20 VC 050: Starting, Building and Selling in SaaS with the King of SaaS, Jason Lemkin, Managing Director @ Storm Ventures

Jason Lemkin is Managing Director at Storm Ventures focussing on early stage SaaS and enterprise startups. Jason is an acknowledged thought leader in SaaS through his creation of the SaaStr community, connecting thousands of SaaS entrepreneurs and generating upwards of 1,000,000 views a month around core SaaS topics, with a particular focus on accelerating revenue and early-stage SaaS sales and marketing. Prior to Storm, Jason served as CEO and co-founder of Storm Ventures-backed EchoSign, the web’s most popular electronic signature service. Jason led EchoSign from inception through its acquisition by Adobe Systems Inc. in 2011. He then served as Vice President, Web Services at Adobe, where he oversaw the growth of EchoSign and Adobe Document Services to $100,000,000+ ARR in 2013. In Today's Episode You Will Learn: How Jason made his way into the SaaS and VC industry? What actions did Jason do to get his blog to 1m+ page views per month? What advice would Jason give to founders thinking of selling to large companies? What type of entrepreneur does Jason like to invest in? How does Jason see SaaS valuations, with recent enormous rounds from Zenefits? What areas of the SaaS industries are neglected or undervalued? Is the 40% growth rule broadly correct and can this be applied to early stage tech companies? What is Jason's pre-investment meeting approach like? What makes a founder insane in a good way, rather than a bad way? How are SaaS companies innovating to acquire new customers? Quick Fire Round: Apple: Hit or Miss Most exciting SaaS companies and sectors Jason's favourite book and why? Items Mentioned in Today's Episode: SaaStr: Jason's Blog Jason's Favourite Book: The Lion Who Shot Back Mark Suster: Both Sides Follow: @saleshacker (amazing content from VPs of Sales @ Top Tech Startups) Emergence Capital: Joe Floyd David Saks: Yammer Slack: Stewart Butterfield, Zenefits: Parker Conrad

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  Welcome to the 20 Minute VC with your host Harry Stebbings and we are celebrating Stay at the 20 Minute VC as we usher in the 50th episode. My, how time flies. And there is no better guest to celebrate such an event than by welcoming Jason Lemkin, MD at Storm Ventures, onto the show. I mean, where do I start with Jason? He is an acknowledged thought leader in the SaaS industry through his creation of the SaaStr community, which now receives an astonishing 1 million page views per month. Prior to Storm, Jason was CEO and founder at Ecosign, the most popular electronic signature service on the web, leading to the acquisition by Adobe.

• 0:43Harry Stebbings?

  In today's interview, Jason and I have an incredible deep dive into the world of all things SaaS. But before we dive into today's interview, have you ever looked at an inbox full of candidates and applications and felt a little overwhelmed? Well, you'll love HiringScreen's Blink algorithm. First, build your job by selecting criteria such as work experience, qualifications, and technical and transferable skills. Then let Blink do its magic by scoring each candidate against your requirements and displaying every candidate in order of relevance for the job. But without further ado, ladies and gentlemen, it's time to usher in episode 50 of the 20 Minute VC. I'm so honoured to introduce to you Jason Lemkin.

• 1:23Speaker 01

  You have now arrived at your destination.

• 1:32Harry Stebbings?

  Jason, welcome to the 20 Minute VC. It's an absolute pleasure to have you here.

• 1:36Speaker 02

  Yeah, thanks for having me.

• 1:38Harry Stebbings?

  Now, can you start off with a little background on yourself and how you made it into the VC world, and particularly your blog, Sasta, and how it's become so successful?

• 1:48Speaker 02

  Sure. You know, it's interesting, I didn't really pay attention to stuff before as a VC, but everyone has a different story about how they got into the industry. I don't think any two stories are exactly the same. But I've been a reasonably successful, not a unicorn successful, but reasonably successful founder of twice in two venture-backed companies.

• 2:11Speaker 02

  And the the the simple story is, and I'll give you two versions of it. You know, my current, the fund I'm a partner at Storm Ventures invested in in my last startup. They were my largest investor. And they also individually invested in my startup before that. So I, you know, I made them, I made them a fair amount of money. So, you know, they decided to reinvest. Whereas, as they say in the VC industry, recycle some of the cash and see what I can do with it. So the VC story, there's other nuances, but it's not more particularly interesting than portfolio company CEO does reasonably well. And let's see if he could do even better if we give him, you know, sixty million dollars to invest.

• 2:51Harry Stebbings?

  Absolutely.

• 2:53Speaker 02

  You know, kind of related to that, after Echo signed my last company, got acquired by Adobe, they made me a corporate vice president, which I actually didn't ask for. I only found out the the day the deal closed in my after letter what my job was. And and they had a very, a very specific corporate media, social media policy for VPs, which made sense because you're representing a big brand, right?

• 3:18Harry Stebbings?

  Absolutely, yeah.

• 3:19Speaker 02

  And in order to tweet, in order to blog, in order to geocodes in Bebo and Myspace and all these kind of funny things that were in the policy, you had to go through corporate communications. So it was like a thirty day turnaround on a tweet. So I decided that like that wasn't going to work on Twitter, definitely thirty day turnaround. But they had left Quora out of the list. So I decided, since I'd sold my company, for better or worse, I had nothing left to hide. I would just answer all the dumb questions that I wished I'd asked on Quora. And so the Quora thing started to take off. And at the same time, even though I wasn't really allowed to blog, I wrote a hundred blog posts about all the things I learned building a SaaS company.

• 3:57Harry Stebbings?

  Okay.

• 3:58Speaker 02

  And then the day I left Adobe was the day of the first blog post on SaaS. I already had a hundred in the queue.

• 4:04Harry Stebbings?

  And how did it really build? Because it's now this momentous blog on.

• 4:08Speaker 02

  It is, it is kind of surprising considering how much it is that we get over a million views a month on the content. And you know, it grew without, I think in some ways I was a little, you know, it took, obviously, you know, let's not even call it an overnight success, but any overnight success is often years in the making. So this started in 2011 when, when I joined Adobe as a VP and it's 2015 now. So it's really four years of building, just like any, just like a recurring revenue business, right? It takes time.

• 4:38Harry Stebbings?

  And when, when you first launched it, did it, you know, did you launch to crickets or was there an immediate audience?

• 4:44Speaker 02

  I was, I was fortunate in that having been a SaaS CEO from the last generation that everyone knew, at least like I could get a lot, a lot of folks would at least do me the credit of reading what I had to say. So I had a relatively low volume but high quality reader base, right? For example, the, you know, the first favorite I ever got on my first Saster blog post was from Aaron Levy. I mean, what does it mean? I don't know, but I was like, I didn't even know what a favorite was.

• 5:08Harry Stebbings?

  That's a pretty good start.

• 5:09Speaker 02

  But then I'm like, okay, at least if I can get a few guys like Aaron to read what I have to say, maybe, you know, and there'll be a few others. And so in the, in the beginning, and it's actually still true now that I've learned a little bit more about social media, on the blog per se, it's still like sort of a high quality, but not ultra high volume. And then you have all these other media, you know, from Twitter to Quora to others that actually make up more of the volume.

• 5:34Harry Stebbings?

  And so...

• 5:35Speaker 02

  And it's a more diverse base.

• 5:37Harry Stebbings?

  And you sold your company to Adobe. What advice would you have for founders thinking about selling to large companies? Would you be learning differently?

• 5:45Speaker 02

  Yes, so here's my, and the world's changed, right? I sold in 2011, which in internet time is like 50 years ago. We were just recovered from Lehman Brothers and multiples were about half of what they are today. So it seemed like a fair deal at the time. Well, today I, I can't believe that I sold. And, but a lot of other things have changed. If you have a successful company, there's more secondary liquidity. The capital markets, the later stage investors are much more aggressive today. And so here's what I boiled it all down to. There's many reasons to sell and many reasons not to sell and you'll know in your gut whether it makes sense. We could talk about that forever. But I will say this to you, and I say this to all my friends going through it.

• 6:28Speaker 02

  Once you hit what I call initial scale, when the business, it's usually around a million a month in recurring revenue, or maybe 10 million a year, 800K a month in recurring revenue. Once you hit that, you can't be killed in SaaS. You cannot die. You cannot be stopped. And my learning is there's, while operationally that may be a good time to sell, that's when I sold it basically a million a month in revenue, it's the worst time to sell. So never sell at that point unless it's twice the maximum amount of money you would ever want. Then do it. Because that's, there's different times when it gets good, and the last thing you want to do operationally is sell just when it gets good. And so you see a lot of these deals out there. This company sold for 100 million, this company sold for 150, this company sold for 200. Look, if you're doing 1 million in revenue, those are great deals.

• 7:13Harry Stebbings?

  Absolutely, yeah, yeah, yeah.

• 7:14Speaker 02

  But if it's just, but sometimes I know the founders and it just got good, and it's usually like five years in and they got tired, is the real story behind the story. Don't do it. That's my advice.

• 7:24Harry Stebbings?

  So why did you sell?

• 7:26Speaker 02

  Uh, I'm not sure. It seemed, the markets were smaller. Um, I, you know, the terms for raising the next venture financing were, were, were expensive at the time. Um, I wasn't sure where I stood with my existing investor syndicate, and it was risk reward at the time, one year out of Lehman Brothers disaster, when the world was gonna end, it seemed like the right call. Um, and things change, right? We're, the bu, if we're in a bubble today, it could pop tomorrow. And then, uh, and then it could seem like everyone that sold the last 12 months was just a genius.

• 8:02Harry Stebbings?

  Of course, yeah.

• 8:03Speaker 02

  Right.

• 8:03Harry Stebbings?

  And talking of acquisitions and valuations, how do you see valuations in the SaaS industry? With, you know, Zenefix and Slack.

• 8:11Speaker 02

  Yes.

• 8:12Harry Stebbings?

  Certain areas sort of being...

• 8:13Speaker 02

  Well, let's be clear, no matter how you slice the data, sort of SaaS multiples for companies that are hot, and we can define what hot is next, those have probably quadrupled in the last 20 quarters.

• 8:26Harry Stebbings?

  Is that indicative of a bubble?

• 8:29Speaker 02

  Well, certainly anyone that's been, even guys like me that sold his company in 2011 are still struggling to get my arms around valuations today. Um, a lot of us are. I think even Stuart Butterfield and Parker Conrad are struggling to get their arms around valuations. They took the money, but they're probably shocked at how much has changed. Having said that, though, the thing is, if you're negative on this, you'll miss the point, that companies like Slack or Talkdesk or Zenefits, they're growing faster, far faster than similar companies ever grew before. Slack just hit a 24 million run rate, basically one year after monetizing. And if you think Slack is just hip chat, you're missing the picture, right?

• 9:11Speaker 02

  Zenefits have built 1 to 100 million in revenue in 24 months. So yes, the valuations are shocking, but so's the growth rate.

• 9:18Harry Stebbings?

  So do you think that justified then?

• 9:21Speaker 02

  I think you always have to pay, we always paid a premium for the best. And when the best grows faster than ever, we should pay the highest premium of all time. That makes logical sense.

• 9:31Harry Stebbings?

  Do you think there are any areas of the SaaS industry then that are perhaps neglected? And this is shown in valuations?

• 9:38Speaker 02

  I think so. I'd like to think all my investments are like that in some way. As a relatively early-stage guy, I'd like to think that I can see something that's been missed or neglected six to 12 months before it becomes obvious to everybody else.

• 9:54Harry Stebbings?

  So what sectors would you say those are that have been neglected?

• 9:58Speaker 02

  I think just that what is, it's not so much neglected is maybe the wrong word. It's more just that every single, every single part of the global economy is being SaaSified today. And it can be hard to see how enterprise speaker training could be SaaSified, or enterprise 401k training can be SaaSified, or how we need the 78 version of call center software, or how onboarding could be a $500 million business. I'm picking examples of companies that have done. These things don't like seem obvious as Slack seems today, but the growth rates are amazing.

• 10:37Speaker 02

  So I think what's not obvious is that probably almost verticals and industries that were not big enough to be SaaSified a couple of years ago, like they're all big enough today.

• 10:49Harry Stebbings?

  And you

• 10:49Speaker 02

  So, and that's why I say that my, my most important Zen learning from this that people miss and is I believe that market size, the TAM is what you make of it.

• 10:58Harry Stebbings?

  Okay.

• 10:59Speaker 02

  Slack is gonna be bigger than HipChat or its entire competitive landscape in six months. So if you had invested in Slack, back when like Mamoon and Social Capital did, when that was, when that was when it was really Slack, and you defined it based on what the market looked like in the past, you would have been like an idiot to invest at 200 million.

• 11:18Speaker 02

  You got 10x in 12 months. Clearly, clearly the social plus guys are not idiots, but you can't, and SaaS, you can't define a lot of these markets by the way they looked in the past. That's a sucker bet.

• 11:29Harry Stebbings?

  Would you say that's the same for the whole of the tech industry and venture? Do you have that approach for investments that you can't define a market by what it is today?

• 11:37Speaker 02

  I define a market by its, its, its current growth rate. I believe that if you can, I believe that if you can hit a million in revenue, and I invested before that, but if you can hit it a million in revenue, growing 15% month over month, you're inherently in a nine figure, you can inherently build a company with hundreds of millions in AR.

• 11:56Harry Stebbings?

  And it's interesting you say about the importance of that growth rate, because we often hear about the 40% rule for SaaS businesses and the belief that growth should be, and profits should add up to 40%. Do you believe this to be broadly true?

• 12:10Speaker 02

  The 40% rule or my 15% rule?

• 12:12Harry Stebbings?

  Your 40%, the 40% rule.

• 12:15Speaker 02

  I think it's, um, I think it's fine, but, um, I think it's, I think it's too clever. I, I think it's trying to justify slow growth, medium growth, high growth businesses and different burn rates. I don't, I, I don't care. I just want a company that, once it hits 1 million or a million and a half in revenue or so, can grow 15% month over month repeatedly. That's the company I want to invest in, period. And whether, however you compress, and I'm investing all in companies with high gross margins, so I don't really care about anything below the top one.

• 12:48Harry Stebbings?

  And, and as an entrepreneur in the space yourself, do you have a type that you really like to back, a type of entrepreneur?

• 12:56Speaker 02

  Yeah, better than me.

• 12:58Harry Stebbings?

  Better than you? That's how you

• 12:59Speaker 02

  I've made, I've made eight institutional investments and 12 as a seed investor, 20. Only one of them was the CEO not as good as me, and it's my worst investment.

• 13:09Harry Stebbings?

  And what would you say then your strengths and weaknesses were as a founder?

• 13:13Speaker 02

  You know, it's funny, I say this to folks and everyone that's been a CEO or founder, they know exactly what I'm saying. They're like, yeah, like I, like, for example, in my, you know, I was backed by both Storm and Emergence. You talked about Joe Floyd earlier, prior guest at Emergence, right? So in my class at Emergence, you know, we had great companies and they included guys like, you know, Peters, CEO of Viva, David Sacks at Yammer. Peter and David were better than me.

• 13:41Speaker 02

  And they had better outcomes than me. And I didn't get it going. I knew they were better than you, but I didn't know what that meant. Now I see it again and again and again. And when I say this to VCs that have a financial background or lifelong VCs, they don't understand what I'm saying. But when I say it to any CEO that's done it, they know, they know who's better than them. And I know within 15 or 20 minutes, I know that they can see the future better than me. I know they're more driven. I know they're more aggressive. I know they're thinking through the issues even better than I have. Right? It's not, and it's better than me adjusted for time. I know a lot now. I've been doing SaaS for 10 years and I've been doing enterprise sales for 15. So I'm not expecting them to know what I know, but adjusted for time, I'm expecting them to be at least twice as good as me.

• 14:22Harry Stebbings?

  And is that blatantly obvious when you see them? Does it hit you that they are?

• 14:25Speaker 02

  It takes somewhere between eight and 15 minutes.

• 14:29Harry Stebbings?

  Okay. And, and how many kind of meetings do you have pre-investment? Is it a very quick cycle or do you tend to lengthen it out?

• 14:37Speaker 02

  So I'm a little, because for a variety of reasons, I'm a little different than most. So I like to do all my homework before I meet with a founder. I will read everything. I will do the research. You send me your financial model that's 78 sheets. I'll read it. I'll read every deck. I'll read every piece of material you send me. And then, and I'll read your entire deck. I don't want to go through a deck when I meet. I will have already read your deck because you have already sent it to me. And therefore, by the time I actually meet, I only do one founder meeting a week. I know that if it is what I think it is, I'm pretty much already in.

• 15:13Harry Stebbings?

  And why do you-

• 15:14Speaker 02

  Now, sometimes it's not what I think of it. Sometimes the fact, like, it's quirky, or the numbers don't tie, or the founders are insane in the wrong way rather than the good way. And so I'm not saying every meeting I take I invest in, of course not. But I'd say, I, every serious meeting that I take like that, I'm already actually pre-inclined to invest, even though, you know, statistically, I, I'll only invest in maybe an eighth of or a tenth of those meetings.

• 15:36Harry Stebbings?

  And what makes a founder insane in a good way instead of a bad way?

• 15:41Speaker 02

  Uh, they just have an insane desire to build a multi-billion dollar business no matter what it takes, and that's their mission in life. Because, you know what you do if you're sane? You, you sell at a hundred million, or two hundred million, or two hundred fifty million. And that, as a founder, like, I'm totally down with that. If that's what you want to do, no problem. I, I would never even pretend to block a sale or even care. You want to sell, you sell. But to make any money as a VC, even just as a partner in a hundred and eighty million dollar fund, which is not huge, if you're not at least going for a unicorn, no matter what ends up happening, I can't make any money, so I'm out.

• 16:16Harry Stebbings?

  And talking of unicorns and the, the kind of increasing competitiveness for these unicorns in the software space, how are SaaS companies really innovating to acquire new customers?

• 16:28Speaker 02

  I don't see a lot of innovation on the, I see something different. What I see is that what's evolved over the last three or four years, and I'm being a little facetious when I say that, but what I'm saying, SaaS there is a little tiny piece of that, is that people actually know the playbook now. There are more people that know how to build an inside sales and field sales team in SaaS. There are people that know how to just run the playbook on demand gen for marketing. There are people that know how to run the playbook on content marketing. And poor guys like me had to figure this out because we didn't have the prior generation. That's why I started this whole community. But I actually want to see less innovation on sales and marketing customer success. I want to see all the innovation on the product, and then my investment thesis and all my investments is, I'll help you find great VPs for these roles, sales, marketing, customer success,

• 17:14Speaker 02

  and even products sometimes, and then we'll just run the playbook. We're just gonna run the same playbook.

• 17:18Harry Stebbings?

  And you said about your investment thesis there. If you had a guiding principle to your thesis, what would you say it all boils down to?

• 17:28Speaker 02

  I would say that an amazing founder, strong unit economics, and a little bit of something can create something amazing. A mediocre founder can only take you so far. A great founder with poor unit economics, with a $3 a month product, isn't going to work. But a great founder with good unit economics in a half decent space, even if people don't see it, I'm in.

• 17:57Harry Stebbings?

  And you tend to prefer SaaS companies with a much higher value per customer than much smaller. So do you prefer enterprise software where each client is worth in the thousands of dollars compared to your Spotify's where they're in the tens of dollars?

• 18:15Speaker 02

  Yeah, I probably won't invest if you can't grow into outsized deal sizes, unit economics. I did, I invested in a search as a service company called Algoilia about a year ago that Excel just put 18 million into. And I did a session with the CEO at Heavy Bit a couple of weeks ago. And I invested, I think, at like 5K MR, so pretty early. But at least they had one customer that could be bigger.

• 18:41Speaker 02

  All the rest, I think, were paying 50 bucks a month or 10 bucks a month, but they had one.

• 18:45Harry Stebbings?

  But they have the potential.

• 18:46Speaker 02

  If you have one, I'll bet that you can get 10 and then 100. As a founder, this is a bet that I'll make, the other DCs won't. I will bet that one is not an outlier, that one is the future. But if it's zero, I'm not sure, I'll take the bet.

• 18:59Harry Stebbings?

  And if it's okay with you, we're going to move into a quickfire round now.

• 19:02Speaker 02

  Sure.

• 19:03Harry Stebbings?

  So your favorite book and why?

• 19:07Speaker 02

  Wow, that's a tough one. Give me the next one and I'll come back to that one.

• 19:12Harry Stebbings?

  Okay, Apple Music, hit or miss?

• 19:16Speaker 02

  I think that it's going to be tough to really materially impact Spotify. And it's hard to have a material impact on Apple's bottom line, so no matter what, it's a miss.

• 19:30Harry Stebbings?

  Okay. Most exciting SaaS companies today for you?

• 19:36Speaker 02

  Goodness, I'm gonna, I'm gonna play to my favorites. You know, Talkdesk isn't a unicorn within 12 months, then, then I'll eat my hat.

• 19:46Harry Stebbings?

  Okay. And your most recent investment and why you said yes?

• 19:52Speaker 02

  I made an investment last week, it hasn't been announced, but in a company that does, that does, that SaaSifies experts' training in the enterprise. And the question is, why did I do it?

• 20:05Harry Stebbings?

  Yeah, absolutely.

• 20:07Speaker 02

  A little bit not obvious, why do you want to invest in expert training in the enterprise? Insanely committed founders, better than me, got to zero, from zero to over a million in revenue in six months, and are just closing their first six-figure deals, and they started off at 29 bucks a month. I just love that mix. And we just put in, ahead of sales, we're gonna put in ahead of marketing, we just put in ahead of customer success, we're just gonna run the playbook. And I think this company will go zero to four million in 12 months, and probably 25 million, zero to 20 million in 24 months.

• 20:37Harry Stebbings?

  Fantastic. And going back to the favorite book, what would it be?

• 20:42Speaker 02

  Wow, um, gosh, I, I, I think that my favorite book might be Shel Silverstein's Lab, Kino the Lion Who Shot Back. And I think, I think all these sorts of things for founders, trying to figure out what world you fit in, whether to be contrarian or go with the pack. I, I think at some Zen level, this, this describes that we're, we're never in, the world always changes, we never know which world we are, are we hunter or hunted?

• 21:11Speaker 02

  And no one has to, you can always go your own way, you don't have to, Lab Kino's about not being hunter or hunted, it's about redefining who you are and redefining the markets. And just because a market was some way a couple of years ago, and someone tells you you have to do something this way, you can just redefine it.

• 21:25Harry Stebbings?

  And for someone interested in SaaS, what would you say are the best resources? You know, there's your blog, there's maybe Tom Tungus's blog.

• 21:33Speaker 02

  Tom's great too. Uh, I think do that, I think, um, even though you probably read Mark's sister already for both sides, read his sales stuff, he's very, very good at it and he, you know, he's been doing this for five years and he writes a lot of consumer stuff too, but he's pretty, in terms of the, the zen of enterprise sales, uh, he, he's pretty darn good. And then follow on Twitter, follow my, my friends at Sales Hacker, um, because he's got operationally amazing content from like VP of Sales at Insette Fit, VPs of Sales at GuideSpark, VPs of Sales from all these companies. And just keep reading and learning what the content Sales Hacker's putting out, um, both

• 22:14Speaker 02

  their own content and stuff he retweets and that's, that's like a, that's like a master's in, in tactical sales strategy too.

• 22:21Harry Stebbings?

  Well, Jason, thank you so much for coming on the show. It's been an absolute pleasure having you.

• 22:26Speaker 02

  Yeah, this was terrific. Thanks for the time, man.

• 22:28Harry Stebbings?

  As always, all of the resources mentioned in today's incredible interview with Jason can be found at the blog at www dot the twenty minute VC dot com. But I also want to say a massive thank you to you, my audience. It's the 50th episode and I really couldn't have done it without your support and listening to the show. I'm so, so grateful. I'd also love to say a special thank you to HiringScreen, whose Blink algorithm means I spent less time looking at hundreds of CVs and more time interviewing and meeting the most incredible VCs from around the world. So HiringScreen, thank you so much. I really couldn't have done it without you. And you can check them out at www dot hiringscreen dot com or you can follow them on Twitter at HiringScreen.

• 23:13Harry Stebbings?

  And I would love to hear what you think of today's show, so please do let me know. And we look forward to seeing you in the next episode.