Pod Insights Equity Podcast What founders can escape venture's no-man's land? About this episode This week, Alex spoke to Anu Hariharan, who’s previously worked with a16z, sits on Brex’s board, and more recently has been investing in later-stage companies at Y Combinator. She's also working on something new.
Hariharan recently tweeted about how "great" founders were successfully guiding their companies towards cash flow positivity. Since that very interesting post, both Instacart (a former Y Combinator company) and Klaviyo have filed to go public. And both have super strong cash flows.
Our chat could not have come at a better time. We dug into how early- and late-stage startups should approach growth and cash conservation (in her view), the future of venture as an asset class, and how healthy the unicorn herd really is. We had a blast recording this one! Enjoy!
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Transcript 0:11 Speaker 00 Hello and welcome back to Equity, a podcast about the business of startups, where we unpack the numbers and the nuance behind the headlines. My name is Alex and this is our Wednesday show where we sit down with a guest, think about their work and unpack the rest. Today, we are joined by Anu Hari Haran. She was previously at Y C's later-stage investing team. She also worked at Andreessen Horowitz, before that, the Boston Consulting Group. She has been around, she knows a lot. She's on the board of Avis, Brex, Whatnot, Monzo, Rappi and Zepdo. And she had a really great tweet, so we absolutely had to have her on the show. Anu, welcome to Equity.
0:42 Speaker 01 Thank you for having me, Alex. Great to be here.
0:45 Speaker 00 I'm very excited about this whole conversation because there's a lot to get through with the recent IPO filings and all of that. But I know you're no longer at Y C and you're working on a new thing called Avera. And I just figured I'd give you 30 seconds to tell people what's going on there. So what are you working on now?
0:59 Speaker 01 So we're building something called Avra. It means-
1:02 Speaker 00 I was so close.
1:03 Speaker 01 That's okay. It means I will create. What we are essentially building is for CEOs who are post-Series A, building a batch-based program to help them scale as CEOs as they're scaling their companies from 3 to 15 million in revenue and building teams from 20 to 100-plus people. We saw this as a gap while at Y C and we, within Y C, had several products and initiatives that helped CEOs with that. And now we're building this standalone and our first batch is this fall, between September 15th and November 8th, we have 10 CEOs going through it. And we'll keep you posted. We will probably announce it in a couple of months.
1:42 Speaker 00 Well, no, I'm excited about that because we always think about the Series A crunch as being a venture bottleneck. But really, when you think about institutional funding rounds, Series A being the kind of the first traditional one, that's when you should have some product-market fit, some go-to-market motion, and you're going to scale across the whole business. Suddenly, you don't know everyone's name and it's hard. So it actually makes a lot of sense that that's a moment where you might want to kind of double down on helping people scale their own, I don't know, competence, for lack of a better phrase, not in a pejorative sense. I mean-
2:09 Speaker 01 Yes, and in fact, we saw that because, you know, more than eighty percent of tech CEOs have never done the CEO job. So it's actually hard to expect them to scale at the same pace. And everyone has to find their own journey. So we want to create a mechanism where they can learn from peer CEOs as well as CEOs who are three, four years ahead of them. And so that we can accelerate their learnings and help them and support them in a way that can scale the company more effectively.
2:35 Speaker 00 This is all very apropos of something that I've been thinking a lot about, which is a tweet you put out a couple of weeks ago. We've been really excited about having you on the show because you said, I'm just going to quote you here. Growth stage startups run by great founders are becoming way more resilient. Many are on track to hit positive free cash flows and net income positivity without having to raise a single penny from external investors. Many have achieved this fundamentals look better. And you're starting with this description of some founders as great. And not to nitpick your wording, but to me, great founders are grown versus discovered because everyone learns in the process. Has mentors, this is why you have a board. And so when you're talking about great founders, uh, before we get into the mechanics of your cash flow and late station and so forth, what do you mean by that?
3:19 Speaker 01 I think that there are two or three characteristics that really define great founders, at least in the way I work with them. And I've been, I've been privileged to work with some amazing Y C founders who have built and scaled large companies. And the three characteristics really boils down into, you know, simply these. One, the speed with which they move. And, you know, the speed with which they move, you can almost dissect them into two parts. The velocity with which they ship. So as a young startup, you have to be constantly shipping. That's the edge you have. And the second, as you scale the company is the speed with which you learn. So think about the last four years, you know, of a startup's journey. You had the pandemic, revenues declined seventy percent.
4:04 Speaker 01 Then it was the boom in twenty twenty one, and then you went back to the dry spell in twenty two to twenty three. The great CEOs are rapidly reacting to environments, absorbing new information, course correcting if the need be, at the same time making long-term bets. That's a lot to expect, but the great stand out from the rest of the pack. They're constantly taking new information.
4:28 Speaker 00 So ship quickly, which means always be very busy, responsive to the market and being kind of like nose to the ground and getting stuff out the door. And then on the learning front, essentially never stop because as your company scales, your learning has to as well. And so great founders really are, it's a posture, ship a lot. And it's also a predilection towards staying, I guess, humble and intellectually engaged on the latter part.
4:53 Speaker 01 Yeah. And sometimes it's very important for the fundamentals of the business. So during the pandemic, when you had a decline of 70% of revenue, you could see the great CEOs really grasping that information within two weeks and making dramatic changes in the way they were operating, but still keeping the certain opportunities alive, but saying, okay, fundamentally, my business has changed. I've lost 70% of the revenue. Let's make the hard calls right now till market information changes. Today, you know, it's with AI, right? Now, every company wants to be an AI company, but the great, for example, I think the founding team at Fair,
5:36 Speaker 01 Max, Marcelo, and Jeff are amazing and Daniela are amazing. So the way I have seen them use AI to improve engineering productivity, to improve their own search optimization for the website, stands out versus the rest of the companies. That's what I mean by a great founding team.
5:55 Speaker 00 So going back to the 70% comment, the company that I think about that had the sharpest revenue shock, if you will, early in the pandemic, managed to somewhat gracefully decrease their staff size through layoffs and then built back up. And then when public is clearly Airbnb, but you're talking about that almost as if it was a more common experience among startups. Was there a larger group of startups that had a similar revenue hit in the pandemic that you're referring to? Or are you mostly thinking about the Airbnb example in that case?
6:25 Speaker 01 No, that are a lot. So for example, Monzo, which is the company, the neo bank in the UK, that I've been in the board off and led one of their earlier rounds in 2019, they Had about eighty eight million pounds of revenue, you know, call it right before the pandemic. It saw a steep decline, right? Because most of the, you know, that time, at least, not today, but, you know, a good chunk of the revenue was interchange. And you make better interchange when that is cross border travel in Europe. So I think the revenue almost declined to fifty million pounds during the pandemic. And think about it, you're a young startup, you're a bank, you need cash for regulatory buffers and controls. And your revenue has declined to fifty million pounds.
7:09 Speaker 01 You may have two hundred million pounds on the balance sheet, but all of that money is now reserved for regulatory buffers. So where is the money to fund the company for operations? So a lot of companies, and you know, to give you a stat, in Y C for the growth stage portfolio. We were very selective, so we made only forty five investments. But about thirty five percent of our portfolio was at risk in March twenty two.
7:32 Speaker 00 Wow. Now, by at risk, do you mean at risk of closing or just at risk of a major revenue decline?
7:37 Speaker 01 We would say at risk at the time was, hey, you have less than twelve months cash. If the current rate of decline was gonna go, like, right? Because think about it, if your revenue declined seventy five percent, but your fixed cost O P X hasn't declined in the same amount in a week, then you are at risk. And so you're constantly taking information every week, right? So the great founders really found ways to like change the dials within a week. Find leading indicators, set up new infrastructure teams for tracking leading indicators. And you have to be really careful, right? Because we didn't know at the time, was this a one month phenomenon? Was this a two month phenomenon? Was this a six month phenomenon? So you really have to operate the business on a monthly basis,
8:22 Speaker 01 but making sure you have enough cash to support more than twelve months and make changes.
8:27 Speaker 00 And then ironically, right after this pandemic shock, minor recession, this like two or three month period of panic, everything kind of went a little bit crazy on the venture and startup side. People turned to software to keep their business running. And so suddenly there was a massive spike in demand and there was a lot of capital available. And it seems like people had a moment of frugality, followed by a period of, I'm not going to say profligacy, but let's go ahead and say higher burn than was perhaps historically normal. And we are now seeing, as you mentioned earlier, the other side of that particular coin. And you delineated great founders as those who are shepherding their companies closer to cash flow positivity. But I want to divide that on the early and late stage axis, because clearly, if you're a pre-seed company, profitability should not be your top concern. If you're about to go
9:10 Speaker 00 public, it matters. So founders across the spectrum, when should they really begin to be thinking today more about cash preservation and profitability versus growth? Series B, Series A, when does that happen?
9:21 Speaker 01 Yeah, so I would actually delineate for early and late into three segments, right? So the buckets I focus on is more, hey, if you are between, call it the 250 million and the 1 billion valuation, which is where the majority of the series Bs and Cs happen, then you have the 1 to 5 billion dollar bucket. And then you have the post 5 billion dollar valuation, right? So think about the company. So let me divide them into three buckets and I'll give you nuances on all three. Before I go into the bucket, a stat that's probably helpful for you to know is across the startup world, and I've looked at this like hundreds of data points, almost on average, startups have improved their cash runway by 50%. Meaning, if they had 18 months, they extended it to at least 24. If they have 24, they've extended
10:05 Speaker 01 it at least to 36, right? Which is, first of all, healthy. This is post 2021. So in the since last year, that's on average. What we are seeing is also the seed stage and C and C startups have been cutting burn more this year, maybe because funding rounds are a lot lower. The late stage started optimizing from last year itself, because they knew that the valuations have dropped dramatically. So you're not seeing as much of a shift, but that's because I think some of the late stage companies are fundamentally better run. But you're seeing the seed stage correct from early this year. Why is that? Well, simple reason. First quarter of 2023, only 6% of active startups raised. Second quarter
10:48 Speaker 01 of 2023, 5% of active startups raised. The lowest we have seen since 2013.
10:54 Speaker 00 2013 was so long ago, I kind of forget what life was like back then. That's 10 years ago.
11:00 Speaker 01 Yes, exactly, right? The lowest we have seen. So now let's take, you know, to answer your question. What are we seeing with the late-stage startups, 5 billion and above? If I put you in the great CEO bucket, which, you know, by the way, majority of the VC growth stage portfolio that we worked with have done exceptionally well in this category. And in fact, the stat I told you, 35% were at risk in March 2020, less than 15% are at risk today. Right? Which just tells you fundamentally, they're running the company way better. So what have the companies like Brax and Monzo, you know, have done, have focused in the post 5 billion dollar category? What happened in 2021 because of the boom? Some of these startups have a billion dollars on the balance sheet.
11:44 Speaker 00 Yeah.
11:44 Speaker 01 Right? And these founders are very well aware that because of the pain they went through 2020 and it wasn't easy. They're very well aware that at this point, at this scale, because they make hundreds of millions of dollars in revenue, it is all about growth supported with operating efficiency. And so a lot of these startups have enough cash that they can all hit, and that's what they've been working on, get to free cash flow positive. Now, some of them have already done that without having to waste a single penny. And some of them, you know, a few of the exceptions are they probably can go public without even a pre-IPO round. Because that's the amount of cash that 2021 gave you.
12:24 Speaker 01 So what they have all been focused on is in the next two to three years, show enough contribution margin, show pathway to, you know, positive free cash flows while investing in growth. Now, there in the 5 billion plus startups, I think a small sliver of them have been still able to grow greater than 50% year-on-year, which is what I would call as hyper growth for someone generating 300 million dollars in net revenue. That's hyper growth at that scale. But a large chunk of them are between 20% to 40% year-on-year.
13:00 Speaker 01 And so the question now for those companies is, look, operationally, we're going to be efficient. But multiples have corrected. We're not back to 2021 multiples. I would actually say multiples are quite fair right now. This is what you would have seen even in 2016, 17, 18, right? So it's more than fair. And so it's a question of will, is everyone going to walk into their last round valuation by just hitting free cash flow positive? No, the answer is no. So there is going to be a reprice. But the struggle is, I think, if you don't need cash, I don't need to go through a reprice now. Which is why it's going to take time to correct. It would be over two to three years.
13:41 Speaker 01 But you will see, I think, the large majority of 5 billion plus companies run by great CEOs. You will see that over the next three to four years, some kind of price adjustment. But it will not all happen in one go. It's going to happen over a period of time.
13:56 Speaker 00 Okay, we're going to get back to multiples in a little bit when we talk about valuations. But go one bucket earlier in your three bucket analogy and tell me what the middle folks should be doing when it comes to cash preservation and growth balance.
14:07 Speaker 01 Yes. So the middle bucket is the trickiest bucket of the three buckets. So I'll give you another stat. I think that, you know, and I ran this data analysis when I was at Y C, but probably around 25 to 30 companies, you know, call it were unicorns and it more than tripled in 2021.
14:27 Speaker 00 Yeah.
14:27 Speaker 01 For every one company that was a unicorn before, three companies became unicorn. Did everyone have to be unicorn? No. We know that fundamentally, that's not true. I mean, just for people's reference, we are back to five to seven times one year revenue forward, which was the case, if you look at the historical median for SaaS companies. And so you have to be at least a 200 billion revenue company to demand that. So the one to five billion dollar bucket is very tricky right now. So what I'm seeing with the great CEOs is they've done an exceptional job. Of running it operationally efficient, but they are at fifty million a year.
15:01 Speaker 00 Okay, so they're much smaller and they wouldn't earn a unicorn valuation at the current multiples. But even though they're dealing with kind of their last private round and where the market is, they have managed to keep growing while conserving enough cash to be safe.
15:13 Speaker 01 Yes, but the growth is not forty percent year on year. The growth is twenty to thirty percent.
15:18 Speaker 00 Oof, that seems low.
15:20 Speaker 01 Yes, and that's because why? This is why venture, and not for everybody, I'm not generalizing, but I'm saying some of the sub-companies are seeing a twenty to thirty percent. Some of them, especially if you service startups, you'll have lower growth because startups are spending less. But if you're servicing SMBs, SMB spend is, you know, kind of low, not as consistent. It's still a little bit volatile. But what's happening is this, why do we have venture capital? We have venture capital to help the startups accelerate their go-to-market ahead of reaching that scale. Right? And now if you don't have enough capital, you are getting to break even. You are efficient, but you don't have extra dollars to fuel the go-to-market growth. And your price is out of whack, right?
16:04 Speaker 01 Now that's where I think it's actually more tricky. Because I think founders have internalized sort of a price cut, but they've not internalized the dramatic price cuts that one needs. I think investors are a little more wary because we don't know. They're more like, hey, it's easier for me to get into the two fifty million dollar round. Why the heck would I touch the one to five billion right now without knowing where it normalizes? Right?
16:31 Speaker 00 Yeah.
16:31 Speaker 01 So that's the one, I think that's the bucket that's going to be really tricky. So my advice to founders in that bucket is, look, if you are hitting forty, fifty million a year and you can prove that you had significant demand, but you need to accelerate your go-to-market team either to support implementation or to accelerate and support with more account reps to help build the pipeline and, you know, cultivate the pipeline. Then you are better off raising a round at whatever discount it is, without breaking the bank, of course, or without breaking your dilution. But if you can show proof points, then do that all day long. And I think some of the best opportunities in the next two years will be there. And so someone who is from both for the investor side and the founder side.
17:14 Speaker 01 So a founder that's the great founder, I think, will always make the right call. And a lot of money always chooses the great founder. But if they can find the bold investor that's willing to reprice the company, but give them the dollars to fuel the go to market because they believe in the future potential, that's going to be prime for exceptional results.
17:35 Speaker 00 Okay, so companies that are doing, let's say, around 50 million ARR, growing around 20 to 30% are kind of in the venture no man's land because they're not growing fast enough to kind of remain interesting to venture capitalists and they're too small to go public. So what do you do? So your point is if they do have a solid founder and they have managed to pull back their burn to a de minimis level, they should take the medicine, raise money to lower valuation, eat it now, use that capital to accelerate and then essentially just go, well, you know, what other option do we have? We didn't want to become a zombie growing at 20%, slowly, slowly, slowly, slowly, slowly, and then going public later on and no one cares.
18:11 Speaker 01 Yeah, exactly. Because, you know, think about it, I did this at Monzo. You know, it was so painful and I understand the pain, but we repriced the round during the pandemic because we had to, we had to raise bridge capital at a time where we didn't know how the world was going to look and then Monzo's revenue was going to accelerate. And it was the first like real significant reprice that I was personally involved with. But even though we went through that pain and it was probably four to six months of pain, in hindsight, it was probably one of the best things we did for the company at the point. Because A, we put it at a new baseline. B, they were able to use that money to like get off all the risk indicators and use the extra buffer they had to fuel a real operations, not marketing, but to invest in shipping more products.
18:56 Speaker 01 And today it's just one of our best performing company in the portfolio. Like it is, it's probably had the fastest growth, fully free cash flow positive. So it's like when, you know, who remembers that reprice? No one does. I remember it, but no one does, no one in the company does. And so my point to founders is listen, if as a private company, you know, you can put that 50 billion extra to good use, take the reprice and do it. Because no one's going to remember.
19:23 Speaker 00 All right, now I definitely want to get to that middle bucket of startups because I'm very curious how your advice differs for them. But before we do that, we are going to take a very short break. More with Anu right after this.
19:38 Speaker 00 Okay, so there's one more bucket, and I do want to talk about a couple of the recent IPOs, but let's talk about this quickly. The smallest bucket in your three-part analogy, advice for them.
19:47 Speaker 01 Yes, so I would separate them into AI versus non-AI.
19:53 Speaker 00 It's not a whole class, Anu, come on.
19:55 Speaker 01 It is. I just think the AI companies are getting way overpriced. I actually think that, I mean, I'm shocked that they're all at 2021 multiples. Maybe I'm not seeing, but you know, the big question for me is, it doesn't matter what category you are. At the end of the day, the business model is the business model, and you're going to get valued on that. You get some premium for growth, but it's not going to be a lot, you know? And right now, we're underwriting those companies like as though they're all priced in for 150 times.
20:23 Speaker 00 Did we learn nothing? Like, I feel like we just, like, I feel like we're still talking about like the last car crash, and then some people are like, well, if you drive the next car really fast. And I'm like, guys, 100x ARR is just nuts.
20:33 Speaker 01 Yeah. You know, I think this is why that is huge demand for anything up to 250 million in valuation, because they say, if there is a small chance the company is 5 billion, and even if I enter at 250 million post-money, I make money. But at 1.5 billion, that just, that argument doesn't hold, right? So the 250 to 1 billion is a really tricky category. So if you are an AI company, you're getting all the attention. If you're not an AI company, you're getting no attention. That's what it is. It's as binary as it can get. So my advice to the 250 to 1 billion is the same, which is operate efficiently. Don't assume you can raise a round that easily. Build relationships early with investors. So you kind of know the investors that really can see your category and can build conviction in what you're building.
21:18 Speaker 01 And then even if it's a flat round or a slight premium, but you can get that extra cash to accelerate go-to-market efficiently, not for you to go hire three times more people, but like to fuel the go-to-market, do it. Do it all day long, if there's someone willing to do it, but be prepared for those runs to take a lot longer than it normally used to.
21:38 Speaker 00 Is go-to-market spend in the back half of 2023 going to be much more efficient than what we saw in 2021? Because one thing I heard from founders back when things were very hot everywhere was that every single advertising medium, conference, it was just all very expensive. Have prices come down there enough that putting more money into a GTM machine is just gonna yield better results today than it would have a couple of years back?
22:02 Speaker 01 Yes and no. I would say, I mean, generally speaking, startups have got a lot of spend. If I look at from a startups category segment, it's not just that, oh, I'm gonna accelerate spending more on go-to-market. It's accelerate spending more on go-to-market managing the cash runway and the ROI. So what startups have done, the ROI is the second part that's crucially important. I've seen a lot of consumer startups that used to have 30 months payback in quarter two, 2022. Forget 2021, even second quarter 2022, some startups have 30 months payback. Now they're down to 12 months.
22:36 Speaker 00 30 months payback is a long time to re-earn your CAC before you're actually generating effectively income for the business.
22:42 Speaker 01 Correct. So therefore now, but they've worked on it for the last one year, right? They've really worked on optimizing the channels, they're turning down customers that are unprofitable. The startups, the great founders have made the hard calls. I can't generalize because there's a nuance here, but the startups run by great founders are down to 12 months payback. And so they now feel really good about investing in go-to-market selectively, small quantum of dollars in increments, but they know they can test it and they can measure 12-month increments. So what are we seeing? Convertible notes from people for these startups who have 12 months payback and are being run efficiently. For the rest of them, there
23:25 Speaker 01 is nothing. For the rest of them, so if you have suboptimal go-to-market, And you need to raise cash, then you have to really ask yourself, are you ready to invest more in fourth quarter 2023?
23:35 Speaker 00 And the answer is probably not, because you probably don't have product market fit. Because if you did, it wouldn't be working out that way. Two things, one, quantum of capital, I think you said, is a great phrase. I'm going to work that somehow into a headline. And two, I want to ground this conversation about cash growth in two companies that recently filed. One, you may have heard of, given your time at Y C, it's called Instacart. It's does grocery delivery, advertising and software. Have you heard of it, Anu?
24:00 Speaker 01 Of course. In fact, the funny story is that's how I got my job at Andreessen Horowitz.
24:07 Speaker 00 Really? Tell me that.
24:08 Speaker 01 That's how I broke into venture. So when I was, I'm an engineer by twenty, so I started my career at Qualcomm. But I switched to venture capital from B C G in New York. And if you know anything about Silicon Valley, they don't like business school and they don't like consultants. And so people had, people had forgotten that I was an engineer for four years at Qualcomm, launched the first three G handset, built video streaming solution before YouTube, didn't matter. And so whenever I reached out to any venture capitalists or introduction, it was a straight no. So I said, you know what? It doesn't matter. And I was doing private equity at B C G and I was really good at diligence, diligencing different business models and companies, but I wanted to switch to tech.
24:52 Speaker 01 And so one of the New York funds had just asked me to prepare three C D S B companies for diligence and the one that I picked was Instacart, because I thought it was a very business model and that was different than Webvan. So through the work that I had done, I was debating with some of the V C's in the Valley. One of them happened to be Jeff Jordan at Andreessen Horowitz, because he had written a blog post saying it may be really tough for groceries as a category to be online. And I thought what Instacart was doing was really good. And I had interviewed many drivers in New York and, you know, taken screenshots of their store and Apurva happens to be a Qualcomm alum. So I sent him.
25:31 Speaker 00 Oh, I didn't know that.
25:32 Speaker 01 Yeah. And I sent him a cold email and I said, listen, I'm interviewing for these funds and I'm pitching you as the series B company. I'll interview more drivers. Can you give me a little bit of data to prove that the business model is intact? And he was very kind and he shared, but long story short, that's how I got my job at Andreessen Horowitz. So I'm very familiar with Instacart and the team.
25:54 Speaker 00 Well, then you must be very familiar with this free cash flow arc that they shared in their S1. In 2020, the operating cash flow from Instacart was negative 91 million, which swelled to negative 204 million in 2021, but last year swung nearly $500 million to a positive $277 million result. And then the other example is Klaviyo, which is going public as well. Couple IPOs filings last week. It went from negative 38 million free cash flow in the first half of '22 to positive 53 million in the first half of '23. So two companies going public, both around the 10, 15 billion valuation mark, depending on who you ask, and showing a lot of leverage in their ability to generate cash and stop burning it. So the question is, should startups that are in the middle to late stages, if you will, look at those results and say, okay, cool.
26:39 Speaker 00 This is super possible. These companies that I respect have done it and they did it quickly. Or are these outlier exceptions to the good in that they're just better than most companies? And so this is a target, but not really a rule for other companies to follow?
26:52 Speaker 01 I don't think so. I think that that's where the great late-stage founders have already grasped it, right? They have already grasped it and they know they have the levers to pull that. That's the beauty of being a technology company. So for Instacart, even when we underwrote it at the Series B, and then, you know, I invested in it again, we did it out of VC growth. The philosophy was always simple. If you look at the US from a top-down perspective, the percentage of groceries that were online, that were purchased online by the consumer was less than 5%. So if you believe that e-commerce was really taking off and was going to double, triple and accelerate, grocery as a category should at least be 10%. And if you looked at it versus other developed markets,
27:32 Speaker 01 US was lagging UK because UK through Tesco had a very popular click and collect model. And then you had Ocado and others, right? The second, but so we always knew with Instacart that the auto values will only continue to get bigger because you are buying grocery. So if you started with $60 auto value, you probably head towards 100, 110. The more groceries you buy, the more merchants they onboard, the more of your spending on grocery will shift online. So.
28:04 Speaker 00 And as a result of that, if you have larger basket sizes, you probably have better margins. So the business would improve as it grew, not just by adding more customers, but by them actually increasing their average order size as well.
28:15 Speaker 01 Absolutely. And then second was we knew that the grocery players can actually optimize ads much better because they know what shampoo I buy, they know what the soap I buy versus if I just walked into a Whole Foods and picked it from the store, they don't really know exactly what I bought. The systems don't integrate and work very well. So a lot of the trade spend and ad dollars from CPG, we knew could actually more effectively flow to Instacart. But then we underwrote it, there was pretty much no ads business, especially in the CDP, there was none. And at the late stages, probably like it was one on one and a half dollars per order. But as you can see, it's really scaled significantly in the last few years.
28:59 Speaker 01 So the thesis behind Instacart was always that grocery needs to go online. The business model as auto basket sizes increase will support more margins and even more margins can flow in through ad dollars. But for this to happen, you need scale, right?
29:16 Speaker 00 Yes.
29:16 Speaker 01 And by the way, it was not a easy ride for Instacart by any means. But that's where I'm said, like, you have to back the great team versus a team that can run this business. And I think in the early stages, especially between the CDP and D, I give a lot of credit to Apurva Ravi Gupta, who is now at Sequoia, and Neelam. The three of them, I think without them building that business through a very difficult 2016 to 18, I don't think the company could have existed today.
29:47 Speaker 00 Yeah. And now, if you want to look at Instacart's S1, I'm reaching into my memory here, but something like $400 million in ad revenue in the first half of this year? I think that's roughly correct.
29:57 Speaker 01 Yeah, and they're growing like, I think the ad business is the one that probably is helping them grow 30% year on year, right? So.
30:03 Speaker 00 Yeah, no, I mean, super high margin. You eventually end up with an AWS versus Amazon e-commerce side of things in which you have a secondary business that becomes a profit driver. Now, in the case of Instacart. I was very impressed with the numbers. Same thing with Klaviyo. It just looks super healthy. Fast growth, strong cash generation, even GAAP profitability on a net income basis. Just check, check, check, check, check. All the boxes look lovely. I mean, Klaviyo has 119% net retention in a time in the market when almost all software companies that I can see are getting pushed into the 110, 109. Like, it's brutal. So two outlier companies doing really well. The question is, what are they worth? And you mentioned multiples earlier on, and I were a little bit compressed for time because there's one other thing I want to get to.
30:44 Speaker 00 But when founders are looking at the valuations market today, we're going to learn a lot through these IPOs. Very excited about that. I suppose the question is just, should they retain any optimism that we're going to see software multiples reinflate in the near-ish future? Or if you think that this is probably the range they're going to be in for the next couple of quarters to years?
31:07 Speaker 01 Yeah, I actually think the current multiples in the market are pretty fair, right? So if you look at, let's separate them. You'll just separate them into three: internet payments and software. All three are different buckets. I think in internet, the best-in-class businesses like DoorDash and Airbnb do get 20 to 25x EBITDA, which is pretty good, by the way, if you look at the history and the median of time.
31:30 Speaker 00 Yes.
31:31 Speaker 01 What we had in 2021 was outlier, or, you know, that's not what it's going to be. 2025, you should be thrilled. And by the way, DoorDash is an extremely cash-flow-efficient business, will probably do a billion dollars of EBITDA this year, right? So it's not just Instacart that paved the way for it, like DoorDash did that too. And so I think that if you look best-in-class internet multiples, you get between 20 to 25x EBITDA. The mega-cuts, you get 20x earnings. But if you look at the index of internet businesses, 15 internet business, yes, that's trading less than 15x, but I do think the large majority of the internet businesses are subscale businesses. You know, they're not large monopolies. If you're large monopolies like DoorDash
32:12 Speaker 01 or, you know, any of these great internet businesses or Instacart, you can get 20 to 25x EBITDA in this market. And that's what a founder should anchor towards. I don't think you can anchor towards the last three years or the four years multiples.
32:25 Speaker 00 Yeah. And if you're listening to that answer and you're thinking to yourself, why is Anu talking about EBITDA multiples versus revenue multiples? The answer is shut up, make some money, I think is how I
32:35 Speaker 01 Actually, internet businesses have always traded on EBITDA multiples. And that's the beauty of consumer internet businesses because they can show earnings and they show profitability. Software businesses, on the other hand, trade on revenue multiples with a steady state margin assumption because majority of them actually don't make any money, right?
32:52 Speaker 00 I know, I know. I really wanted to get into the our software companies, good businesses, but we don't have time. What I do want to do before we go quickly, we were talking before the show and one thing that you really wanted to get to was venture as an asset class for the next 10 years. And you didn't tell me what you thought, so I'm going to take a guess at it and then I want to repost from you before we go. So venture as an asset class, some funds do great, some funds don't. Some funds that are bigger have lower return expectations, so they're putting more capital to work. Cool, cool, cool, cool, cool. My guess is that venture returns of the next 10 years for new vintage funds, starting now, are going to be great. But for funds that are mid-vintage right now are going to be terrible. And that's my hypothesis. Hit me with your answer.
33:31 Speaker 01 I think that's true, but I would say that there is more to ones than that. I think that is a question that we've been debating and grappling. Will the venture return for the next 10 years look as good as it did the last 15 years as an industry? And my guess is, as an average as an industry, it won't. Because the simple reason that we have way more venture funds, way too much competition, and way too much supply chasing few companies. You see that in AI, like we haven't even been two years since 2021 and it's already overpriced. And I think the fact is, we are going to see, the top returns are going to come from a very small set of funds that are focused on fundamentals.
34:16 Speaker 01 And fundamentals has to be, you're good in one thing or two things max and a niche. Because large dollars, large amount of dollars chasing few companies have never generated significant returns for an entire fund size. The problem is we have too many large funds and we have too many funds.
34:35 Speaker 00 Yep.
34:35 Speaker 01 You have to really pick the differentiation. So I think the winners are going to be people who really have a product and a differentiation for founders and therefore are able to attract them at a reasonable price, right? Because that is important in the end for returns. And then for public markets, fundamental stock picking. And so we're going to go back to fundamentals over the next 10 years.
34:56 Speaker 00 That sounds great to me because I can do math. So fundamentals work. It's when I don't understand things that I lose my, my marbles. Also, just, you know, as a final note on that, I think the logic of the market seemed to change in 2021, that there was going to be so much more growth for software companies in particular, for so much longer, that there were going to be many more hard billion dollar public companies launched from the venture and startup community. And that doesn't actually seem to be the case. And so it feels like we're coming down to the realization that the number of true outlier companies with great founding teams is only so big and you can only wrap so much capital effectively around that before it becomes inefficient. And that's tough, given how much money people want to put into venture. So it's not my problem, Anu, but I am going to be very curious to see how it all plays out. But sadly, we have to go.
35:41 Speaker 00 We will have you back on because this was an absolute treat. Post Instacart's IPO and we'll find some excuse to drag you back on the show to talk to you about it. But Anu, for folks who want to find you on the great wide internet, where should they go?
35:51 Speaker 01 On the wide internet, you can read my Substack. I put up a Substack and you can follow me on Twitter.
35:56 Speaker 00 Cool. And we will have links to both of those in the show post. If you want those, techrunch.com, you will find it. And that is our show for this fine Wednesday afternoon. Don't forget, if you need even more equity in your life, we are EquityPod on both Twitter and threads, and we are back in your favorite podcasting app Friday morning. We'll see you then. Bye.
36:16 Speaker 00 Equity is hosted by myself, editor in chief of TechCrunch Plus, Alex Wilhelm, and TechCrunch senior reporter, Mary Ann Azevedo. We are produced by Teresa Locan Solo with editing by Kel. Bryce Durbin is our illustrator and a big thank you to the audience development team and Henry Pickavet, who manages TechCrunch Audio Products. Thank you so much for listening and we'll talk to you next time.
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