Invest Like the Best with Patrick O'Shaughnessy
00:04:00 · Ramtin Naimi
A lot of things that are somewhat reminiscent of 2021 in that sense, but the other things you're seeing is the pace at which things are moving kind of makes everyone feel like they need to do something to stay ahead of the curve. In this market, getting markups is the bare minimum requirement to be keeping up. So to the point where markups don't even feel like good anymore. Markups just feel like you're keeping pace with the state of the market. Once every three weeks, you have something happen in your portfolio that makes you feel pretty good and you're like, okay, cool. I'm doing really, really well in this market. Then the subsequent three weeks, you see things happen to companies that you're not in. Then you're like, holy shit. I'm falling behind once again. You see the pace at which things are happening. You're seeing exits that are the largest in history happen, and then it's news for, like, two days and people move on to the next thing. So I'd say the pace at which things are happening is not unprecedented because I think the similar pace happened in 2021. I think the pace is more healthy today because, know, there's real value creation. These companies are doing truly amazing things. I do think the thing that's a little misleading about this market is the story behind the revenue with all these companies. You do have companies growing 10, 15, 20 year over year. But I think any company that's growing at that rate has something interesting about their revenue. It's not a clear, clean, pure play SaaS revenue, 90% plus gross margins, annualized recurring revenue contracts. They all have something that's either ridiculously high growth but very low margins. Either low margins or negative margins. Ridiculously fast growth but really high customer concentration or annualizing revenue because they're selling data and whatever their revenue was last month, they multiply by 12 and that's their annualized revenue. Or it's consumer based revenue and not enterprise based revenue or it's usage based revenue and not contractual rhetoric. So there's a lot of that and I think that could be somewhat discouraging to founders whose companies aren't growing that pace when they see those numbers and they think like, oh my god, I'm completely left behind.
00:05:50 · Ramtin Naimi, Patrick O'Shaughnessy
But I think if you peel back the layers and you start looking at it, you need to actually compare your revenue growth companies within your style of company versus the absolute top line figures. You have data labeling companies growing at insane rates with their margins of 15 to 20% because getting that data is expensive. You have other companies that are reliant on foundation model providers to power their products, and all of the margin goes to the foundation model companies. But the cool thing that you are seeing is that these margins are improving at really rapid clips. Anthropic were 85% in [00:06:19] S0: the first half of this year, they said.
00:06:19 · Patrick O'Shaughnessy, Ramtin Naimi
[00:06:19] S0: the first half of this year, they said. [00:06:21] S1: We have companies in our portfolio that are gonna grow 200 to 700 this year, but their margin profiles are going from negative 15% to positive 35%. So you're getting massive revenue growth and margin growth simultaneously. And then you have other companies that are like vertical SaaS businesses that are getting 100 x revenue multiples. And then you look at that and people are like, well, how do compare that to the public markets when the SaaS multiples publicly are at 13 x revenue multiples? And you look at these and you're like, well, are these actually SaaS businesses or are these labor replacement businesses? And then some people don't buy the labor replacement thesis, but the way you actually kind of have to believe in it is these companies are still growing five, seven, 10 x year over year even at, like, the massive scale they're already at. I haven't seen them actually start to replace labor yet. But the pace at which they're growing, you know, if you look at companies that sell to law firms, you look at the total amount of money that law firms spend on software every year, and you're like, oh, these companies can't be that big, actually. But you look at how much money that these law firms spend on paralegals every year, and you're like, oh, that's actually a really big number. So if these companies can capture 20% of that, the scale of it [00:07:17] S0: doesn't actually work. [00:07:18] S1: So the math starts to really, really work.
00:07:18 · Ramtin Naimi, Patrick O'Shaughnessy
[00:07:18] S1: So the math starts to really, really work. [00:07:20] S0: If you were to compare this to 2021, which you lived through and were very active through, obviously, two very euphoric, frothy seeming markets, what are the most notable differences and similarities?
00:07:33 · Ramtin Naimi
[00:07:33] S1: If you look back to 2021, the companies weren't that interesting when you looked at them. Just we didn't have anything else to compare them to. You were looking at SaaS companies growing, what was it, five x, three x, three x, two x, and everyone's like, that's best in class. And you would have companies with, you know, $8,000,000 of SaaS revenue raising a billion dollar valuations, and they had very constrained TAMs. And you kind of had to look at these things for, like, a seven year timeline to get to a 100,000,000 of ARR, and that was what Venture was back then, and that was exciting. And now you look at companies today, you're like, can't believe we've even got out of bed for those types of opportunities back then. So in terms of the round structures, the volume of deals, people feeling the need that they need to keep up with the market is all very similar. In 2021, there was a period of time where if you pretty much ask every VC and even LPs about this similar situation, there's like a six month window in 2021 where VCs were just ripping checks. And if you ask any of those VCs to look back at their portfolio for 2021 in that six month window, a lot of them are like, yeah, we like that grabs our heads and being like, were we thinking doing all of those deals? I'm not saying we're at that point in the market today. Like, we could be in 2019 and not 2021. But some of the things that I'm starting to see happen today in 2021 that was like public market investors trying to aggressively come into venture is very actively happening right now. How frantically people were trying to do deals back then versus how they're trying to do them now. Some of the things we started seeing near the late end of twenty twenty one were companies getting term sheets very, very quickly and then term sheets getting pulled also very, very quickly or reneged or renegotiated in one way or another. And in the last six, seven, eight weeks, I've probably seen a larger amount of deals get renegotiated after being offered than I have since 2021. But the thing that's most dissimilar is kind of the enthusiasm around the companies. I don't think people were investing in companies in 2021 thinking that these companies were gonna be category defining or be global scale companies within eighteen to twenty four months and that you're kinda just seeing in this market play out.
00:09:26 · Ramtin Naimi, Patrick O'Shaughnessy
You're having companies find product market fit at a faster rate than ever. I'm looking at companies in my portfolio that I'm using very actively, and I can't think of anything I invested in 2021 that I was using personally. And now I'm actually starting to see, like, how much value these things can drive. Family members that are using some of these products that never would be an early adopter of AI products or any tech products, period. And they become integrated as parts of their daily life. So I think there's, like, a huge paradigm shift in terms of the technological innovation in this market that people truly believe that if there is a window of opportunity where you can't afford to sit on the sidelines, it's in this moment in time. [00:10:02] S0: Can you drill a level further down the stack, which is to the LP side and the funds that are being raised? So this money comes from funds Yeah. Going into these companies at record paces and amounts. VCs also have to raise money themselves from a group of LPs that have historically been the reason VC exists, endowments and foundations and things like this. And, like, at some point, it seems like what the market is doing is we're all spending so much money so quickly that the sources of capital themselves are starting to ask deeper questions.