The Thrive strategy was brilliant.
Buy the best property on every block.
It's like Monopoly.
Intent block, Stripe, tick.
The OpenAI block, tick.
The infrastructure block, Databricks, tick.
Then you just go home when you're done and you wait for the checks to roll in.
It's genius.
Why struggle to pretend you can do 8x over 20 years on a seed fund when you can just write one big check into a winner and call it a day and achieve liquidity in a quarter of the time?
The multiple will be lower, but the absolute return will be higher.
Like, it's so stupid.
Like, see this for suckers.
This is 20VC with me, Harry Stebbings.
Now, today is a new form of show.
We analyze the news from the last week.
So we discuss Andreessen's new funds, Founders Fund's new 46 billion fund, Rippling versus Deal.
When will IPOs come back?
And joining me, I really wanted two amazingly smart people.
But they also had to really not give a shit what other people thought of what they said.
And so I chose my dear friend Jason Lamkin, always one of the best to have on the show.
And then who I think is one of the greatest investors who bluntly, isn't given enough airtime Rory O'Driscoll.
He's a GP at scale and an early investor in Bill.com, Box, DocuSign and WalkMe.
This was so much fun to do.
I want to hear your thoughts and feedback.
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Jason, Rory, I'm so excited to have you here.
I was thinking who are the most insightful venture investors that I can bring together to discuss today's news?
Sadly, Bill Gurley turned me down.
So thank you so much for joining me today, guys.
What was Chamath doing, by the way?
He turned you down too?
He was teaching Larry Summers about economics.
I see.
It's going to be vicious.
I love it.
Rory, since we have you, Harry, go on.
But I want to know why these billionaires are so bitter on Twitter.
I think Rory will have an answer for us here.
Well, first of all, you must be bitter if you bought this product four months ago and said they're really smart and really intelligent and they're going to run the country really well.
You must feel like a bit of a buffoon.
And when you feel like a buffoon, you've only got two choices.
Double down and bluster your way out or fold away quietly.
And billionaires tend not to fold away quietly.
So they're just going to bluff their way out and say this is all part of the plan.
It's a tough look, by the way.
It's a tough look, right?
But whatever.
I think what it shows is just because you really understand one domain investing or technology it doesn't automatically make you understand a totally different domain politics.
And I think you're just saying look, it turns out raw IQ is not transferable and you can't walk into a different game where people have been playing it for 20, 30 years and think you're good, just because hey, you're smart.
It's so interesting you say that because I'm actually just really worried.
I wanted this to be a very free-flowing conversation.
We just released a show the other day with Victor Lozate from Benchmark, a GP at Benchmark.
And he said the generation of SaaS investing before is dead.
Spreadsheet, SaaS investing, where you look at NRR, you look at growth rates and you can reasonably predict good quality companies.
That's dead.
Nabil at Spark said the same.
Is the way that we've invested now dead?
And do we fundamentally have to change all of our rubrics?
Rory you've been thinking about.
Actually, you know, when you and I first met Harry, when Rory and I first met, he was the first guy that really opened my eyes to this question of SaaS metrics.
And I met Rory, I think the first time I met him was at like the first Upfront Summit in like 2013.
Okay.
And I think that was the first time I met him.
I might be wrong, but I think so.
I asked him what a good SaaS startup was because I didn't know at the time.
I'd done Pipedrive and Algolia, but I didn't know.
I made this up when I worked at this other VC firm.
We didn't have a consensus what good growth was.
And he said, one to 10 and five quarters or less is S tier.
One to 10 and five quarters or less.
And I copied that with attribution.
I used that as my investing yarn stick for years, right?
And then he's done the Mendoza line, right?
But then I'll say one thing and then I'll shut up.
And then I think in late 2020 and 2021, it seemed like every startup met that.
So literally I had two startups in my portfolio, two of them that a VC.
All three of us know really, about one of the best cloud VCs.
He offered them.
I remember term sheets at high nine-figure valuations, without talking to the founders, just immediately in late 2020, because you only needed a spreadsheet in late 2020, early 2021, did you?
If you're growing 20 a month?
At double 10 million in ARR, you didn't actually need to know what the company did in SaaS for a while, right?
And so I think that is dead.
Sure.
The answer is yeah, it's done.
And the question is why and what's actually done.
I mean, I think it's that spreadsheet investing is one comment and then SaaS is another comment.
There were two proper nouns in that sentence.
And it's true that first-generation SaaS investing is definitely I don't know if I'd say done, but you've hit a plateau in terms of that.
There was a 20-year period where it was pretty obvious what to build, and you built it.
And because the broad direction was obvious, all that was left to analyze was the math, right?
It was pretty clear the direction of travel was take X, move it to the cloud compound for a long period of time, get a great outcome.
Pretty straightforward.
So the only thing you had to do was actually fairly simplistic.
Evaluate the relative growth rates of different things and pick the thing that's grown the most at the most efficient level.
And there was a 10-year period where these companies didn't change.
I mean, I invested in Box in 2010.
They didn't change.
And in the end, Jason and I, we competed in leasing at Sherlock at DocuSign and EchoSign.
The thing that we invested in in 2010 was the exact same in 2024.
It's stunning.
So there was no conceptual thinking about, you know, what should we build next?
It was just like, build this thing and sell as much of it as you can.
And that's done now.
Two things happened at the same time.
The existing market saturated.
So all the growth rates flattened out.
Anyone who needed a Zoom account or a DocuSign account has a DocuSign account because they all got it and call it.
Right.
We're done.
At the same time, these new AI startups took off where Jason and I were just chatting on this.
Unlike the SaaS thing where, you know, stuff was the same for 20 years.
This shit changes every I can say shit, right?
Yeah.
This shit changes every six months.
It's like literally I've had companies acquire and lose product market fit two or three times in a two-year period.
It's terrifying.
So it's way harder now.
I mean, when it works, it's way better, but oh my God.
Yeah, that's the hard part.
It used to take you five years to fall out of product market fit.
Now it can be five weeks.
When all three of us started.
I mean Harry, you were dropping out of school but literally you could count on if you hit product market fit and you had a decent team.
Like there were exceptions, you had five years.
You had five years to run and you had to reinvent yourself around year four to five.
And you can't count on any of that today, can you?
What has changed that has made product market fit a very transient and fast moving thing, rather than something that you held for reasonably long periods of time?
Probably two things.
One is model progress.
Probably has something to do with the very deep level, is the things what you can do gets better.
And then the second thing is we're still at the figuring out stage of what you can do, even absent model progress.
There's a lot of oh, we thought they would do it this way and you fast forward six months and it turns out well, they do it this way for a few months, but then you know they want to do it a slightly different way and in fact, If you don't add more value, the customers say no, I can do something better somewhere else.
So we're in this exploratory phase, which makes sense that it's changing because we're not yet locked in.
I mean, I remember there's a period from about 99 to maybe 2002, 2003 where what a SaaS company was was changing.
I mean, you had Salesforce nail it.
But before that, there was this MSP weirdness.
And it wasn't quite sure what a SaaS company should be.
And I think it's the same thing here.
It's not...
And it's much harder here because instead of just automating some backup or shit, you're really trying to automate the head of the worker.
Like you've got to get in the head of the sales rep or the SDR or whoever you're augmenting and assisting.
And just figuring that out is really hard.
And then it changes as the AI can do more.
So, I mean, go Jason, yeah.
I also think we were talking before we went on about a hot AI SaaS company where literally, the team was all in Adderall and it was a joke, right.
It was true, but a joke.
But I actually think in SF, today most of the startups we work with are in Adderall, not literally, necessarily.
I mean, I don't know, but all the best startups I've invested in are working seven days a week, 12 hours a day in the office.
In the office, seven days a week, 12 hours a day.
Now, it is true, as they hit super scale they're, they're being more flexible for folks with families and more heterogeneous.
But man and everyone is working seven, 12 and it's a vibe and you can make fun of vibe coding and vibe moding.
But when?
When your competition in 2021?
I mean, people are working 10 hours a week from home, guys.
Literally they were working 10 hours a week.
Okay.
Now your competition's working a hundred hours a week for real, not for fake.
If you haven't evolved, you're going to die, right?
Especially when you can add AI on top of it, you're going to die, right?
I just want to try and go back to product market fit being so transient, because if product market fit is transient and revenues are highly unreliable or unsustainable, as we're seeing with your gen AI companies at scale to 20 30 40, 50 million very quickly but with a lot of potential sugar high.
If we've got revenue unpredictability, PMF unpredictability, what are we underwriting?
Yeah, I want to know what Rory says, because I don't know right now.
Because if you're not understanding that you're underwriting more risk, you're missing the movie.
You're taking on more risk.
What you're underwriting is the upside.
You know less.
At every stage, on every check you're writing.
Today, you know less than you would have known 10 years ago at a similar stage.
SaaS company.
A lot less.
A lot more things can go wrong.
But on the other hand, the upside is there, and it's huge.
You're just taking on more risk for a dollar of revenue.
Is the upside there and it's huge?
Because the prices are inflated much higher than they were 10 years ago.
It doesn't feel like you're getting paid for the risks that you're taking.
Well disaggregating that, because again you inject the price into the equation at the risk of channeling Monty Python.
I was a reference to the Holy Grail, but I meant leaving aside price.
In other words, do I think the outcomes of these companies can be huge and arguably even bigger than some of the SaaS companies?
So, quote, the upside is there.
Now the worst of all worlds, as you say, is if you've got high product, market fit variability, high risk, still good ups, big upside, but then you pay up so much that even that upside has been competed away, then it's a sucker bet.
And yes, that would be bad.
It's a very scary time to play the game today.
We all do it because we enjoy it.
But every time you're writing a check, today you're going.
I know a lot less than I did on some of these other things.
I'm paying a bit more.
The upside is amazing.
Oh, my God, look at that growth.
But we've seen companies fall off the growth track in six months.
So it's pretty scary.
Turns out making a lot of money is hard.
In venture.
You think we'll have more bimodal results where a lot of funds will just be massive unperformers because it's hard to assess the risk properly.
Yes, for two reasons.
And we'll talk about what is each individual deal has more risk in it.
And then on top of that, the whole totally separate thing, the holding periods have elongated.
Right.
And every year holding period elongates.
One of two things happen.
If you roll the dice and if you win, you go up 30 percent.
And if you lose, you go down 50 percent.
If you roll the dice three more times, by definition one company will go up 2x and the others will go down.
So yes, it's going to be.
I mean, portfolio construction really matters here, because you're in a riskier game for a longer period of time.
And yeah, some of you are going to make it, but a lot of you are going to not.
Yeah, it's scary.
I had Victor from Benchmark on the show, and he said that portfolio construction doesn't matter.
His first check was 8% of the fund, with $55 million into HayGen, which was, I thought, a lot.
Jason, we've spoken before about percent of check as a percent of fund.
Two, three standard.
Eight is a lot.
And he said that, bluntly, they can raise whenever they want to at will.
So $500 million fund can be deployed in a year.
We saw KP deploy a fund in 12 months.
I guess my question to you is, if you're a brand name firm that can raise on demand, does it matter?
It always matters.
When people actually lose money, as this thing from thinking about losing money or, in particular, when they lose money two funds in a row, even a brand name firm, can hit a bump.
I think someone as amazing as KP and Benchmark.
No, I never take it for granted that you can win the net, you can raise money.
Because I'm sure Jason has had the same experience too.
I raised our first independent.
We raised my partner Kate and I raised our first independent fund in 2009.
We were in the Lehman and AIG offices the day it went bankrupt.
And it turns out they didn't need to add to their exposure of private illiquid assets that week.
And I ended up taking it for granted.
It was Dan Haar.
It took a year to raise that money.
So probably true for Benchmark and KP, probably not true for the other 898 funds out there.
We were talking just about kind of like hey, we see the growth and the question is are we getting paid for it?
What about the normal SaaS companies?
There are thousands and thousands of SaaS companies that will listen to this and be going from one to three million in ARR, maybe one to four.
And that was kind of good in 12 months.
It was it was decent for X year on year.
In any normal world, it's great, right?
It is great.
You're still elite.
But can they still race?
The companies that are doing triple, triple, double, double, it's not lovable.
It's not Bolt.
It's not McCall.
I think they can, but I don't think that's the issue, Harry.
I don't think the issue is, Can the companies doing trouble, trouble, double, double raise?
If you hear the story and you go, yeah, that makes sense.
It's a SaaS hasn't been made illegal.
It's a totally good solution.
It doesn't have AI magic pixie dust, but it solves the customer's problem.
And the proof that it solves the customer problem is it's growing 3x, 3x, 2x, 2x.
I would do that deal all day, every day.
So let me put that out there.
If you've got one of those, call me.
And I'm mentally thinking of a deal I turned down two or three rounds ago that has done just that, and I'm an idiot.
The real problem with SaaS isn't what you just said.
The real problem is they're not treble, treble, double, double.
The real problem with SaaS is there's tons and tons of SaaS companies that have slowed down from exceptional growth rates and 3x year-on-year is exceptional that are doing 50 million growing at 10 or 20, or 100 million growing at eight or 9.
There are myriads of those.
And that's where the real question asks is for what those companies end up as.
For me, the triple, triple, double, double, I'm totally into it if the CEO is amazing, right?
Because that solves for everything, right?
But I will say, I remember it was kind of almost a chilling moment to me.
Maybe 15 months ago, I got together with another top cloud SaaS VC.
I've known since inception that all three of us know.
And I got together with him and he said, big fund.
He said, I'm only doing AI investing.
And then I started asking other folks.
And here, listen, I don't have a survey.
Rory, you're better at this than me and everything.
I would say 70 to 80 of the folks I grew up with that were SaaS investors are not, won't do those normal triple triple double, doubles.
You would.
You are a top tier performer, but they're just, they're momentum investors and they want to put 200 million into the latest AI deal.
Right?
And triple it in eight months.
They want to triple it in eight months.
80%, I would say.
They won't take these meetings.
What about this?
I've often found when smart people are using a heuristic, there's sometimes logic behind it.
Maybe a more refined version of the sentence that they're giving you is I just don't believe I'm going to kiss all those sass frogs and I'm not going to find my prince.
So mentally, I'm not even going to bother.
Because I'd say for me, most of the stuff I'm looking at is AI.
A priori and without data, I would assume anything that could have been done 20 years ago in SaaS probably has been done.
So I'm not rooting around in SaaS land looking for a good deal.
But if one was to crop up, troubling year on year, you'd have to look at it, right?
As I say, a modified version of that is not don't despair if you're in SaaS land and you don't have an AI pixie dust story.
But if you don't have the growth as well, then you're right, then it's compellingly hard.
You say compellingly hard.
We all have LPs.
I have a lot of LPs call me up and go, Harry, what the happens to this company?
Where am I getting my liquidity?
I've got exposure from Jason.
I've got it direct.
And when you look at a generation of your data IQs, your Calibras, your Algolias the growth rates aren't quite what they used to be.
The profitability isn't quite there.
And it's a question of what happens to this generation of companies and where does liquidity come from?
Look, it is the $3 trillion question.
The reason it's a 3 trillion question is because that's the rough fair market value of privately held venture assets.
And, you know, maybe half a trillion to a trillion of that is high growth, new stuff, and the other 2 trillion is mature, slower growth, SaaS and cloud companies that don't have the trajectory anymore for an IPO but as yet have meaningful value.
And I think that's the interesting thing is that if it was like I was around in 99 2000, all the good deals went public and all the bad deals were so shit that by 2002 we closed them down.
We said, whoopsie, and we all moved on.
You can move on from a $200 million.
You can't move on from $2 trillion.
Right.
So there's a huge amount of really grim industrial work that's going to have to be done on everyone's portfolio to manage these companies through to a meaningful exit.
Because you know, as I say, you can't walk away from two trillion dollars.
That are not only your LP's economics, the euro economics, significant big companies.
And they're so big that you're not going to walk away.
But it's going to be a lot of hard work.
One option, you just grind your way to profitability.
You look at PE exit.
You look at consolidations.
You're going to see some private to private where you put the two or three companies in the same space together and try and change the economics of the trajectory.
Maybe you'll see some smaller IPOs where people go.
I know it's not a great market, but God give me some liquidity price to all markets.
All of the above.
It's going to be real case-specific, long and tiring work.
But on the other hand, $2 trillion is real money, even in America.
Rory, one thing that worries me.
I wanted to write this up, but I don't have the data to support it, because you have a much broader portfolio.
I'm worried that the PE firms aren't trying to buy these companies.
That's what I'm worried about.
It's not the valuation.
At least you have an option.
I am worried that...
And the private-private, I think, is a great idea, right?
Take two companies at 200, growing 20.
Take it public at 20% at 500 million.
You've got a game.
Everyone should look at that deal.
But I'm just stunned.
I used to see PE hunting everything in the portfolio.
I would come to South Triangle, and every year I'd talk to some founder.
I'd be like, well, we're here.
Has a PE firm talked to you?
Yes, 20, right?
Folks that in this sort of... mediocre growth level.
They're getting no tire kicking.
Are you seeing lots of tire kicking that's not happening?
Because I ain't seeing it.
We're not seeing a huge amount.
And you're exactly right.
And it's quite a shrewd comment, Jason.
And I think the reason is this.
PE guys, ironically, love the things that we don't love.
And let me tell you what I mean by that.
They love a boring ass software company in a teeny tiny vertical with 40 market share where they can screw the customers for the next five years by raising prices because there's nowhere else to go.
Venture deals, SaaS deals.
Love broad, horizontal markets where you can compete and maybe get a billion-dollar outcome.
So those are the companies that our industry's funded.
And the problem is when you fail to get the billion-dollar outcome, when you discover your market is tinier or when you discover that an adjacent company is competitive, you're left with this subscale company that doesn't have the same pricing power.
You're in a perfectly good big market, but there's a bigger company out there that can grind...
Yeah, there's no pricing power.
With no pricing power.
And PE guys just hate that because they can look at it and go, I get it.
You're doing $100 million now.
You can grind it, but you can't take 30% of the cost out, raise the prices and get the same thing.
So I agree.
I think that not every deal at 100 million would be interesting to PE if they have an adjacency in the same space.
Then they might buy it because they can load it on.
But when you look at the things they love and you look at the things we make in venture, they're not the same deal.
And it's very clear when you list the kind of companies they do.
It's like oh, obscure vertical accounting software for an obscure vertical massive market dominance, and no one's ever going to fund a competitor.
They just run that math.
They fire all the salespeople, double the prices, cut the engineering down, kick off 40 cash flow in some of the broad horizontal stuff in a CRM company, or let's just say a first-generation customer support company from 2016, if you cut off the RD and the sales and marketing, your gross dollar retention will be 80.
You won't be selling any new shit.
You'll be declining, and your product will become irrelevant in two years.
But other than that, have a great day.
Those companies, you're right.
And where do you put those companies?
You have to one of the things you said earlier about you probably have to find a way to fund new growth while at the same time, you know, building a new product.
It's a much harder play than just sell it to PE.
As I said, it's all the other things we talked about.
You said that kind of the difference between what venture likes and what PE likes.
And hey, if we do this and this, we can see the billion dollar outcome in venture.
Kind of relating it to news, but Andreessen announced a $20 billion fund and the plans around it.
General Catalyst have $8 billion.
Lightspeed, I don't know how many billion dollars they have.
It's so confusing with all the different vehicles, but billions and billions.
Billion dollar exit?
Thanks for paying for the Christmas party.
I'm being serious.
If you have 8%, it's 80 million back.
I mean, to state the banal, they're obviously not focused on billion dollar exits.
They're focused on a much smaller number of much larger exits.
And that's the bet in a nutshell.
If you're going to make those kind of numbers work, you either have to do lots of I mean you have to get like vast numbers of billion to 5 billion exits.
Are you in, as I say, you're playing for the 10 billion or the 100 billion exits.
The question is how many of those there are.
Typically, anyone who raises one of these funds has proven they can already find at least one.
And the reason why is they found Databricks.
And they've done amazingly well.
They own a huge slug of that.
It's not just a fund returner.
It's a multi-fund returner, right?
No one gets given $10 billion or $20 billion because they're idiots.
They got given 20 billion because they earned it by 10 or 15 years of track record, with no bad funds, by the way, back to that kind of the comment you made on another partner earlier, you demonstrate your and then typically most things in finance.
When things goes wrong is when people lean into a trend just a bit too far.
And the judgment here is, is this that point?
And that's really what you're asking.
And I don't know.
I mean, I think the biggest thing they have in their favor is the fact that so many companies are staying private for longer which, by definition, means more need for capital which, by definition, means if you have that capital, you should be able to make an acceptable return.
So the venture market that I knew 20 years ago couldn't digest $20 billion.
It wouldn't even be close.
There would be no possibility of return because typically IPOs were $1 billion to maybe $5 billion.
And there was one bigger than that every year at most.
In a world where things are staying private for 15 plus years, where there's massive secondaries to deal with employee issues, it may well be that there's a place to put all that money.
The returns mightn't be 3x venture returns, but the competition is the small cap return of 11%.
You know, if you're delivering high, mid-high teens, it may be that the LPs think that's great.
And that's the bet they're taking.
Jason, how did you analyze that?
There's some LP on Twitter that made this tweet literally this last week that I'm a little slow.
Like when Rory made the old 1 to 10 to 5 players less, this one opened my eyes too.
So if you're Andreessen, a beauty to an Andreessen at this point.
Certainly been true of Sequoia since we started.
Is they see every deal?
Andreessen sees every deal.
OK, and so they can put this on a spreadsheet and they're, like you know, Databricks was 27 billion in 2021.
What if we'd done the whole round?
Forget about that.
They were in the A, right?
What if they just put in $3 billion in 2021?
They would have already two and a half X their money.
Right.
And they put it on a spreadsheet and they add it up and they're like yeah, we can deploy 20 billion in 24 months.
Right.
I think that's the way it works.
And I think it's that simple.
And there's so much capital to Rory's point, especially in these later stage deals and AI deals, they can easily deploy the 20 on that spreadsheet.
If you see every deal.
I do think there's a sensitivity analysis and the model supports it.
That's what you want to do in venture.
And when you raise too much for the fees or whatever, you run out of deals.
Most folks run out of great deals to see.
If you see every S-tier deal, like here would be my Andreessen math.
What if we see every S-tier deal there is in venture?
We see 100% of all the best deals.
100% of the, we've seen them all and we passed on 90%.
Then you could go back in time and just do an analysis, right?
This is what we should have done when we passed on all the decacorns, because you're in every one and it maybe solves to 20 billion.
I think it probably does, but that's what they should have done.
I would hard push back that they see every deal hard, but folks get fired.
My limited experience is evan dreeson if you're not mark or ben, you get fired.
If you didn't bring in every deal, don't you, rory?
Isn't i mean, isn't that the way you can stipulate they see most right?
I don't think i how a genuine comment.
Of all the things that could go wrong with a 20 billion fund strategy, not seeing every deal is not a top three issue.
The two issues with deploying $20 billion are, first of all, yes, you see every good deal.
But remember the next sentence, you see every deal, which means you see every bad deal.
And there are 99 shit deals for every one good deal.
The more deal for it you see, the more important picking is.
Now, relative picking is easier than absolute picking.
In other words, if we are comparison shoppers at heart, most sometimes in the abstract, when I look at the deal I get kind of caught up with it.
Maybe it's good.
Maybe it's not.
But most of the time if I see a good deal and five bad deals, my little IQ can go.
I think that one's better than the other five.
I should do that one.
So seeing all the deals is a huge advantage, but you still have to piece through them.
So that's kind of issue one.
You're going to see every good deal at round, every good deal, but you're also going to see every bad deal.
So picking still matters.
I think they can figure that out because they're wildly smart dudes.
I think the real question in the end comes, is there just room as privates for all that money?
And if there is, this will continue.
And if there's not, then at some point it won't stop because the venture guys will be mature.
It won't stop because the founders will kind of be more careful.
It won't even stop because the LPs will stop.
It will stop because the LPs bosses, the overall CIOs will stop allocating capital to venture.
Until that happens, this game goes on.
And, by the way, if it happens the day after they close 20 billion, they win the best because they have 20 billion and no one else has any.
So this whole little ecosystem in venture is going to keep going as long as there are enough new LPs to fund it and keep it fueled up, almost clearly independent of the wider market.
It's been stunning that the 2022 crash didn't cause much more than a pause for breath.
It was just a pause for breath.
It was crazy.
When you look at OpenAI raising 30 billion and when you look at Anthropic's multi-billion dollar fundraiser, I don't think there's any question on whether this ecosystem can actually absorb it.
I think the subsequent question is, is it fundamentally a venture game?
I know and we both know many investors in some of the model providers who came in at $4 billion.
It's now 60 billion and they're three and a half X up because employee stock dilution was so heavy and the funding rounds coming in were so heavy.
The multiples are shit, even with great returns.
My observation, my own thinking, is I'm sometimes too conservative.
So I push against myself.
I think one of the big advantages some of these newer entrants had was that they weren't in the business a long time.
When you've been in a long time, I remember 99 to 2002.
I remember the crash after dot com and all the capital getting withdrawn.
So it made me naturally cautious.
And you're right.
The idea of writing a check at four billion, you know, I did this instinctive.
Well, that's not really venture.
But the truth is this.
Venture will pay to make money.
And some of those rounds have made decent money, perhaps not as money as they thought because of the dilution.
But I mean, if you look at, one of the common characteristics of the folks who entered this market and have been successful has been newer entrants like Andreessen, like founders unencumbered by quote is it venture?
And who have just said to themselves how do I make the most amount of money and hack the system?
Thrive, I think, are a great example.
Beth, no, proof, by the way, and I'll tell you why, why I've worked.
Because a real estate investor knows only one thing, buy the best damn house on every block.
So he bought the best damn house on the FinPET block, strike, tick.
He bought the best damn house on the OpenAI block, tick.
And then he bought the best damn house on the infrastructure block, Databricks, tick.
Then you just go home when you're done and you wait for the checks to roll in.
It's genius.
And you're right.
Every little fiber of my being would have said, don't do that.
That's not venture.
But I'm not living in three houses in Miami.
He wins.
So I've learned to say to myself, don't just say it's not venture.
Just saying, is that the right strategy for this game?
And it clearly is the right strategy for this market at this point in time.
You know, will it be the right strategy across the cycle when there's an equity downturn?
Maybe not, because the only risk you're taking is price risk.
But that's typically a correlated risk.
So if it does go wrong maybe that's only a one in three chance it will go wrong on everything, because your equity values will tumble.
But absent that, the Thrive strategy was brilliant.
Buy the best property on every blog.
It's like Monopoly.
You got all the little blue ones.
People are going to land in it.
You're going to make a lot of money.
I'm profoundly jealous of that insight.
If someone had given me $5 billion, I probably hope I'd have been smart enough to do that myself.
The criteria is not is it venture or not venture.
There's only one criteria.
Is it going to make you money?
And is it going to make you money across the cycle?
And the answer to the first part of that question looks like it's yes.
And the answer to the second part of the question across the cycle is call me in a year or 10 years.
Why struggle to pretend you can do 8X over 20 years on a seed fund when you can just write one big check into a winner and call it a day and achieve liquidity in a quarter of the time?
The multiple will be lower, but the absolute return will be higher.
The carry will be higher.
Why would you do the stupid seed investing and wait 20 years so that everyone on Twitter can say you had an 8X or 10X fund?
Hooray.
Split with four partners on your tiny little fund after 20 years making nothing.
Just write the big fucking check and call it a day.
Like, it's so stupid.
Like, When outcomes are a billion, Seed is great.
When outcomes are north of $1,200 billion, Seed is for suckers, Rory.
Seed is for suckers, I think.
I love that.
That, by the way, is about to be... I'm going to steal that.
I'm not even going to give you credit.
I love it.
No need.
All joking aside, you're exactly right, Jason.
We're saying the same thing, which is and this was a compellingly great way to make a lot of money, provided someone was willing to give you that kind of capital for that risk.
And what I don't know is part of me sometimes thinks it's a really good risk and you should make sense to do it.
And part of me thinks it's a very risky strategy in terms of correlations.
And if it goes wrong, it'll be horrible.
It's not what we do.
So I don't spend a lot of time thinking about it.
But right now, it looks pretty good.
Can I just ask, what could go wrong when you say about that correlated risk?
They feel relatively uncorrelated to a certain extent.
They're uncorrelated in terms of individual financial performance or picking.
Anything to do with picking.
You've picked the best asset in three diverse markets.
You're right.
They're not correlated that way.
What is correlated is fundamentally equity values.
We live in a world where high-growth tech companies get 30, 35 PEs.
If hypothetically, a president were to destroy the economy, like in the 70s, just saying, and PEs went to 9 or 10 or 11 and even growth stocks went to 12 or 13, like look what happened to Nifty 50 between 68 and 82.
In a world where the growth stock premium goes away.
If you start valuing all those assets of six or seven times revenues, which is still pretty healthy you're just in a very different place.
So that's the only risk.
You've bought the best assets.
The only risk is that the world decides that equity isn't worth as much.
And in that case, to be clear, a strategy that would get a 3x will get a 15x because you haven't taken a ton of valuation risk.
If you're doing the kind of things we do a strategy that's entirely predicated on buying marquee assets at high prices could get a 05 or 07x.
And so what you are there is like time sensitive, because you don't want to have to liquidate in a time where you have that compression or multiple, which is why, if you have 20 billion ka-ching, I can pay that price buy the best house on the block.
And if I want to sell that house and there's a market crash, kaboom.
I can put in even more money at a reduced price and wait for the multiples to expand again.
Again, there's one implicit, broadly yes, but there's one implicit assumption in that, which is that the company will continue to compound.
And the problem here we're dealing with is ex post facto vision.
There are five or six technology companies worth a trillion dollars.
So it's clearly doable.
You can clearly compound from 300 billion, which is where OpenAI is today, to a trillion, because five other companies did it.
What you forget is most tech companies don't.
And every time you hold for longer, think of it as a process of distillation.
Your best ones get better and your worst ones go down.
So provided you've got the right ones, you can tough it out forever.
But be a bit of a bummer to discover you'd invested in BlackBerry and it was still private.
And they just launched the iPhone and you decide, screw it, we can take these guys.
I'll put in another billion.
And, you know, and then you just march your thing down.
The hard truth is most tech companies in the end get acquired, rolled up, unsuccessful.
So the longer you push, the more premium there is on the absolutely right on your stock picking and having the winner.
Not a crazy bet.
I'm just saying typically any financial bet has an embedded risk somewhere in it.
There's no such thing as free money.
And when stuff looks like there's free money, it just typically means that the risk isn't fully recognized.
This has been a great business.
It's also late stage.
I mean, you sent a tweet, Jason.
I saw it there about that.
It looks like the easiest way to make money imaginable, which makes you go, A, I wish I'd do that.
But then B, what's the buried risk?
And here, I don't want to discuss the company, okay?
You can push me on anything except this one thing.
But I just have a company that's just become a unicorn.
A late stage fund just put in almost nine figures, okay?
And they own as much as me.
Now listen, I'm lucky to be a part of the company.
But like okay listen, if the company's only sold for the basis, they make nothing right.
But they're underwriting a $10 billion outcome, right?
They, for all intents and purposes, will make just as much money as me, right?
In fact, they can support the company more.
They skipped years of work and stress.
And it has to be a big outcome.
But if it does, why would you do this seed stuff?
Like it's the same ownership, but skip all the years.
Right.
And yeah, if it you know, and you've got your one X, worst case, your wonderful one X.
But the reason I'm going to argue against, I understand it because I go to the same.
You know angst and machinations, right.
Good deals in my portfolio, but we've made good money.
And we're later stage investors haven't.
And that's just the nature and number.
But if it's really good money, you make the same.
Yes, agreed.
If this is an outlier game, right?
Who cares about those little $800 million outcomes?
Who cares?
Rory, can you talk about one way you've made money, others haven't, and just what you learned?
You don't have to name it, but just to put it in.
The higher the price you pay going in, the higher the price you have to be on the exit to make money.
It's just as simple as that.
Because we've been on both sides of that.
We had a sale recently where we got a 1X and the early investors got a 3X, right?
And it all comes back to this idea of even the access to capital.
If you have access to capital that's large and forgiving, which is what these megafunds have, then you should play the big balls game.
Because you're exactly right.
You don't do it, you have to do less work.
If it works great, you make out the same as jason, who did the seed for suckers, and rory, who did the a, and if it doesn't work, i'm going to get a 1x, but you get forgiven and you start again.
If you have access to that kind of money, that's the game you should play.
Reminder, the reason you and i don't play a different game is i was wandering around in 2009 and no one offered me a billion dollars and said hey, have a go, and if it doesn't work, we'll give you another billion in 2030.
When you have a smaller fund, you want to have a higher probability of the upside.
And logically, even though you don't want to hear this, the higher you're going in price is, just the less likely it is you're in that one deal that can transcend price and be there not the billion-dollar outcome, but the 10 billion outcome.
You're just upping the bar on getting it just right.
So that's the argument for it is that 5 billion and I could get 20 billion, I'd play, but Mark and Jason, let's do it.
I get that, Roy, but you have a pretty great track.
You've proven yourself to be a phenomenal investor across cycles.
With respect, you could probably get a lot more now.
Why do you not?
I think actually we're all products of our experience.
I think I'm a very conservative investor, somewhat conservative investor.
I think I am branded a little bit by remembering surviving 99 to 2010.
I don't want to take a lot of money at the end of my career, manage it badly, and then fail.
I don't want to make that bet.
Because I've seen what it looks like when it goes wrong.
I remember what 99 to 2005 was like, and it was miserable.
And it's kind of you to say about my track record, I'd say it's solidly good rather than spectacularly amazing.
I'm a solid, good investor.
And I would say this I am most proud of the fact that I made small amounts of money from 2000 to 2010 than I am about much larger returns from 2010 on.
I've lived through a downturn and survived when 70 of the people I knew in 99 2000 were out of the business four years later.
So probably the way we run our business, the way we run our investing strategies.
I always wanted to survive that downturn.
And that probably constrains your upside a little bit, but it increases the probability of not going horribly wrong.
I mean, I remember how horribly wrong things can go.
I mean the two biggest momentum players of the last decade, Tiger and SoftBank, are already out of the game.
Huge credit to someone like Insight, who were putting out a lot of money but managed to survive because of Savvy.
But the bigger the dollars you're playing with, the more risk there is of just getting crunched up.
You know when the tide goes out.
What did Insight do to survive more than Tiger?
I think they had a much broader, they were doing deals at much earlier, lower prices.
I named them only because logically, if you just ranked the dollars raised, they were third on the list.
And, you know, South Bank gone, Tiger effectively gone.
I think they were just better investors.
Well, Teddy doing a few whizzes is going to help, isn't it, Harry?
Absolutely.
That's my point.
He didn't even do the last round.
I mean, yes and no, Jason.
If you actually looked at the returns, I mean, yes, 100% amazing.
But it was a $2.6 billion reported return to them in an $8.5 billion fund, which is like...
That would drive me nuts.
I would probably quit venture if I did whiz and it was only a third of the fund.
I would probably tell him to go talk to Harry and Rory.
If you are pulling down the fees on an $8 billion fund, I don't think it quit.
I might quit because the game wouldn't be fun enough.
The game wouldn't be fun enough, right?
But I do think the bigger you are but genuine comment on that the whole 26 billion only returns.
The bigger you are, the more you're undertaking to be competent and find not just one of those but multiple of those.
It's the same point over and over again.
You've embarked on a strategy that only works if you have a really strong level of execution and you get in large, significant numbers of the very best deals.
Mm-hmm.
And, you know, all credit to Insight looked like they've done that and without paying over the odds.
Less credit to Vision Fund and Tiger.
They kind of kind of went over the top of the curve and just kept going a little too long.
Like, you know, your degrees of freedom and, you know, Andreessen will wrestle with the same thing.
I think they're wildly savvy investors.
But when you've got 20 billion, the impetus on being disciplined, just the degrees of freedom you have are tight.
For the old school, like Emergence just raised a billion, okay?
They were one of my investors.
I didn't ask them, but I think I know.
I think there's probably two reasons they raised a billion right?
One is because there's a new generation, right?
Who's maybe less risk, doesn't have those scars.
But I think the second reason is because the checks are bigger.
Emergence just did like 50 billion or 60 million into like Bolt or something like that, right?
Back in the day, that'd be a $15 million check.
So what about funds, like you having to have a fund size to play the game today?
I agree.
Because, yeah, I know and respect those guys enormously.
And we've done roughly the same thing.
We've probably over five or six funds, you've gone from 300 to 600 and 900.
And the number of deals in the fund hasn't changed all that much because the average check size has gone up.
And let's talk about that for a second.
I just checked it.
Nominal GDP growth, in other words, the paper value of money, it's 3x from 99.
In other words, GDP in 99 was 10 trillion and it's 30 trillion today.
So in other words, if your fund size was 100 in 99, you've got to be 300 or 400 today, just to be the same thing.
And in particular in the last four or five years.
Nominal GDP growth in the COVID period has been huge.
If you're not up 50, you're falling behind.
Some element of fund expansion is almost inevitable because the check size has gone up.
And the check size has gone up appropriately.
And then on top of that there's probably some extra increase in the check size.
That maybe isn't appropriate, might not be the right word, but it's less driven by the economics of just inflation and more driven by people are playing to win.
And what you see in that is, if you don't go and we wrestle with this if you don't grow the fund size, we were finding that deals that we would have thought were a scale sweet spot, we just weren't relevant.
You'd come into a deal with your little 20 million check and they'd laugh at you.
And you'd go up to 25 and you'd call an LP and they'd get five and then you'd be up to 30 million.
And you've got to size the fund for the strategy because fund size is the strategy.
And I think for... the kind of A, B stage where those guys play, we play.
You probably are writing $20 million initial checks.
You're probably writing 30 million total checks, including reserves, without even hogging for those late stage rounds.
And you probably want more than 20 deals per fund because, as we discussed half an hour ago, with product market fit variants to replicate the same overall fund return.
And this is where I do disagree with you the podcast of a benchcock.
I want to make sure I have enough deals in every fund that the fund has a good probability of success.
Say you're closer to 25 deals per fund, you're at 700, 800 before you blink.
But this is why $50 million seed funds drive me nuts.
Because actually, when you take away fees, you've got 40 of investable.
And when you think about the average seed round today being 3 to 5 million, if you want to lead it and take real ownership, like they say they do, there's no way that you're getting at least even 20 companies.
You're not.
You're taking concentration.
That's what I always do.
High concentration risk.
Yeah, but a pre-seed or seed?
I mean, Jason, this is nuts.
Well, if you want to play that game and you don't want to raise a massive fund, you've got to take concentration risk right.
Or pretend.
So Founders Fund raised $4.6 billion, $1.6 billion oversupply.
I have so many LPs call me asking which funds I like, which reference well from the show.
I've never had such institutional demand for any single fund asset than I have for Founders Fund.
Every single LP wanted Founders Fund and wanted Founders Fund growth, which is even more rare.
Will we have more and more money go into the asset class?
Will we have more and more money concentrate into just the top players and it'll be shit for everyone else.
How do we think about that?
I'm trying to relate the facts to the question, because it wasn't obvious how you got to the question from the facts.
Because the correct response to the facts you outlined about funders is they may be to a rounding error the best fund, so no surprise, they get the most amount.
I mean, yeah, it was great to see the leak.
Now, they're astonishingly good.
I mean I don't like this conclusion, but I've realized that my Bayesian prior on financial matters and venture should be checking in what Peter Thiel does, because he's been right on a lot of things.
They have a very clever high IQ strategy that they've made work and you can see it in what they've done and how they've done it.
We can come back to that in a second, right?
So it's kind of like we're all playing this game and they're just playing it really really well and cleverly.
They should get the most money.
Just because you give the money to the smart guy doesn't mean, from an LP perspective, that you should do it to 10 other people.
That's why I said I couldn't connect the facts to the question.
You could argue that this is an idiosyncratically brilliant performed track record, because it obviously leaked.
What you saw is exactly what they advertised, which is long holding periods Strong IRRs, though not amazingly stupidly stellar, but holding periods of 10, 15 years.
They bought SpaceX, I think, in 07, 08.
So they have compounding after compounding.
And it turns out, if you compound at 30, 40 gross not for eight years but for 15 years, because you don't give a damn about giving the LPs money back early.
You're just going to compound the thing to make money.
Then you end up with an 8 or 10x fund.
They did exactly what they said they'd do.
But two things they did.
They held for long periods of time in highly differentiated companies.
And then the second thing they did was they to an earlier point.
They were absolutely willing to take on massive concentration in their windows.
Again, armed by the one fact that you can overcome.
They didn't have to give a damn about anyone being afraid of the risk, because their perspective was if you don't like the risk, take your money and go home.
They were able to push.
So you take those two facts and add to the fact that they're very good pickers, you have the best dealer right.
It's the best.
It's a money-making machine and they're one of the best.
Brian Singerman said to me in a show once the enemy of great venture returns is capital concentration limits on a per fund basis.
We have 30% of a fund in certain assets.
We know what great companies look like.
Yes, and it is exactly right.
But now again, to take both sides of that.
It is the enemy of greatness and it is the protector of massive wipeouts.
And it just boils down to the personal choice of where in that dimension you want to be.
I think, for example, I mean, Brian, I've heard him speak once.
I thought very articulate, very clear strategy.
They had that big win.
They had the stones to put 300 million in a biotech company.
I can't remember the name, but I should do.
Yeah.
STEM scientists are exactly right.
Got a 5X, took money off the table.
We're pointing out three years later, the acquirer canceled the program.
Huge amount of risk, made it work, but never forget the risk was there.
But those guys, they built a product that said we're comfortable with the risk because we like risk.
We are.
And we think we're smart enough to underwrite risk.
And they were.
It's a very high IQ, high conviction strategy.
And I think, An LP saying I'll do Founders Fund because they got these returns and 10 other funds.
They'll be just like Founders Fund.
That sentence doesn't make sense.
They won't be just like Founders Funds because they're not the same people with the same approach.
You're right.
But I have two LPs a week managing between 350 and 500 who come into our offices in London and say Harry, you've got all the data from the shows.
Walk me through how I should do this.
I've got 100 million going into index, Excel, founders funds, Sequoia, 25 each.
And now I've got.
Let's take the low end of the budget 350, 100 going to the best assets, like your founders funds, we said there.
Now I've got 250 left.
Where do I put that?
It's my annual budget for venture, Harry.
I need to spend that.
Let's go to Lightspeed.
Let's go to GC.
Let's go to Rampoint.
Let's go to... It's an interesting point.
You have to accept the fact that you probably are going to do deals.
It's going to sound really obvious when I say it, but it matters.
That won't be as good as the best deal you do, but they still can pass your IRR threshold.
At the end of the day, let's assume there's a force ranking and let's agree for arbitrary sakes that we put founders I don't know, I haven't seen the numbers so I can't comment on Sequoia but based on observed data at scale, in other words not including seed funds, but in terms of turning industrial quantity of money into eight and nine Xs let's put founders fund at the top.
You put what you can in there, and then you got two choices.
You can stop and go home, but the problem is any money not allocated to that has to go in small cap public companies and gets 11.
Or you can decide on what you know.
You just have to pick a portfolio of folks and go down you know and hope that they all perform as well.
But you're just looking at.
You build a portfolio of companies whose strategy says not that they can replicate the best number, but that they can comfortably outperform the public markets with a strategy that's repeatable and differentiable.
And many of the names that you just said have that.
Can I ask one question about Founders Fund?
Not to interrupt Harry, but before we go on, just because it started this conversation.
What do you think about Rory and Harry?
What do you think about the fact that Founders Fund doesn't do B2B intentionally?
They make exceptions, but they don't believe in B2B.
They don't believe the outcomes justify it.
It's explicitly they don't do it.
I think that you mix the point, which is a lot of different ways to make money.
It's the intellectual conviction of wanting singularity deals.
It's it's wanting deals that are n of one, where there's a high, typically a high technological component to winning, but then once you you kind of have that done, you have low competition.
You know you get the prize.
It's a totally realistic way of playing the game.
The interesting thing is there's not as many of those deals.
This actually goes back to the point Conversely, B2B.
They are right, which is that very few companies in B2B have the same level of untrammeled, competitive free space that something like SpaceX does.
That's the negative on B2B.
But the positive on B2B is there's been 200 to 300 SaaS winners.
And there's a lot of different ways to make money in B2B.
So it's a different strategy.
I mean I'm sitting here going.
Would I prefer to have put 20 million in SpaceX, gone home and compounded to 360 million?
Yeah, of course.
That's one way to make money.
But I'm pretty damn happy about the way we chose to make money in a whole bunch of B2B software companies, each one of which doesn't have the same investment multiple as you might get on a SpaceX 10-year return, but nonetheless provides a very attractive adjusted risk return profile.
I admire them for the way they look at the world.
They basically said we are smart enough to look at a whole series of wholly different markets and have the raw IQ to recognize greatness in biotech space, et cetera.
And we can do that.
We can see those deals and we can pick them.
Whereas conversely, by focusing on B2B, little old us we're saying we're just going to focus in this space.
We're going to try and see all the deals.
The competitive set in each one won't be as compelling in terms of white space as doing rockets.
But there's going to be a lot of winners.
We can pick by market.
We can have a nuanced way of picking the winners and make it work.
It's a different gig.
Good luck to them.
They're amazing.
I would also just say two companies that they are most excited by are Rippling and Ramp.
That's true.
A good friend.
They told him they don't do B2B investing.
Then that viewed Ramp as a fintech.
That's how they think.
Now, listen, I just thought it was, you can do it.
But I'm saying from the inside, this is not a criticism.
I found it eye-opening.
And Rippling's good, but they did that deal with Sam.
It's only so large and it's the same.
It's minor, right?
I think even if one's a FinTech and one's an exception, it doesn't mean the point isn't true that they don't generally do B2B.
It just doesn't work for their model, right?
I think kind of the refined version of that statement is look, we're not going to industry focus and do 50 B2B software companies like you're doing Rory or you're doing Jason.
We don't believe that's the way to grade us.
We're going to do everything.
And if some percentage of them, three, five, ten, turn out to be B2B, that's fine.
But we didn't back into it with a thematic market focus.
We backed into it saying, I only want to do greatness, amazing greatness.
If I run into a B2B guy who has amazing greatness, I'll do it.
If I don't, oh well.
You think the fact it's like a 50% capital commit and run by rich people informs that too?
I certainly hope so.
Because I have a pretty large capital equipment myself.
But it's like if I had that much I wouldn't want to be going for triples either.
I'd be wanting to hold for 20 years because I'm plenty rich.
And I'm certainly not in it for the fees if my capital commit exceeds anything in the fund.
Exactly.
No, I mean, it's exactly what they should be doing.
What I admire most about it is that the practical steps they're taking are in sync with a stated strategy, which is ambitious, hard to do, and nonetheless, they've been able to do it.
Go team.
Will we have more or less LP money going into venture in the next three to five years?
There's a lot of macro uncertainty.
We have endowment funds facing large fines, more uncertainty there.
We've got the denominator effect impacting their public books.
But then venture is powered by AI again, and now's the best time ever.
Will there be more money going in or less over the next three to five years?
My gut would say, at some point, you'll see less.
It boils down to this private for longer trend.
The thing is, there's an optimum amount of money relative to the opportunity set.
The tricky thing is this.
There's an optimum amount of money relative to the opportunity set.
The opportunity set has massively expanded because of this whole stay private for longer, which consume vast amounts of capital in the labor stage.
So it makes sense that the amount of money going in has also expanded.
So you look at that and you can really make a modest, an optimistic scenario that says the capital has only expanded proportionate to the opportunity.
But on the other hand, the cynic in me says in financial markets things tend to overshoot, especially when the indicators of success are lagging.
And venture is the most lagging market.
And then at some point, those returns will go the other way.
And then it'll take a while for the shoe to drop.
And then they'll start withdrawing capital, probably just at the point when they should be investing.
So, if I was to guess, sometime in the next five years you'll see a significant change in availability of capital.
Like I remember in 2010, people saying literally what I tell people is this it will not be a great time to invest in venture until people spit at you when you mention the word.
And in 2009, 10, they were like, Lily, get out of my office.
None of you have done anything for me for 10 years.
The last good fund you have is a 96.
Why the hell would I even do venture?
And it turns out that was a time you should have done nothing but venture.
So if that's true, and it is, the inverse is probably true.
When it's obvious to do venture whenever it wants to do venture, it's probably a tough time to do venture.
When does that turn back?
Hard to tell, but intuitively at some point, I think it will overshoot and then start to pivot back.
And it'll be a better time to invest and a tougher time to raise.
Rory, let me ask you this heuristic.
If you take a window of time and maybe elongate it to seven years okay, the amount of exits in IPOs and MA roughly speaking all the exits should be how much venture comes in right?
New venture comes in roughly, right?
Roughly.
So I mean I think LPs are pretty, I mean they get scared and smart.
But if those exits keep going it should happen, right.
But it's been a while for IPOs.
It's been a hot minute for IPOs, right?
Maybe the Windows seven years.
I don't know how long it is.
Yes.
I mean, I think at some point the money has to come back, because in general my observation is people don't stop doing stupid shit because they intellectually figure out they should stop doing stupid shit.
They generally stop doing stupid shit when there's no more money to do stupid shit.
And the answer is if the money doesn't come back, then eventually the money won't be given to us.
And that's simplistic.
There's a famous Ben Stein quote.
If something in economics, if something can't go on forever, it will stop. famous quote from that.
But I think the corollary is also true.
Until idiocy has to stop, it will go on.
So the real question is, does a Stripe, a Databricks, an OpenAI IPO, does the cavalry come back quickly enough to keep the money flowing at roughly the same level, which would be an indicator that probably the amount of money in the system was roughly about right.
I mean, individual funds might do better or worse, but the system was about right.
If, on the other hand, if those keep pushing out, then at some point it becomes really hard to have all this money in private illiquid assets when you have pressures on your endowment and all that.
And then at that point, you would see the money go down.
So on that, we've seen your Klarna, which was going to go out, push back.
You've seen several others push back in the wake of macro uncertainty.
StubHub.
StubHub, you've seen, you know, Stripe.
Stripe don't want to go out for a long time, Rory.
If you know the Colossians, they're like, why would I do that?
They said on a show recently, why do I need some analyst at a bank to tell me about my margins?
Agreed.
And if you step back from that... first of all, they're correct.
And it's a massive public policy failure because what's happened here is this.
It is more attractive for companies to stay private and access capital from GPs, who are paid two and 20 plus to make those investments, than it is for those same companies to go public and access capital from Fidelity Growth Fund, where Fidelity only gets paid 70 bits to make the same investment.
If you think about it, we have defaulted to the higher priced capital alternatives. which is absurd.
So you have to say to yourself, why has that happened?
Because remember, one of the rules is the company doesn't care if it's public or private.
Stripe is going to be an amazing company, all other things being equal, public or private.
So the only thing that's changed is, instead of it being public and compounding nicely and, as I say, getting funded by low-cost public mutual funds, it's private and getting funded by high-cost venture funds.
That's a weird outcome.
And you have to say to yourself, why has it happened?
You would also say that it's not high cost venture funds in a lot of the latest rounds.
These are very, very large pension funds.
Actually, you're agreeing with me, not disagreeing.
I didn't say high cost to the investor.
It's the other way around.
It's not high cost to the company.
You're exactly right.
That's one of the key points.
To the investor.
If I was a pension fund in New York 20 years ago, I gave my money to Fidelity Growth and I got Stripe at 70 bps.
Now I have to give my money to Thrive and get Stripe at 2 and 20.
That's why I said it's a public policy failure.
The ordinary investors of America are either not getting the good assets or getting the good assets at massively higher fees.
And if you believe, as we said a few minutes ago, that the performance of Stripe is not impacted by whether it's public or private.
What it means is the return to the investors is Instead of if they start compounding at 15.
If I owned an infidelity growth as an investor, I got a 15 gross return 70 bits, 143 net IOR.
If I own the same asset in privately held venture coal, 15% gross, 10% net after fees and carry.
So my return as an investor, an ordinary saving American who's trying to put money aside for their future, has been reduced massively because all these companies are staying private instead of being public.
And that's a monstrously stupid outcome.
So why is it happening?
That's the question.
And I think it's a combination of things.
I think the public is a pain in the ass, which is something you need to fix.
And I think being private is cheap and easy money, which my gut is if something would eventually be fixed.
Those two things together have to change for it to be rational for late stage big private companies to want to go past.
I was with one of the most successful founders of our time the other day and he said, literally there is no really significant reason for any great company to go public today.
For the not so great but still very good, yes.
But if you can raise endless money at great prices with private investors with no scrutiny... Agree.
And that sentence is why it will eventually stop.
It only stops... Go back to the thing.
It's that those poor investors... they have two choices.
There's public companies where they can get 15 gross 147 net, or there's private companies where they can get 15 gross 10 net.
At some point they will reallocate capital away from those private investors to those public investors.
And then what will happen is private companies will not be able to access effectively free capital.
It's absurd that the free capital is at a higher cost in terms of total cost to produce the capital.
It's absurd that it is cheaper to get money as a private company from a provider who has a 500 basis points cost structure than to get money from a public company public mutual fund that has a 70 bips cost structure.
It's like intellectually madness, but it's where we are now.
And they're correct until that stops.
And intuitively, when you say it like that, you say to yourself at some point, what logically will happen is the late stage.
Private investments will underperform equivalent public investments by the amount of the fees.
And then it will switch.
I guess that'd be the efficient market thesis, right?
Can I throw one out there?
We've said about the enormous funding rounds.
Superintelligence, $32 billion, $2 billion in, supposedly no product.
What did we think?
I have some thoughts.
I'm intrigued.
I think, go team.
I think, look.
I think that the argument is compelling arguments in favor.
OpenAI invented all this.
And as an investor, you can say to yourself I ought to do OpenAI or I can do one of six or seven other foundation model companies.
If you fast forward three years, all the foundation model companies that weren't populated by people who were at OpenAI haven't done great.
And Anthropic, that was populated by people that came from OpenAI, has done pretty well.
So what it says to me is, hmm, they cracked the magic code in OpenAI.
They have the secret recipe.
Fund people who have the secret recipe and it works.
Fund anyone else and you kind of get a me too outcome.
In retrospect, that was the logic for doing Anthropic.
They have the secret recipe.
They snuck away from the Magic Kingdom with the secret recipe.
Back them.
Don't back all these other dudes who are trying to figure it out.
Using the same logic, you got the guy who invented the secret recipe.
Why not?
At least you know he'll probably crack it.
So your risk level not being able to figure it out is pretty low.
And remember the risk level for people who didn't have the secret recipe, not figuring it out, with the exception of Grok, which is astonishing, is quite high.
So it makes sense because you can buy something that can crack the code.
Now, what that model is worth once the code's been cracked is a totally separate discussion.
I don't have an insight on that, but I totally get why they're making the player.
I cannot see why one would not do this deal.
I think this is, people looked at this and went, what nuts, nuts.
With a Lickpref, there is zero chance this does not get bought for at least Lickpref.
It's fucking Ilya.
It's like Microsoft will buy him for 10 billion tomorrow. provided the government lets them buy in.
But yes, agreed.
No, you're exactly.
Look more marginal foundation model outcomes have yielded returns beyond the 1x with exactly that mechanism.
So yes, that's your answer.
You're exactly right.
Rory, can we really count on the liquidation preference in these types of deals?
Can we really count that it's going to be honored or we're going to get our money back?
Is that really the real... That's a brutal comment.
And you're quite correct.
It's always stunning when you get down into the arcania of Delaware law and what can actually happen the day of a transaction.
If someone decided to actively not honor the press, there's a bunch of ways you can do it.
So, yes, I hear you.
That's the risk.
Or if you acquihire most of the team for 10 billion and you leave the liquidation preference over into C-Corp.
Doesn't that work?
Yes, that works too.
Listen, my limited visibility recently in MA is that every acquirer is looking for ways to get around all the BC preference stacks.
It's aggressive.
It was always true, but now it's super aggressive.
It's like we just don't even give a rat's ass in CorpDev how the certificate of incorporation structure what the documents say we'll do, side deals, back deals.
We just want nothing going to the vc in bigger, in nine figure deals, right.
So why would you honor this liquidation preference when i want that going to the engineers?
I don't want.
Why would i want to go into the vcs and why does illy even care about them?
I think founders care less about their vcs today than they used to.
I think they care less.
I would love to have been in the room on some of these marginal sales where Google did one, Amazon did one where, in fact, they did take care of the VCs to some extent and do the founders.
Because you're right, Jason.
I'm not going to comment on those.
In smaller vehicles that we're in both when we're a seller and when we're a buyer.
You're exactly right.
Anyone buying the company says, especially if it's a business where you want the customers, you pay down the cap table because you want the whole damn thing.
If it's an acqui-hire, every dollar you give to the venture guys is wasted.
So you're exactly right.
You do small headline deal and then large earn out contracts and you sit there.
And, you know, I can pretend that I'm appalled by it.
But, perfectly honestly, when I'm on the other side of the table and my late stage companies are trying to buy early stage companies, I do exactly the same thing.
I don't give a shit about Jason and his bloody preference.
I want to hire those five great engineers.
Let's just give them a contract.
I mean, respectfully, is that not a bit short sighted?
Maybe I have a grudge.
But if you did that to me, I'd be pretty pissed off.
And I wouldn't be that willing to give you my next great deal.
It happens every day.
I think if I'm a corporate acquirer, let's leave these big deals out.
If I'm a corporate acquirer and I come up against Rory and Jason this time, I don't sit there thinking I'm going to come up against them next time.
I push as hard as I can.
And if I don't push totally brutally, it's not because I'm worried about a multi-period game.
It's just like at some point I'm just not paid enough as the VP corporate development to waste enough time and take the litigation risk of fucking over worrying Jason.
It's just easy to give him that $30 million and call it a day.
Now, as Jason points out, when it's $2 billion, who knows?
But so far the observed fact is, even in these transactions, investors have made money in a sideways sale and have been able to rely on their preference.
Whether this happens in the future, I can't speak to.
I don't know.
But that's all you know.
And in the meantime, you're getting an at-bat with the guy who figured it out and made the magic recipe at OpenAI.
So that's what they're doing.
Again.
One of the things that every one of these discussions today have in common is in almost every item, we're realizing we're all taking a lot more risk than 10 or 15 years ago.
We're all playing a high stakes game.
I mean, it can be the price high stakes game.
It can be the pre-money 2 billion round high stakes game.
It can be the concentrate the fund in smaller number of investments.
But the one thing all this stuff has in common is we're way out there on the blue, on the yield curve, on the risk curve.
Except for one thing, which is we're seeing this increased trend again of founders taking secondaries more and more early in the journey.
I saw a tweet yesterday where it was like hey, you know, founder secondaries at A again is completely the new norm.
Are you finding founder secondaries at A really back and back in vogue, one?
And have we just shifted risk to founders taking money off the table earlier, which may or may not be a good thing?
Well, I can tell you what I've seen for what it's worth.
But in all of my hotter companies the last whatever months I've seen the later stage investors put everything into the term sheet possible to win.
There's no more waiting for.
Rev the maximum, secondary the maximum, refresh the maximum, even cram down the prior investors because they don't care.
They just don't care, as long as the founders get their post money, their equity and their secondary.
So what I'm seeing is straight out of the gate, All the boxes you can check in hot rounds, they're all checked.
Like there's no more games.
There's no more.
Is it too much secondary?
Don't care.
Is it too much?
Just don't care.
Just, I just want to win the deal.
So I'm not gonna, and someone else is going to do it.
So I see it all like every box checked in the term sheet today in the hot deals, every box checked to the maximum, to the maximum.
I haven't seen it in A's.
I've always seen some in A's.
But after that, win every deal.
I just want to win it.
Don't care.
I want you to be capital efficient.
I want you to be stingy.
But here's an extra $100 million and $30 million of secondary and extra stock.
But I like capital efficient companies, but I got to win the deal, right?
You just got to do it to make these big money and growth.
You got to win it, right?
Yes.
Because there's only one thing worse than this.
I can go both ways on the second.
I really don't like the.
Here's a secondary for 5 of your position and here is a pre-approved increase to your equity ownership.
Per seven.
That's the play in the growth today.
Sell five, we'll give you seven.
That way, it's not even a dividend.
You come out ahead, right?
Well, dividend might be better because you don't have to sell, right?
Yeah.
The refresher always exceeds the sale.
I'm going to be sympathetic to the investor now.
I've lost the deal through not doing that.
Because again, it sticks back to my comment.
I tend to be perhaps stuck in the mud on history.
I think that's just nauseating, because you're effectively replacing the comp committee of the company you're investing in.
But you're right, Jason.
You see it, especially in later stage rounds, not at the A, but at the latest.
And you're like if you're going to lose the deal.
Bad money drives out good and bad habits drive out good habits.
And you know, If you've got to win the deal, maybe you do it.
I mean, I've had two deals that were done in one day, like hot deals.
And how do you get a deal done in one day?
Right.
How do you guarantee you win?
You check all the boxes.
If you check so many boxes, there's even an argument the valuation doesn't even matter.
Right.
At some level, because you've made you've done you've checked all the other boxes.
This is what worries me so much with growth funds today is they assume that the outcomes are equitable, equiprobable in size, and what i mean by that is they're going okay, i know x company is great and only worth 2 billion, but if i pay 3 billion and i put in 200 million, i know it's a 10 billion company.
So i'll get a little bit of a compression on my outcome size in terms of multiple, but it's a 10 billion.
What they don't understand is that if i stuff rory with 200 million before rory's ready for 200 million, that 10 billion outcome size will be a 4 billion outcome size.
I want to point out that I'm always ready for you to stuff me with 200 million, dude.
There'll be no ambiguity around that stuff.
But yes.
No, I want to kind of throw out one final one before we wrap.
But one that is, we said there about like, hey, play the long game, maybe being nice.
Something that is just getting kind of more and more Hollywood movie.
Jason, me and you were messaging about it last night like hey, is this just going to turn into a shit show.
What happens from here?
Can you be nice and win?
There's a big gap between being nice and committing what is at least some level of civil, having some civil issues and potentially I don't know criminal issues right.
You know, you can be pretty driven without actually planting spies.
And if, in planting those spies, you actually steal secrets, i'm winging it.
Without you know, my wife was a criminal lawyer so she hit me on the head for practicing law without a license.
But there is a point at which this is kind of industrial espionage and you get caught and you get criminal proceedings and no ceo and no company can provide that.
So I think it is possible to go too far.
You can be aggressive.
You can be driven.
And I'm not talking about the facts of the specific case A, because I have to use the word alleged and I don't know.
B, I have a company broadly in the same space, so I'm not unbiased, papaya.
But if what's alleged is true, it's very troubling.
And you would be struggling as a board member to figure out what to do.
But even more importantly than that, As a customer of this company, if you're relying on them to manage your payroll, to move money on your behalf, you possibly can provide them having some kind of civil liability.
But if it trends over into criminal liability, you probably have to find a new payroll provider.
So I think that was way beyond the norm.
But Wiley entertaining their complaint.
The growth rounds we discussed are part of it in general because they encourage There are fewer and fewer boundaries in these massive growth rounds with no diligence and all the tertiary and quaternary and secondary you want and all the deals at 8 billion and 10 million, 12 billion.
There's no boundaries.
You don't ever have to go public.
Harry and rory, it's cool.
Take our money and whatever terms you want, just get us our target and anything goes.
And i whatever exactly happened here?
I mean, some of the stuff's hard to argue with.
Okay, clearly this guy went into the toilet and flushed his.
It was paid, that we can't argue with.
That like we can't argue.
It's like okay.
But i think there's a hundred startups doing versions of this five thousand dollars a month.
You can't.
That's because he's got ten of them.
You can't get an intern for 5000 a month these days.
I know, but I think you're going to hear a hundred, just like fraud.
Like every day.
Now we pull up the media and there's another founder that stole 30 million from the investors and we shrug it off right.
There's going to be a hundred of these in this environment, right?
It's true we get revealed when the tide goes up.
Yeah, Galbraith, John Carter Galbraith, it is, yeah.
He wrote The Great Crash.
It's just a great small book about financial euphoria.
And it's worth rereading every couple of years.
But one of the things he has is this concept of the bezel, which is at every point in time.
There is an amount of embezzlement that's taken place.
And, you know, in a boom time, the bezel just increases because nobody knows.
And the minute the tide goes out, all the shit comes to the surface.
And I think you're exactly right in this kid.
Typically in a boom time, you see erosion of quote-unquote good behavior, erosion of standards, erosion of care and due diligence.
Then things turn bad, and then everyone starts focusing real fast.
Everyone looks at the numbers real fast.
And it's interesting, you had one other thing in your pre-show prep.
You made a comment on ARR versus GAAP.
I mean, we started really focusing on GAAP revenue now.
Because ARR is a made up number and GAAP numbers are fact.
And when the tide goes out, there'll be a whole bunch of this kind of stuff surfacing and people go.
Hmm, miss that.
Sorry, for anyone that doesn't know, why is ARR not so important and GAAP is more important?
ARR is a really good leading indicator.
And I used to lean on it because it's better than GAAP because it's a forward-looking metric.
But the beauty of GAAP is there are rules on how it's produced.
If you break them, you've lied.
And there's no ambiguity around it.
Whereas ARR is an experimental, is an actual.
It's just more loosey-goosey.
It's, as I say, you're trading a better forward-looking metric.
ARR has more signal about the future, but more variance about the correctness.
AOR gap is a trailing indicator, but it's pretty damn accurate usually.
In today's market where there's a lot of experimental AOR, leaning into that AOR, it gets back to where we started this conversation leaning into that AOR and thinking that's repeatable scalable there, forever AOR like a SaaS, multi-year contract from Salesforce.
It's just not the same thing.
Yeah, most of the A and the R, the R aren't real.
It's not really annual.
It doesn't really recur.
What's the third one?
Revenue, yeah.
It may or may not be revenue.
Definitely doesn't recur.
No way it's annual if everyone can get out after a month or two.
So it's neither A nor R nor R. Can I share one number just for fun before?
I was just pulling up a SASTR survey, going back to real and dipling.
Real and dipling.
Yeah.
I asked 2000 folks in Sastr, how many folks lie in deals to win deals?
93% said they lied over 2000 to win deals.
If 93% of 2000 B2B folks are lying to win deals, lying about features, lying about feature gaps.
Okay.
And you've just been handed billions.
How much would you get?
Would you throw someone into your competitor to get in?
Yes.
You really think of those 2,000 people, if they could get someone working at a competitor feeding?
Forget this happened to the CEO level.
What if just VPs of sales could do it, right?
93% say they lie in deals, 93%.
I think there's a big difference about lying about a product runway and Sorry, a product roadmap and when a feature is going to come.
I'm going to orchestrate a spy in Rory because he wasn't paid 200 million.
Sorry, buddy.
And I'm going to plant him in... Dude, that's...
Listen, I like to think of myself as fairly ethical.
I'm not sure the line is as black and white as you think.
I think of 93 folks are living in deal.
How many sales reps have gone to a competitor's sales pitch, wasted a rep's time for an hour to learn their thing?
Does that cross the line?
And how many of them, if they could make a million dollars a year as an AE, wouldn't have their buddy sending them information.
How many reps have taken their Rolodex with them?
How many folks take their Rolodex with them when they leave, which violates many laws?
All of them.
I remember in 2003, a company who shall remain nameless did something like this.
The only difference is the FBI pulled up at the company the next day.
They were accused of stealing trade secrets and they just basically empty out at every desk and the process grinds on.
I think a lot of this stuff.
People will experiment and figure out where the line is and they'll discover by going over it and getting caught.
Is it a little bit coincidental that Rippling are going to go out and raise money now at 18 billion?
If only for his cunning and acumen, you'd want to give him money.
I think it's an anti-coincidence.
I don't think it's intentional.
It was pretty smart.
I mean, by the way, timing.
I don't think there's anything in the timing.
I just want to say that was very clever of the rippling team to figure out what was going on and trap the person involved.
I looked out and I thought, you win, dude.
That was good.
It was a good honeypot.
And then the way you reported it through Parker, like it was.
You see these people, you know John Le Carre, you know a double agent.
Now we've got a double agent.
They probably could have run him as a double agent for a while, feeding false information.
I mean, it's just great.
The best part is the story got worse, like most good stories.
Act two was worse.
At first it went out, and when Parker's first tweets went out right, I remember someone asking me it can't be this bad, can it?
And I was like, no, no, I guarantee you, I don't know him well, but I've known Parker for years.
It's got to be worse.
He would not, given fundraising, given other things, he would not do this.
There's no way he would waste his time.
He has a complicated company.
It has to be much worse than the first septum, otherwise you can't do it.
It's too just.
This is this.
Stuff is so distracting, isn't it where you've seen it on boards?
It's so distracting, right?
Is this a case where it can take down the company, though?
Or actually, your news cycles are so fast these days i honestly believe that trump does something crazy, elon does something crazy, we move on.
No one cares.
The b2b customers really give a shit?
Probably not, because in the i mean In the end you can always make a change.
I don't know the dynamics of this company.
What would happen in a public company?
The rest of the board would do the unshocked and appalled.
The attorneys would come in and explain their fiduciary obligations and they would basically say you sack this guy right now and you can burn this liability off.
You stay in this thing.
You were down with the ship and you're going to get sued by everyone.
They would be drawing up the for-cause termination before the attorney stopped speaking.
The person in question would be out.
They'd hire an interim CEO or crisis PR manager.
And they'd say, as I say, shocked and appalled to discover this is going on.
New day, fresh broom.
Pick your cliche, hire Skadden, you know some ex-SEC lawyer to go on the board and do the whitewash and power right through.
You'd lose a year.
That's what you do.
Maybe if these guys have board control, they don't do that.
But if I was on the board, that'd be where I'd come in from.
Companies are bigger than any one person.
Sacrifice them and move on.
I don't think many customers are going to leave.
Where it might hurt you is at the margin.
It's going to hurt you for new customers.
It's a weapon for the sales team to use against you.
I say 2%.
You know how much work it is to change payroll providers?
I'm outraged, but not that outraged to do any work.
When it gets company endangering, you fold.
But I don't think it will be because there's a lot you can do.
So we're going to play a game and then we're going to wrap up.
Okay.
The game is called buy or sell.
I'm going to say an asset.
I'm going to say a price.
And you can say whether you buy it or not.
Not sell because it's not like a negative.
So that's a really important addition.
It's not a negative.
It's just like I wouldn't advance to that price.
Open AI at 300.
Buy or not buy.
Not bad.
I recently took a look at my investments.
I can't make any decision well north of 100, so I'm out.
All my decisions are bad north of 100.
They're just all bad for a variety of reasons.
I'm the opposite of you two.
I would buy the shit out of this.
Escape velocity reached.
Cursor at 10 billion.
The irony is the AR multiples for some of these, if they're AR, are pretty low, relatively speaking.
If you're really paying 10x forward revenue on some of these deals, we've all done worse.
By the time I did Lovable, it was like 10x revenue.
The whole reason this business is awesome is there are singularly amazing companies in every generation, and maybe these are they.
And when you do those companies, everything works and you're just so glad you bought it at any price.
That's why this gain is fun.
All the things been equally should be doing private equity.
The reason it works is because you have those singularities.
I just don't know enough on the data to know if this price gets to that point.
You know the thing is.
I know you want a one word answer but, going back to the beginning, if you want to tie a bow on it, right?
The problem if you listen.
If it's a SaaS company with highly durable revenue, then cursor any sphere.
10 billion is a good deal.
It's not like a great deal, but it's a good deal.
If this is a classic high NRR coming up on a billion, 140...
It's probably got 140 or 200% NRR on paper, right?
So if you treat this as a B2B company with a massive moat that has destroyed its competitors, it's a pretty good deal.
Now, if you look at everyone I talk to who in a week switch, they're like, oh, Windsurf is cool.
You know, my portfolio companies switch back and forth.
They're switching IDs, which seems crazy to me.
My son is switching.
It's like then, at this durability.
This is the question of the ages.
For us is is this revenue durable?
Because if it's SaaS, then I take my money a cursor, right?
I just wish I had 500 million.
But if it's not, this is the risk to Rory's point, right?
Because as a SaaS company, they don't get any better, right?
There's nothing better than those metrics.
And you can, back to the OpenAI comment, you can say it's Google.
It takes the entire market cap.
That gives you plus or minus a little over a trillion.
So 3, 4x from here, if you replace all of Google in three or four years.
You know, is that the best 3 or 4x you could do?
I don't know.
Guys, listen, I've loved doing this.
Rory, it has been so fantastic to have you with us.
Thank you for joining us.
This has been amazing and I really appreciate it.
Harry, I think you need a $4 billion fund for the next one is my big takeaway from your bet.
The way you like to bet, I would go for 4.5 billion.
I would start there.
But I would do a hard cap around five or six because it's going to be hard to deploy in 24 months.
But I do 4.5 for the next one.
Just remember, we like to stay small.
We're small funds.
We're a small and focused fund.
Small handful of partners.
And we all work on all deals together.
So everybody remembers right at the end that we got to stay on message.
That was really touching, Harry, right?
And now, of course, you have editorial control.
So he can just nuke all his crazy shit, leave ours in.
And at the end Harry Stubbing says I really think we need to stay focused and keep our deal so small.
No wonder you're a fundraising genius, Harry.
I'm wise to you.
You know me so well, Rory.
Good for you.
My word, I so enjoyed that show.
Now, if you want more shows like this, please let me know.
I want your feedback.
I think Rory was such a great addition to me and Jason, but let me know what you think of that show and I would love your thoughts and feedback.
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As always, I so appreciate all your support and stay tuned for an incredible episode coming on Monday.
