Jason Lemkin: Crowdstrike, WTF Happens From Here? Wiz Rejects Google’s $23BN Acquisition Offer|E1181

Intro (0s)

• The speaker, Jason Lemkin, acknowledges the current state of the venture capital market, where early-stage companies are struggling with liquidity and late-stage companies are facing pressure to deploy their funds.
• He expresses hope for a return to the high liquidity levels seen in 2021.
• Lemkin is excited to discuss the recent news surrounding Crowdstrike and Wiz, highlighting the significance of these events in the current market landscape.

Wiz's Rejection of Google's $23B Offer (47s)

• Google's $23 billion offer for Wiz was not overpriced. Jason Lemkin argues that the offer was fair considering Wiz's rapid growth from zero to $500 million in revenue in just four years. He compares Wiz's valuation to CrowdStrike, which traded at over 20x revenue, and believes that Wiz's potential for future growth justified the price.
• Google's acquisition attempt was driven by a desire to fuel Google Cloud's growth. Lemkin explains that large tech companies often make big acquisitions during periods of strong growth to maintain momentum. Google Cloud, despite being the fastest-growing of the major cloud providers, is still in third place. The acquisition of Wiz would have given Google Cloud a significant advantage in the rapidly growing cloud security market.
• Wiz's rejection of the offer was likely due to a combination of factors, including the potential for a higher valuation through an IPO and the risk of antitrust scrutiny. Lemkin believes that Wiz's founders were confident in their company's future prospects and saw an IPO as a better path to maximizing their returns. Additionally, he points out that the acquisition could have faced significant antitrust scrutiny, given Google's already large presence in the cloud market. The potential for a lengthy and disruptive antitrust process likely played a role in Wiz's decision to decline the offer.

Influence of CrowdStrike on Wiz's Decision (9m9s)

• The speaker believes that CrowdStrike's success influenced Wiz's decision to reject Google's acquisition offer.
• The speaker suggests that Wiz's team recognized the significant risks associated with the acquisition, including the potential for regulatory scrutiny and delays in closing the deal.
• The speaker speculates that Wiz's team may have been hesitant to endure a lengthy and uncertain integration process, similar to the experience of Figma's team during their acquisition by Adobe.

Choosing Between Antitrust Issues & IPO Demands (9m54s)

• The text discusses the dilemma faced by Wiz, a cybersecurity company, in choosing between a potential acquisition by Google for $23 billion and going public through an IPO. The author compares this decision to an old witch test in the UK, where a person was thrown into a lake with their hands and feet tied. If they drowned, they were not a witch, but if they survived, they were a witch and would be burned at the stake. Similarly, Wiz faces a difficult choice between two potentially risky options.
• The author argues that both going through a potentially lengthy and challenging antitrust process with Google or going public through an IPO have their own drawbacks. An antitrust process could be disruptive and potentially kill the company, while going public exposes the company to intense scrutiny from public markets, short sellers, and activist funds.
• The author believes that most founders would be better off taking an acquisition offer, especially if it's a significant exit. He argues that the stress and headaches of dealing with public markets and activist investors are not worth the potential rewards. He also points out that the market for SaaS companies is becoming increasingly saturated, making it harder for companies to maintain high growth rates.

Discussion on Liquidity in the Venture Ecosystem (13m58s)

• The venture ecosystem is facing a liquidity crisis. There has been a lack of liquidity for three years, with few exceptions like the recent Figma acquisition. This lack of liquidity is hindering the ability of venture capitalists to exit their investments and generate returns for their limited partners (LPs).
• Venture capitalists are pretending that liquidity is not an issue. While early-stage investors may not be concerned about liquidity, late-stage investors are facing pressure to deploy capital. However, the current market conditions make it difficult to find attractive investment opportunities, and LPs are not pressuring GPs to deploy capital if they have managed their funds well.
• The need to maintain momentum in the venture ecosystem is driving investment activity. Venture capital firms need to raise new funds regularly to maintain their momentum and attract new investors. This pressure to raise funds can lead to over-investment, even in a market with limited liquidity. The speaker argues that the focus should be on finding exceptional companies like Wiz, regardless of market conditions.

The Venture Game & Finding the Next Big Entrepreneur (17m42s)

• The speaker believes that the venture game remains the same as it always has been: finding the one or two entrepreneurs who will revolutionize an industry each year.
• The speaker acknowledges that while finding these entrepreneurs is difficult, the real challenge lies in convincing them to take your investment.
• The speaker argues that the best founders don't start companies when they are ready, but rather when they are forced to by factors like liquidity or market conditions. This suggests that the speaker believes that the current environment of abundant capital may be hindering the emergence of truly groundbreaking companies.

Requirements for Going Public (19m8s)

• The speaker believes that a company needs to be generating $500 million in revenue, growing at 30%, to successfully go public. This is because the public market requires a certain level of scale and growth for analysts to pay attention and for the market to be liquid.
• The speaker acknowledges that companies can go public at lower revenue levels, but they would need to be growing at a much faster rate, likely 50-60% or more. This is because investors are looking for high growth potential in the public market.
• The speaker notes that there are many SaaS companies in the $100-$200 million revenue range that are not growing fast enough to meet the requirements for a successful IPO. This is a challenge for the industry, as it means that many companies are stuck in a "no man's land" where they are too large for private funding but not large enough for the public market.

How Well Did CrowdStrike Handle the Crisis? (21m40s)

• CrowdStrike's handling of the crisis was not ideal. While the CEO acknowledged the issue and addressed it in a video, the company's website lacked a comprehensive root cause analysis. This lack of transparency was particularly concerning given CrowdStrike's status as a single-point-of-failure solution for many organizations.
• The impact of the crisis on CrowdStrike's business is uncertain. While churn is unlikely in the short term due to the significant time and effort required to switch security solutions, the incident could negatively impact future sales and upselling efforts. Customers may be hesitant to invest in additional CrowdStrike products after experiencing a major outage.
• CrowdStrike's multi-product strategy may be hindered by the crisis. The company's success in upselling has been dependent on customer satisfaction and trust. The recent outage could damage this trust, making it difficult for CrowdStrike to convince customers to purchase additional products. This could lead to a decline in net revenue retention (NRR) and growth in the coming year.

The Bull & Bear Cases for CrowdStrike (25m20s)

• The Bull Case: CrowdStrike, despite the recent outage, remains a strong contender in the SaaS and Cloud market. The outage was not a security breach, but rather a technical error, which is forgivable. While the company may face some short-term challenges, it is likely to recover and continue its growth trajectory.
• The Bear Case: The outage could potentially lead to significant legal and financial consequences for CrowdStrike. The company may face increased scrutiny and skepticism from customers, potentially impacting future sales. There is a risk that the company could become overly conservative in its approach, hindering its innovation and growth.
• Overall: Despite the recent challenges, CrowdStrike remains a valuable service provider. The company has a strong track record and is likely to recover from this setback. However, the company needs to be transparent and proactive in addressing the issues and regaining customer trust.

Predicting CrowdStrike's Market Cap for End of 2024 (29m8s)

• CrowdStrike's market cap is currently at $66 billion, down from $100 billion last week. This decline is attributed to a 40% reduction in growth projections due to factors like upselling and longer sales cycles.
• Despite the recent downturn, CrowdStrike's conservative projections for next year suggest a potential rebound. The company has projected only a teen growth rate for next year, which is significantly lower than the 33% growth rate achieved this year. This conservative approach provides a buffer for the company to potentially meet its targets even with the current challenges.
• The speaker predicts that CrowdStrike's market cap will reach $83 billion by the end of 2024. This prediction is based on the assumption that the market cap will recover half of the lost value, considering the company's conservative projections and potential for growth.

Jason's Analysis of Clio's $900M Round & $3B Valuation (33m1s)

• Clio raised $900 million at a $3 billion valuation, which is a significant amount of dilution, especially considering the company's size and stage. The majority of the funding was secondary, meaning existing investors sold their shares. Clio's revenue is $200 million and growing at a rate of 200%, making it a 10x revenue multiple deal. While this is a high valuation, it's not unreasonable given the company's growth trajectory.
• Clio's growth has accelerated since they started managing legal payments. The company was founded in 2007 and took 15 years to reach $100 million in revenue. However, they doubled their revenue in the past two years after implementing payment management solutions. This demonstrates the power of combining payments and software, similar to how Shopify has achieved success.
• Clio's success is a testament to the power of perseverance and commitment. The company's founder, Jack Newton, has been dedicated to the legal tech space since 2007, even when it was difficult to convince lawyers to trust the internet for legal documents. Clio's story shows that even companies that take time to gain traction can eventually achieve significant success if they stay focused and adapt to market trends.

Jason's Take on Harvey's $100M Raise & $1.5B Valuation (37m25s)

• Jason expresses concern about the sustainability of Harvey AI's rapid growth and $1.5 billion valuation. He notes that while the company's tripled ARR in two years is impressive, the legal tech space is becoming increasingly saturated with AI capabilities.
• Jason predicts that by 2025, most legal tech products will have similar AI features, leading to "AI parody." He draws a parallel to the contact center space, where companies like Zendesk, Intercom, and Gorgias all offer AI-powered automation, but with subtle differences.
• Jason argues that while AI is disruptive in legal tech, it's not a unique advantage. He believes that the rapid adoption of AI across the industry will make it difficult for any one company to stand out, and that Harvey's current success may not be sustainable in the long term.

Quick-Fire Round (41m59s)

• Undervalued Public Company: Jason Lemkin believes that Klaviyo is the most underappreciated public company. He highlights its impressive growth, exceeding HubSpot in marketing revenue, and its strong position in the e-commerce market, particularly with Shopify. Despite its success, Klaviyo's valuation remains relatively low, making it a compelling investment opportunity.
• Overvalued Public Company: Jason believes Snowflake is the most overvalued public company. While it was once considered a "whiz" in the data space, its recent performance has raised concerns. The departure of its CEO, Frank Slootman, and the emergence of competitors like Databricks have cast doubt on Snowflake's future dominance.
• Private Company to Invest In: Jason would most like to be invested in Revolut, a fintech company, and ServiceTitan, a home services software provider. He acknowledges that he should have invested in both companies earlier, given his strong belief in their potential. He emphasizes the importance of investing in companies with strong leadership and a commitment to building a great team.
• Recruiting Talent: Jason expresses regret for not being a better recruiter of investment talent. He believes that spending more time on finding and nurturing talented individuals would have led to greater success in his investment portfolio. He encourages other investors to prioritize building a strong team, as it is crucial for long-term success.