Two-time entrepreneur Jason Lemkin just closed a debut venture fund with $70 million called SaaStr Fund. It’s an impressive feat and the latest in a string of interesting opportunities that Lemkin has created for himself since selling his most recent company, EchoSign, to Adobe four years ago.
It started with blogging. Lemkin also began actively answering questions about SaaS businesses on Quora — and people listened. Soon, he’d created a popular site that publishes SaaS-related tips and news, along with a growing events business, one whose yearly SaaStr Annual conference attracted more than 5,000 attendees earlier this year.
All have worked together to lead Lemkin (who also worked briefly at 16-year-old Storm Ventures) to this point. Last week, we asked him to share a little more about how he did it.
TC: Your debut fund is huge, considering that you’re the only GP. Are your investors a mix of institutions and individuals?
JL: No. I have a handful of VCs who know what they’re doing, but I think high-net-worth individuals are a terrible idea. No matter how sophisticated they are, venture is too illiquid. The timeline is too long. When you’re an angel investor, you can maybe see a 50x return on your dollars. But in a tiny fund – even with a Union Square Ventures — you’ll do 8x in the best-case scenario and it’ll take the fund 12 years. It’s stupid. And I don’t want unhappy customers.
TC: So your backers are endowments? Pension funds?
JL: Top endowments, big universities, hedge funds.
TC: Hedge funds don’t mind being locked up for a dozen years?
JL: They’re interesting. They want to find a place to play where they can see high returns, so they want exposure to the best managers so they can see the best companies at their “pre unicorn” phase. They don’t want to do the $3.5 billion round but the round before that, including [by way of special purpose vehicles, which VCs organize when they want to make a particularly large bet in one portfolio company]. So if you squint and look at a lot of emerging managers, a lot of time they [feature hedge funds as LPs].
TC: What’s in it for your VC investors — deal flow?
JL: When you have a fund like this, you want to build two downstream layers. One of Series A VCs, and whatever the next stage is. So I have folks who are involved with my fund who’ve also put money into my companies and who I want to continue to [know], from Emergence [Capital], Social Capital, Bessemer [Venture Partners]. Then, in a perfect fund, you want folks who can invest even later. What you don’t want to do is take second check risk.
TC: Meaning you don’t want to be leading two rounds in the same company?
JL: A risk for any smaller fund is that you’re stuck writing all the checks. If you’re a half- decent investor, you can always write off that first [bad] check. The first check never breaks the model. It’s when you have to write off the third check [to support a floundering company] that the GP loses the job, and if there’s just one GP, you lose your fund. So you want a coalition of the willing who are super successful together to de-risk your investments. You want great investors writing follow-on checks because if you’re small and you have to write off a huge part of your fund, it’s a killer.
TC: What was your pitch to LPs? What’s the focus of your new fund?
JL: I’m focusing only SaaS companies from the SaaStr community. My model is 100 percent inbound. I’ve done okay investing; I’ve made 23 investments and 22 have had a great investor or investors write a follow-on check. Now, the only thing I want to do is have founders who pick me and who are better than me. I don’t want to meet people who haven’t heard of me. I don’t want to compete for deals. I just want to invest in the best founders each quarter that are the right stage and fit. One a quarter like clockwork.
TC: How many of these teams will you back? What size checks are you writing?
JL: Between $1 million and $4 million. The average will be $2 million, so at $70 million, if you reserve half for follow-on deals, then you’re looking at around 15 core deals.
TC: What criteria will you use? How far along does a startup need to be?
JL: I’m not smart enough to figure out what’s good at [the] pre revenue [stage]. And what’s more, founders don’t pick me at that point. They’re looking for something else. But when they have 50 customers and want to get to 500, they pick me.
TC: Are you targeting a certain ownership percentage?
JL: I’m anti dilution. If I don’t believe a founder CEO will own double digits at an IPO, I won’t invest. I’ll quit no matter what. But I believe in buying as much as you can until it stresses the owner or the model. Why not buy 12 percent if you can buy 10 [percent]? At a lot of firms, 30 [percent ownership] has become the new 20 [percent that VCs have historically aimed to own].
Hopefully, it averages out to 12 percent. If it’s [going to be below] 10 percent, then that doesn’t work. I quit.
TC: How would you describe the fundraising process? What’s the mood like out there right now?
JL: I think it’s the hardest time in the last four years to raise a fund. Everyone went back to market in Q1, they raised larger funds and more quickly, so the combination of more money and going to market faster sucked up a huge amount of LPs’ allocation. Also, a lot of LPs who invested in new firms like Data Collective and Homebrew are happy with them and don’t necessarily need another emerging manager. New funds are also competing with [experienced VCs] whose old firms are maybe breaking apart but who are starting something new.
TC: Yet you broke through.
JL: But you need the full package to do it. You need a track record, as much as you can have one. I have a good track record but [through] mark-ups, not cash-on-cash returns. You need a truly differentiated proposition. I don’t mean deal flow but something that really stands out. You need founders to say amazing things about you. And fourth, you need the support of the venture community. It’s a high bar, but with all four, you can pull it off.
TC: Interesting that it wasn’t crucial have some cash-on-cash returns.
JL: It can take 10 years to prove out a company, so you have to make some sort of bet. Do LPs want to bet on paper returns? No. They want 6x returns now. But if LPs waited, they would have missed out on Data Collective’s first funds. They would have missed out on Lowercase [Capital’s] second fund [which became a major shareholder in pre-IPO Twitter]. It’s hard to be an LP.