SaaS multiple compression, downturn outlook & advice for new VCs with Jason Lemkin of SaaStr | E1461

Episode Summary

Executive Summary: Jason Lemkin argues the SaaS and venture boom has reset to reality after a period of irrational momentum, bad diligence, and inflated valuations. He says founders and investors should now focus on runway, fundamentals, quality of revenue, and disciplined capital allocation, while still recognizing that cloud/SaaS tailwinds remain strong and markets will likely rebound.

Main Topics: Market reset and sentiment reversal (Priority: 5/5): The conversation frames the recent selloff as a dramatic shift from a period where every investor felt like a genius to one where pricing and sentiment reverted quickly, especially in late-stage SaaS. SaaS fundamentals and quality of revenue (Priority: 5/5): Lemkin explains why recurring revenue, gross margins, churn, and true software economics matter more now than raw growth or hype, especially for fintech-heavy or services-adjacent SaaS. Capital allocation in downturns (Priority: 5/5): Advice for founders and investors centers on extending runway, cutting nonessential spend, delaying panic layoffs, and using the downturn to play offense against weaker competitors. Early-stage investing playbook changes (Priority: 4/5): Momentum-style investing—copying hot deals, paying up, and relying on markups—is becoming harder; true sourcing, diligence, and early-stage work are again required. Secondary sales and liquidity strategy (Priority: 4/5): The discussion covers when investors or founders should sell secondary shares, with Lemkin favoring selective liquidity for discipline but not at the cost of huge upside. LP overload and venture fund economics (Priority: 4/5): Limited partners are described as overcommitted and dealing with poor recent marks, making it a difficult time to raise institutional capital for new or frequent funds. Long-term cloud/SaaS tailwinds and consolidation (Priority: 4/5): Despite the correction, cloud adoption, app consolidation, and platform expansion (e.g., Datadog, HubSpot, Notion) remain powerful structural drivers.

Key Arguments: The boom made late-stage investing look easy, but that was a distortion created by abundant capital and upward momentum, not a permanent change in venture economics. SaaS businesses should be judged by recurring revenue quality, gross margin, churn, and free cash flow potential—not just growth rates. If gross margins are below 70%, the company is not really behaving like software and should not receive pure software multiples. Founders with 18+ months of runway should stretch it by about six months, avoid panic, and use the downturn to eliminate waste and focus on the highest-ROI work. Investors should resume real diligence instead of relying on hot-round syndication or “diligence by proxy.” Secondary sales can be sensible for risk management, but if the goal is outlier returns, selling early often caps upside. LPs are overloaded and digesting bad marks, so raising new institutional capital is now much harder than in the boom period. The cloud and SaaS secular tailwinds remain strong; the correction is a market reset, not a thesis failure.

Data Points: SaaS stock crashes since 2012: At least 5 - Lemkin says SaaS has already experienced multiple major drawdowns, so the current selloff is not unprecedented. 2016 SaaS crash: About 50% - He cites 2016 as a comparable percentage-based decline where sentiment briefly declared SaaS dead. SalesLoft acquisition: Over $2 billion cash - Used as an example of a high-value exit that, at the time, investors still didn’t want to sell. SalesLoft revenue at signing: Just over $100 million - He notes the company had crossed this milestone when the deal was signed. Bill.com quarterly growth: 179% - Used to illustrate that excellent SaaS fundamentals can still be punished by the market. Bill.com revenue: $147 million - Quarterly revenue level cited alongside the growth figure. Bill.com market cap/run rate: Almost $800 million / expected $8 billion run rate company - He argues the scale supports a much larger long-term business. Average SaaS sales and marketing spend: About 50% of revenue - Illustrates why SaaS often looks unprofitable during hypergrowth. Hypergrowth SaaS sales and marketing spend: 60%+ of revenue - For the fastest-growing companies, growth investment can consume even more revenue. Cloud vendor growth: Almost 40% combined - AWS, Azure, and Google Cloud collectively grew nearly 40% in the quarter, supporting the bull case. Datadog multi-product adoption: Average customer buys 10 products - Shows platform expansion and consolidation within SaaS. Datadog product adoption in 2018: 1 product per customer - Used to show how much cross-sell has expanded over time. SASTR intro meetings: 50–60 per week - Lemkin describes the volume of sourcing work required for real early-stage investing. Investor updates runway example: 53 years - One portfolio company with very low burn had effectively enormous runway, illustrating offense-ready startups. LP endowment returns last year: 90% IRR - He says top endowments benefited enormously from venture markups in the prior year. Founder secondary threshold: Do not take before $100 million valuation - His heuristic for avoiding premature founder liquidity. Pipedrive investment max valuation: $20.9 million - He says his valuation discipline has remained consistent since his first investment. Average ownership since start: 12.5% - He cites a consistent target ownership level across investments. SASTR inclusion tickets: 2,000 free tickets - Used in the conference inclusivity discussion. All-In Summit underrepresented attendee price: $500 ticket - Jason and the hosts discuss pricing as a lever for inclusivity.

Pivotal Quotes: "Everyone in venture became a genius for 20 months, that part made no sense." — Jason Lemkin: On the distortions of the boom and how easy money masked real investing skill. "Add six months to your runway. Don't chop your head off." — Jason Lemkin: Core advice to founders navigating the downturn and avoiding panic layoffs. "If your gross margins are below 70, you're not really software." — Jason Lemkin: His simple rule for judging quality of revenue and whether software multiples are justified.

Implications: Founders should cut waste, protect runway, and refocus on durable unit economics; investors should re-embrace diligence and valuation discipline. The SaaS thesis still holds, but only for businesses with real recurring revenue, strong margins, and patience.