Protect the Hustle | A SaaS Podcast
00:03:39 · Doug Pepper
[00:03:39] S2: Yeah. First of all, thanks for having me and appreciate the intro. And yes, I do feel very lucky to have been a small part of some of these great journeys of amazing companies. And it's been a lot of fun and a unique privilege to be part of these great founding stories. You know, in terms of today, you know, I have for better or worse been around long enough to see a bunch of these. I started in the business in 2000 and saw that very significant downturn. Of course, you mentioned in 02/08. There was actually a SaaS crash in 2016. Then we had the pandemic in 2020, which was pretty scary for a quarter or two. And now we're here. And in some ways, this environment is similar than some of those. And in some cases, you know, they're all very unique. I'd say a couple of things. One, you know, we all know we've been just in an incredible time in the last ten years. We've had a very constructive economic environment that has led to lots of investment. But more than that, we've had really legitimate trends in software, in the internet, cloud computing, and those trends are real. And by the way, they continue. I don't have any real concerns about the long term future. The challenge is today. And if I had to boil down what's going on, to me it's sort of simple. We had an incredible set of tailwinds the last two years, both economically as well as with the pandemic, a rush to adopt technology. And that led to really the best performance I've ever seen in my career of software companies. And we looked very closely at the data. No exaggeration, in our portfolio here at Iconiq, nearly 100% of companies met their plans in 2021. And the growth rates were high. The average growth rate for us across 100 portfolio companies was like 83%. And these are some larger companies as well. And what we all made the mistake of doing was drawing a straight line from the growth rates of 2020 and 2021 through this year and next year. And the reality was that those growth rates were probably too high to expect them to continue just in general given scale, but obviously now we have a new economic environment. And so most companies are seeing a real slowdown in their growth, but they've scaled and built their P and Ls for a higher growth rate, and therefore they're burning too much money. And that's why we're seeing layoffs and other such things.
00:06:01 · Doug Pepper, Andrew Davies
But, you know, it's from a valuation perspective, this feels a lot more like 2,000. I mean, it is painful, right? The public companies that we're involved with, some of the best companies in the world are down anywhere from 60 to 80%. That is tremendous value destruction. And the private companies haven't yet seen that revaluation yet, but it's coming. And now we're seeing growth rates start to slow. So it feels like 2,000 from a valuation perspective. But my point of view is that the markets are much healthier than that. These businesses are fundamentally sound, strong businesses. They've needed to revalue themselves because we got ahead of ourselves on a multiple basis in terms of valuation, and they need to adjust their spending and operating plans to account for more normalized growth going forward. [00:06:51] S1: Super interesting. So you talk about a few different dips there. So 2000, 2008, yeah, the SaaS dip in '16, then the pandemic in '20, and then, you know, what we're facing now. So can we pull out a few things that are similar about all of those crashes? And then maybe let's talk about some of those obvious differences. Well, what's similar in how companies are facing into them and the consequence of them?
00:07:13 · Doug Pepper
[00:07:13] S2: Yeah, think what's similar is that for all the, you know, people that we work with most closely and partner with the founders, each one of those moments, maybe not 2016 because it was short, but each one of those moments, founders have to step back and really think about how do they change what they're doing. And it's challenging to do that and do it quickly in some cases. So in every one of these markets, investors and most importantly founders have to think about how do I adjust what I'm doing? Yes, I have to deal with the fact that my stock and valuation is much lower than I thought. Usually that's actually pretty easy to get over and you just move forward. I think the harder part is how do I adjust, yes, my spending, my hiring plan, my growth plans? How do I make sure I have runway to survive the hard times and be sure that I'm thriving at a time where I'm going to need to fundraise in a year or two or three years from now? I also think a lot of companies are needing to change how they sell. Today, budgets are constrained. The decision makers are different. In almost every case now, we're having to sell to CFOs, to gatekeepers who make the ultimate decision on purchases, and therefore sellers have to learn not just to sell to their domain expert, but actually sell higher to the true economic decision maker. That's a real challenge. So I think the similarity is in every one of these moments, founders have to think about all of those and many other dynamics about their companies. You know, what's different about each of these environments? You know, two thousand and eight-two thousand and nine was a broad economic downturn that interestingly hit tech, but very briefly. Two thousand eight-two nine was obviously the Great Recession maybe the biggest economic challenge that I've had in my lifetime, you know, broadly the economy. But for tech, it was actually quite limited. 2000, like today, that's the similarity. This has landed right on tech. It's tech that has the greatest pullbacks in valuation. Tech is where the layoffs are. Other industries aren't seeing as many layoffs as us. And why is that? Because we were the greatest beneficiaries of the tailwinds of the last two years. So it stands to reason if you believe in reversion to the mean that it will be the industry that's most hard hit here. And that's certainly the case.
00:09:36 · Doug Pepper, Andrew Davies
So this feels a lot more like 2,000 in terms of its technology impact, both valuations as well as layoffs. But again, I want to make the point that I don't think this is 2000. Now, as an aside, I do think it's 2000 for crypto, which I believe, similar to the Internet, which of course became very real. But in the 2000 timeframe, there were a lot of businesses that were public that weren't real yet. And I think that's true of crypto as well. I think it's got a long way to go. And there's many businesses that have high valuations in crypto that, quite frankly, should just go away. In software and SaaS, as I said before, incredibly bullish about the long term prospects. And I'm actually bullish about the short term prospects. These companies are still in great demand and they are still thriving, just maybe not to quite the extent that we thought. And in 2000, you know, we had lots of software companies in our portfolio. They couldn't sell anything to anyone. It was a true nuclear winter and people went back to the concept you can't get fired for buying IBM. In today's world, you get fired for buying IBM. You get rewarded for buying innovation, which comes from startups. [00:10:52] S0: Next, Doug talks about why it's important to become a wartime CEO.
00:10:52 · Andrew Davies, Andrew Davies
[00:10:52] S0: Next, Doug talks about why it's important to become a wartime CEO. [00:11:00] S1: So let's just go into a bit more detail on a couple of those points. So firstly, you mentioned about the role of a founder CEO at this time and how, you know, in all of those crises is the founder CEO role to realize the fundamentals have changed and then to change their operating model, their team, etcetera. We hear, you know, Ben Horowitz and others always speak about wartime versus peacetime CEOs. So is this the time for a wartime CEO in that nomenclature? And what does that actually mean? What makes a great wartime CEO?
00:11:29 · Doug Pepper
[00:11:29] S2: Yep. I think it is, and I think there's lots of analogies you could use. I was on a board call where the CRO of one of our great companies said that one of the challenges he has as an operator is that his team, the salespeople, are a summertime team that is not prepared for winter. And I thought that was pretty apt. I think that for all of us, it was summertime for a long time. The weather was nice and the environment was pleasant. And now it's more challenging. So I don't think it's just CEOs. I think it's all of us who have to prepare to adjust for more of a winter like set of conditions. I think we're all making that adjustment. But I think for CEOs, you know, I'm seeing many of our CEOs adjust really well, by the way, but I think it's being prepared and able to make tougher decisions more quickly. And what are those tough decisions? Obviously, you know, the hardest one for them and many of them is deciding that they've hired too many people over the last year or two that does not match the needs going forward. And the hardest thing for a CEO is to let go of good people who otherwise are doing all the right things. But the wartime CEO is making those very tough decisions and making them quickly and proactively. The other key decisions are the decisions of saying no. During summertime, you say yes a lot. Yes, let's go to Europe. Yes, let's move into Japan and Asia. Yes, we'll add that new product line. Yes, we'll add to our ideal customer profile. And I think the wartime CEO is saying no more often and largely operating under the word focus. Let's do fewer things better. Let's pick and prioritize one or two key initiatives. And that's what we're doing during the tougher times. And and I'm seeing the wartime CEO make those those very important. Sometimes it feels like ruthless decisions in order to to bring the companies forward a drive.