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Guys, I am so excited for this.
It's always my favorite show to do.
We have the wonderful Tom Tungas joining us today.
Tom, welcome to this wonderful trio.
It's so great to have you.
Thrilled to be here.
Thanks for having me on.
Not at all.
Tom, I gotta say, have you become so Americanized, Tomas, that you're just going with Tom now?
Are you just recognizing that Harry, like all English people, has no command of foreign languages?
Sorry, I didn't understand that.
Would you like him to use your given name, Tom?
Are we going to stick with what Ari said?
Oh, Tom's great.
This is great.
Let's roll with it.
Let's be brief.
We've become an American.
Tom it is.
Don't worry, Tom.
Roy will remain this obnoxious way for the following 90 minutes.
It's all good.
I've got used to it.
He'll correct your punctuation next.
But I want to start on some very exciting news for Casa.
$2.3 billion at a $29.3 billion valuation.
Andreessen, Thrive, Kotu, DST, Excel, all the big players all involved.
Chaps, how did we analyze this?
And I look at this and honestly feel more irrelevant than I've ever felt.
How should we look at this?
And this is a free-for-all.
I mean look, I think product market fit for agentic coding is probably the best of any use case aside from search.
And then you have this just like massive growth.
So I think the bulk case is The productivity gains for software engineers here are pretty enormous 30 to 70 kind of, depending on which company you're looking at.
You have pretty significant multiple expansion.
I'm not sure if you guys have played with the new cursor model, but it's phenomenal.
It's unbelievably fast, four or five times faster on a tokens per second basis.
And that allows them to capture a whole bunch of margin.
And then on a multiples basis, it's actually not that wild.
You put all those things together, plus the billions in the market.
And so you see evaluation here.
I mean, can you see a three X?
You don't have a lot of ESOP dilution because total employee count is 30.
Is it still 30?
They just hired a PM four months ago.
So they increased that count by 5%.
But you don't have a lot of the CapEx dilution that you'll see within the foundation models.
And so, you know, does it go public?
You have massive revenue growth, increasing margin, pretty attractive financial profile.
We can debate the entry price, but I think classic bull market bet.
Big question.
I mean we were looking at a bunch of the vibe coding companies.
Typical gross account retention is 50.
And so what does that really mean in this business?
Can they push any other price?
I think that's probably the ultimate determining question.
But just given the usage that we see, I can see the case.
I can see the case.
There's two thoughts to add on to it.
One.
I think this idea that you get a 30 to 70 productivity boost is almost a backwards way of looking at it.
Because the way I think about it now is it's just default and necessary.
This is the way we code.
So if we were talking earlier in the year, even if we were at Sastr in May, we were talking about productivity boosts, right?
What are you getting out of Cursor and Windsurf at all?
I don't know anybody not using Cursor or something.
It's moved to like.
We're going to approach 100 penetration per developer of some sort of price per year 5000, 6000.
You guys, Rory and Tomas are better at the math than me.
Before we even get to Replit, and Lovable like Prosumer for engineers.
How many engineers are there on planet earth today?
And what's 5,000 times that for seriously, we're going to have a hundred percent penetration, right?
I agree with you.
So when I used to do market sizing models five years ago, we used to assume that there were 25 to 30 million developers.
In the most recent Microsoft transcript from the earnings they're talking about a hundred to 150 million developers just on GitHub.
Okay.
So 200 million times five grand.
How much is that Rory?
Yeah, 200 million.
I mean, look, 200 million times a grand is 200 billion.
No, five grand, five grand a year.
Now, I don't buy that for a second.
I think Cursor can do a trillion if it has its current current okay, it could do 500 billion right.
Seriously, this is what we're missing.
This is all the whole AI play to me.
If you're not seeing massive TAM expansion, there's just no point in even playing as VCs.
Okay, so I was chatting with a sales leader last night.
He's a mid-market seller in an agentic company.
And I asked him, how many figures are in your mid-market deals?
And I think of mid-market deal like a mid-market deal for me is like 20 to 50K, 50K on the highs, maybe 75.
Yeah.
So they're all seven figures.
Seven.
Yeah.
So there's an agentic, an agentic software company, and the mid-market is high six to low seven figures.
Yeah.
That's TAM expansion.
That's TAM expansion.
It's labor replacement in some form or another.
Right.
And so to that point like if the total number of developers increases and look willingness to pay.
I mean I pay for a cloud code max per 200 bucks a month.
Yeah.
And you run out.
I run out two days into the week, right?
So now I'm at a place where like, okay, do I buy two additional seats, three additional seats?
And so instead of spending $200 a month, I'm spending a thousand dollars a month.
And I have this total pain of being able to switch between these keys.
It makes me wonder.
What is my willingness to pay for clock?
I will never go back to using a computer without clock code.
I couldn't imagine it.
And that sound you hear is them creating the Tomas 300, 400 buck a month plan because they need it.
And you don't want to know what I spent on Replit.
It's more expensive.
And you would never go back, right?
There's no way.
There's no way you go back.
Well, they're different.
Cursor is never going back.
I actually think now that we do the math, we said 100 million active developers.
Sorry, maybe I got the math wrong.
Yeah, I think that's right.
I think everyone's going to pay $400 to $500 a month ultimately, no matter where they are.
So that's a trillion.
We're coming up on a trillion.
I think that's real.
And maybe Cursor gets 30% of it, we could argue, right?
Then we could back into if it's a good deal.
Then the Replit, Lovable, Base44, and Friends, that's the other couple hundred million of people.
I mean, Tomas, I've shipped 12 apps since June on Replit.
12 apps used 700,000 times.
I built product, but I don't code, right?
That's a whole nother TAM.
But that's three to 5% of US GDP.
I mean, if we're talking about a trillion dollars.
Well, that's global.
You said global developers, right?
Okay, fair.
But most of the money will accrue to US companies.
Any software business is 50% US.
Even though we're only, you know, what is it?
Okay, so that's 2% of GDP, right?
Most of us aren't even going to be working in five years.
So 2% of GDP is necessary because no one wants to work.
No one wants to be a hands-on keyboard executive.
No one graduated from college that I know wants to work, right?
So 2% sounds low to me.
I'm going to call it.
It won't be 2% of anything like it, but it can still be huge.
Yeah, you multiply $100 million by $5,000 a pop and you get a huge number.
You can narrow this thing down to quote-unquote serious developers.
You get, I think, three or four in the US.
Really serious, unpaid, to code eight hours a day, five days a week.
You can still multiply that by five grand a year and get a huge company.
So I think the aha here is, I'm just kind of going back to the question, call me boring.
The Harry question is, roughly $30 billion for a billion in revenue, is this crazy?
And the proof of it that I struggle more to get the con side than the pro side because look, the pro side is revenue and revenue growth rate and probably TAM.
If something's gone one to a hundred a year ago and it's gone from a hundred to a billion this year, it's hard to imagine with that.
You know, Newton's laws of motion require it to go to three or four billion next year.
So suddenly you're in this thing at 10 times NTM revenues.
So on revenue and revenue growth, and we just did it on TAM, all of these are great.
So, if you're trying to come up with an argument against, the two ones I hear are profitability and moat.
And I'd love to talk about those.
And Tom, maybe you have some insight in that.
Let's talk profitability.
You had a whole bunch of, oh my God, the gross margin on these things isn't great.
Sometimes you hear it isn't great.
Sometimes you hear it's awful.
And obviously all that money is flowing to Entropic, and we'll come back to that.
But it is also noteworthy.
They talked about building their own model which, of course, would allow them to capture that revenue.
So I don't have compelling data on that, but I'd love to hear people's thoughts on profitability, gross margins for these businesses.
My pushback on the con side would just be the emphasis and the focus that OpenAI and Anthropic are placing on Codex and on Cloud Code, and then your alternative players like Cognition.
I said there's two negatives, and I'm going to list them, profitability and durability.
And profitability is do you make money?
And durability is someone else going to take your money.
And I think those are the only two issues, which is amazing.
Just think about it.
It's a 30 billion market cap deal where, on a revenue and a revenue growth in the TAM perspective, it's big resounding yeses.
Revenue scale, hyper growth, huge market.
Yes, yes, yes.
So you're right.
The two are profitability and then competition slash durability.
So let's do them in turn.
Because I think they are linked, Harry.
You're right.
Because the odd thing about the current business is The direct competitor is also currently the supplier of the raw ingredient.
That makes 50 60, 70 of their product.
It's a very weird platform risk kind of deal.
And maybe you can just lump them in together.
Because look, with 100 or so employees, it ain't labor that's killing them.
It's the cost of the tokens, which money they give to the company who also has a competing product.
So Tom, I'd love to hear your thoughts.
How do you think about cloud code versus cursor?
The way I'd put it is as the models improve in performance dramatically, people switch.
Gemini 3 just came out.
It's a little bit better than Cloud 4.5 Sonnet on coding.
That's what matters to this audience.
When there's a lot of improvement, people switch.
I want to see, is the cursor model a whole lot better than the Cloud model?
4.5 comes out of OpenAI.
Great.
I want to go, or 4.1.
I want to check out that model on Codex.
But as the improvements in coding start to asymptote, I'm going to stay where I am.
I'm going to stay where I am because there's memory and it remembers how I program and it remembers my linting, which is how many tabs I put into each particular function.
I think we're at a place where agentic coding is no longer on this extremely steep improvement path.
And so people will stay where they are because the cost of, so I have a hundred tools in Cloud Code.
Cloud Code wrote all of them.
And now I have this whole setup where it does all kinds of stuff for me.
And sure I told Gemini this morning when Gemini 3 launched Look at everything that I've done in cloud code and migrate it so that you can use it and it'll migrate.
But I will only do that if I think that the benefit of the migration is significant.
If you look at the distribution initial distribution of cursor, what fraction of people really going to switch, especially once the enterprise business starts to come in?
Because
Fortune 500 will pick one standardized by effectively an ELA and then the switching diminishes.
And so I think they'll be able to improve margins.
And so as long as they're able to continue to grow.
I bet they hold on, I don't know, five years from now, 75% of their audience, something like that.
And so to your point, Rory, on like just inertia in the business, it will be there.
What I don't get, here's where I'm ignorant.
And here's where the difference between Replit and Lovable is so different, right?
Replit and Lovable, frankly, are using cheap models.
Most people don't know or care and they're well marked up.
The margins are north of 50, the gross margins, okay?
We're not bouncing back and forth between the latest Gemini and 4.5, right?
In fact, Replit defaults you to an N-1 model unless you want to pay more.
Okay.
And it works fine for that use case.
What I'm still remain ignorant of, even as we're talking about is, I think cursor has a mode and has switching costs, and and enterprise ELAs and others will lock in.
But ultimately even with mixing in their own model, which may not even have that much higher margins, right?
It'll have higher margins, but that like, how do they get to 60% gross margins?
How do they get there?
Right.
But I totally get how Replit and lovable are already at 50.
Yeah, i mean, i don't know either, but i mean, so we've met a bunch of different companies and they're taking big models and then distilling them into small, and so we've done this internally.
We've taken cloud code, which is i don't know a trillion parameter model, and then we've taken a 20 billion parameter model and said cloud code, teach this little model how to call tools.
I mean, this is a venture capital firm.
Yes, we have a great head of ai, but we're not a research lab and we can get to 97 equivalency on that tool calling distillation with a model that's 150 at the size.
Anyway, the point is, i think There is so much efficiency to squeeze out of these model architectures because there's just a lot of fat in these systems.
Candidly, I don't know if any of these companies achieve 60% to 70%.
I mean, we all know publicly traded software companies, previous era was 70%, 72% gross margin.
I don't know if we ever get to that place.
But the other point is, do they need to?
You don't need to.
Absolutely.
You're exactly right.
Those companies were selling workflow software with big sales force, lots of integration.
Here you're selling a tool that people can... turn on, use themselves.
You got low sales and marketing costs.
In the end, things are valued on a multiple of free cash flow in the end, in the limit.
And I'm kind of with you.
I think that, as I listen to this whole discussion, if we buy the durability thing, in other words, most people won't switch once you ask them to talk out, then the only quote negative is this gross margin issue.
And I think you're right, Tom is that if the only thing between you and you know 50, 60 billion is your ability to chip away at a digital product where there's a ton of optimization to be done, my guess is you'll find a way to get it.
It mightn't be 80, but if you can get to 60 GM and sell a billion dollars in revenue with 100 headcount, you're going to be kicking off cash.
Totally.
And then Microsoft also said they were producing.
Compared to 12 months ago, they're producing 90 more tokens per GPU hour than 12 months ago.
So yeah, that's the rate of efficiency gain.
So one, two and three in this space in five years time, who is going to be the top one or two and three players and assign a market ownership to it before we move on.
So I think Codex is going to have 60, Anthropic is going to have 20 and Curse is going to have 20, for example.
My gut would be Cursor because they're there and they're ahead.
GitHub because they'll bundle and it's Microsoft.
So a whole bunch of corporate America will just go with that, especially.
It's like the Zoom versus Teams discussion.
They'll be bundled people.
So that's those two.
The third, you have to put Entropic in because they're relevant, and our cognition just because it's slightly different, which leads me to assume Codex isn't a huge player here.
I mean, I just did that on the fly.
But I think that you throw out Codex Harry, which is OpenAI obviously, but you look at people who have a natural lock on the space.
You have the people who are first, which is Cursor.
You have the people who can bundle, which is Microsoft at the enterprise level, at the distribution level.
You have the people who can bundle at the model level, which is Entropic.
And then you got the clever guys out in the corner.
It's a crowded space.
I don't know if you put OpenAI in the top three in this space.
I agree with Rory.
I think it's a very astute assessment.
I think Cursor has 40 to 60% share.
I think Microsoft, they really need to step up the product.
They really had it.
They had the market locked up.
And then I don't even know what the agentic Microsoft coding product is.
And it's definitely not the tab autocomplete, which is the last time I used it.
But maybe it's bundled within VS Code.
But they can come out the way they did with and just come out of nowhere.
And so if it's in five years, yes, in year four and five, are they probably the number two player?
It's right on the money.
And then you have Anthropic is just so good on coding and it seems like that's where they're focused.
So that's one, two, three, 60, 2020, something like that.
I could provide a slightly different perspective.
The latest version of Replit V3 blows everything out of the water.
It's not just night and day.
It's what's more than night and day.
It's Pluto and Mercury, okay?
And in V3 now, I'll just give you an example.
Agents talk to agents.
It calls in an architect and reviews my code.
It calls in a different agent and finds bugs.
It calls in a different agent to review what it has.
It has an unlimited context window that appears to go on for months now and remembers everything we've done.
My point is the rate of change is so high in this side of the things that I'm not betting there won't be someone else in 18 months.
That'll blow everyone out of the water.
Do I think someone can invest what Anthropic and OpenAI can invest?
Hard to imagine.
How much have they raised?
A lot.
Okay.
So I don't know that you can build that, but in terms of building a layer or on top of other models, we there's a level of disruption to come.
I don't think we've even touched on yet.
You know, it's just so much different and so much better.
So for example, for me, like the biggest issue now that this rep, the agents are so good, right?
And so autonomous.
I mean, this is true for all of software.
The biggest issue is QA.
What if there was a version that could truly do all functional QA agentically, right?
That would be another step function. then I'd be 10 times more productive.
I think all these leaders are too big to go away.
But I mean, if 30 kids at Cursor can build this a billion, are you sure 30 kids?
Because AI is not static.
This rate of change is so crazy.
It's not.
I know Gemini feels like 8 better than four or five Sonnet, but in a year what we can do with it.
We may under predict what we can do in a year.
I wonder, is that correct?
There's one word which says the window opens it was new technical discontinuity and there's three or four years where it's up for grabs and then things start to coalesce and settle less because the technology is not continuing to train, but more because enterprise, it's time assets come on.
You make a decision, you get locked in.
You know a corporation buys for its people and then just things.
Market share becomes harder to move.
And yes, another step function.
Revolutionary change in the AI underpinnings and the models could cause that to happen.
But my base case is that it will start to coalesce more and that market shares will become less subject to flux.
In other words, people will settle into their rough market share.
And that's been typical for most markets.
There's this new wild period.
But after three or four years, you grab what share you can.
And then in most other markets.
Then there's a long 10-year, 20-year period where, even though the market doubles trebles 10Xs, the rough market share at the start is the rough market share at the end.
But I don't think we've ever seen software get remotely this good this quickly in our lifetimes.
It's like two orders of magnitude faster.
Software used to get better maybe every five years.
You'd have a major release and it would have an API.
Yeah.
It would integrate with Looker.
That would be the big deal this year.
We got our Looker integration working.
Now this isn't like even 10x faster.
This is like 20 or 30x faster than 24 months ago.
Arguing back is that Intel doubled every whatever 18 months and you know market share didn't move for 15, 20 years, throughout the entire lifecycle of the CPU.
Mass performance increase on its own often isn't enough to cause.
You know, market share shifts once they get embedded in
Intuitively, Four years ago, no one did coding using AI.
Now everyone's doing coding using AI.
There was a four-year period where everyone would have to pick their AI coder.
Once you've done that, are you just going to lie back and say the AI coding company will just make my shit better?
As Tom said, is he going to be in the market to shift two years from now, provided they all stay roughly comparable.
I think it's at least plausible that the balance of probability is no.
Sorry, Tom.
No, no, no.
I'm trying to figure out the right blog post for this conversation.
I think it's the bacon and the skillet debate, which is when does the fat congeal?
Yes.
Right now, everything is hot.
Everything's moving around.
There's a lot of sizzle.
And then all of a sudden the heat comes off and then everything's fixed, right?
And it's much harder to move through.
Yes.
I love it.
And when does that happen?
I think that's the debate.
Jason's perspective is well, that probably doesn't happen for a while, because the skillet's going to be cooking on 10 for a long time.
Let me give you another version of that.
So we rolled out AgentForce for Salesforce.
We're probably one of the few organizations of our size to have rolled out AgentForce, okay?
The interesting part is we took the prompt from another AI agent that we trained for months and we gave it to AgentForce.
We iterated it with it for about a day and it worked just as well.
The point of the story is these moats are real, okay?
But if I could move that prompt and all that learning from one agent into AgentForce?
Don't overestimate your moats today.
It's just the meta learning.
They're there, but I think they're lower.
So just on that point, let's talk about commoditization, right?
Like we talked about moats at the beginning.
The markets are growing incredibly quickly.
And so you have technologies there.
You could see rapid commoditization and deflation in pricing power.
I'm hoping.
You're hoping we see that.
I think a hundred grand per agent.
There's only so many that I can buy.
I need theories fees.
I need a little bit of that theory fee stream to go beyond 12 agents in production.
Let's just ask that quick.
I want to drill down on the word deflation because there could be two meanings to that word.
One of them, the BLS, meaning Bureau of Labor Statistics, and then the other one, the terrifying one.
The BLS meaning is, oh my God, this year I get a million tokens.
Next year, for the same price, I get 2 million tokens.
At some macro level, I've had more increase in value.
I'm still paying roughly the same amount.
It's not catastrophic.
It's not an implosion.
That to me is what's happening right now.
Agreed?
It's roughly that trajectory.
But you hinted at something that if true would be something more than that.
It's where you suddenly see price erosion.
Price wars.
Price war.
What if there's a price war?
And it's worth pausing on this because it's the only bad scenario.
And we never saw that in SaaS.
We never saw with a few exceptions.
I mean, I remember bots had to compete against Microsoft, which was free, but most of the time there wasn't this.
What you're possibly in Thomas is a year from now, the product manager on Tropic says, screw it.
I want to win and clog code.
I'm going to go from a hundred to 50 bucks a pop.
The guys have to respond.
Maybe it's because people are embedded.
Some product leader says the only way to change that is to go down in price.
Yeah.
And it's not number two, number one and number two in the market is number three, four, and five.
They say we have to win significant share.
How will we win share?
We win share by underpricing.
And then what happens?
But that's not new.
There's always been low end versions of every product we can think of in the market.
I'm not saying it's not new.
I'm just understanding the point.
There's always been a low end CRM.
There's always been a low end everything in the market.
There's always been a $5 a month version of CRM.
It didn't stop Salesforce getting to almost $50 billion.
Right.
But to your point, Jason, if I can take a prompt out of one agent, put it to another.
Yeah, it's riskier.
Your point is it adds to the risk, because that portability from the product or even using the low-end clone in CRM, but adding that enterprise-grade, having the prompt work just as well, that's very disruptive because then maybe I actually pay the same for the AI but the core CRM I pay 5 a seat instead of 300.
Well, and then the time to ship the feature to compete is much less.
Go ahead, Rory.
I've got to take two extremes.
I mean to kind of encapsulate this price war comment is that subscription revenue, enterprise software that's embedded with a whole bunch of integrations, like Salesforce, is almost immune to price wars.
Even if the other shit's cheaper, you're like, I'm not going to rip it out, right?
So there's some maybe mild price pressure, but they're indifferent.
The other extreme, I've got a classic product, DRAM.
We don't talk about the DRAM wars now, but commodity memory semiconductor chips, right?
They glut.
And then they go short every 6 12, 18 months and your pricing spikes 5x and you're loyal to Samsung for 30 seconds.
And then, you know, it's an embedded product, so the end user doesn't care.
And six months later the prices have gone down to Tom's point, not kind of 10 decline, but a 50, 80 decline.
And they're a commodity and someone's now buying them from Hynix or Microchip for, you know, one-tenth of a price.
Those are the two extremes.
And we mentally always assume that most software products are, you know Salesforce, are a bit below it, less sticky than Salesforce, if it's lovable, but still in the sticky category.
If anything like that semiconductor DRAM, product type commoditization took place.
To say that would be ugly would be an understatement.
It would be terrifying.
I mean, beyond terrifying.
If GPUs became more like DRAM, it would not be pretty out there.
No, it hinges on how easy is it for a mid market or an enterprise to switch?
What abstraction layers can they impose as a business?
You could imagine, look at Iceberg within the data ecosystem, right?
Snowflake captured compute and storage, and then an open source technology came in and made the large enterprises realize I want to control my own data and I want to store it.
So Snowflake, I'm going to take this out of your business and I'm going to hold onto it and I'll selectively give you access to it.
So Jason, what if you had a database of all those prompts and you fed them in selectively into different agents?
You can.
Two thoughts.
One, it's just tough.
The fact that we have, we essentially have 12 AI agents running now at Sastr, more than humans.
Okay.
And we have five sort of SDR, BDRs running.
Okay.
From different instances and different vendors.
You know I've been a Salesforce customer since the beginning, but now they've turned it almost into a database for us because we interact with the agents.
We don't log into Salesforce.
We don't talk to Salesforce.
We talk to agent force or qualified or artisan.
Some of what you're saying has already happened to us.
That's why Salesforce has to win with agent force, because these agents are the most important part of the stack.
It can lead to a lot of portability, portability of data, or even just portability of value.
To me, that's what I'm learning.
It's portability of value.
Old school guys have to win the agent wars or the value just leaks out of their platforms.
Even if the logos are retained, the value is just leaking, slowly leaking out every week.
Yes, they would be in the category of the thing you sell.
The existing product you sell as Salesforce is still wildly sticky, but nobody cares and all the extra money went elsewhere.
So you just flatten out and obviously your market cap reflects a 10% growth, not a 50% growth.
Yeah, but if you somehow you can monetize these agents and that's interesting, you know, going to the deflation question, the other interesting thing, what I've learned from the GTM agents right,
I think there will be a price war coming, but right now there isn't.
Right now they basically all cost a hundred grand to start, but the cheapest entry price is like 50 to 70 grand plus like 25 grand of an FTE to get going right.
A forward deployed engineer.
So you're talking about a hundred grand to get going.
There's not, they're not rampantly discounting it for a lot of reasons.
If that price war would become then, like all of this massive ARR quotes we're seeing in these vendors, would deflate rapidly, right.
Instead of being a hundred thousand dollar product, they were a 2000 product would be tough in venture.
Look, I don't think it's going to happen.
I just think it's important to raise the question because I suspect maybe in one or two categories this does happen.
I think that's the right statement.
It could happen in other areas more quickly.
If it's going to show up, it's going to show up in core API pricing.
It's going to show up in coding agents.
It's going to show up in the lovables.
That's where more likely.
But if you're out there charging 100000 a year for your agent with super happy customers this is Tomasz's point they're great.
It's working great.
It's wonderful.
But I can take that prompt and just a little bit of history, just a little bit of abstracted data, and move it to a 10K a year tool.
When things are a little less frothy and when AI budgets are a little more stable, moving that 100K or 200K to a 20000 a year agent might be appealing.
I remember looking at churn in SaaS companies and the number one predictor of retention was the number of integrations.
Because going back to your point, if it's easy to rip it out, you will rip it out if it's cheaper.
And if it's hard to rip it out, you won't bother.
So I agree.
If you are just literally, I mean your concept of a database of prompts and you are interchangeable, then it's like you're right.
It's a big sign saying, cut me now when you have to save 80 grand.
But if you're integrated to five things and you're like, oh my God, we'll have to talk to IT, then screw it.
But can I?
I want to talk about a totally different topic, but on the same topic, as it were.
I want to come back to your therapy, harry.
Do you feel irrelevant right?
And i think yes yeah, and i think there was a fun point in that, because this is a company cursor, i think, has had at least maybe three rounds this year and the first round was above a billion.
I mean, i think one of the most noticeable things about this year and i have a start for it is the number of companies doing multiple rounds.
Obviously it's significant step ups in the same year.
Can I just touch on that?
RAMP was 13 billion.
RAMP, 13 billion at the start of this year.
Now it's 32 with the latest round announced yesterday.
They've seen four rounds this year.
I looked it up.
RAMP had four separate financings this year.
To give a statistic on that.
We look every year at the newly minted unicorns for that quarter, because that's mentally the outer edge of where we play.
So I'm like, okay, what did we miss?
And there was something like 20, 24 minted unicorns in Q1.
By Q3, 15% of them already had a step-up.
And now with Cursor, some of them had two.
If you think about the velocity of step-ups, that's almost normally.
You think your financing is 12 to 18 months.
15 of your companies within six months that you entered at a billion, above a billion, have already had a step-up.
To your point, it seems...
It's a high velocity, big numbers, and it looks like a remarkably easy game from this.
I'm sure it's not.
But you're right.
You look there and you go, let me get this straight.
You put in 100 million and a billion and you have a 15 chance of being worth 2 billion within six months.
Why not do that for a living?
I mean, I think that's what you're saying, Harry, effectively.
Buy ramp in January 13, sell ramp at 26 in May.
I'm saying it's my insertion point fundamentally wrong. challenged because it is just so much easier and and you say oh it's all it's not easier harry like it is it absolutely is like with the brand it looks easier with the brand in the platform that we have access to a certain extent is the core challenge for most respectfully i could be doing 10 to 25 million dollar checks into these high flyers like your harvey's of the world that we've discussed before at length and we would be able to get them and i could get the step up But no, I go back to the craftsmanship of Seed and the building companies in the trenches with entrepreneurs.
And I'm thinking, why the fuck do I do that?
Well, I'll tell you what's interesting.
Watching Bessemer, who's wildly successful in cloud and B2B, right for generations.
Just co-lead the last ramp round.
And...
You know, they did Anthropic, what, a year ago, right?
And that's probably up 10X, right?
So they did 100 million or something into Anthropic.
Canva, so late.
Byron, I love Byron.
Well, Canva, I think, this is my observation from afar.
They did Canva in 2021.
And then I think maybe they had a little bit of shock.
They're like, wow, maybe that's a great one.
Maybe we overpaid.
Now they're in the money on it.
But then they did Anthropic. which seemed expensive, we should look it up.
And then going from that being conservative but wildly successful, then going to Anthropic, then going to ramp at 30 billion saying, you know the classic post we're so excited to partner together now.
Bessemer must think that is a low risk investment.
That's what I'm saying.
This is a venture capital firm that's been around since the 1800s, right?
Or something like the Bethlehem Steel or Bessemer Steel or something.
They think rampant 30 billion is the best play in the market.
I don't know what theory thinks, but it's to your point, right?
This is not Tiger or SoftBank rolling the dice.
This is Bessemer saying rampant 32 billion is a safe bet.
Kleiner and Mamoun doing Anthropic at 180.
Another example.
I mean, one of the interesting thing here is that A large number of the folks through these kind of rounds are not the late-stage crossover people who to some extent got snookered in 2021, you know, have licked their wounds and crawled away.
It's actually the great large early-stage, now multi-stage firms who are going looking at the same map we just lacked in Cursor and they're saying to themselves risk-adjusted, is this just a great place to put my money?
If you have the scale of capital to be relevant at that stage, because you know you maybe can show up Harry, because you're a media celeb when you're 25, but normally they want to talk to people at 100 plus.
If you have a fund that size, so far it's been a very excellent place to put one's money.
And many of the big, what we would have called early stage firms 10 or 15 years ago are doing it.
You're right.
It's the Bessemer's, China, Lightspeed Lead, I think, the ramp round.
This stuff is working.
I always used to say to my LPs The late stage business is either the best business in the world or the worst business in the world.
And there's nothing you can do to determine which it is.
When prices go up, putting in 100 million and having it go to 200 million with no effort on your side, that feels as good as life is going to get.
And obviously, when prices go down, it ain't so much fun.
See 21, 22 for details.
I think the secret to success in that business is just being a trader.
I was walking in the park with a multi-billionaire today who is in this market, and he is a trader, a ruthless trader.
He buys at 60, sells at 180 in the same year.
And it is absolutely a book that he manages not.
With the ride, your winners, hail this unicorn, founder.
It's fucking trading.
It's the new public market.
Yeah.
Guys, one huge fucking difference, which is my image.
There's no liquidity to the downside.
It is the new public market, because these are companies that by any rational stretch could be public today.
And Harry, you're right.
In public markets, some people have a trading strategy and some people have a holding strategy.
But the key sentence you're missing is you can't execute a trading strategy if they're private.
Because when things go wrong, the liquidity won't be there.
When things go right, you can.
You can trade on your way up, but it'll be a lot harder to get out of one of these investments on the downside because the liquidity will not be commensurate to the public markets.
100 Beroit putting 25 into a I'm just making up any chosen company at the start of this year.
A ramp at 13 and then selling it at 32 now would not be difficult.
No.
No, exactly.
Let me repeat.
On the way up, the late stage business is the world's best business.
But most are on the way up.
We have our YOLO segment, which you've taken the piss out of me before, Rory.
They're all just riding freaking high.
But apparently, you might want to turn on your ticker for the last 24, 48, or 36 hours.
But yes, in general, stocks go up.
I did.
There's so much red, Rory.
There's so much red.
Duolingo, it's like Titanic.
It's like, ooh, it's all under the surface, you know?
Totally.
Totally.
Two elements worried slash concern me this week.
Well, there were several, to be honest.
One was the thinking machines at 50 billion.
And the other was Teal and SoftBank exiting NVIDIA.
And just like what it means for are we top of the market?
Both of them potential signs for top of the market.
When you look at those two, unpack either of them, both of them.
But both kind of concerned me when I saw them.
The only thing I would note from the media, Peter Teal sold 100 million of NVIDIA.
What's the dude worth?
This is like me selling, you know, a tenth of a Bitcoin.
I mean, it's just not... The estimate's been 10, 20.
So you're right.
It's some 1% of his network.
Though I will say it's been my life experience that people rarely sell stocks because they think they're going to go up.
So at some minor level, in the 10 seconds it took to run that decision by the big guy, he said yeah, you should sell that stock.
But you're right.
It's not like when he was unloading his Facebook position.
And again...
I'll do the NVIDIA one is that I don't think there's any data in SoftBank selling.
They just need that.
I mean, they're selling the profitable public company NVIDIA to put that money in OpenAI.
This is a guy ramping up his risk.
I mean, this is not a de-risking.
This is someone saying you know that profitable, publicly traded chip company just isn't risky enough for me.
I'm going to roll out of this one and into OpenAI.
I mean, my comment is you might well be right on a market top.
But it isn't because of those two data points.
The data points I'm paying attention to are in the credit market.
So I'm looking at Oracle credit default swaps, triple what Amazon and Microsoft and others are.
I'm looking at even in consumers, you're looking at, here's a data point.
Subprime borrowers in the past 60 days hit the highest delinquency rate on auto loans in recorded history.
And then you have Blue Owl, which has frozen redemptions for like 1 non-traded BDC vehicle and it's moving it into another one, right.
And then you have the first brand's default on private.
So can we just unpack those?
You said about the Oracle credit default swaps.
Can you help me understand what's going on there and why that's important?
Okay, Oracle has a big deal with open AI.
Oracle needs to build lots of data centers.
To build those data centers, they borrow money, like a mortgage.
They borrowed money.
And there's a thing called a credit default swap, which you remember from the great financial crisis, which is the odds that Oracle defaults on its debt.
They cannot pay their mortgage.
Google and Microsoft and other major technology companies are at a certain level, which is basically the same rate as the federal government.
And Oracle is three times that in the last three or four days.
So the risk is still quite small.
So the overall probability of an Oracle default is small.
The magnitude of the move suggests a meaningful repricing of risk.
I totally agree.
And we're pointing out at the same time the entire value of the quote Oracle deal.
Remember, we talked about when the stock writes 33% that it was crazy.
That entire deal has been unwound.
The market cap of the core company is actually below where it was when the deal was announced.
And I think both that data point is saying the same thing, which is Oracle.
You've just underwritten a risky piece of business.
So your equity is worth less and I'm going to have to reinsure your debt.
All people at the margin are going.
Maybe I want to be one of the first people off this pain train and maybe I can, you know, ensure my risk.
You know, hedge my bets.
That's the tell here.
And so is it this like big screaming flag?
No.
It's not.
It's just a data point that people are starting.
The market is starting to perceive an increasing amount of risk in some of these big contracts.
And then you have the anthropic deals today from Microsoft and NVIDIA with a 15 billion investment, and the circularity questions and all those kinds of things.
So there's just people are perceiving more and more risk as the capex for data centers goes from 500 billion a year to 800 billion a year or more.
Do you think there are any screaming flags from the last week?
I don't think so.
I mean, most of the hyperscalers GPU capacity is sold out for the next two years.
They generate cash.
The debt as a percentage of free cashflow is really small.
The major red flags for me are customer concentration risk is higher than it's ever been.
So Nvidia, two customers for Nvidia represent more than 40% of revenues.
4% represent more than 50% of revenues.
I went back and looked at the dot-com era, the networking companies.
NVIDIA is 10 times more concentrated in terms of revenue than Lucent was.
I think that's an issue, but most of NVIDIA's customers are super cashflow positive, like Google and Meta and others are spitting out cash and they can decide to stop it at basically whatever point.
So I think it's all okay.
How does this merry-go-round stop?
Like if the game of musical chairs were to collapse and everyone falls on their butt in the seat.
What happens?
It's inference demands slows.
And if there's a hiccup, if Google says we built this amount of capacity and we can only fill 80.
If that happens, then you see a You're about to learn something about doing this podcast on Tuesdays that you might have internalized, but I'll tell you what it is.
This thing comes out on Thursday and NVIDIA reports on Wednesday night.
So we've now been pontificating.
And one of two things is going to happen on Thursday, when you listeners are listening to this right.
If NVIDIA is steady as she goes and it's doing fine with a few little warnings we will look like balanced and rational people.
If they pull the pin to the downside, we will look like the last men on the Titanic here.
And it's terrifying because that's just the nature of the recording class.
But now to lash myself to that mast with you, Tom, I think you're right.
And what you're not seeing is and now I'm going to do something I hate doing.
You're almost to some extent, I suppose, predicting something that, by the time this is played, our listeners will know.
What you're not seeing is mass collapse of demand or anything like that.
You're seeing really strong demand.
All the hyperscalers are saying, we want to buy more.
We want to build more.
We want to invest more.
The stuff is at the margins.
The negatives are at the margins, which are the over-levered people trying to do this.
People are correctly worried about their debt.
The people who have bought the balance sheet and the need for these products.
On the other hand, the Microsofts and Googles people aren't worried at all.
And in the middle you have meta where it's like you can afford it.
But why are you doing this, dude?
So you internalize that.
I doubt Nvidia are going to get on the call tomorrow and say, the man's gone down.
So all should be fine for a while.
It's to your point now.
Over the medium term people are going.
Hmm, The debt that some of these folks are taking on, like the Blue Owls, like the Oracles, that's just a risky bet if things turn down.
And I think we're at a point where, if there's some wobble, the magnitude of the correction will be fast and brutal.
Everyone knows we're kind of like the tachometer is at a red line.
We are going as fast as we possibly can.
In fact, we're going so fast that we are, as an economy, really uncomfortable with it.
I was reading a macro hedge funds tweet last night and he's talking about how, because of the big companies borrowing lots of money, they're paying less tax revenues to the us government, and those tax revenues are so significant that it actually will increase the national debt.
Right like this is where we are.
We are going like a thousand miles an hour on a car that's designed to go 999, and so the whole thing is shaking.
I totally agree.
I mean.
The fact that people argue about the depreciation schedules on GPUs and the answer to that question can move the entire US stock market is beyond bizarre.
But you're right.
We are where we are.
We're making this bet.
And even a mild slowdown would be painful.
My theory random comment is because no one can get the power to do these.
We actually might be saved from ourselves.
If no one has to say there's no inference demand, then everyone just says well, I would love to build that extra 10 data centers, but we just can't get the power.
So we'll just gradually slow down the ramp.
Maybe it'll kind of just slow a little bit less ostentatiously than if someone gets on a conference call and says we built another brand new spanking data center.
We turned it on and nobody came.
Because that's the moment, as Tom said, where you go.
Hmm, maybe the other 20 we have in the works ain't going to be worth much either.
Maybe our inability to connect power will save ourselves from overcapacity.
And that's my upside case, people.
What do you think the chance is that we actually just continue smooth sailing into the sunset and that we don't hit a air pocket?
A challenge for the next three to four years.
What if we're overestimating?
Zero.
Maybe 10%, 20%.
I'll be more.
Jason?
I think the past moves so much more slowly than the present in B2B.
But if we go back on our history of SaaS which we all can do we had a lot of minor bumps on the way to the peaks.
We had a meltdown in 2016.
We've all forgotten, I think, where SaaS fell like 30% or 40% in two weeks.
It was right during SaaS or annual, right?
So if you go back and you kind of squint on those charts, you'll see massive corrections that then we fully rebounded to right until 2022.
So why wouldn't we have micro, massive corrections, like on the way to us all living in a data center, which I think we all are?
I think data centers are the new cities.
We're building more data centers and offices, I think.
But why shouldn't we have 30 or 40 percent corrections along the way?
We should.
We should.
How could there be no bumps, right?
Maybe Oracle can't get its debt refinanced.
Maybe those core contracts aren't quite what we hoped, right?
Maybe it's something small.
Maybe Nebius just has a bump and it creates a contagion in the market or Microsoft has some issue.
I mean, why, why, why should we not expect three to four little, little 30 to 40% drops?
We've seen it before in our life investing lifetimes.
I'm trying to imagine what a house would look like with a white GPU fence.
Oh my God.
That's the new American dream.
I love a white GPU fence.
That's right.
With a made in Taiwan sign on it.
How much more American can you get?
It is coming.
There'll be more agents in this country than humans soon enough.
Oh yeah.
Yeah.
No, for real.
It's going to fundamentally change our lives.
So that's the part we're missing when there's more agents than humans.
Linking it back to Tomas' comment, though, unfortunately, what they don't do is pay their car loans.
This is back to the comment on where the wider economy is.
But just one comment on That crash comment, Jason, and I remember 2016.
And I even saw a tweet that showed, you know, the Nasdaq since 1981.
And they were saying, hey, it's all fine.
And they did a little pointer to the 2001-2002 crash and saying look, in the scheme of things it's nothing because the line go up.
And to the right,
And they're entirely correct.
But I really, someone tweeted back and said, yes, but it took 16 years to get back to par.
And the longer your time horizon, the more indifferent you can be.
But if you find yourself the wrong side of what was in 2001 a 70 80 correction, I think, plus to that in the NASDAQ, it can hurt for a long time.
So my kind of public service announcement is if you find yourself feeling pretty nauseous about the de minimis crash you've lived through in the last weeks of 4 to 5 down maybe 20 in the second thing sucks you should just look long and hard at your asset allocation and maybe put a little more in cash.
I'm doing that.
I got a little scared and I was like, hmm, Roy, what are you doing here?
No, when you're scared, seriously, don't look.
This is the best.
If you've been around for a little while, you have to learn if you're scared, don't look.
That's the only thing you should do.
Don't look.
It's the best advice.
If you're scared, don't look.
That is the theme of this YC's batch.
I can tell you this week.
I'm being serious.
I mean, I've never seen such exuberance around a batch.
I'm getting emails.
They're always the best batch ever, Harry.
That's the obligatory tweet you have to start doing.
We've raised the 5 million round and now we've opened up the next note for the next note, on the note of the note.
I cannot tell you the exuberance there is.
And they're good companies, but holy shit, the fear of public markets and impending doom.
Oh, it has not reached early stage, baby.
It's like 50 million posts.
Standard.
Are you seeing the same?
Are you nervous like me?
I'm like, guys, I don't want to... Also, a question for you.
Advice.
I feel like it's like you're so lucky to have a meeting with me, and I'll determine if I should ever take your money, Harry.
And I'm like, I haven't even met you.
Am I being too romantic?
The thing is this.
When money is scarce, conditions toughen up.
And frankly, VCs get pretty hard-nosed about allocating the capital.
You got to expect that when money is plentiful, entrepreneurs behave the same way.
So some part of what you're describing is legit.
Now, the test of character is how you behave and how you act interpersonally in those times.
You know when money is scarce.
I think as a VC, you have to allocate capital carefully, but you don't have to be a dick.
And in the same way, you're right.
You see some behaviors now where it's almost like an interview to an interview.
You're like, OK, I get what you're doing and you have the hot company, but knife is long.
I think the best way to approach this is try and be a human being most of the time, either as an entrepreneur or a VC, and recognize it's a massive multi-period game.
But at the same time, you can't deny that the market is the market.
And right now, that market is wildly pro-entrepreneur.
And railing against that, Harry, or being romantic about that, it's a waste of time.
OK, so I have a question.
What are the odds you think the US venture capital market hits half a trillion by 2030? in size.
What's it now?
So when I started in 2008, it was about 8 billion.
In 21, it hit about 300.
And today it's about 275.
100% chance.
100% chance.
Maybe more than 100.
What's north of 100 again?
Okay.
So if that's the case... I'll tell you why, but keep going.
Yeah.
Okay.
So let's assume that's the case.
Then venture capital, or the cost of venture capital continues to decrease, which means valuations continue to increase, which means capital increasingly commoditizes.
Put it this way.
You would be correct, Tom, on the data that you put forth.
I'm going to add one more data point that you missed.
What was your first year, 2000?
How much was in the business?
What did it say?
What was your first number?
Eight.
Eight.
What you missed was in 1999, four years beforehand, there was $100 billion in the same system.
So it went from $100 billion to eight.
Basically, since then, it's been an upward line.
I remember I was in the business from 94 on.
I remember in 2000 you literally could delete 75 to 80 of your address book because you're never going to see them again.
They're just VCs who were gone.
So if you extrapolate the line, you get to 500 billion.
You're exactly right.
If you allow for a call, maybe you don't.
Well, but here's the thing.
It depends on you.
I'm just looking at Excel's Globalscape they published this week.
They had a nice chart.
Tomas always has the better data.
But they said this year...
They're estimated in 184 billion in venture capital invested this year by their definition.
Okay.
The peak was 2021 of 183 billion.
So one more billion this year.
Okay.
But half of the 184 billions into four companies.
So is that venture capital?
If that's venture capital and AI grows at anything like the rate we've discussed, of course it will double.
Maybe 110 95, but only 74 went into the rest, which is half of 2021 and consistent with 2020.
So it could be that YC is overloaded and these four to five names are overloaded, but the rest, the money says it's not overloaded.
It's not easier.
Yeah, it's money from the public market that is fighting its way to those shares, irrespective of the venue.
That's what you're saying.
So we have this bimodal market where YC and maybe Neo and a few others have huge benefits and they've earned it right.
And then the massive names have earned it.
And then we've got 900 unicorns that are never going to IPO.
Poor guys.
We have nine.
We all have one or two in our portfolio that are at nine figures in revenue, that are still growing and will never IPO.
And there is no PE buyer for them.
I think we really have to define what venture capital is to fully answer your question.
But if you include Anthropic and OpenAI and XAI, it's got a double, right?
SpaceX, it's got a double.
Ramp doesn't even make the list.
Poor guys at 32 billion.
Maybe they'll get there.
They're just, they're only consuming a few billion.
It's not enough.
And so what we're basically talking about is a huge concentration of those dollars at the very, very late stage.
I mean, these seed rounds of a billion at five pre.
Absolutely.
None of it matters.
What it means is To be clear and Thomas, that was actually a helpful intervention because it made me realize something clear.
The answer to the question, will the industry double in the next two years?
You hinted at it earlier on, where you said it's a function of if the return is there, then it will double, because money chases returns.
That's the first statement, right?
If the returns continue really good, more money will come in.
Until eventually the money kills the returns.
That's the way the movie works.
So the question is will the industry double?
Can be reduced to a simpler question will the returns be good?
And then the aha that you guys just gave me, the two of you, is The interesting thing.
To a rounding error, that question really resolves itself to will the four or five companies that constitute 40 non-diversified of that industry be good?
If OpenAI, Anthropic and all, yields the return that everyone obviously hopes they do, then already you've taken half the risk off the table.
Everything else does roughly okay, even if some of the old stuff doesn't work out.
A lot of the old stuff doesn't work out.
The 40 billion in OpenAI from a pooled return perspective can swamp 40 separate unicorns entirely.
Poof gone.
So basically you could be right.
If the concentration works, it's all going to be fine and the industry will keep on chugging.
If the concentration doesn't work.
Yeah.
So what you're saying is if OpenAI trades up at IPO, it's roses for everybody.
More on topic than OpenAI, but those kinds of things.
Remember SpaceX too, which is worth 300, 400 billion.
It definitely helps a lot.
The way that I always see that actually is in meeting LPs, because of the amount of LPs that are sitting there with positions in Stripe and SpaceX and the names that we mentioned.
And I think you forget the downstream multiplier recipients of all of these big names to literally dentists in SPVs now in a lot of them and poor dentists we always use.
But it's just thousands and thousands and thousands.
It's back to what Thomas said earlier.
This is where we find ourselves.
Who knew?
But this is it.
The bet is on and the bet is single, singular and utterly correlated.
Why do dentists have so much time?
By the way, it seems like they finish work at five and they just go home and figure out how to invest their cash.
I've never seen a group outside of tech more obsessed with tech investing than dentists.
It's because they have a non-insurance governed market.
It's a cash payer market.
Dentistry is a good business because you get your crown done and you pay cold hard cash.
They don't have to deal much with insurers.
They just make good money.
If you go to your dentist, they're all good businessmen.
They have 10 chairs running.
They have 10 hygienists.
You get five minutes with your dentist.
He charges you a ton.
It's a great business.
I try to avoid dinner parties, but my biggest fear, I go to one and I'm sitting next to a dentist.
Not because I don't want to talk about his or her business.
I don't want to talk about tech.
Can you get me into Tomas' latest deal?
Can Harry get me into perplexity?
Can you ask Harry if I can get into perplexity with the dentist?
Oh my God.
Rory, after all these weeks of Harvey and LaCour and me chatting about Solve, You go and do a deal in legal tech, baby.
GCAI raised from scale at a 550 post money.
Well, weren't that price sensitive, were we, Rory?
What are the top lessons then, Rory, from leading this round?
I'm really interested, given that we've talked a lot about it.
Sure.
And look, I'll say something.
I didn't expect to lead this deal.
We were doing references on another company in broadly the same space.
And we just got customer love for this product.
It's just that simple.
We just got customers saying, I really like this.
Again, I don't like making this show about our own deals, because I think people respect the fact that we're all not trying to talk our own book.
So we'll keep it tight.
The name says it all.
It's GCAI.
It's AI for the in-house legal team, which is different than AI for corporate law.
We talked to customers on a related space.
They all knew GCAR.
They all liked it.
The adoption was huge.
The barriers to adoption were low.
It really dealt with what the GC does in their daily business.
So that's how we got to the company.
It was just great references.
We like the team and the structure.
I mean, no more complex than that.
The company is growing really fast and barely able to spend the money they raised.
So you're in it.
It's profitable and growing very quickly.
How did you get comfortable with future financing partners, given everyone is out of market, being an investor in Harvey or Legora?
Because they won't touch this.
Yeah, so we do see this slightly different market.
But the more important point is this.
A company is... widely cash efficient.
They haven't spent their last round.
I mean, we have a very elegant distribution strategy.
So I don't think we're looking at a whole bunch of huge raises.
I mean, one of the key issues, stepping back, making it less about the deal.
One of the things we are thinking about.
As you're leaning in a little on price in some of these companies, I want to at least pay attention to burn.
What you don't want to be is a high price, big burn deal.
So I find very attractive.
And some of our recent deals actually two of the most recent three deals have all been hovering around cash flow positive, despite trying to invest more because the organic demand has been such that you know you've been able to sell enough to frankly fail to invest ahead of revenue.
And I think if you do have a downturn, I think that's a nice place to be, right?
A little more demand-led, a little more PLG-led and a little less massively expensive.
And you weren't concerned about the kingmaking?
I think that I do buy the idea of leaders.
First of all, that can become the leader in the industry, and that's a big advantage.
Going back to what we said earlier about durability of lead, I even do buy the fact that money can be important, especially in big burn deals.
I do buy some kind of employer-level kingmaking, if you seem to be a hot venture firm in the valley.
But step back.
In the wider US.
I don't buy this idea that because X company got money from YVC that the average corporate buyer cares all that much.
They want to solve that problem.
So I'm not a believer in king making big dispositive when you have great execution and great customer love.
I think the customers decide.
We're in a capitalist economy, and definition of a capitalist economy is the customers decide whom they choose to do business with.
And on average, customers are rational.
They're going to look and they're not going to say, oh, this software is crap, but Sequoia invested.
I'll buy that.
They're going to say, which software do I like?
That's how capital is meant to work, Harry, in case you're unclear.
Okay, so Stripe does tender all-time high of $41.
Love your thoughts.
Yeah, I mean, we have a new public market.
This is wild for me, right?
I went back and looked at Microsoft.
You needed like 50 million in trailing revenue and six quarters of profitability to go public right.
And the cost to take a company public was a couple million bucks.
To do a late-stage financing, I mean, what is the legal cost?
What is the legal cost on like a Series D?
Like a million bucks?
Probably less on a D.
But actually I think once you get into the employee selling, it gets a lot higher because you have a lot more transaction costs.
So let's call it a million.
Okay.
What is the average cost to take a company public in the US?
According to, I think it's KPMG.
The transaction costs.
Well, it's 7%, it's six to 7% of the raise and the raises are now 200, 300 million.
So yeah.
It's 25, 25 to 30 million bucks transaction costs.
And so there's just no.
I'm like, why in the world would you pay that amount of money to raise around a capital?
Why?
I mean, it's like getting a million dollar mortgage and having to pay $150,000 in legal fees.
The only reason you would Thomas, is the point you made earlier is if the capital you get is cheaper than the capital you get private.
And as you pointed out, in fact, it's not.
No, because now there's illiquidity premium, right?
I remember when I joined the venture business, I was taught about the illiquidity discount.
Private companies should trade at a discount relative to publics.
It was always, you were taught it was 20 to 30% to the public multiples.
That's the discount.
It should be for late stage.
Right.
And now there is an access premium.
Harry mentioned this.
And so have we completely inverted?
Is the access premium now 20 to 30% above public?
It probably is.
So from a company's perspective, it's a cheaper cost of capital with a lower transaction cost.
Yeah.
Why wouldn't I do that?
And then the ongoing service of that financing round is significantly less burdensome to the business because quarterly earnings and all that kind of stuff.
And so you really only have to go public if you need to raise a quantum of capital that is so massive that the privates cannot support it in some form or another.
Do you think that even is a blocker?
Why would you not be able to raise billions privately?
OpenAI are proving that you can't.
I guess you're right.
I guess they could raise in the private.
And we have a liquidity mechanism now where you can trade in and out not quite as efficiently, but still pretty efficiently.
Right.
And it's a form of regulatory arbitrage, right?
If you think about it that way, it's a whole lot easier.
So the reason that you would actually go public maybe is bluntly, because you need dumb retail ambassadors to supply you with cash.
It's the capital market of last year's work.
I think I love the access premium thing.
I think there's a small number of companies who, even at super scale, have this desirability and cachet such that they can continue to raise in the private markets.
Right.
You know, I think Stripe's a good example of that.
Obviously, I don't think it's true for most companies.
I think, you know, let's take Navan.
They just went public.
Or come on, Roy, the service titan. went public this year or maybe late last year, right?
Great cloud companies.
But, you know, they're not going to raise 10 more private rounds because it's not wildly sexy.
It's just they're both just perfectly good businesses.
So they didn't have access to this.
I love the expression access privilege, access premium private capital.
They couldn't get done.
You wouldn't be able to do two.
Three hundred million dollar employee liquidity for a company like that.
It's just not desired enough. bring it back to Jason's company.
Your dentist doesn't get excited about being in service tight and private.
So ultimately they had to go public because that was the lowest cost of capital available to them.
And that is going to be true for most companies.
There will be this small number of high taste, high premium Silicon Valley beloved companies that can push it off a lot longer.
The only time Stripe will go public and we've said this on a call before is when the capital available in the private markets is too expensive.
Okay, so let me make the case why I disagree with that.
And I don't know if I believe this, but let me strawman it for a second which is retail has had no access to venture for the last 15 years.
It's been in technology, basically where you want to be.
And so now with upcoming changes in regulation, I can take my 401k, put it into an ETF.
ETF goes into a fund of funds, fund of funds invest in a venture capital.
And as a result of that flood of retail capital, those dollars need to go someplace.
Well, they'll probably end up going into the businesses.
That, you're right, are not the top, like the Pareto optimum 80 of secondary dollars where the market is effectively liquid.
But those retail dollars are effectively going there and they're still probably cheaper than the public market dollars.
That's a fair counter.
And it's true.
Provided the capital keeps coming in because it perceives the returns to be high, more and more people will be able to stay private.
Again.
The reason that capitalism has bankruptcy and downturns and pain and suffering and wipeouts is to stop the extrapolation to infinity.
And until that happens, it's not going to stop.
You're exactly right.
If returns go monotonically up for another five years in venture, more and more money will come in.
And all it will ensure is that when they do, in fact, go down, they'll just go down further.
Do you think the supply of cash is dependent on the returns?
I was with Hemant from GC.
I was with one of the great investors from Co2 and they were saying the opening of retail is the next frontier of the supply of our business.
Do you think the opening of retail is predicated on great returns actually, or are we just going to see it open over the next few years regardless?
I think in the end, when people lose money, they figure it out.
They may take longer.
They may be last to the party.
In the end, the only thing that matters is returns.
The only question is, how long does in the end take?
We're in an industry which has very long reaction cycles.
You put in the money, you don't get signal for five years, you don't figure it out for seven.
The runway at which things can continue is very long.
But we could see the opening of retail much quicker than the runway happening.
And we've got CO2 with $3 billion now in retail funds.
And we're seeing GC be very aggressive in opening up retail funds.
That could come in the next 24 to 36 months, whereas that evolution of poor returns could be a five to seven year lag.
You mean there's a mismatch between assets and liability?
I mean, how many times have we learned this lesson?
But I think you're totally, I mean, you look at Blackstone's Real Estate Investment Trust.
They rent.
I mean huge retail, I think 21 billion.
Huge flood and then all kinds of redemptions issues associated with that.
So I agree with you, Harry.
I think there's a tsunami of retail capital that's coming into venture, which is another reason to believe why the asset class, broadly defined, will hit half a trillion before the end of the decade.
Because they were liquid assets.
They're not marked to market very often.
The hottest ones.
Sure.
It sounds like they're marked to market every four months, but the ones that the 2021 marks on the unicorns, they won't be marked to market both 18 months, maybe longer.
Tom, should we do a $10 billion retail growth fund?
Let's do it.
Only fees.
Only fees required.
Only fees required on this fund.
You guys keep the carry.
We want you to make money.
We'll just take 5% a year in fees.
Yeah, we just want finder's fees.
That's enough.
We want you to capture all the upside.
I will say one hard-nosed thing.
This is all great until you've had to go in a room and look people in the eye and say you've lost the money.
I did my own business when I was 21 and it didn't work out.
And at 26, I had to shut it down.
I had to go into a room and say to people, all your money is gone.
All these folks we're talking all this great game, but there'll be a miserable part of this when you've taken these big funds and it was fun and you put all the money out and then you realize you've locked in a whole bunch of retail investors to a subpar return for a decade.
And that will not be fun.
Just remember that.
Hold that thought for five years from now.
I'm not going to let you read the kids a bedtime story.
Thanks for ruining that party, grandpa.
We were talking about 5 fees on 10 billion and you come in with like you got to come in and you know, throw water on the fire.
You don't have to have an annual meeting for 10 years and explain to them why you've made a ton of money and they've lost.
That's why Jason doesn't have an AGM.
You don't do that.
Right team before we do a quick fire.
Are there any final topics that we need to discuss that I've missed?
You know, just one, since we have Tom here, I just wrote it up today on Sastr.
You know, we're not ending the year with a great IPO market.
We're not.
When we started this show 30 something shows together IPOs were just coming back and it looked like 2025 would be a pretty good year.
Now, in some senses, it's a good year, right?
But we're well off our peaks and the number of deals is not what we thought.
StubHub is a mess.
We have some deals that are a mess.
Navon's a mess, even though it's a great company.
We're ending the year with an IPO whimper.
It's kind of a bummer despite, you know, cursor hitting 30 billion in 22 months.
It's kind of a bummer.
Yeah, I think the lens may be outdated.
And so what I mean by that is I think so secondaries have exploded, absolutely exploded.
So private equity, you look at private equity.
Total fraction of dollars in secondaries is a fraction of the asset classes, about 25.
Historically, venture has been about two to three.
Now we're kind of like 10 to 12.
And so Liquidity dollars maybe another way of defining it is a total value of liquidity dollars, irrespective of liquidation channel.
M&A, IPO, secondary.
That's the stat that I'd want to see.
And I bet that we're up meaningfully on it.
Because, just to the conversation that we've had this you know nobody wants to go, why would you go public?
And so yes, IPOs will remain a very slow way and probably a decreasing as like total share and count and dollars, except for when OpenAI goes public, will likely remain slow, less attractive liquidation option.
You really believe that?
Are we just deferring these eipos?
You believe they'll never come for the top 50 names?
They'll literally never go public?
I mean why like, what are you getting?
You just may exhaust the capital if you fall a little bit out of the top 30, just just a degree out of the top 30 right right, but you know, okay.
So goldman bought industry ventures right, leading secondary fund paid the highest multiple, i think, ever for an asset manager.
Why?
Because a lot of retail dollars coming, they need to go into the private asset class.
What's the best way of doing it?
Secondaries.
And so I think there will be a mid-market secondaries market for not names one through 20, but names two through 200.
And you made the point, Jason, before 900 unicorns, they're never going public.
No, but people will need liquidity in some form or another.
But there's no liquidity for them, my friend.
But there's some market clearing price for that secondary.
I agree with that.
I think you're right on that part, Tom.
I disagree on the IPOs, but I think you're right.
The 900 unicorns have to go to someone that works north of zero and south of $2 trillion.
And somewhere between those two numbers, there's a buck to be made.
And you're right.
Someone's going to have to deal with the problem of cleaning up 900 companies and maybe turning them into 30 great companies merged up or acquired away.
Right, that's a buy-off business.
There's a buy-off business in there.
Some kind of restructuring business.
I'm not sure.
I do agree though, on the.
I think in the end the big exits will IPO and we're in the business of the big exits.
I don't believe long-term.
I mean, the top 30 names prove me a liar today.
But I think over the medium term the IPO window has to reopen for the MAC to work overall.
And it just has to become more relatively attractive.
You are right that direct cost to the company of an IPO is higher than the direct cost to the company of a private round.
But if you look at it from a systems perspective, the private capital has 2 and 20 fee drag and the public has almost 60 bps fee drag.
So, from a societal perspective, there's no doubt in my mind that assets being managed privately have a far higher aggregate costs between cost to the issuer and cost to the investor than public assets.
Yeah.
So I think that changes.
I think the fee structure changes on these extremely late retail products.
That's interesting.
Then you could be right.
Look at SPV fees.
They're not 2 and 20.
That's fair. the fees are significantly less.
They're significantly less.
So those late stage guys the good news is your business is going to double and the bad news is you're working for one in 15.
Right.
So I was looking at PE funds, right?
You can look at PE funds, the publicly traded ones, and you can see like the average fee load is something like 65 to 75 bps.
And so at some point you'll see late stage funds and venture capital.
They'll have to approach that because they need to be competitive.
And so then I think the math can work.
But I don't know.
I mean, you know, we're all just Pontificating.
Tom, let's delete that.
We don't want to talk about reduction in fees.
Come on, dude.
We just said about a $10 billion fund.
You want to do 65 bips?
I'm not.
Come on.
You think Jason's getting out of bed for 65 bips?
No, we're craftspeople here.
We're craftspeople.
We're making artesian water.
Remember, they're writing $200 million checks.
So even 65 bips is plenty of money to monitor one deal.
They'll be fine.
Dude, Jason needs to buy a place in Yellowstone.
65 bips ain't it.
Come on.
We've heard about it.
Country club.
I've got enough material goods.
I'm starting to shed them.
But Tom, you think there'll be a perpetual secondary market, like infinite secondary market for top names.
Because that would be very disruptive.
We can't prove that yet, right?
But that would be utterly disruptive to venture as we know it if secondaries go forever.
It feels like it's true of SpaceX at least, right?
No one's expecting an IPO there ever, are they?
No.
So PE works.
You buy and hold for three to five years.
You package it up for the next person in the value chain.
Right?
That's how it works.
10 million EBITDA company.
I get it to 25 as a result of acquisition and operations.
I hold it for three to five years and I sell it to the next guy.
And I think venture moves in this direction, except for a handful of very, very large funds.
If that's true, then venture failed.
Because if you look at the point of ventures, if you look at the top 10 companies by market cap in the US, nine of them are venture-backed.
Those companies don't get PE packaged around.
PE makes a lot of money moving mid-market shit up and down the value chain and nothing is amazing, but everything is good.
We're in the business of lots of things being utterly crap, some things being okay, but a few things being amazing, and the amazing sit moves everything else.
Okay, so Rory, right, you find your nth fund returner.
You find your nth deck of corn.
I don't know how many you have, but I'm sure you have many.
And you know that it will take 15 years to get to liquidity.
And so what you do is you decide you know what, I'll sell a quarter of the position three rounds later, and then I'll sell a little bit more in the next round, and then I'll sell a little bit more in the next round and I'll dollar cost my way out of this business.
It may not look exactly like PE because it's not a full ownership sale.
That's fair.
Yes, I do buy that.
It's not a PE sale.
Basically what you're saying is in this pretend public market that's still private, I act exactly as I would have in the public markets.
I just do it at a different transaction cost to a different set of buyers.
Yes, I buy that.
That's right.
I think that's what's happening.
And unless the cost to go public and the premium that the public market is willing to pay...
The trend is inexorable and the number of publicly traded companies will dwindle as PE picks them off.
I think in 22 I calculated PE had taken private 12 of all publicly traded software companies in a year.
That was 22, yes.
They held it up.
And so if that continues to be the case and we only have eight IPOs, I mean there's you know, the number of publicly traded software companies.
They're a dying breed.
So IPOs will be for the A minus.
They'll be for names 50 through 150.
Very, very good companies, 500 million growing 50, but that can't do quarterly tender offers of billions a year.
It'll be for the B tier.
Well, it kind of depends on how big the retail flow is in the secondary market.
It may be for companies like 200 to 500.
That'd be a gift.
Oh yeah.
Thumbs up.
But there are a lot of pieces coming into place where the probability is increasing.
I do agree with that.
I think every part of the trend is in your favor. to prove you right in this assertion.
I think the unknown is how people's response will be to a significant down mark which we haven't seen since, you know, meaningfully since 08 or 09 and in tech really not since 2000 to 2002.
So the two things were a meaningful down market where you're not able to trade the stocks because there's no liquidity.
Private
We'll see how that impacts the trend.
But until then, I think you're right.
I think the trend is clearly going this way.
Okay, team, we're going to do a quick fire.
He loves his Kalshi, Tom.
It's a pain in the butt, but you got to deal with it.
No, I love Kalshi.
It's awesome.
It's another new stock market.
Yeah, yeah, yeah.
Thank you.
Optimism.
Optimism, Rory.
See that?
We love Kalshi.
Thank you.
Would you rather invest in Cognition at $12 billion or Cursor at $29 billion?
Cursor.
Jason?
Yeah, I don't mean to make, I usually go the cheap one, but the numbers are just god-stopping with Cursor.
You got to go with it.
All right.
Harvey at $8 billion or Legora at $2 billion?
I'll go, I'll go LaGorra.
And that's knowing very little about the business is just entry price.
I'm seconding it.
I'm not yet.
Listen, I'm only so smart.
I don't see the $30 billion exit in the category yet, but it may be ignorance.
It may, I believe in the AIGC.
I believe in that model.
I met her at the seed round.
I think it's a great investment Rory did, but I don't see the 30 billion exit to justify Harvey yet.
But it may be my ignorance.
Like if I had the numbers in front of me I might say I'll do it at 12, but I got to go LaGorra just for math.
I'm backing Tom on this one.
Oh, my God.
We're in sync again.
Entry price counts on this one.
Sometimes.
It's an interesting point.
Yeah, you're right, because we didn't do entry price counts on Cursor.
Entry price counts when TAM is unclear.
Winning is the only thing that counts when TAM is huge.
So I think our two choices have been rational.
Love that.
Give me a quarter for when OpenAI will go public.
That's not on the list.
Well, think on your feet.
Q3 26th.
Yeah.
I mean, Q3 or Q4, 26.
It's stated next year.
Hasn't started yet.
It's already end of the year.
You'd want to be going into leaning into 27.
That was a very good call.
Yeah.
Sorry.
We're wildly in sync again.
I think that's a good idea.
I think Sam will come up with so much alternative financing, it'll slip into mid-27.
But I think that's the straw man today would be my guess.
Like that's the plan, but there'll be so many other sources of.
Maybe the government will guarantee it.
Who knows who will guarantee the money, but I think that's going to be the straw man.
But it'll get pushed to 27.
To be fair, we do now know from Intel that the price of a government guarantee is 10 of the fully diluted common stock.
So for $50 billion, I'll gladly guarantee opening on myself.
So that's been a price, that's a price call here.
If you can guarantee infinite compute, it might be a good deal.
It might be a good deal.
Okay.
It's not like Sam's seen a lot of dilution.
I mean, if I were running OpenAI, I would not be dilution sensitive if I had no shares.
No, exactly.
I would be growth sensitive.
I would raise as much money as possible if either I had a full anti-dilute or no shares.
That would raise everything.
Funny thing you should say that, because we've talked a bit about this in the past.
And I'd like to say it at the time, but there's always something terrifying about someone who's in charge of a company, who's just not money motivated are incented.
And you're right, it is kind of bizarre.
I always have this reassuring feeling when I realize my CEOs are motivated by dilution and money, because then you know what the buttons are.
It must be weird to be on a board with someone where you're like, what are your buttons?
Because you're right, they're not dilution.
It's therefore world domination.
And that's just kind of weird.
I had one CEO in the beginning of my career I worked with.
He had negotiated full anti-dilution as CEO through the IPO.
He was re-upped in every single grant, every single everything.
He was guaranteed his 7% through IPO.
Oh, wow.
He was a good guy, but it did actually change a lot of motivations.
He was an outside CEO that came into a cluster frack, okay?
And that was his condition.
He's like, I don't know how much capital this is gonna take to fix.
This is not Cursor.
It's a real business, but I'm not gonna take that risk, if you want me, because I can't predict what it's gonna take to right the ship.
He did right the ship.
He did take the company public.
It'll be nameless, but it did create a different set of incentives.
Listen, team, I'm excited for us to be partners in the growth fund.
It's going to be a very profitable journey that we have together.
Transition from our normal early stage.
Tom, you're going to have to let the theory LPs know that slight strategy shift.
I know we were said we were artisan, but we decided that volume was the way to go.
Yeah, it's just so hard.
You know, Jason told me seed was for suckers and I was like, okay, yeah.
We're making t-shirts, by the way.
We've got t-shirts being made.
Jason's face, seed is for suckers.
It's brilliant.
It's great.
Don't have to go to board meetings.
You don't have to add any value.
You just write the check and send some tweets.
And get the step up.
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