invest in is going to be dilutive to your returns, which is why you kind of either you are going to, you're going to further concentrate as you get later stage as an investment firm, or you're just naturally going to have to widen the aperture, which will force your returns, which will be dilutive to your returns. Because there's just, there's only so many companies that matter. And the reality is no one's going to be in all of them. But I go back to why do big funds get bigger? It's like, well, the big funds have a lot of influence. They have a lot of brand. They have a lot of reputation. It's who the best companies at those breakout stages want to work with. And so it's kind of this like recursive loop of that's why the big get bigger because the big are generally the firms that those

SPEAKER_02: late stage, those quasi public companies want to work with. I want to underscore your point about

SPEAKER_16: companies growing faster than ever before. And look, open AI scaled from essentially nothing to what is it this year, $3.7 billion run rate, or, you know, maybe it's trailing revenues, whatever, huge number, but it's showing up in other companies. I'm cursor, which just, I think they're closing around at 2.9, 2.5, somewhere in there. And I was reading that they grew from 4 million in

SPEAKER_15: annual revenue to 4 million in monthly revenue in an incredibly quick timeline. That's a pace of growth. That's simply insane. And it's crazy. I honestly, I think, I think cursor two and a half is undervalued, but that's a different story. Um, but that people are chasing those prizes. I just,

SPEAKER_16: that company probably won't go out until it's worth 20 or 30 billions. That means it's going to be

SPEAKER_03: another eight, 10 years. I mean, it's just, yeah, you see a lot of value accruing in the pub, in the private markets. I think the interesting thing with AI in particular is like, there's just

SPEAKER_00: going to be a lot of head fix. There are going to be a lot of companies that grow really quickly. And the growth curves kind of look like this, and then they stall, maybe go negative. And some of them will either rebound back up or go negative and just kind of fade to a relevance. And because what happens is you go to any big company, everyone's boss says to them, Hey, Alex, like, I want, I want you to introduce efficiencies to our business with AI. It's like, it's a mandate. You say, I got to go do that. You're just going to go out and buy a lot of AI solutions because it's your mandate. And you're not, you might not have a clear cut ROI case to be made, but there is a demand for AI efficiencies in our business. I think you see a lot of companies growing really quickly off the back of that, right? You're not doing a full RFP. You're not really saying, let me evaluate three solutions is I need to buy it and I need to buy it now. I do think what's going to happen with a lot of the AI startups is there are going to be some that kind of are on that trajectory that are best of breed that are end of one that then continue once we get a little bit more scrutiny on AI procurement and AI purchasing. But there will certainly be a lot that grow really quickly that become commoditized, that grow really quickly that are actually the number two or three in their space. And then they really slow down and they see a lot of churn. You know, we had Eric Vichery at our investor day, not too long ago. And like, he said this very well, which was, you know, like we expect a lot of the companies that we invest in to slow down or decline at some point in the next one to two years. That isn't what we said about kind of classic SaaS and classic software. It's what we expect to happen in the AI world. I don't want to misquote him. So if I said it wrong, he can correct us after the fact. No, no, it's close enough, I'm sure. Yeah. Um, but there's, you know, like why we're investing in the companies that we're investing is, is we, is because we believe that even despite that inevitable slowdown that will happen, like we're investing in best of breed companies that will then continue to grow once kind of the dust has settled in a lot of these AI categories. I appreciate you talking me through this, uh,

SPEAKER_15: watching venture capital from the outside is, is incredibly interesting and fun, but it's always good to get, uh, kind of the horse's mouth perspective on things. So thank you. And I'm just going to say it again, cloudedjudgment.substack.com. I am a huge fan of reading it for a long time and it's more popular than my blog. So you jamming. Uh, okay. So now onto our favorite stuff,

SPEAKER_16: which is, um, SAS multiples and kind of what's going on in the world of software economics,

SPEAKER_15: uh, over on clouded judgment, you had a chart showing quarterly performance versus consensus estimates for the last earnings cycle. And if you're watching the video, you'll see on the far right, we have 100% of companies that had reported when Jammin put this chart together, in fact, had beaten consensus estimates. So to me, Jammin, that would imply that the SAS market is incredibly healthy right now. And yet market enthusiasm for SAS, as we discussed earlier in a multiples perspective is relatively limited. So is this just clearing a low bar or is the public

SPEAKER_200: market being a little bit parsimonious with its multiples? Yeah. You know, w we'll see,

SPEAKER_00: I'd say it's always hard to draw a trend from one data point. Um, but you know, like historically, and when I say historically, I'd say like the markets for SAS got tough. In, you know, 22 and 23, right? The SAS occur, the SAS apocalypse, whatever you want to call it, like selling software got hard. As we came out of this Zerp period, people focused on cloud optimization. They focused on reducing redundant spend, right? There was just a lot of contraction and emphasis and focus on driving efficiencies, particularly around how you buy software. We've kind of been in this period for two years, right? So prior to that period, and even prior to Zerp, you know, like you'd see kind of 95 to a hundred percent of companies beat quarterly consensus estimates, you know, that why is that it's because there's a beaten raised model in software, right? Like slightly beat, you know, hitting the estimates is actually a miss, right? Because you've built in a margin of safety and you basically missed that margin.

SPEAKER_15: And people know you've built in a margin of safety. Exactly. They know you're sandbagging just a little bit.

SPEAKER_00: It's sandbagging. Exactly. Um, you'll get it. So in this period that was harder, the 22, 23 period, you know, that dropped down to 90%, you know, now all of a sudden 10% of companies were missing the quarter's consensus estimates. And I don't remember exactly off the top of my head, but you know, and then companies report a quarter, but then they also guide, you know, we dropped from something like 70% of air, 80% of companies then guiding above consensus for the next quarter to 50% of companies guiding ahead for, for next quarter's consensus. And so I'd say, you know, that chart it's, it's not a hundred percent, you know, there have been some companies, software companies that have missed earnings. This is just like the longitudinal same basket of companies, you know, over a period of time, just to kind of, it's more of an apples to apples comparison. But I think there's about 30 companies so far that have reported Q3, like all of them have beat and they've kind of in the margin with which they've beat has gone up relative to the last couple of quarters. And so, you know, that's maybe more indicative of, Hey, is the buying behavior changing? You know, we might also be getting towards the year end and look like there's just a lot of positive reflexivity in the market today rates are going down, you know, Trump's elected people say, are the tax cuts going to be permanent? Is that going to be stimulatory? Is, is Lena Kahn out as M and a, you know, like there's just a lot of, you know, if you're more cautious about buying budgets, I'd say everything that's happened over the last six months makes you less cautious. Yeah. And so you're more likely to kind of spend that budget for 24 that you haven't, that's sitting on the shelf. And so it could just be like a budget flush. That's what that's called that we're kind of heading into towards the year end. So again, I'm, I'm hesitant to necessarily say performance is starting to rebound because if we rewind the clock back to Q4 of 23, which those companies reported those quarters in January and February of this year, software performance really ticked up and people are like, we're back. Um, it turned out that was kind of largely just this budget flush. Well, at least it's just my theory, but you know, other people as well, it was just budget plus the end of 23 people had an huge budget that they kind of spend at the end of the year and the environment hadn't actually really changed. It was just this kind of one-time thing.

SPEAKER_35: We have a chart from cloud of judgment that shows the aggregate cloud software,

SPEAKER_220: net new ARR Y O Y growth chart. And it went up as 23 ended and then it went plonk. And then it went

SPEAKER_00: up again. Yeah. And, and so we'll, you know, we'll see if, uh, if one data point is a trend or, or not. And, you know, we, again, you know, you're not going to know until it's obvious in hindsight and the market will move ahead of, of ahead of that. Uh, and so I think multiple software multiples have, I think the median has kind of hugged right around six times over the last few years. And, you know, historically pre COVID the median was around eight times that comparison, just for reference, like the eight times median software multiple from, I dunno, 2010 to 2020 occurred when the average 10 year was about 2.2, 2.3%. So eight times and 2.2% today we're at six times and 4.2%. And so rates are still higher, you know, and ironically is the fed have cut rates. The tenure has actually gone up from kind of 3.8, 3.9 to 4.2. But I think that's just as, as views of the strength of the economy have continued. Right. And then maybe views of, Hey, will inflation pick back up? And so if you have a strong economy, you don't need to cut. If some of these tax cuts with

SPEAKER_03: this new president are made permanent is that, you know, I think you just have, there's lots of reasons for why rates have gone up, but yeah, we're at six times today. Uh, and so everyone looks at the historical average and say, oh, eight times like that should be a 33% multiple expansion. But it's like, Hey, let's remember that also was when multiple rates were low twos right now rates are low fours. And so, you know, rates will have to change for, for kind of multiples to expand or companies will

SPEAKER_16: need to, if we got to a 2% rate again, even if we got to eight X, that doesn't solve a lot of the problems we discussed earlier for unicorns and stock companies that probably provides a, a, a more attractive IPO window. It probably makes some M and a a little bit easier to do, but that's gonna like

SPEAKER_15: cut your fever from 103 to 101 degrees. It's not gonna get you down to 98.6. That's right. That's right. That's, that's tough. Okay. So one last question. I recently talked to the CEO of Amplitude, a public company at 2021 IPO, love Spencer. And I was reading through their earnings reports. And one thing that kind of caught my eye was he was talking about how the era of software, you know, people trying to cut back on their spend and dealing with overpurchasing was kind of coming to an end. And that to me just felt very, very bullish for startups next year. And so I just wanted to put that to you and say, Hey, do your portfolio companies and the boards that you sit on seem to be pretty optimistic about next year? I'm trying to get a vibe for January, Janet.

SPEAKER_79: Sure. I think, I think we're seeing some signs of that. And I'd say you look at the hyperscalers and

SPEAKER_00: what are they saying? Hey, this focus on cloud optimization has eased and the focus on new workload growth has grown. And so I think you're hearing a lot of consistent messages from, from the folks who are giving us big public statements. I think that the thing to be wary of is in 21, right in the Zerp period, like everyone benefited proportionally, right? Like every company, whether you were the best of breed, whether you were the third in your category, like you all benefited. And so it's important to call out that as the, you know, as the software buying environment thaws, we're not going back to this, like it's easy for everyone. What we're going back to is it's going to be easy for the best of breed, the leaders in categories with differentiated products who, you know, have a right to win that incremental budget. And so I think there is a little bit of like a disillusionment that, Hey, we're going to get this snap back when rates go down and it's going to be easy for everyone. But all of the muscle memory that's been built into every procurement team, everyone buying software over the last two years, your CFO, like cracking the whip behind you about you can't buy this, this product because we're already spending for something else in this org. That's similar, like no redundant spend. Sorry, you don't get this standardized on that, like that muscle memory around procurement of something like that's not going away. Okay. Right. And so like that, because it has been like whipped into people. And so budgets might get bigger, but there's still going to be a lot of scrutiny on them. There's still going to be a lot of like, why this versus that? What's the

SPEAKER_02: ROI? What's the business case? What problem does it solve? How much revenue is it going to

SPEAKER_16: generate us? How much costs are it's going to cut out? Jamin, this was my attempt at ending on a positive note. And I feel like you just brought in the procurement department and CFOs cracking whips. You're supposed to be throwing some joy out here, man. It's the early Christmas.

SPEAKER_00: No, look, I think, yeah, it is. I think it look, it is what it always has been, right? Companies that

SPEAKER_17: are differentiated playing in big markets are going to big build businesses and those who aren't are going to struggle. And I think it's important just to call it out because we did have this period of disillusionment where it's like, Hey, everyone's going to win. And the reality is, is everything over the last few years has kind of been a theme of just like reversion to the mean. And like everything

SPEAKER_29: we're witnessing now is just, it's just exactly that. Um, a reversion to the mean.

SPEAKER_16: The reversion to the mean where it's not reverting is the wall of capital looking to get into venture. And that's going to remain distorted to your point about incentives. But if you want to know which companies out there are the, the breakout winners, I would recommend, uh, Airbyte, ClickHouse, DBT Labs, LiveKit, and Prisma, which are the boards that Jamin is currently on. So if you want to know where he's placed his bets, there you have it. Uh, Jamin, a real treat. I'm going to have you back on in like six months to talk about what goes on in the new year. Yeah. The new administration, startups, exits, and IPOs. But I'm really hoping that you and I get as many IPOs next year to chew on and look at as we are hoping, because my gosh, we have been starving these last two years.

SPEAKER_244: You and me both.

SPEAKER_16: All right, dude. Thanks for coming on Jammin' Ball, Jammin' Ball on Twitter,

SPEAKER_116: Clouded Judgment over on Substack. He's the man. We'll have him back. Bye everybody.

SPEAKER_245: See ya.