Scale at all Cost?

Um now scale at all costs well We're in it we're not in Kansas anymore Are we you know it's not 2021 whereas a Markets are nuts and Bitcoin is going Crazy Um we are in 2023 so we're on a Different place right now so how do you Scale SAS you've got to we've got to be Talking about this so Um the the markets are changing so how Do we but we've got to keep going as We've just heard from Catherine and her Panel so The best way of talking about this is to Get up some fantastic experts on now Jill Chase from capital G and Guillermo Roche from versel to talk about the Taxes they think that SAS startups Should use today to keep growing right And the ones that they should avoid and To Curate this wonderful conversation is Going to be our very own not Ron Burgundy but Ron Miller from TechCrunch Give them a round of applause everybody [Music] Afternoon everybody Thank you for coming to the four o'clock Session there's a good number of people Out there I'm really happy about it we Were having a fabulous conversation Backstage about this and I'm pretty sure You're in for a treat when we get into This

Um you know we're here to talk about Transformation from growth to Profitability and efficiency and it's Something that seemed to happen like With the snap of your fingers in in 2022 It was as though a switch flipped and Suddenly it wasn't growth at all costs Anymore it was suddenly You know that you had to be efficient And you had to be profitable and I mean It had to be kind of like mind-boggling For for Founders but also for investors And how they deal with those founders So The messaging just simply transformed And we're going to talk about what that Meant and how that affected each of the Parties up on the stage So Joe how did how did the way you Communicate With startups Change once this switch happened and and How how long like what was the time Horizon where you started to realize the Economic conditions were changing and I Need to think about this differently Yeah for sure well hey everyone thanks For coming Um I'll quickly introduce myself and First of all I'm a little thrown off I Thought this was getting moderated by Ron Burgundy but I guess not Um I'm Jill Chase I'm a partner at Capital G which is alphabet's

Independent growth fund so I'm a growth Investor who looks at mostly sort of Series B through IPO companies and the Reason I mention that is because it's Quite relevant as it relates to how I Advise and interact with the startups in Our portfolio Um you know obviously the the market Conditions have changed quite Dramatically from sort of the 2020 2021 Time frame into sort of the 2022-2023 Time frame it all sort of starts with we Always are looking at what's happening In public markets because we're sort of Advising our companies as they move Towards IPO and so when Public Market Software multiples are quite High you Might think sort of the private Market Multiples for investing in the Private Ryan series BCD should also be high Because you can sort of justify that Type of valuation when Public Market Multiples are lower as they are sort of In this market environment given Interest rates you might start to look Back at the private Market multiples and And readjust that way and so what we've Seen over the past year and a half is This correction because we've seen in The public markets the multiples go down And the corrections happen in the Private markets correspondingly and so How that interacts with the way that we Chat with and advise our portfolio

Companies is you know because we have This long-term time time Horizon towards IPO We've always worked with our portfolio Vendors to really think through Investing efficiently because we know You're going to have to defend it in IPO Markets Etc over time and so really Making sure you're keeping a Keen Eye on Sales and marketing and having efficient Unit economics at that time and keeping A Kenai and r d and making sure that You're spending appropriately to build a Tech mode is quite important nothing's Really changed over the time Horizon in What we've been talking with our Founders But the economic conditions change so How did that you know I mean you had to Start talking to them kind of in a Different language instead of saying you Know now grow grow now you have to sort Of start like tempering the growth but Not too much you know so how does that Work well I think it's important to keep In mind that when the macro environment In 2020 and 2021 was such that Capital Was easier to come by if you're a Startup founder it's rational to then Spend that Capital towards sales and Marketing and building a distribution Mode because that's the way that you can Differentiate yourself and so spending Quite a bit on sales and marketing is a

Rational Play Because capital is easier To come by same thing for r d it makes Sense to spend quite a bit of money on R D in that market environment because Again building a tech mode is a way to Differentiate yourself with the macro Environment changing the way that it has Capital is not quite as easy to come by And so actually sort of thinking through Okay throwing a lot of money at sales And marketing is maybe less efficient And really think about the foundations And the unit economics the business Start there and then scale it's a little Bit of a different story in the order of Operations is quite different right Right but camo you're you're actually on The ground off from the other side and So I'm in the arena right I mean you Guys are not and and they're not an Investor of Guillermo's company but I'm Sure you heard similar kinds of things And you know from your perspective when That message changed and you're being Kind of asked I mean it's kind of a Contradictory Dynamic going on here how Do you how do you fix that when they're Telling you okay you need to do this in This but don't do that too much I fully Embraced it so for context I run and I Started versel which is an Infrastructure company that essentially Makes developers more productive which Is very handy to have in this

Environment and we host and serve Websites and web applications at scale We also created a framework called Next.js which is open source which is Also very good in this environment for Companies to adopt and The the reason that I embraced a lot of The changes that have been happening Over the past few years is that the Beautiful thing about software the Beautiful thing about the web and the Internet is that you can naturally be Very efficient right you produce a great Application and you deploy it on a Platform that scales and now the sort of Marginal cost of attracting the next Visitor and serving that is basically Close to zero so you can have a small Team of great r d practitioners that Deploy to the cloud where a lot of the Infrastructure has already been figured Out for you and there's constant Innovation and you can scale in a very Efficient way so I think when the tone Of the market change towards do less but Do less better I think that's it that's How you can sort of marry the idea of Spending less but still growing because If you're what I would look at is a lot Startups that were punching above their Weight too many products too many Concurrent initiatives maybe too much DIY so something that's certainly Benefited us so to to give you some

Context A lot of innovators come to build on Versailles that meant that during the Let's call it a high zero interest rate Times we had a lot of web 3 companies Crypto companies blockchain companies as Customers And when the Euphoria sort of come down A bit in that market when Jill stopped Investing in so many like uh you know Board Apes nft companies uh we did see a Contraction in certain markets But at the same time we saw New Opportunities now with companies in AI Or companies that were looking to do Less they were saying okay I was doing All this DIY infrastructure I had all These platform Engineers maybe it was Scattered across three four different Clouds now I want to simplify I want to Consolidate I want to offload the Non-critical and differentiated work so It ended up being a positive for our Business of course it's been with the Positives have come some some challenges And new opportunities but I think Overall it's been a really healthy thing For the environment and for the Ecosystem so you touched upon two things One was the impact on your customers and What you produce and how that kind of Helped for them control costs but also You touched upon how you're kind of Development methodology yes allowed you

To stay lean can you dig into that a Little bit Yeah internally we call it More wood behind fewer arrows so how can We focus our product initiatives can how Can we say no to features that just seem Opportunistic we were just talking about There were a lot of successful companies That were going into adjacences in the Market that you would kind of like Scratch your head you were saying why is Company X entering Market why and it's Because to Jill's point when there's Just so much capital Pursuing high growth opportunities and Successful Brands and successful Companies you can be tempted to do more You can be tempted to go to adjacency's Beyond your core capability so for us The answer has always been to root Ourselves on what we do best And then when we we can spend our Innovation tokens in a very judicious Way for us right now our Innovations Tokens are going towards AI The self-serve tier on Versa I recently Shared on x Formerly Twitter that AI has become the Leading reason that new web developers Join our platform so folks are saying I Want to develop AI native products we're Also developing our own AI native Products that's where our Innovation Tokens go and they don't go to you know Crazy adjacencies of which there's so

Many and so many tempting ones that we Could be going after So we were talking about AI backstage And AI has kind of an interesting Dynamic because on one hand it can be Super expensive but on the other hand it Can drive efficiency in a way that Nothing else can so how can companies Use AI without overspending particularly Startups yeah use AI to their advantage To kind of reduce overhead costs well You know not falling into that trap of Chasing money yeah I mean I think AI is A really interesting one because you can Sort of apply it you can add a product Adjacency that leverages generative AI To make your product even better that's Obviously hitting the revenue side of Things but then also to your point There's many products that are coming Out that are sort of hitting the more of The cost center side of things and so You can leverage AI to make your Customer we're talking about this Backstage your customer support function A little bit more efficient your sales People more efficient and in that Scenario you're sort of hitting the cost Centers of the business per in many Times purchasing a product which might Seem counterintuitive purchasing that Product like to then make the folks Within each of those organizations and Cost centers much more efficient and so

You can kind of see leveraging an AI on Both sides hit the bottom line quite Cost effectively right but it can also Be super expensive if you're not Managing those models efficiently or you Don't have people or products that are Doing this well right totally I mean I Think that's the most interesting thing About AI right now which it sort of Remains to be seen how the unit Economics of using a large language Model in your product either on the cost Center side of things or on the revenue Side of things is going to work out a Lot of that depends on things like Inference cost or how expensive it is to Ping an AI model so if you incorporate AI into versl and suddenly it's like Doubly as expensive for your users to Come in and use the product and you have To decide then am I going to pass that Cost onto my end customer or am I going To eat that cost as cost of goods sold And so it's decisions like that that are Quite interesting that I think over my Own perspective is over time the Inference costs will go down as the Architect pictures of these models get More and more effective but it's true That right now the higher the reasoning Power of the model the more costly it is Right so you got to make sure that your Business model is ready to incorporate AI right because you have to have maybe

Something that gets goes into cost of Goods sold but if you have an overactive User of AI you have to think about the Consumption metered way of charging this Customer so you kind of keep the AI Utilization under control and you're Able to scale with your customers usage Of your AI feature so there are a lot of Considerations that go into how do I Effectively add AI to my product So again there's two there's two aspects To that right there's what you're Creating in-house and how much that Costs to create to give you customers More efficiency to you know and how that Costs to benefit is going to play out And then there's the other side of it Like you may be purchasing AI from you Know a vendor or something that's built Into your vendor's product and that may Make you more efficient so that maybe You don't have to hire as many employees Because people can do more with less how Much are you seeing of that I not only Am seeing that I'm also in the market For that so one of the things that we Did instead of passing hiring we said Let's be more judicious with hiring Let's make sure that our bar is Calibrated correctly let's make sure Crucially that folks are on boarding Very efficiently and they have all the Learning and Development tools to Actually be productive and Thrive within

The organization so applying AI to Learning and Development applying AI do Onboarding applying AI to increase Efficiency with customer support these Are all things that I want to do and a Lot of our vendors say they announce at Conferences that they're doing AI but I Haven't really seen the AI products Actually hit the market and like we're Ready to buy because now we're hearing a Lot of announcements for sure everyone's Announcing and like putting up the the The conference Billboards and whatnot Saying like we'll do AI trust us so I Think this is a great opportunity for Innovators or entrepreneurs to actually Bring those efficiencies to to hit those Bottom lines I think it's it it's Important to remember that like we don't Know yet that's it's you can sort of Make that decision on betting yeah You're making a bed exactly yeah So fast a lot of what we do at Capital G Is you know we are I would say super Focused super analytical on a lot of This stuff and so we'll help a lot of Our portfolio companies like I've built Illustrative models on like based on What I know from a research perspective How do I think this is likely to pan out In terms of value to your business or How it's going to hit the cost center And then I can sit down with a bunch of Our Founders and talk through like then

If we are to purchase these products on The cost center side or add these Products on the revenue side what's our Best guess on how it's likely to impact The business I think for the one that's Interestingly easy to measure and it Could have never anticipated is Generative code yeah the fact that you Can make Engineers more productive with AI was surprising to me because I Thought well programming is surely the Job is going to be hardest for AIS to Tackle but it's clear like there's I've Read now several papers on we can we can Measure down to like percentage points The efficiencies that we're bringing to Our engineering workforces a lot of Companies are still holding out because They're worried about codex filtration They're worried about IEP they're Worried about copyright they worry about Is my data being used to train at Someone else's model so you have to also Balance it with the needs of I.T and Security but it's very clear that you Can make Engineers a lot more productive With AI it's yet to be seen if the ROI Is so easy to measure for other Functions right right So I saw a report recently from a Berlin-based company called chart mobile I don't know if you're familiar with Them but they they look at SAS data and They compiled a report over 14 years of

SAS data and they found that speed to Revenue correlates to SAS success so the Fastest a company got to a million to 10 Million to 100 million was the more Likely that that company would be a Successful company both as a private Company and maybe eventually as a public Company So if that's true and then the job of a SAS company is to grow How do you tell them that suddenly it's Not quite as important totally it's Interesting that obviously there's some Serious selection bias in that Um I mean I I I did push back and say Like that you know like could there be Other metrics yeah not measuring so I Will acknowledge that totally I mean I Think what that's indicative of is do You have a product that people are Willing to pay for do you have a product That people are willing to say like I Need this product I am willing to Dedicate a significant amount of my Budget towards this product and I cannot Live regardless of the economic Conditions yes exactly it has to be sort Of mission critical software and I think You know scaling revenue is obviously Exactly indicative of that point Um but what's important about that is Many of those companies that have done So quite successfully and are in public Markets today if you were to double

Click on what the actual Union economics Of the business look like because the Product is so exceptional and people Again are sort of like pounding their Fists for it the unit economics of the Business look quite good because you Don't have to spend quite as much on Sales and marketing it's much more Efficient growth it's either Bottoms Up People are sort of referencing it across The organization and it grows virally Um and so I would say that's a huge Contributor as well that's maybe missing In the in the headline of that study Right so so when when you are suddenly Being told like to control costs versus You know spending like There was just periods where sales and Marketing spend worked through the roof And when we saw you know S-10 would be Like wow look at theirs sales and Marketing spend that's crazy Um and now you're being told no no no no No don't do that so so how do you in Particular like what levers do you start Pulling to I I think I would agree with The data that that company put forward Because what I noticed a lot in our Ecosystem is You're trying to drive you're trying to Create a platform really you're trying To make customers get invested to your Point and you want to grow you want to Land you want to expand you want to

Become ubiquitous So getting that getting fast to 100 Million AR to me correlates with I've I'm I made my presence known within the Category that I'm operating in And that is where the real growth even Starts that's when I can start if I have A customer like unity and Nintendo and I'm starting to put myself in the Critical path of these customers I can Be with them for the next 10 20 years So we talked a lot earlier about how Important it is for companies to Position themselves in a mission Critical capability now so it's not you Have to look at the quality of Revenue One of the things that we stopped doing For example is we have customers that Would come to us just for support they Would say can you please give me support You created the open source tool and we Said no that's just it doesn't make Sense for us so going back to your to Your push on are your investors telling You to stop growing absolutely not I Think you can have efficient growth and You can start doing fewer things and Continue to drive this engine that then Will will put you in that position for Long-term durability in the market but I Think that's the mission of a startup if A startup is not growing fast then I Think you start questioning yourself not

Just the the fundraises that you did the Last two years but the last 10 right the Other thing I'd add just is it's Important you mentioned a couple times And sort of like Shifting the priorities Of an investors saying this and then That I think there's an important Message in there which is like really Understanding and picking your investors Thoughtfully and I I this comes to mind Because I think at Capital G like we are Long-term partners and we invest we Oftentimes will start at the series B And then invest over time and sort of Subsequent rounds through IPO and I Think because of that we sort of always Have this long-term orientation on Looking at what's going on with macro Economic conditions Etc Um and sort of supporting our Founders Through that entire phase I think it's a Little bit harder when you have folks Who are just trying to get you to the Next round and so it might say like grow Grow grow so that you can raise capital For the next round and are maybe less Less helpful in thinking through like Hey how do we build a long-term durable Business and so sort of putting your hat On and thinking through like when I do Choose an investor how do I make sure I'm getting that sort of long-term Vision quality I also think quality of Revenue diversity of Revenue so I talked

Earlier about like yeah we have Companies that are in the web 3 space we Have companies in the AI space we have Companies in e-commerce media travel Luxury so diversity of Revenue and is Something I think sets companies up for Success because in any given downturn There's things that do really well There's things that do not so well so You can still continue to grow fast While you know again pushing against a Market that is perhaps not as favorable As it was a few years ago the other Thing I would call out is I pay a lot More attention to my customers in the Broader Market than investors it's not That I show up to the board of media and Say like I shut up guys like we're gonna Do X but I do think it's really Important to uh basically adapt yourself To what the customer is telling you we Certainly adapted the way we pitched Because customers were looking starting To look at at consolidation customers a Lot of customers in e-commerce we're Looking at Cost cutting themselves so we Had to basically emphasize the benefits Of our platform that made sense for Their business and those were Avenues in Which we could still find sustainable Growth without overhauling how the Machine actually worked So if you're looking at things for the Long Haul yeah and I mean I think that's

That's the way you should look at it if You believe in a company you know a Couple of years of you know downturn is Not going to change your view of that Vision it may change their ability to You know they kind of have to hang on For those two years but your support for Them shouldn't alter because if you Believed in the founders and you Believed in the vision you're going to Continue to support that but um you know I think a lot of people Uh you know if we think that maybe the Last downturn was you know ended in Around 2010 right after the 2008 crash There are founders who have never Experienced a downturn so I mean I mean People have a certain kind of life Experience know that there you know There are these economic ups and downs But a lot of people who are in the Current you know who are currently Founders you know if they started the Company five years ago and they're Fairly young may never have experienced A downturn how do you you know how do You kind of help them navigate that Knowing that you want to be in there for The Long Haul and knowing that they may Not know what this means yeah for sure That's why I love our investment Approach we make super concentrated bets Which means that we have only 50-ish Portfolio companies that are active at

Any given time and so we are really Hands-On with each of those portfolio Companies over very different stages of Their life cycle like the series B stage Is very different than the series D then You're when you're going out for IPO and So we end up spending we actually have a Whole growth team that sort of like Dedicated resources to our portfolio Companies like I said I was just on with One of our portfolio companies like Helping them build out a financial model That's really responsive to this Economic environment and sort of walking Through literally like Excel line by Excel line to understand like hey this Is how the macroeconomic environment has Changed the way we think about anything Above cost of goods sold here's the way It's changed the way we think about Opex And like here's how the next few years Might look and then here's how we would Sort of turn things off Exactly and really what it's kind of the The boring stuff but it's actually quite Critical to how you think about business But I think that people haven't been Thinking about the boring stuff because It was just like here's a bunch of money Go spend it you know totally well it's Interesting because I would say that There were sort of two camps of Investors over the period of 2020 to 2021 there were investors who truly

Believed that the public market Multiples that were sort of like 30 Times Revenue that we were seeing at That time were going to be sustained Because it was fundamentally a new type Of software with SAS that that was so Much different and so much more valuable And if you believed that then it made Sense to invest at the valuations that We saw during that time frame there was Another class of investors that sort of Believed hey this might be a really like Blip in the market and we we did this we Studied sort of over time we looked at 2008 we looked at 2000 and we said like This feels a little bit more like a blip And so we had a hard time actually Really thinking through what are the Right investments in that period of sort Of euphoria because we did believe a Little bit more that there would be some More of this correction and and we would Want to support our companies over the Long term through it yeah I have an Interesting perspective on this because I moved from Argentina to San Francisco In 2008 right 2009 quick timing I had Asked Chad GPD recently was that was There a financial crisis at the time it Confirmed indeed there was and yeah Because I was oblivious to it because The seed funding environment was so Exciting at the time everyone that I was Talking to in Assaf was building uh

Mobile social all these new platforms Were emerging so there was this Excitement in the air I look at the Current environment and I see the same Thing with AI where again it's a great Time to start something new And perhaps you're actually better off Maybe having some blinders on and not I Think it was a Steve Jobs that said like I didn't have time to read The Wall Street Journal and like calculate like IPO multiples when I was building Apple In the early days but I think you Partner with investors that are looking Out for what are the metrics that you Need to hit in this environment to raise Your subsequent round uh to actually set Yourself up for Success over the long Term so the environment has changed it Would be silly to say like it's just uh 2021 again or 2020 but I think that There's incredible new opportunities That have come with a downturn and I Think history does Rhyme a bit in this Case as well so every time I get up here I'm just a little like time goes at a Different speed up here and we only have Less than five minutes left Um so I had a bunch of other questions I Wanted to ask you but we we have to sort Of move the conversation along and one Of the things that kind of occurs to me Is that you know there are Lessons Learned when you have to go through an

Experience like this and I'm wondering What you can take away from this both as An investor and as an operator what you Can take away when the economy improves And you know maybe money isn't as cheap As it was because I don't think we're Going back to zero but it's going to be Cheaper than it is now and you'll have More choices so what will you take in Terms of what you've learned about how To you know communicate about efficiency And how to implement efficiency Yeah Um it's a great question I think Something we've been thinking a lot About obviously is when there's a big Change like this a lot of reflection Happens Um you know I think one thing that's Important to consider from the Investment perspective is the value of Of patients and the value of sort of Like picking with Founders who you feel Really excited about working with day in And day out and for us like I mentioned At Capital G we tend to be more sort of On the analytical side like we go very Deep in sectors and we work with our Founders over a long period of time What we've realized through a correction Like this is we love working with Founders who are ready to get sort of Down with us look at the Excel Spreadsheets think through like okay if

The market environment were to change in This way how would we change the Strategic direction of the business Etc And You know if a Founder is less excited About doing something like that that's a Good indication that like maybe that's Not a great fit you know we're more Excited about working with someone who's Like really wants to partner with us Really is excited about our guidance and Really is excited about working together Over a long period of time and I think In the sort of stages of like 2020 to 2021 it's easy to forget that because Things are moving so fast and people are Raising it you know crazy speeds and so Um I think our reflection was sort of Like hey stick to what we know stick to The types of Founders that we work Really well with and um continue we're Going to see these Cycles if we back Companies for eight to ten years and so Just continue to stay strong with what We know we do well and those those Founders that learn how to for the first Time take into the Excel they're going To take those lessons with them and They're probably going to be better Founders totally exactly and it's you Have to sometimes you have to go through Things like this to really understand a Lot of those Dynamics so so how about You what do you what do you think very

Similar the the lesson for me is to Continue to optimistically focus on What's going to be true 10 years from Now uh if I can think in in that time Horizon and then have partners that can Meet you there and and support you for The long term I think that's where the Magic happens because when I if I think Back from 10 years from now I think Consumers will be demanding great Digital products companies are upgrading Themselves to become digital native Companies and will continue to spend and Invest in delivering great digital Experiences for their customers Companies will continue to invest in Developers making them happy making them More productive will will invest in ai Ai is here to stay so focusing on those Long-term trajectories it's very hard to Predict what the market is going to do Next week but it's actually quite easy To predict what's going to be true 10 Years from now so I think staying Focused on that and and then being able To weather the storm so to speak and be Very adaptive and dynamic in how to Approach the day-to-day week to week I I Think that's that's a big lesson in how To run any any good business So so one last question which we have to Answer pretty quickly Um you know what qualities Are different you know in the starter

Startup founder You know when you have all this money to Spend versus when you don't have all This money to spend and you have to Think differently and like how is are Those teachable qualities Yeah it's a good question I think that Patients decisiveness and sort of like Analytical rigor I think are quite Important in an environment like this Um and really I think it was so easy in The in the fast-moving environment of 2021 to just sort of like to your point What markets can we enter next and how Can we continue to spend money in XYZ Ways and it was it was you know for many Companies kind of fine to do that but I Think the founders who really sit down And put a strategic lens and a decisive Lens on like this is the direction to Your point like we're spending all of Our Innovation tokens on this one thing And we've done the the sort of Analytical work to defend that that's I Think where we get really excited all Right well we are exactly zero so we've Got to go but please give these two a Hand they were great [Applause]