Weekly Update on SaaS & VC
A few highlights from the week of 7/4
It was a good week for SaaS with the WCLD SaaS index up ~8% to $31.17.
Perhaps public SaaS bottomed in mid-June when WCLD his $25.66?
Summer typically has low liquidity, which means less of a signal for price discovery. Time will tell.
Speaking of low liquidity, VC activity has seen a major summer slow-down. What’s going on? There are many factors in play:
Travel: lots of VCs are doing extra travel this summer after so little in the past few pandemic-constricted summers1
Valuation: after the recent downturn, there’s uncertainty around what’s a “market” valuation, making it harder than normal to find deal conviction
Fundraising cycles: just as VCs are telling founders to increase runway, many LPs are telling (or signaling) VCs to slow down their pace of deployment.
Most VCs will say they are operating “business as usual” - and while some are, the summer slowdown suggests otherwise.
As for HorizonVC, our capital deployment plan has not changed.2 We have a few investments likely to close in July and August that will leave us on track for the same pace of capital deployment that we have modeled since we began the fund.
Podcast recommendation of this week:
Fascinating interview with Deepmind founder and AI pioneer Demis Hassabis. (Lex Fridman podcast)
We might look back at this moment as an early stage in an AI revolution that was happening gradually enough that it could be overlooked. I think Hassabis will likely become much more well-known in tech over the next few years.
A few interesting reads from this week:
A little late to this, but I found a wonderful May blog post by Index Ventures VC Bryan Offut on GTM for infrastructure startups. He makes many great points that are applicable across SaaS, including a lovely, concise summary of product marketing:
The overarching goal of product marketing is to build clarity and trust.
One reason why it’s so hard to nail product marketing at an early stage is that every founder’s product vision is crystal clear to themselves. Similarly, just about every founder knows they are trustworthy. So it’s easy to forget that a target user will find it much harder to see the clarity and trust that are obvious to a founder.
Going even further back, this is one from my Blog Post Hall of Fame - a blog post from 2007 from a notable web 2.0 entrepreneur, Rich Skrenta, that was loaded with keen insights on Google’s emerging, dominant business. Google has been so dominant for so long that it’s easy to take for granted that Google Search is the best (legal) business model ever.
But it wasn’t always so obvious. One criticism of Google pre-IPO was that Google Search had zero switching costs, meaning it had a risk of losing users over time. Everyone knows that low switching costs is a huge liability, right?
Skrenta explains otherwise:
zero switching costs paradoxically yield a winner-take-all market
Switching costs are beloved by founders and investors alike. Yet Google Search had (and has) no switching costs - which turns out to be a feature, not a bug.3 That’s not to imply that every business should strive for no switching costs. But, if a tech company has the dominant product in a category, they will benefit from reducing switching costs, not raising them.4
In the pre-pandemic cycle, surging VC competitive intensity dramatically reduced the historical trend of summer slow-downs. I suspect next year, with catch-up travel finished, it will be a lively summer for VC deal-making.
I’m fortunate that we completed our fundraising in May, with most of it finished by January, before the market disruption. I’m even more fortunate that my wife and I had a baby girl in May, so we are restricting our travel over the next few months. Maybe this gives me an unfair “edge” in deploying this summer. :)
True, Google has an ecosystem that creates switching costs. But using Bing for search is incredibly easy for any user.
This is why great products should make it easy to cancel. If you make it harder to cancel, it’s strategically wise only if your product is terrible, although it’s a rather sinister way to advertise that fact.