Why Some VC Investments Work Out, and Some Don’t. What I’ve Learned. | SaaStr

Dear SaaStr: What Should I Do after a Failed Startup? Get a Job or Try Again? | SaaStr

So as an investor, I was fortunate to have a strong start.  My first investments ended up performing quite well.  Investment #1, Pipedrive, ended up acquired by Vista for $1.5 Billion.  Investment #2, Algolia, is worth $2.2 Billion today and a strong IPO candidate for 2023 and beyond.  Investment #3, Talkdesk, is worth $10 Billion.  Investment #4 was part of Greenhouse, acquired for $800m+.  And Investment #6 was Salesloft, acquired by Vista for $2.3 Billion.

But as time goes by, you see the patterns.  What works, and what doesn’t.  And why.  And as more time goes by, they haven’t all worked out.

So a few things that didn’t work out for me at least:

  • Momentum Investing.  This is piggy-backing on someone else’s hot investment, without being 100% sure on your own it’s the right one to make.  This has been a total negative strategy for me.  I’ve only done one material investment like this, but 3 tiny ones as experiments haven’t done much, either.  There are ways to make this strategy work.  But for me at least, I’ve learned make your own momentum.
  • CEO of bit of a b.s. artist.  The above billion+ exits, the CEOs were all quite different.  Some caring, some a bit less so.  Some very transparent, some guarded.  Some sales-y, some very technical.  But all were honest.  What they did share, was true.  By contrast, every CEO I invested in that fudged the numbers … none are really going to go big.
  • CEO good at sales, but CTO not that great.  This was a bet I made a few times, and I learned.  A CEO that is great at sales can often brute force things even to $10m, $15m ARR or more.  But if the product isn’t great, it catches up to you.  A truly great CTO though makes sure it doesn’t really catch up to you.  So now I try to only invest in Great CEO + Great CTO combos.

And a few things stand out in the “ok but not great” exits:

  • CEO not better than me.  Only other founders will truly get this, but being a CEO is hard.  Really hard.  If you aren’t a better CEO than me, it rarely leads to a big outcome.  But if you had the same traction I did, but are a better CEO … you can build a unicorn.  You really can in SaaS.
  • CEO who couldn’t control burn rate.  Some CEOs just can’t get the burn rate under control.  Personally, I haven’t seen a great outcome here.  It’s one thing to let a high burn rate slide for a few months, but some CEOs literally don’t think there is anything they can do to make their cash last.  The best ones just find a way.
  • Not really SaaS.  I’ve tried experimenting in investing in startups that have SaaS elements but aren’t really SaaS.  So far, no big successes here, either.  That’s likely on me.  I do understand SaaS.  But maybe I don’t really understand other things with recurring revenue nearly as well.

Now, if you have enough strong outcomes, the smaller ones don’t really matter that much.  But I’ve learned to stick to the plan.  Invest in SaaS companies with great CEOs + CTOs with a smidge of traction. That maybe the others … overlook.

Published on August 9, 2022

Go to Publisher: SaaStr
Author: Jason Lemkin