Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045

Jamin joins Alex to kick off the show (0s)

• Venture capitalists and founders traditionally had aligned incentives, as both parties got rich through big company exits, with the only way for founders to get rich being through equity in one company, and venture capitalists profiting from these exits as well (12s).
• However, this alignment has changed, and now venture capitalists' incentives are more focused on maximizing their assets under management (AUM) and deployed dollars, rather than solely relying on big company exits, which can lead to suboptimal outcomes and experiences for founders (32s).
• The 2 and 20 model is a key component of venture capitalist incentives, with the "2" referring to a guaranteed 2% management fee charged annually on the fund, and the "20" referring to a variable 20% performance fee (3m34s).
• Venture capitalists make money through two predominant ways: a guaranteed portion (the 2% management fee) and a variable portion (the 20% performance fee) (3m27s).
• The alignment of incentives between venture capitalists and founders is crucial, as misaligned incentives can lead to negative outcomes for founders, and understanding these incentives is essential for founders before entering a fundraising process (48s).
• The growth of venture capital has led to changes in the incentives that drive the industry, with some investors arguing that these changes have significant implications for founders and the startup world as a whole (1m49s).
• Jamin Ball, an investor at Altimeter, wrote a post about venture incentives that gained significant attention, with Bill Gurley stating that it could be the single most important issue for the entire venture capital landscape (2m53s).
• Venture capital firms have a management fee, which is roughly 2% on average, used to pay salaries, rent, and other operating expenses, and this fee is typically collected annually over a 10-year period, independent of the investments made (3m54s).
• In addition to the management fee, venture capital firms also receive a 20% share of profits, known as carry, which is the firm's share of the returns on investments (4m1s).
• The carry is variable and can range from 15% to 30%, but it is typically around 20% (4m22s).
• The price of venture capital has remained relatively fixed despite the growth of the asset class, which is interesting given the increased supply of venture capital (4m34s).
• To illustrate how venture capital firms make money, consider a $100 million fund that returns 3X, generating $200 million in profits, with 20% of those profits, or $40 million, going back to the fund as carry (5m20s).
• The carry is then allocated among the partners and employees of the venture capital firm based on their ownership percentage (5m27s).
• Historically, venture capital firms were smaller, and the guaranteed portion of compensation from the management fee was not enough to make partners rich, so they had to maximize carry to get rich (5m48s).
• To maximize carry, venture capitalists need big company exits, which aligns their interests with those of founders, who also need big company exits to get rich (6m10s).
• This alignment of interests between venture capitalists and founders has been a key driver of the venture capital industry, but it may be changing as the industry evolves (6m28s).

Alignment of incentives between VCs and founders (6m30s)

• Historically, venture capitalists' incentives were aligned with those of founders, as their primary source of wealth was carry, which required the success of the companies they invested in (6m34s).
• However, as funds have grown significantly in size, this alignment of incentives has changed, and venture capitalists can now earn substantial amounts from management fees alone (7m16s).
• For example, a $1 billion dollar fund can generate $20 million in annual management fees, which is guaranteed for a 10-year period, regardless of the fund's performance (8m0s).
• This has created a situation where venture capitalists can become wealthy even if the companies they invest in do not succeed, as long as they can raise and deploy large amounts of capital (8m42s).
• This has led to a distinction between "2% firms" that focus on maximizing management fees and "20% firms" that focus on carry and the success of their portfolio companies (9m12s).
• The incentives of venture capitalists are no longer perfectly aligned with those of founders, and this can lead to suboptimal outcomes for founders, such as being offered too much money at too high a valuation (9m44s).
• Even venture capitalists who have historically prioritized the success of their portfolio companies may be influenced by the temptation to maximize their management fees and deployed capital (9m54s).
• Founders should be aware of these changed incentives and consider them when deciding which venture capitalists to partner with (7m38s).

LinkedIn Jobs - Post your first job for free (10m25s)

• Hiring the wrong person can have severe consequences for a business, including decreased productivity, slowed momentum, and a negative impact on company culture and vibes, ultimately derailing the entire company (10m26s).
• On the other hand, making a great hire can accelerate business growth and productivity, which is why finding the right talent is crucial (10m42s).
• A "bar raiser" is someone who joins an organization and raises the bar for everyone else, and LinkedIn is a great platform to find such individuals (10m46s).
• LinkedIn has over a billion members worldwide, in more than 200 countries, making it an ideal platform for businesses with international operations (10m55s).
• 70% of LinkedIn users do not visit other leading job sites, so businesses that are not using LinkedIn may be looking in the wrong place for talent (11m6s).
• LinkedIn is packed with amazing talent, and the platform uses AI to help craft job descriptions that attract the right people (11m15s).
• 86% of small businesses that use LinkedIn Jobs get a qualified candidate within 24 hours, making it an effective platform for finding talent quickly (11m33s).
• Businesses can post their first job for free on LinkedIn by using the URL linkedin.com/twist, with terms and conditions applying (11m41s).

Venture capital allocation demand and its impact (11m54s)

• The amount of capital flowing into Venture Capital has increased dramatically over the last five years, which is confusing given the expectation that the era of multi-billion dollar Venture funds would be behind us due to rising interest rates (11m54s).
• The increased demand for Venture Capital allocation is a driving factor behind the incentive shift, with the Venture asset class moving from a high-margin cottage industry to a lower-margin mainstream industry (12m33s).
• 15-20 years ago, the Venture asset class was smaller, funds were smaller, and returns were higher, creating demand for the asset class and attracting more dollars (12m59s).
• The sophistication and globalization of the Limited Partner (LP) base, including the emergence of single-family offices, multifamily offices, rich individuals, and private wealth platforms, have contributed to the increased demand for Venture Capital (13m27s).
• The Zero Interest Rate (Zer) period accelerated the trend of increased demand for Venture Capital, allowing latent demand to find a home and attracting new investors who didn't historically have access to the asset class (14m17s).
• The increased demand has led to larger funds, but smaller funds and first-time funds have had trouble raising capital, which is confusing given the historical success of small funds making big bets and achieving impressive returns (15m10s).
• The returns profile of Venture Capital funds is expected to come down as funds get larger, which raises questions about the sustainability of the current Venture Capital model (15m48s).

Comparison of returns between small and large venture funds (15m55s)

• Many Limited Partners (LPs) have increased in size and now require larger funds to invest in, as they need to write checks of $100 million or more, which smaller funds cannot accommodate, leading to a preference for larger funds with lower IRR targets (16m28s).
• The trend of companies staying private for longer has resulted in world-class companies appreciating significantly in the private markets, with some reaching valuations of $20-150 billion, making it difficult for smaller funds to invest in these companies (16m50s).
• This shift has led to a situation where only large Venture Capital funds and their investors can access these high-growth companies, leaving retail investors out (17m55s).
• To achieve top-quartile returns, Venture Capital funds need to focus on generating power law outcomes, which are more likely to occur in a concentrated portfolio of high-potential companies rather than a diversified portfolio (18m14s).
• The number of companies that can generate power law outcomes decreases as the investment stage progresses, making it more challenging for larger funds to achieve these outcomes (18m38s).
• A possible approach for larger funds is to adopt a highly concentrated strategy, investing hundreds of millions of dollars in a small number of high-potential companies, rather than building a diversified portfolio (18m55s).
• This approach is not commonly used by large funds, which often prioritize diversification over concentration, leading to median returns rather than alpha above the median (19m4s).
• As venture funds get bigger, they tend to build an index and hug the median, making it harder to generate outlier returns at scale unless they are more concentrated (19m14s).
• Some Limited Partners (LPs) prefer a product that provides a return slightly better than the index, rather than expecting a 10x return, especially when investing large sums like $300 million (19m35s).
• The promise of venture funds has shifted, and as the world moves back to a zero-interest-rate period, people move out the risk curve, and when interest rates reverse, they move in the risk curve (19m45s).
• Smaller funds are more likely to provide power law outcomes, but with more risk comes a greater potential return, and the challenge is that there is limited data on the performance of second or third-time funds (19m54s).
• Big funds only have the right to get big if they have a history of success over a decade or more, and they have made money for LPs in the past, making them a safer investment (20m20s).
• The question remains whether someone who made money in a smaller fund setting can also make money in a larger fund setting, and whether it's riskier to invest in someone with limited data (20m41s).
• Those who are having trouble raising a second-time fund or first-time fund are often folks who broke off from large funds to start their own, and may not have a personal track record or history (21m0s).
• There was a surge of "fast money" entering the venture market in 2021 that may not have been sure of the risks, and LPs need to smooth their vintages and invest in a manager over multiple funds, rather than just one (21m16s).
• Funds are driven by power law outcomes, and individual funds are driven by individual power law funds, so investing in a manager over multiple funds can provide a better return in the long run (21m40s).

Beehiiv - Get 30 days free and 20% off your first 3 months (21m54s)

• Beehiiv is a service built for growth, particularly suitable for email lists and podcasts, and has been instrumental in the success of "This Week in Startups" and its Twist 500 newsletter (21m54s).
• Beehiiv was co-founded by one of the minds behind the popular newsletter "Morning Brew", allowing users to access the same tools that helped Morning Brew reach millions of readers (22m23s).
• The platform offers features such as an AI post builder and a referral program, making it a comprehensive tool for growth and revenue (22m54s).
• Beehiiv has an ad network, enabling users to drive revenue from their newsletters, making it an attractive option for those looking to monetize their content (22m36s).
• The platform is super affordable, priced at $39 per month, and a special offer is available, including a 30-day free trial and 20% off the first three months for new users (23m0s).
• To take advantage of the offer, users can sign up at beehiiv.org (23m6s).

Power laws in startups and venture capital's impact (23m23s)

• The top 25 podcasts receive approximately half of all downloads, illustrating the concept of power laws, where a small proportion of entities hold a disproportionately large share of the total (23m28s).
• Companies are staying private for longer periods, leading to increased demand for venture allocation, and funds with a proven track record are able to absorb more capital (23m36s).
• As a result of this trend, returns expectations have decreased, contributing to the current capital wave in the venture capital landscape (23m49s).
• Historically, the old model in venture capital kept venture capitalists and founders aligned due to their shared 10-year journey (23m58s).
• However, with the shift to a faster fundraising and deployment cadence, as well as a more index-based approach, founders can receive significant funding but may be left without support if they are not among the top-performing outlier companies (24m12s).

Effects of rapid fundraising cycles on founders (24m19s)

• Venture capital has shifted from a "cottage industry" where investors were true partners to a model where larger funds make multiple investments, resulting in less time spent with each company (24m40s).
• This shift has led to a reality where investors prioritize deploying new capital over optimizing existing investments, which can result in suboptimal outcomes for founders (25m20s).
• Founders of successful companies may not need as much guidance from their investors, but those struggling may require more attention and support, which can be challenging to receive from investors with multiple board seats (25m56s).
• When approaching the market for fundraising, founders should consider the type of firm that is the right fit for their company and approach, rather than simply assuming that a larger fund is bad (26m57s).
• Founders should evaluate what they are getting from their partner, including their level of commitment to the company's success, rather than just considering the firm as a whole (27m15s).
• The ideal investor-founder relationship is one where the investor is a true partner through thick and thin, but this can be challenging to find in today's venture capital landscape (24m41s).
• Founders who are struggling may need to rely on their investors for guidance on handling the future of their company, including decisions about selling or shutting down (26m6s).
• The nature of venture capital has changed, with larger funds and more investments, which can lead to a transactional relationship between investors and founders rather than a partnership (25m24s).
• Large funds have an incentive to deploy capital, which can lead to raising bigger funds and generating more fees, with the primary KPI being deployment rather than returns or company growth (27m27s).
• This can result in situations where companies receive larger investments than they need, with round sizes increasing faster than company growth, and founders may struggle with the pressure of meeting high valuations (28m20s).
• Founders may receive higher valuations and more capital, but this can also create risk and expectations that are difficult to meet, potentially leading to companies becoming over-capitalized and struggling to grow into their valuations (29m17s).
• Over-capitalization can create a structure where companies feel pressure to raise more money and hit multiple milestones in a row, rather than focusing on underlying business momentum and fundamentals (29m43s).
• This can lead to existential questions for executives and employees if the company struggles to meet its high valuation, and may ultimately hinder the company's growth and success (30m16s).
• The benefits of over-capitalization may be short-term, but the risks and challenges it creates can be significant, and founders should be cautious of taking on too much capital and pressure to meet high valuations (29m5s).
• Companies that raise too much money at high valuations may struggle to grow into their valuations and may ultimately fail to meet expectations, highlighting the importance of careful fundraising and valuation management (29m24s).
• When companies raise large amounts of capital at high valuations repeatedly, it creates an illusion that the company is extremely successful and will continue to grow rapidly, leading to a shift in hiring from people who deeply believe in the company's mission (missionaries) to those who are primarily motivated by potential financial gains (mercenaries) (30m22s).
• This shift in hiring can lead to problems when the company encounters difficulties, as mercenaries may lose conviction and leave the company, taking their skills and knowledge with them (30m47s).
• The departure of these employees can create a ripple effect, as their attitudes and concerns can be infectious and spread to other employees, leading to a loss of morale and momentum (31m10s).
• The use of valuation multiples, such as the example of software companies being worth eight times revenue, can also contribute to this problem, as employees may become disillusioned if they feel the company is not meeting these expectations (31m17s).
• This can ultimately lead to turmoil within the company, as it struggles to retain employees and maintain momentum in the face of changing circumstances (31m30s).
• The challenge for companies is to navigate these issues and find a way to maintain a strong and motivated team, even in the face of difficulties and setbacks (31m32s).

CLA - Get started with CLA's CPAs, consultants, and wealth advisors now (31m33s)

• Stephen Estus, a principal at CLA, a professional services provider specializing in CPA, tax, consulting, and wealth advisory, has expertise in VC startups, VC funds, high-growth startups with complex tax issues, and multi-state and international filings (31m36s).
• Founders are currently sweating about funding due to the tightened capital availability caused by inflation and higher interest rates, making it challenging to raise funds (32m6s).
• The days of easily securing investments with just an idea are gone, and founders are now being asked to do more with less and defer the need to raise funds again for as long as possible due to lower valuations (32m37s).
• Founders need a trusted adviser for taxes and accounting to get things right, and a great partner like CLA can provide this expertise (32m48s).
• CLA can be reached at CLAconnect.com, and founders can let them know they were referred by JC (32m52s).

Raising large rounds and long-term commitments (32m59s)

• Raising a large round of venture capital, especially a big round, implicitly commits a company to a certain outcome and closes a path for an exit, as the venture dollars invested go into primary shares, which means primary shareholders get paid back first on their investment prior to everyone else in the cap table (33m3s).
• If a company raises $100 million as a series A and sells for less than $100 million, nothing will flow through to anyone who's not a preferred shareholder, effectively closing that exit path (33m38s).
• Founders may still benefit from selling their company for $100 million, potentially earning a significant payday, but that path is no longer on the table if they raise $100 million, as they are implicitly committing to the next big outcome (33m52s).
• Big funds are driven by power laws, where what matters is whether an investment is a home run or a zero, and even the in-betweens don't really matter, as a fund's overall return is often determined by a few highly successful investments (34m10s).
• Middle ground outcomes, which can be meaningful to founders and employees, are often irrelevant to a fund's ultimate goal of delivering a top quartile return, as the fund's success is often determined by a few highly successful investments (34m38s).
• Raising big rounds can shut a lot of middle ground doors and implicitly shut exit path doors, and founders may not realize that they are now playing the same game as venture capitalists, but with only one bet to make, which is their company (35m1s).
• Venture capitalists, on the other hand, get to build a portfolio and diversify their bets, which is different from a founder's situation (35m12s).

Venture capital's influence on startup M&A activity (35m15s)

• Venture capital firms receive a 2% management fee throughout the investment period, which can influence their decisions on startup mergers and acquisitions (35m16s).
• The delay in IPOs is a known phenomenon, and there is ongoing commentary in the startup world about who is to blame for the lack of M&A activity, with some pointing to venture capital firms over-capitalizing early-stage companies (35m27s).
• Over-capitalization can lead to a lack of exits, as it closes off opportunities for smaller acquisitions, often referred to as "singles and doubles" in the venture capital world (35m48s).
• The IPO market is always open, but the market clearing price varies, and companies may be unwilling to accept a lower valuation than their last private funding round (36m13s).
• There are approximately 1,300 private unicorns, but it is estimated that only 5% or less will exit at a price greater than their last funding round (36m24s).
• One reason IPO markets appear closed is that companies may be hesitant to go public at a lower valuation than their last private funding round, which can result in a "down round" and negatively impact employee morale and investor sentiment (36m41s).
• The valuation gap between private and public markets can also deter companies from going public, as they can raise capital at higher valuations in the private markets (37m27s).

Public vs private market valuation disparities (37m38s)

• Public markets are placing a premium on platforms that have proven staying power and have hit escape velocity, rather than point solutions that may have a zero terminal value in the future due to disruption (37m39s).
• Large, successful companies like Confluent, Braze, and Rubric trade at less than 10 times revenue, which is a lower multiple compared to private market valuations (38m1s).
• The public markets are placing a premium on large companies, which creates a challenge for startups that are not yet at a billion dollars in revenue (38m26s).
• There is a significant delta between the market clearing price for subscale software companies in the public markets and the valuations they were able to raise at in the private markets (38m38s).
• This disparity between public multiples and private valuations has been a multi-year situation, and it is unclear when or if the logjam will release and companies will be forced to accept the market clearing price (38m57s).
• The question remains whether there will come a point when the tension between public and private valuations becomes unsustainable and the logjam is released, or if the situation will continue indefinitely (39m14s).

Future of startup liquidity and exit scenarios (39m24s)

• The startup liquidity environment was expected to change exponentially, but it has reverted to the mean, and the log jam in exits is unlikely to break, with rates going down and markets coming back, but not exponentially picking up (39m24s).
• Many companies were overfunded and shouldn't have been, resulting in a lot of money being lost, and large funds with brand names can absorb a lot of capital and stay large, leading to over-capitalization of startups and unpalatable valuations to public markets (40m5s).
• There is a lack of movement among venture capitalists to build smaller funds that can perform better and help founders capitalize correctly, due to incentives and fees, which make it difficult for large funds to downsize and deal with reputational damage (40m26s).
• Venture capital firms are not incentivized to change their strategy, as they are used to earning well from their assets under management, and downsizing would require laying off people and dealing with reputational damage (42m17s).
• The current situation is similar to companies being stuck in a zombie march, slowly going out of business, and venture capital firms are also stuck in a similar situation, with no clear downside or incentive to change (42m31s).
• The problem is a result of collective inertia, and it's hard to point to one individual constituent as being at fault, but rather a combination of factors, including limited partners, founders, general partners, and the Federal Reserve (41m51s).
• The question now is whether venture capital firms want to take their medicine and downsize, or stay the course, but either way, it's a painful process (42m0s).
• Venture funds do not have the same issue as companies with runway, as there is still a lot of demand for large venture funds, and they do not become "zombie" funds even if they are not performing well, because companies are staying private longer and there is more value to be captured in the private markets than ever before (43m6s).
• The LP environment is changing, with a new class of LPs having different return expectations and a different cost of capital, making the game more complex (43m42s).
• Venture capital fund partners are expected to put some of their own capital into the fund, known as "skin in the game," to align their incentives with those of the LPs (44m2s).
• The percentage of AUM that partners put into a new fund, known as the GP commit, has historically been around 1-2% of the fund size, but it is unclear if this percentage has changed over time (44m34s).
• The GP commit is typically split proportionally amongst the different seniorities of the venture fund, and while the dollar value of the GP commit has gone up, the net worth of the people putting it in has also increased, so the relative percentage of their net worth may be smaller (44m53s).
• Historically, venture capital fund partners would take out a line of credit to fund their capital commitment to the fund, but now it is less common, and the industry has gotten bigger and richer (45m21s).
• Venture capital firms have altered their approach, lowering the percentage of net worth they invest in funds, which may require adjustments to their strategy to optimize performance (45m43s).
• The percentage of a fund owned by a venture capital firm can impact their willingness to invest time in companies that may not be extremely successful but still have potential (45m51s).
• Venture capital firms may be more inclined to support companies that are not grand slam successes but still viable, such as those that could be considered a triple, if they have a larger stake in the fund (46m3s).

Proposals for realigning venture capital funds and founder incentives (46m6s)

• Venture capital funds have varying levels of GP commit, but there is no clear mandate for a specific percentage, and rational actors may prefer to put in zero dollars to guarantee a significant amount of money (46m15s).
• LPs may request a higher GP commit, such as 5%, but the high demand for the Venture asset class means that funds can find other investors willing to accept a lower GP commit, such as 2% (46m36s).
• The supply and demand curve for Venture capital means that there is a high demand willing to absorb all the supply at the current price of 2% and 20% with a GP commit as a component (46m52s).
• The question of who is to blame for the misaligned incentives is effectively nobody, as it is a result of the high demand for Venture capital and the rational decision of funds to raise money and play the odds (47m3s).
• The problem is that there are not enough outlier companies to absorb the amount of money being raised, leading to distortion on the founder side, delayed exits, and other issues (47m15s).
• Until the number of breakout companies can be increased, the current situation is likely to continue, with VCs making rational decisions based on the high demand for Venture capital (47m31s).

Impact of AI on startup growth and venture capital (47m41s)

• The growth of companies, especially those in the AI space like Open AI, is happening at an unprecedented rate, with some companies scaling to billions of dollars in revenue in just a couple of years (47m55s).
• The size of the prize for successful companies is larger than ever before, with blockbuster IPOs on the software side now reaching tens of billions of dollars, compared to just a billion dollars in the past (48m14s).
• Despite the potential for huge returns, the number of outlier companies that achieve this level of success is still relatively small, and the funnel of successful companies narrows at each stage (48m33s).
• Large investment funds face a challenge in balancing their portfolios, as they need to absorb companies that aren't outliers in order to maintain a certain level of investment activity, which can dilute their returns (48m39s).
• The concentration of successful companies among a few large investment firms creates a recursive loop, where the big funds get bigger because they have the influence, brand, and reputation that the best companies want to work with (49m27s).
• Companies like Open AI and Cursor are examples of this rapid growth, with Open AI reaching a $3.7 billion run rate and Cursor growing from $4 million in annual revenue to $4 million in monthly revenue in a very short period (49m41s).
• The rapid growth of these companies is creating a new dynamic in the market, where companies are staying private for longer and reaching much higher valuations before going public, with some companies potentially reaching valuations of $20-30 billion before going public (50m17s).
• The growth curves of these companies can be unpredictable, with some experiencing rapid growth followed by a stall or decline, and others rebounding or continuing to grow (50m35s).
• Many companies are introducing AI solutions to their businesses due to mandates from higher management, without a clear-cut ROI case, resulting in rapid growth for some AI startups (50m43s).
• This growth is often driven by the demand for AI efficiencies, rather than a thorough evaluation of solutions, leading to companies buying AI solutions quickly without a full RFP (51m12s).
• As scrutiny on AI procurement and purchasing increases, some AI startups will continue to grow, while others will become commoditized, slow down, and experience high churn rates (51m27s).
• Eric Vishria, a guest at an investor day event, noted that many invested companies are expected to slow down or decline within the next one to two years, which is a common expectation in the AI world (51m41s).
• Despite this expected slowdown, investments are being made in best-of-breed companies that are believed to continue growing once the dust has settled in various AI categories (52m11s).

SaaS multiples and cloud software market analysis (52m20s)

• The current state of the software as a service (SAS) market appears to be healthy, with 100% of companies that reported earnings beating consensus estimates in the last earnings cycle (52m55s).
• Historically, the SAS market has seen a "beaten raise model," where companies slightly beat quarterly consensus estimates, which is considered a normal practice (54m1s).
• However, during the 2022-2023 period, the market saw a contraction and emphasis on driving efficiencies, resulting in a lower percentage of companies beating consensus estimates (53m47s).
• In the past, around 95-100% of companies would beat quarterly consensus estimates, but during the 2022-2023 period, this number dropped to around 90% (53m55s).
• The recent chart showing 100% of companies beating consensus estimates might indicate a change in buying behavior, possibly due to the approaching year-end and positive reflexivity in the market (55m9s).
• The market is currently experiencing a positive environment, with decreasing interest rates, potential tax cuts, and increased mergers and acquisitions activity (55m17s).
• The current cautious approach to buying budgets may be lessened due to recent events, leading to a potential "budget flush" as companies spend their remaining budgets towards the end of the year (55m27s).
• A similar phenomenon occurred in Q4 of 2023, where software performance briefly improved, but was later attributed to a budget flush rather than a genuine rebound in performance (55m47s).
• A chart from Clouded Judgement shows the aggregate cloud software net new ARR year-over-year growth, which increased at the end of 2023, then declined, and has recently increased again (56m12s).
• The median software multiple has remained around six times over the last few years, which is lower than the historical median of around eight times from 2010 to 2020 (56m35s).
• The historical median of eight times occurred when the average tenure was around 2.2-2.3%, whereas today's median of six times is accompanied by a higher average tenure of 4.2% (56m42s).
• Despite the Fed cutting rates, the average tenure has actually increased from 3.8-3.9% to 4.2%, possibly due to views of the economy's strength and potential inflation (57m5s).
• The current six times multiple may not expand to the historical average of eight times unless rates change, as the current low fours interest rate environment is different from the low twos environment of the past (57m36s).

Software spending trends and startup optimism for 2024 (57m43s)

• A 2% interest rate decrease, even if it goes up to 8X, may not solve the problems of unicorns and stuck companies, but it could make the IPO window more attractive and facilitate some mergers and acquisitions, although it would only provide minor relief (57m44s).
• The CEO of Amplitude, a public company that had an IPO in 2021, mentioned that the era of cutting back on software spend and dealing with over-purchasing is coming to an end, which could be bullish for startups in 2024 (58m18s).
• Portfolio companies and their boards seem to be optimistic about 2024, with signs of this optimism including hyperscalers focusing on new workload growth rather than cloud optimization (58m43s).
• However, it's essential to note that not all companies will benefit equally from the thawing of the software buying environment, and only the best of breed and leaders in categories with differentiated products will have an easier time securing incremental budget (59m24s).
• The muscle memory built into procurement teams over the last two years, with a focus on avoiding redundant spend and scrutinizing budgets, will not disappear even if budgets get bigger, and companies will still need to make a strong business case for their software purchases (1h0m1s).

Procurement scrutiny in startup budgets and market differentiation (1h0m15s)

• The focus of companies should be on how much revenue a solution will generate and how much cost it will cut, rather than just its potential for growth. (1h0m16s)
• Differentiated companies playing in big markets are more likely to build successful businesses, while those that are not differentiated will struggle. (1h0m33s)
• There has been a reversion to the mean in the market, where companies that were previously overvalued are now being reassessed, and this trend is expected to continue. (1h0m45s)
• The wall of capital looking to invest in startups is likely to remain a distortive factor in the market, affecting incentives and decision-making. (1h0m54s)
• Companies that are well-positioned for success include Airbyte, ClickHouse, DBT Labs, LiveK, and Prisma, which are all companies that Jamin Ball is currently involved with. (1h1m2s)

Promising companies and Jamin Ball's investment outlook (1h1m17s)

• There is a desire for more IPOs to analyze in the upcoming year, as the past two years have seen a scarcity of such opportunities (1h1m18s).

Expectations for IPOs and startup exits in the coming year (1h1m28s)

• Jamin Ball is a guest on the show, and he can be found on Twitter as "Jamin Ball" and on Substack with his publication "Cloud of Judgment" (1h1m28s).