General Catalyst, a well-known venture capital firm with at least billions in funds raised over time, has backed Hubspot, Jet, Ping Identity, and Kayak over the years.
And General Catalyst isn’t slowing down, taking part in ten known rounds so far in 2020, including Karius’s Series B, Fastforward.ai’s Seed round and Nova Credit’s Series B.
I recently caught up with Quentin Clark, the firm’s newest managing director. Clark, formerly Dropbox’s CTO, joined the venture shop back in October, putting about a half-year on his full-time venture clock.
Given his deep SaaS experience, I wanted to get a feel for Clark’s views on the present-day software market, as well as his notes on how to respond to some pretty awful trading days. Modern SaaS companies are a hot category. But despite a recent valuation boom, SaaS companies have been repriced in recent weeks. For a group of startups and public companies accustomed to being fêted and trading at fresh highs, the recent pullback must feel almost surprising.
But there was more ground to cover. So, to share his notes with you, I’ve extracted the most salient elements from our chat, including:
- How startup operators and public tech CEOs should react to public market gyrations
- Whether he’s more excited about investing in vertical or horizontal SaaS startups.
- The prospects of investing in a downturn.
- The cloud market’s maturity.
- Historical SaaS valuations compared to today’s and where the market might go next, and why the spread of SaaS valuations today with 3x revenues for some and 30x for others, is actually a good thing.
Lots of calls and interviews wind up in buried the archive. Clark’s perspective on the market, however, was worth sharing, so we’ve transcribed it. What follows has, at times, been condensed and edited for clarity and brevity. Enjoy!
SaaS, the market, and what things are worth
TechCrunch: How much attention are you paying to to stock market gyrations in terms of how they might impact valuations and exits?
Quentin Clark: As an operator, the immediate thing you start to worry about when you have the kinds of economic stuff that’s going on right now is, ‘Is this going to affect short-term results?’ Because, especially as a public company, there’s a lot that goes into those short-term results and how the markets [are] measuring. And so that becomes immediate sort of question, right?
Yes, as an operator there’s always things to worry about [like] your stock valuation, that kind of stuff, but you’re focused on, ‘Is it going to affect our business or not?’ [But] in this job, what I’ve observed is that our conversation has been much [less] impacted by that short-term thinking, but much more impacted by, ‘Okay, what’s our portfolio of companies going to potentially need? Are they are they going to be impacted by this in some way? And and what does that mean for them?’ And what does that mean for us in terms of what we may need to do to support them?
So if you have a portfolio company that [gets] impacted by this in terms of their growth, does that mean we need to think about longer cycles for their next round. So it’s less about what this does to us; it’s more about what the impact could be on the portfolio in terms of their ability to operate. We’re long-term investors, so we’re not looking for something to convert [to] an IPO in six months, and if it doesn’t happen it gives us angst. That’s not an issue.
It’s much more about how can we make sure we do the job for them to continue for them to maximize their long-term outcomes. As long-term investors and holders, we get the bracket beyond [recent market disruptions]. So it’s not really this hot burning concern of what’s going to happen next month or six months from now.
Do changing public market conditions impact your investing decisions?
I picked the following perspective: We’re not hedge fund managers, we’re not short term stock traders, we’re not looking for short-term angels to squeeze a bit of vig out of [the] flow, right? If I believe something can be big, and there’s a good team behind it, and they have a good strategic approach, and there is traction, and I’m investing as a result, that’s not any less true today at the end of a shitty week in the market than it was a week ago.
And so if the economic conditions changed under which we work with them and [helped built their] operating plan, and that requires us to shift and provide more capital […] because it’s going to take longer, or the ACV is gonna be lower for a while, whatever the reasons are, it doesn’t change the fundamental thesis that this thing is important, and it has an opportunity to be a huge company one day. It doesn’t change that. So it’s our responsibility to ensure that we don’t lose the opportunity because of short-term thinking.
Is SaaS as attractive an investment to the VC community as it was a year ago? And I’m curious about the answer to that more in terms of cloud migration than the recent changes to valuations.
What I can tell you today is that we are investing in SaaS companies. Yes, the world’s getting a little bit more conscientious about how software is adopted. The whole thing that Dropbox started of end-users in the workplace bringing their own tools has met things like SOC 2 compliance, GDPR, and CCPA. We are seeing, even in our early-stage SaaS companies, more focus on ensuring that IT is ready and able to adopt these things, as opposed to just getting after the end-users. But I see that as just [the market] maturing.
We’re really still at the beginning of a journey of the transformation in workplaces. Anyone that thinks that Office and Google Suite, ‘That’s it, we’re done, we figured it all out’ [doesn’t have] the right perspective. There are still 100 companies that haven’t been born yet that are going to end up transforming the entire work landscape.
Are you more interested in vertical SaaS (software focused on particular industries) or horizontal SaaS, which can see broader?
Broad. Definitely broad. The way I would say that I think about things that I’m looking for — as an early-stage investor — are great people and a differentiated approach to a real pain point that’s broadly felt.
[On] the people side, I’m looking for curiosity. We call this today “growth mindset,” but before that [phrase] was invented it still existed, we just called it curiosity. [Laughter] This is the way the industry is; it’s fine. It actually also presents itself as being humble, right? It presents itself as empathy. So curiosity is really important thing to me. “Will” shows up in different ways; it used to be called grit, now it’s called will. It’s hunger; the ability to sell. You can see that will in people that they will knock down obstacles.
The differentiated approach gets to my own experience and views and point of view on products. Products need to have an opinion; there really needs to be an approach that comes from some insight that perhaps a team is seeing or an opening that others aren’t seeing.
To get to your point [regarding] broad pain points, in general it’s true that building something interesting isn’t enough. It really has to shift things for people, and we look for companies with potential to be really big. And that’s just part of who General Catalyst is. We aren’t looking for things that are niche or point solutions. We really love things that have very broad potential impact.
SaaS multiples have expanded greatly over time. Fred Wilson said that SaaS companies might trade at 3x to 4x revenue nearly a decade ago. Are we going to see over time a reversion to a lower band of multiples for SaaS companies?
That’s a good question. I think that what we’ve seen between 2010 or earlier to now is a maturing of how to evaluate. So there are SaaS businesses that are valued at still at 3x to 4x. And there are businesses that are valued much higher than that. And this gets to things like the Rule of 40 and other sorts of things that have emerged in the last few years.
Like the earlier days of Amazon, which I know is not precisely SaaS software, but it’s an example of a community of investors who understood the potential and the scale of what was being built. And even though famously, for a very long time, Amazon was not profitable because they were investing everything they could to continue to broaden and expand, it was an early indicator of the future potential scale of that business. That bet worked out.
And so I think we’re seeing companies being rewarded at these high multiples because there’s a common belief that their ability to grow is different than other things in their class and their field. Like every other segment of the market, as an area matures, the understanding of how to evaluate [it] also changes. And you start to see this widening on how things are evaluated.
A blanket statement of, ‘SaaS companies should be valued at 5x revenue’ is a sort of un-nuanced point of view. In the investment community, the thing I’ve been learning is how we evaluate companies [at] different stages. You have to take this very nuanced view. Again, [a] long-term mindset, but this very nuanced view in terms of understanding what the mechanics that they’ve built in terms the business are, and what you really believe is possible is different for [every] company and industry.
I’m actually glad to see that the valuations have widened that much because it is a sign of maturity, and it’s a sign that not everyone is going to get it right, so there’s always going to be opportunity.