Anthropic Inference Costs Skyrocket |TikTok Deal Closes |The IPO Market:Wealthfront & EquipmentShare

1. 0:00 – 1:10

   Intro

   1. RORory O’Driscoll0:00

      The bad feelings last for a day, and the 5 billion lasts forever [laughs] , right? So you'll get over it.

   2. HSHarry Stebbings0:06

      Boys, it has been a big week of news. Anthropic's inference costs skyrocket. Brex's $5 billion deal and the $12 billion OpenEvidence round.

   3. RORory O’Driscoll0:15

      At some point, NVIDIA puts will be a great buy 'cause every semiconductor cycle for the last 40 years has ended up in a massive downswing. I ain't buying them today.

   4. JLJason Lemkin0:24

      We talk about, is SaaS dead, or what's going on? I worry this is the next final act. I think it's the final nail.

   5. HSHarry Stebbings0:30

      Is there a way out then?

   6. RORory O’Driscoll0:32

      Most of the time we sit around here waiting, reading, and thinking, and I thought, "Hmm, that's a real investor." Understands that activity is not everything. SaaS is not dead, and now SaaS has an army.

   7. HSHarry Stebbings0:44

      [laughs] I love it. Ready to go? [upbeat music] Boys, it has been a big week of news. Now, I was super, super happy when this, uh, news came out because I got tagged on so many being like, "Can you do an emergency pod?" And I was like, "Well, that is a great sign of product market fit for

2. 1:10 – 9:06

   Brex Acquisition by Capital One for $5.15BN

   1. HSHarry Stebbings1:10

      what we do." And so we're gonna start on Brex's acquisition by Capital One, 5.15 billion, 50% cash, 50% shares. Diving right into it, how did we analyze the announcement of this, which c- did come as quite a surprise to many of us?

   2. RORory O’Driscoll1:25

      I thought it was a great outcome for the company. By the way, no one... And I've... You know, obviously everyone who's on this pod has probably heard all the thread. You have the, first of all, you have the great outcome people, then you have the people sneering saying, "Oh, that's a disappointment from where they were." Then you have the counter parts saying, "Grow up, kids. Anyone who builds something from nothing to $5 billion, it's a great outcome. Shut the f- up." And which, by the way, I think is the right outcome. So let's assume everyone's already caught up on that so we can kind of engage from there, right? Um, going back to the first thing, I think it was a great outcome, and I think, you know, you build something from nothing to a $5 billion outcome before you're 30, heroic result. Absolutely be praised. Think it's a smart acquisition for, yeah, for Cap One too, by the way, and we can come back to that later. But that's kind of the first big picture comment here, right? And then on the second thing, and I really, I think there's three different sets of comments. There's the, is it a great outcome in the abstract? Of course it is. Second big picture question, is it a great outcome relative to the $12 billion raise in 2021? And there actually my co-podcaster, Jason, I thought did an awesome piece on that, and we should talk about that next, you know, um, hubristic financings. And then, by the way, the last thing we'll circle back to is, is it a great outcome relative to Ramp and the competitive dynamics? So I'd like to throw it to Jason and say I thought your post on hubristic financing and, you know, the s- the pros and cons of raising at 12 and selling at five was actually really good. So over to you to get your thoughts.

   3. JLJason Lemkin2:53

      Look, I don't know everybody like Harry does, but someone that was a smaller investor in the company, I asked what, what, what, what she thought and, and the outcome was, well, given where we are in the world in 2026, it's a good outcome. And that qualified answer kind of, uh, was interesting. And so that was my thought. It's like there's so much... I mean, listen, some folks are taking potshots on the, on X. That's, that's the way it is. But why do we have these, these weird feelings? Why are we not sure if this is a good exit? At 5.1 billion in eight years, I mean, I would have loved to have led the seed round, right? Maybe it's not good enough for Harry, but Rory and I would've been happy to have led, led the round, right? So why do we, do we have this feeling? And, um, look, this is nothing new. I just, this is the era, I called it, um, you know, hubritic financing. You've got to keep doing these Harveys and Lagoras and what, OpenEvidence from one to 12 to keep up. And, and, uh, if you don't, um, it- you put yourself at a competitive disadvantage, but then you set yourself up for d- disappointment. When you... Because these companies that are fundraising to the nth degree, the thinking machines today, the Brexes back then, they are promising, as Rory says, this 0.1% growth ad infinitum, not just a couple years of, of, of sustained growth. Brex was basically promising it would own all of business finance at some point, and that was the bet at 12. And so it leaves us with, with, with a, with a, with a weird feeling when, um... Put, put the late stage investors aside, on paper, all other stakeholders have a great outcome. Even, even the liquidation preference, it's not like it ruined the deal, right? They raised like a billion something equity in debt. This wasn't one of the grouchy deals where 7 billion went into the company, right? This was a, a, a great outcome for everyone on paper except the late stage. But, but it, it, it's, it... The p- Versus the promise, the commitment made to everybody, customers, late employees for four years, it's you have... But do you have to make these promises to win today? Do you have to make them to win today?

   4. RORory O’Driscoll4:52

      When you take money at a high price, you run this risk of subsequently exiting at a lower price and having this weird, odd feeling for a day. But I think the wider level comment is step away from the weird feeling, right? Why... I thought the thing you were like, why did you raise money at 12? I mean, going back to 2021, who's gonna say, you know, investors are offering you money at 12? "No, I'd prefer to take it at six, thank you very much. I'm an idiot." Right? No. Y- y- you raised the money because you needed the capital. If they had... I mean, let's run through the logic here. If they haven't raised the money, they would have run out of money. That would be dumb. Once you need the money, you're gonna raise it at a market price. So I thought what you said was, look, there's pros and cons to that. You get the buzz, you get the momentum, you get the employees, you get to compete in a world where other people are doing it, right? And in return, you pay this weird one-day tax the day you exit, which is you've just had a heroic world-changing, you know, life-changing event, and then you just feel weird. But given what's on the field, there's no way to avoid that because you had to raise the money in '21, therefore you did market price at the time. The bad feelings last for a day, and the 5 billion lasts forever [laughs] , right? So you'll get over it.

   5. JLJason Lemkin6:01

      No, we're gonna, we're, we're actually... Because I'm gonna get a Capital One card in the mail as soon as this deal closes. We're gonna forget about Brex in 24 months. We're gonna even forget whether it was two X's or how to spell it. This is, this is our world. We'll, we'll forget, right? Um, I will say just one thing on the topic. Look-A great outcome for the founders, right, on many levels. Great outcome for early employees. Not what they thought they'd make in 2021, but a great out- great outcome for Ribbit. Um, the one thing, in addition to my post, I, I, um, I saw that not too long ago, but a while back, Ali from Databricks said, which is one of the most successful companies, at this strategy at Hubritics, he said, "I never wanted to raise more than two years ahead of the valuation I was confident I could hit. I never wanted to raise..." Not just two years a- not just the classic, the VC side is, "Hey, listen, two years, one year ahead for a hot company, two years ahead for a great company. Maybe Thinking Machines, 28 years ahead." I, I don't know. But, um, that's a thoughtful response. Like, if you believe it, um, did, did Brex believe they'd be worth 100 billion? Pr- probably. I don't know. I don't know. But, but s- things were cr- loopy in 2021, and maybe they're loopy in 2026. But, um-

   6. RORory O’Driscoll7:08

      They probably did. Because look, it's the sin of extrapolation. The growth rate was probably 2, 300%. You extrap- I mean, it's, it's, it's the age-old truth. Most of these, quote-unquote, "insane valuations" can be explained actually by the Ali comment. Provided I keep the growth rate up for two years, then I will have grown into this valuation on a revenue multiple basis. It's a perfectly innocuous sentence, but buried in it is a whole death trap. Because the minute '22 came on, the growth rate faded, right? Then your capital gets more scarce, so you have to try and converge on profitability, so growth rate goes down even more. And, you know, what was a totally legitimate belief in 2021, which is three more years of 300% growth and I'm worth 12 billion, becomes utterly insane in 2024. It's just the cost of doing business in this crazy game that everyone plays, right? I, I, 'cause I, I suppose what I'm trying to do is I'm trying to avoid this kind of moral, oh, it was good, oh, it was bad, bl- all these emotion-laden things. It's, if you play the game of hy- uh, to, to something that... For example, for the late-stage investors. If you played a game of paying up massively for hypergrowth and it doesn't work, you get a 1X, right? Now, as long as maybe 30, 40% of them are the 1X and you don't do any major whoopsies where you actually get a loss, and you get a three, four, five, 6X on your good ones, then overall the math works, and even in a mediocre year like '21, you end up with a sub-2X but still perfectly fine fund. In other words, it's... I, I go back to my comment. It's just the nature of the business. You know, things pr- uh, it's one of my things that I've said a lot in this pod. Things prove up in the end for what they really are, not what you delusionally think they are at one point in time. In, in the end, a financial services company was always gonna trade at a financial services multiple adjusted for growth, and that's what happened here. So growth came down to still very impressive but normalized levels. Cap One leaned in and said, you know, "700 million in growth, plus or minus seven times revenues. That's a good deal for me.

3. 9:06 – 15:13

   Does Brex's Acquisition Help or Hurt Ramp?

   1. RORory O’Driscoll9:06

      Done."

   2. HSHarry Stebbings9:07

      How does this change the game for Ramp? Ramp obviously raised at 32. Does this help or hurt them?

   3. RORory O’Driscoll9:13

      I think this is a great question, 'cause remember I said there's three things. There's the, there's the is it standard on a great outcome? And then of course, is it a great outcome for the investors versus 2021? You're raising the third one, which to me is the interesting one. 'Cause Ramp, you know, and some of the... No, actually, I've got to say it. The CEO of Ramp did a fairly classy post. It's like, "Hey, congratulations." He had sold a company to Cap One. It wasn't awful, right? The Founders Fund guy did a dance on your grave post.

   4. HSHarry Stebbings9:36

      Dude, dude, dude, I, I love Eric, and I, I do, yeah, I like the team there. It, it was a dig. I know some good London-

   5. RORory O’Driscoll9:42

      It was a dig, but it wasn't a to- but, but perhaps, a- as is so often the case in America today, I'm, I'm judging, I, I'm judging quality by the opposition. The Founders Fund did a straight dance on your grave. If I'm Ramp, you know, from an opera- I mean, the two things are true here, guys. From an operational perspective, this is further validation that, quote-unquote, "I've won. I started later and I'm doing a billion. They started earlier, they're doing 700 million." Good news, you've won, right? But the bad news that you just can't ignore with a tweet is when Real Money decided not to buy 2% of this thing in a, in a secondary sale, but to actually write a check for the asset, they said, "We're gonna multiply by seven." Right? And if you multiply Ramp's billion-dollar run rate by seven, you get 7 billion. Now, if they're growing faster than Ramp, maybe double it, 15. What it points to is, you know, we live in this crazy land of VC valuations where they're made once a year, when only one person buys, no one can subsequently sell. They're very thin markets. And, you know, we hope they're roughly right. [laughs] And sometimes we're surprised to the upside when they go public, and then sometimes we're surprised to the downside. If I was a... I mean, hard comment here. If you're doing your mark to market on Ramp right now, how do you factor in a recent transaction at seven times, uh, to your multiple of 30 times? You know, it, it does at least... I mean, I'm not saying it's dispositive, because you're faster growing, and you did, as you put it, win. But it does make you think maybe when you go public in two years and you wanna monetize a, let's say at that stage, a $2 billion revenue company, maybe you're still growing a little faster. Maybe you get 10 times. I don't know. But it does... If, if I was the investor in Ramp, or if I was the investor who just wrote the $32 billion check, I'd at least pause and go, "Hmm, let me check my assumptions one last time here." Right? Maybe it can still work, but I gotta be a big company. I mean, you ain't gonna get the M&A outcome anymore. You've just gotta be the big company and trade in the public markets at a significantly higher multiple than the other financial services companies. The only way you can do it is if you keep the growth up, if you keep the growth up. So it's not like it's impossible, but it's just a significant data point that weighs the other way as you think about value.

   6. JLJason Lemkin11:55

      If I'm the, the, the Brex founders, right? If, if I'm, if I'm Pedro especially, Ramp, we talk about Ramp, but we also look at Navan, public, and I have another comp, going to Rory's point. And I'd be like, let's say the three of us were the founders. I'd be like, "Jesus, we have a comp that's basically worth the same as us, basically the same revenue. Now, it's got debt, it's got other issues," but I'm like, "My God, guys, we could work for three more years to an IPO, suffer lots of dilution in the IPO stress-And basically economically be the same place in three years. Now, that's cool if the three of us wanna build something much bigger than this, right? But I don't even know if 10 billion's worth it if we don't wanna do it, if we don't wanna build this as a generational company on our own for a decade, because the Navan comp's a tough one. It sort of says to me we're gonna grind it out for two to three years and be worth the same, so we better want it. And all my public company CEOs, uh, on, uh, they're pretty grouchy today. [laughs] I would say 80% of the public companies, B2B CEOs are... Now, they may be thrilled when they- when the next generation IPOs, but this isn't the happiest cast of characters, is it, the public company CEOs? They're not happy today.

   7. RORory O’Driscoll13:06

      It's a super good out- I think Capital One have played a very shrewd hand here. 'Cause remember, all these businesses, Ramp, you know, Divvy, which my former com- company I was formerly involved with, Billboard, Brex, they all monetize on interchange, right? And most interchange is Visa and MasterCard, which is, you know, third-party network. You have Visa, the issuer bank, and the accepting bank. Capital One bought Discover Card. Discover Card has a closed network where they get all the money in the interchange, right? So that's a really powerful asset for them now with, you know, now that they have Brex. They will probably be directing as much of that money flow onto their own rails, as the bankers call it, as they can. And what that means is they'll be able to extract a lot more of the value from it. So this could be an example where the asset is worth more to Cap One than it was on a standalone basis. So I think it's a very shrewd acquisition for Cap One. In the last, you know, we forget, in the last five or six months they bought Discover less than six months ago. I think it closed just recently, like, for 35 billion at announcement, 50 billion at close, and now they bought Brex, which they can fold onto Discover. So they're making a real push into this space, which is another thing you gotta think about as the independents. You're sitting there going, "Hmm, I'm gonna be playing against the A team now with a structural cost advantage." You had three pieces of news today, investors in Ramp. You clearly won, and the other guy said, said you won. That's good news. Tick, put that in the positive column. Second piece of information, people think a company growing a little bit slower than you and roughly the same business is worth seven times and you think it's, yours is worth 30X. Hmm, put that in the negative. And then last, a well-funded public company competitor is directly entering your space with a structural cost advantage. Now, you can hit total on that and decide. My, my impulse at the end of that is to tweet and say, "Well done," but deep in your soul you kinda go, "Hmm, not sure that was the best day in, out there for my stock."

   8. JLJason Lemkin14:58

      At least stay private longer. [laughs]

   9. RORory O’Driscoll15:00

      You're gonna have to, these guys.

   10. JLJason Lemkin15:01

       At least, at least-

   11. RORory O’Driscoll15:01

       You're gonna have to stay private

   12. JLJason Lemkin15:02

       ... live in the dream world of pri- of private. Let, let's, let's do ano- let's do another secondary, boys, lads.

   13. HSHarry Stebbings15:08

       Okay. M- moving on, boys. Another very, very significant bit of news that we've all been waiting for for a long period,

4. 15:13 – 18:38

   TikTok Deal Completed: Who Won & Who Lost: Analysis

   1. HSHarry Stebbings15:13

      is TikTok deal finally done? US investors will own 80% of the company. Algorithm retains in control of Chinese owners, which is interesting. Um, how do we analyze this deal getting done now, and how do we think about it?

   2. RORory O’Driscoll15:29

      I think you can't t- I mean, you can't approach this deal economically in, in, in the main. You have to... It's, it's a political/geopolitical decision to force TikTok to divest. And when you have that, and then have a very directed purchaser program. So let's do the economics first of all. It looks like a very attractive deal. I think the company's doing $15 or $16 billion in the US revenue, and they bought it for for- like, one to, one times revenue plus or minus. That's a wildly cheap deal compared to anything else. Now, there's a term that says some portion of the re- of the OPEX is a license fee or some payment back to the Chinese parent. So, um, you don't know the full economics, but my sense is that it's a wildly accretive deal for the lucky chosen investors in the new oligopolistic capitalism that we now practice. And it is worth pointing out how wonderfully... I mean, it's good to know that we fundament... So, so that's it. From an economics pers- So fundamentally, ignoring any questions, ignoring any other questions, I wish I had some of that in my 401 [k] . You know, right? Um, the, the most addictive, popular, um, application in the United States social media marketplace at one times revenue.

   3. JLJason Lemkin16:47

      Hmm.

   4. RORory O’Driscoll16:47

      Put me down for some.

   5. JLJason Lemkin16:48

      At first when I saw this deal, I thought, um, and, and Rory can, can play historian here. It hearkened back to me to when Andreessen got off the ground doing Skype.

   6. RORory O’Driscoll16:57

      Yes.

   7. JLJason Lemkin16:57

      And the reason it, it was a structurally weird deal where they got a good deal. Now, they took risks. Skype was a aging platform, but they bought it from eBay, right? Is that-

   8. RORory O’Driscoll17:06

      Yep. It was eBay

   9. JLJason Lemkin17:07

      ... eBay needed, eBay needed to divest it. They had enough of it.

   10. RORory O’Driscoll17:09

       Very shrewd deal.

   11. JLJason Lemkin17:10

       There was no synergy. And, and Andreessen went all in. They didn't have that much m- about it. They went all in and 3X'd net their money in, like, 12 or 14 months. This felt like another moment in time where you could get a great deal. Uh, the only thing I don't get is why didn't those guys show up? Why isn't Andreessen and Sequoia and Lightspeed in this deal? And you have weird ones. Oracle, which is also has infrastructure. You have UAE sovereign wealth funds. Where are Sequoia and Andre- That's the only thing that made me pause and, like, maybe it's not such a great deal. 'Cause those guys are just in the business of minting money now. Why didn't they each at least throw in a billion or two into this deal? They put it into everything else.

   12. RORory O’Driscoll17:48

       I don't know. I don't know.

   13. JLJason Lemkin17:50

       [laughs]

   14. RORory O’Driscoll17:51

       Maybe, maybe it was a bit of a... Yeah, I don't have a g- Yes, 'cause at one point they were in it, and then they were not.

   15. JLJason Lemkin17:55

       There's a reason they're not in that deal. It's free money otherwise, right? We're missing something.

   16. HSHarry Stebbings17:59

       And they're none of us is structurally challenging deals like X with Elon taking over, which they all engaged in.

   17. RORory O’Driscoll18:04

       No, totally. And I, and I think you exa- I remember them doing the, um, Skype deal very, as a very shrewd deal. And I, I wanna say the, the PE firm brought them in because they had kinda venture expertise, which was, again, a-Don't quote me. I think this PE firm was in fact Silver Lake again, but I'm going from memory there. But I remember, as you say, Andreessen came in on the deal, it was spun out from eBay. There were some issues around licenses and IP, and it was a little bit risky. They cleaned it up for 12 to 24 months and then sold it to Microsoft and made three times the money on a ton of money on their first fund. So super shrewd that was, and if someone does the same thing here,

5. 18:38 – 39:05

   Anthropic Inference Costs Higher Than Expected

   1. RORory O’Driscoll18:38

      it'll be interesting.

   2. HSHarry Stebbings18:39

      Let, let's move on. Let's discuss, let's discuss Anthropic. Anthro- Anthropic Inference Costs 23% higher than expected. Are there economies of scale in AI after all, and how do we read this?

   3. JLJason Lemkin18:53

      You know, look, there's a lot here, but I think this is so important for, for, for B2B companies. Um, I just, I c- I mean, literally, I was at a board meeting of a, of a B2B company with a powerful AI agent costing 100 million, and just seeing some of the dumb points in this board meeting of saying, "Hey guys, in 2026, we've really got to drive down inference costs now." And I'm like, "Do you realize you have six mega funded competitors and a huge amount of your diff- like the only differentiation is who has the best agent? Now you're gonna cut back your inference? It doesn't make sense," right? And this is the point Amjad was making so many times. I'm sure Anton from Lovable's made his own version, but Amjad's always been like, "No, you're, it's gonna, everything's gonna get more expensive because as soon as we figure out how to do this stuff, we're gonna burn even more tokens. We will actually burn an infinite amount of tokens if we can." It even happened to Anthropic, right? It, uh, it happened to everybody, and I think for a lot of so- a lot of folks, especially folks that aren't quite growing it at the OpenEvidence levels today, um, or Ramp are thinking, "God, I gotta, uh, what, what am I gonna do with these inference costs?" And I gotta tell you, the idea that you can use, uh, cheap models and cut back on your inference and still be competitive, that's the thing. Still be competitive with the hot Andreessen-funded company? Like no chance you can be competitive without that inference.

   4. RORory O’Driscoll20:08

      But I do think it's important not to lose sight of the fact that for, even though, I mean, you asked the question, oh my God, the, the, the Anthropic Inference Costs were higher than expected. Is there any leverage? Was your rhetorical economies of scale, Harry, right? The truth is, remember, last year they had a negative 94% gross margin, and this year they have a 40% plus or minus gross margin. Now it's not 50. So clearly the gross margins are improving substantially. So I think the real kind of l- in the middle boring comment is, there is significant leverage in inference costs and th- the ac- the, the P&L is getting a lot better, but it may not go all the way to the, you know, the, it may take longer. We thought we'd be at 50, now you're at 40. It may take two years to get to 70, or you may never get there. You may a- asymptote out at 60, right? So I, I think it's just the, the nature of the beast and, you know, you're dealing with this totally new business product, totally new market. You don't have a f- you have a hypothesis on where things kind of shake out, but it may take a while to get there. Fundamentally, however, I don't doubt the fact that a profitable, and defined by that as free cash flow, operating income business, will emerge from something like... I mean, Anthropic's not gonna not have a profitable business model because this clearly is converging. It's just a question of, you know, what scale does it converge at and what operating model does it converge at? Is it a 10% operating margin business or a 30%, right? So it's getting better. That's, but it's getting, it's getting there. It's getting there a little more slowly than you might like if you're, but it's still massive. I mean, from negative 94% margins last year to positive 40 this year, that's a big move.

   5. HSHarry Stebbings21:43

      Can I ask Jason-

   6. JLJason Lemkin21:44

      It's a big move

   7. HSHarry Stebbings21:44

      ... specifically to you, I mean, you said at the end of the year when we did our kind of quiz show, um, on like, uh, roundup, you said that 2026 would be the year where we would see inference running for 24 hours a day for a small portion of the knowledge economy, and I thought that was a really interesting takeaway. When you think about that-

   8. JLJason Lemkin22:00

      Yeah. I actually tried to build it over the weekend.

   9. HSHarry Stebbings22:02

      When you think-

   10. RORory O’Driscoll22:03

       Oh, yeah

   11. HSHarry Stebbings22:03

       ... when you think about that combined with these increased-

   12. RORory O’Driscoll22:06

       Yeah

   13. HSHarry Stebbings22:06

       ... inference costs and being more than expected, how do you think about those two together?

   14. JLJason Lemkin22:12

       It's easy to say we're gonna use three orders of magnitude more inference in 24 months. It's easy to say it, you know, it, it's more than an order of magnitude by the end of the year potentially. You know, the, the cost decline that we're also seeing despite the Anthropic thing, the, the, it's, it's hard. The, the token consumption is increasing the deflation in the per token cost. So I, we haven't seen-- we've seen that improvement I think in Anthropic to Rory's point, and I'm, I, I might be getting it wrong, but we haven't seen this break point where we're gonna, we're getting that, we're c- we're catching a break. We, maybe the margins are getting better, but we're gonna keep burning more. So I'm waiting for the moment, but, um, I'm not seeing... Like for, I built over the, like I was, you know, we've talked about memory, but ChatGPT and Claude don't have that much memory if you try it. It don't remember much, does it? It, it, it remembers this little bit. So I built a version of, of Claude over the weekend called Wren. You can try it at Wren, W-R-E-N chat.ai. It remembers everything. It compacts everything, so it never forgets anything, and I learned a lot of things, but one of them is it's gonna burn a lot of tokens. [laughs] If you want to save every chat you've ever had, every discussion over all time and reference it for years, and what if that runs 24/7? Maybe I'm rambling and not answering your question, but I don't see... I, I just see it ac- ex-accelerating. Um, and again, my, my, maybe I'm not, my, my biggest concern for founders out there, especially for folks that are not quite in the top 0.01%, right, is just that they're not, especially folks in ops on their team or folks that aren't close to AI, that they're mismodeling this. You need to model in- your inference costs are going up this year, not down. There's no... If you walked into your board meeting and said, "Hey, good news, guys. Inference costs are, are going down 30% this year 'cause our, our IT team's really good at managing costs," [laughs] I would, I would throw my mouse at the monitor.

   15. RORory O’Driscoll24:01

       Uh, y- you are right, but can, at, at the risk, z- zoom, I have two zoom out comments on that. First of all, when you look at the problems you'd like to be wrestling with as a business, an individual business or an industry, the problem of I have infinite demand for this digital good, which is still quite expensive to produce, so we're gonna have to figure out how much to charge for it and how to ration it, is a wonderful problem compared to no one wants to buy this digital good, I don't know what to do.Right. So the big-- But you're right. I mean, what you're saying, Jason, is correct. The demand for inference, the demand for tokens can be almost unlimited in some cases, because the more you can deliver, the more you can do. So metering that demand relative to the cost to produce is, as it were, the business challenge. And you're seeing that across the board. I mean, in Entropic, you're seeing all these, the, the, the $200 plan, the $20 plan, and then they have those few people who are doing $1,000 of tokens on their $200 plan, and what do you do about that? So, but again, so that's what's happening out here, which is everyone's trying... And that's if you're the model producers. If you're a SaaS vendor like you and I are investing in, uh, a-a-an AI apps vendor and tok- and, you know, and inference is one of your biggest costs now. It used to be five years ago, you know, AWS would be one of your biggest costs, and it would hit 10%, and everyone would lose their shit in the board meeting, and you'd say, "Let's get it down," and, you know, you'd manage the process and get it down to eight or nine with efficiencies. Now you're right, it's inference is the big cost. If you're a high-priced app, maybe it's 10 or 15%. If you're a coding type app, maybe it's 50, 60, 70% of your revenue. And if you don't manage that correctly, you don't have a business. So but again, I think, so I think you're exactly right. Yeah, but-

   16. JLJason Lemkin25:39

       But I do think-- I do wanna get your thoughts, Rory. I do th-- what I worry, and maybe it's at, at a practical level, I worry there's this middle category. These are mature company, not hyper-mature, 50, 100, 200 million ARR, okay, B2B companies, and they finally got a decent agent built, okay? It's taken them for a while. They didn't, they didn't b- but, but they have, they have 10,000 happy customers, and they're pushing this agent out, and they got to broke e- break even last year because Scale and 20VC aren't gonna put any more money in, even though they're supportive, because the growth's not there, right? They, they've got 30 million left in the bank. They're break even at 40, 50 million ARR. Now I'm competing with Decagon or Lagora or whoever, and I need 20 more million of inference this year. Or it just, it's game over because I can't compete because their agent is be- like my, my, my, my... The way, the way I've deployed it is great, but it's at $2 per interaction, Rory. It's $2.50 per interaction. I need 50 million interactions this year. That means I need 100 million. Now I, I bring it in 50. What do I do, Rory? I can be competitive. You told me to, you told me to get break even. I did that. Thank you, guys. Then you told me I gotta be more AI. Thank you, guys. Now I built it. Where-- how am I gonna fund the 50 million inference? Right? OpenEn- OpenEvidence has the money.

   17. RORory O’Driscoll26:56

       You, you, you have the irritating habit of exa- asking exactly the right question. No, yeah, I totally... Like, I'm mentally thinking of some companies that have gone through that j- you're exactly right. It's like, "Hey, your SaaS comp product isn't enough. Let's get profitable. Okay, you got profitable, but nobody cares. You need an AI product. Oh my God, you've delivered an AI product. Your customers love it." And now you're at the next shoe to drop is, how are you gonna finance this thing? 'Cause you're up against people who can raise $200 million on a dream. And I, I, I acknowledge that. And rather than telling you I have the answer, it's an issue I'm wrestling with, and I can think of two boardrooms in the next two months, right? Maybe one month, as we do annual planning, right? How aggressive can you be, um, in this market? 'Cause if you play def- I mean, if you try and meter it to, to your cash constraints, you're gonna get left behind. So you better be... I mean, so the really, the, the, so the gut level comes, and this is how capitalism I suppose is meant to work. The gut level test comes if your customers are getting value from your AI agent that they can't get anywhere else, and you can make that value clear, then you can charge enough to pay for your tokens, and yay you, right? If you're not getting v- if you're not giving value, or if you're locked in a war with someone else who has infinite capital and is willing to give it away longer than you, then you're probably gonna lose, and you should figure out how to exit now. And to some extent, you know, the midyear kind of coding wars where, oh my gosh, Windsurf looked to exit, or there was a little bit of that dynamic going on. Is this war escalating with a level of token intensity that you just can't keep up at? And I, I, I acknowledge that that at the app level, as a coup- as I say, a couple of my companies are wrestling with those issues right now.

   18. JLJason Lemkin28:30

       Yeah, I'm just, I'm honestly worried... We talk about is SaaS dead or what's going on. I'm, I worry this is the next final act, is that you d- you checked all, you did all the right things, right?

   19. RORory O’Driscoll28:40

       Got it. I did everything you told me to do.

   20. JLJason Lemkin28:41

       You did it. You did. You're not growing 0%. Your customers don't hate you. You built an agent, and the final nail in the coffin is we just can't afford the inference. We just can't build a competitive product. We can't... And even, you know, st- earlier on this podcast, in essence, even, uh, Canva, which will be one of the great IPOs, great... But even Cliff teased at that. "I c- I could build Gamma, but I can't, I can't burn the way Gamma burns those tokens." Now, maybe he'd say something different today, but it was the same point that echoed in my head that now we're seeing across boardrooms, a-across B2B companies. I think it's the final nail.

   21. HSHarry Stebbings29:15

       Is, is there a way out then? If you can't raise the money to compete, but you can't not spend.

   22. JLJason Lemkin29:22

       Well, Rory hit the way out, the way out. There is a simple way out, uh, which is you build an epically good agent, typically one, maybe that's, let's say your product's $5,000 a year, $10,000 a year, and you're able to charge $20,000 a month for your agent, $10,000 a month because it replaces 20 people. It's that good. It's not pretend that good. It's not that good on a sales pitch. It's literally so good that the ROI is measured in weeks, right? That's your way out. But the problem is it, like, you, a lot of B2B companies, they're ei- they're just struggling to get parity. The bar is so high, and so... But that's the answer. But it's exhausting because it was so much work just to get here, to get to profitability, to get to agent. Now you have to beat the agent, that OpenEvidence, Lagora, Harvey, who- whoever we're gonna talk about, repla- you have to have a better agent than them to earn the 20 grand a month. Like, your, your team better be the best.

   23. RORory O’Driscoll30:17

       To take another example that probably applies to even a large public company like Salesforce, who, yes, has infinite money, but also doesn't wanna, you know, dip in the red, or you make sure that a combination of y- you, you haveThe advantage of the data that you possess to make it a better agent, to make it a more efficient agent, maybe you have to do less processing. Maybe another thing is s- I've seen some of these companies using the open source models for a lot of it, so you can leverage that and get cheaper processing. Yeah, you, you, you gotta do all those things. But more than anything, I think, Jason, you're right. You've got to deliver value such that you can charge for it. But in the end, I mean, look, the dirty little secret is, in the end, everyone's gonna have to deliver value greater than the amount of money they are... Yeah, they're gonna have to be able to charge more than the amount of money it costs to make the thing. I mean, OpenAI may get to do that for longer than anyone else, but y- in the end, the wheels of capitalism do grind fine, and we're all gonna have to pony up and cash flow positive.

   24. JLJason Lemkin31:08

       But the thing is for... Listen, I don't have everybody's numbers, for sure. The, the other advantage that the new entrants have is that if you have the best agent and you have the kind of market demand we see, right? Then your, your, um... For you, your inference costs are a marketing cost. The established players don't have that luxury. They're already spending massive amounts on traditional sales and marketing-

   25. RORory O’Driscoll31:31

       Yeah, yeah, no, I hear you

   26. JLJason Lemkin31:32

       ... versus, uh, you know, it, you know, if, if, if, if... I mean, Harry's had Harvey and Lagorane. If Harvey went to 200 million last year, OpenEvidence 100 million a year, they- they're often, there's, they have no sales and mar- very little sales. Maybe Harvey does, but I can think of plenty of AI leaders that have four people in sales. [laughs] And I can think of some that just hired a marketer at 200 million in revenue. So they're, they, the inference is your marketing, sales and marketing team in, in essence, right? 'Cause you just throw all the money into the making the agent great, and I don't see how even... Salesforce is one of the few that can do it with its resources, and even there, it's stressful. If you talk to folks at Salesforce today, they'll tell you this is the most stressful time they've ever worked at Salesforce in the history of the company. [laughs]

   27. RORory O’Driscoll32:12

       One of the a-has from this is just the demand for inference, and just by extension, the demand for compute, and what does this say about it, right? And I always think, this is gonna sound cold, I always discard a l- not discard. I always h- apply, you know, a certain discount factor to what, you know, people running the large AI model companies say about demand, 'cause they're talking their book. And even the poor fools like Oracle who are investing to chase that demand and sell them compute services, I'm like, "Maybe you're getting fooled by these other guys." But I always think the guys running TSMC are sharp, right? And they've been around a long time, and, you know, they're cynical, which I, I mean, you know, you, I'm sure you all saw that piece about 12 months ago. They were fairly skeptical when Altman's talking about we're gonna need to raise a trillion dollars. They're like, "Yeah, yeah, yeah, go, go, go away, AI boy," right? They just did their earnings call, and the comment was, you know, basically demand for compute is in, uh, effectively infinite right now, and they're raising their CapEx. And remember, these, the, these are not kind of... These are folks who say, "I'm gonna spend $50 billion." You know, peak before was 40, so low was 22 billion two years ago. They're raising their CapEx budget for next year, and they're basically saying, "We think the demand is real right now." And to me, that's the... You know, 'cause there's been a lot of... And, um, we've all been wrestling with it. Is there gonna be a day when everyone says, "Well, we're not gonna invest as much anymore. We're gonna slow down just a little"? Because you're so far out there on the... Going back to the Brex comment in '21. We're so underwriting hyper growth that even the slightest slowdown would be kind of pretty brutal for the markets. And this was the biggest tell of all, because these are the guys who spend the CapEx with a two or three-year lead cycle that, you know, services Nvidia, that services the hyperscalers, that service OpenAI, that service the AI companies. So it's the very bottom, bottom, the, the very... The, the first step in the AI pyramid, and the guys running that are saying, "We're gonna need a whole bunch more compute here, boy. Uh, we're gonna need a whole bunch more CapEx," right? And it was just interesting, 'cause I think keeping an eye on TSMC as the, the people who would own the problem if they overinvest. You know, you can cut employees, you can turn off your GPU. But if you big a, dig a big deep hole in the ground in Phoenix and a big deep hole in the ground in Japan and put a fab in there, and no one uses it, you know, you're out 20 billion bucks, and they're leaning in right now. So that inference demand is pretty clearly there according to all the tells.

   28. HSHarry Stebbings34:43

       For those that think about the AI bubble, does that not completely denigrate those risks of an AI bubble bursting when you look at them, when you look at the improvements, when you look at Dario coming out today saying, "Hey, when you look at the improvements, we'll be replacing everyone's job in, in under five years"?

   29. RORory O’Driscoll35:00

       Not every statement that says it's going to go on now has to be equally correct. A bunch of people who have the money, starting with the, um, the foundries, going to the chip companies, and going to the hyperscale, have all said, "We're gonna spend this money this year." So I think it's highly unlikely that you... You know, this is not going to be the year where people get terrified and say, "I'm not gonna do it." At some point, I think they will, because I think we probably are overinvesting at some level. But right now, people are saying, "I can see logic to this thing for the next 12, 24 months." You know, despite the massive gap between the, you know, the huge... The CapEx is now 600 billion. The apps revenue, you know, squinting, is 100 billion. So you're still, you know, 500 billion a year in the hole. But right now, people are saying the return is there. That's all, that's all you can conclude right now. If you knew when it was gonna happen to the day, you'd be trading Nvidia puts, and you wouldn't be talking to Harry Stebbings.

   30. HSHarry Stebbings35:51

       I'm so sorry. I'm, I'm the least intelligent on this call, which is why I love doing it. Um, when you look at the cost of inference maintaining its high price, and when you look at Jason, I think quite rightly saying that inference will be running 24/7 for more and more of the knowledge worker population, why is that not just continuing evidence that Nvidia has so much more room to run and is actually underpriced today?
6. 39:05 – 46:41

   OpenEvidence Raises at $12BN from Thrive and DST

   1. RORory O’Driscoll39:05

      all you can do.

   2. HSHarry Stebbings39:05

      People playing the game on the field, we mentioned them a couple of times. Um, OpenEvidence raises at $12 billion, nabbed by Thrive and DST. It's a 12X valuation step up to where they raised at a billion dollars from Sequoia at the start of the year. Revenue growth has been amazing. Um, pharmaceuticals ad spend in the US on media is $22 billion a year. If you think about the transition of that to their business model and assuming a, a reasonable take, you can see them being a four to five billion dollar revenue business and that alone doesn't feel crazy, but then in other aspects it does. How did you guys read this one?

   3. RORory O’Driscoll39:43

      I think it's... start, it's a great company.

   4. HSHarry Stebbings39:46

      Yeah.

   5. RORory O’Driscoll39:46

      It's a perfect use case for AI, and it's one of the use cases where, you know, the general models are good, but the combination of, um, specific, um, relationships with Journal of New England Medicine and all that, plus, um, restricting access only to medical professionals, plus HIPAA compliance means you've got this really nice product to allow doctors to do decision support, which is, you know, go and check online, what's the recommended treatments for some obscure disease I haven't seen, right? And then the obvious thing you do with that is you sell them ads, right? And the obvious people to advertise to those doctors are the drug companies, 'cause they wanna sell to the doctors, right? So it's a perfect business, and they've escalated to, I believe, $150 million in revenue, right? So I was actually impressed that you led with the market size. 'Cause the only quest- so the things that are clear here is they're the winner in the space, right? Doximity is the old pre-gen AI competitor. But in terms of think about doctor media mindshare for doctor-like things, Doximity helps you a lot with, you know, thinking of salary, thinking about job. But I have a medical question to which I want a highly technical medical answer. They appear to have commanding market share. So you've won that business. So the only question is how big is the market? And you're right, you can say total media s- total drug company spend on quote-unquote drugs, uh, drug advertising is $20 to $30 billion. But Harry, a good half of that is TV ads to consumers, right? So for a lot of these drugs, especially the long-term conditions, the advertising is not going to the doctors, it's actually going to, um, the individuals who are wrestling with the disease so they can build consumer preference. So that halves the market, right? And on top of that, if you look at the adverti- if you look at pharma companies spend on trying to reach medical professionals, actual direct-to-doctor advertising is a $2 or $3 billion marketplace, which is now getting a little bit smaller, right? And you then have a whole bunch of these, you know, infamous ph- pharmaceutical reps. So a lot of this marketing is done in person. So, you know, you have the, you know, folks just calling on doctors, bringing donuts, saying, "Hey, here's a sample pack of my nice new arthritic drug. Give it to your consumers." So the only way this market... So, so for OpenEvidence to get to that valuation, what they have to do is one of two things. Either A, they have to blow open some of that budget away from do- you know, pharma reps calling on doctors and move more of that budget online, which by the way, is a totally credible thing to do, right? But that's what they have to do. Or they have to expand into other services to doctors. And just like, um, I think Doximity added some sche- for example, Doximity, a product they added that was a really clever product is a scheduling app with a, with a kind of phone number that doctors could use that wasn't their personal cell. 'Cause doctors wanna give out their cell so people can reach them, but they don't wanna give out their personal cell. So some nice little doctor products. So-To get to, yeah, to get 3X from 12 billion, you probably have to do some significant TAM expansion. It's not, it's credible they do it, but they gotta do it

   6. HSHarry Stebbings42:51

      You gotta be at $5 billion in revenue, don't you, on a 7X multiple?

   7. RORory O’Driscoll42:56

      To get to the, mm, to a 35, yeah, that's what it's open.

   8. HSHarry Stebbings42:59

      Yeah.

   9. JLJason Lemkin42:59

      Right, I'm not a total expert, but based on what I do know about OpenEvidence, if the deal was priced right, anyone would wanna do it. It's got the market share. Um, it, it's, it's very valued by physicians. It's one of the largest. They haven't figured out the to- the, the, the, the, the, the true TAM, but the notional TAM is about as big as it gets. Of course you'd wanna do this deal at the right price, right? Any- anyone would do it, I think.

   10. HSHarry Stebbings43:20

       If you were a growth investor, would you do it at 12, Jason?

   11. JLJason Lemkin43:24

       Well, that's the que- going, it, this is the back to hubristic fundraising in the Brex round. Who, who at OpenEvidence is gonna do the Brex round at 12 billion at OpenEvidence and Eleven Labs and Lagora and Harvey? Who's, when, when is that round? Is this that round? Or is it the round in, in, in, in March at 30? 'Cause, uh, this is hubristic fundraising. OpenEvidence will probably do a round at 30 or 40, um, next year. I'm, I'm actually gonna suggest that Thrive is very smart, and they've probably done the math, and this is the right insertion point for them, and they believe in it. And someone else is gonna do it at 30 to 40 next year as it goes to 400 next year or 500. Someone's gonna do that. So who, who does the $12 billion Brex round here where nothing, nothing but greatness, but gets caught with, uh, with the, with the tail end of hubristic fundraising?

   12. RORory O’Driscoll44:11

       The first line really resonates with me. This is such an obviously good deal in such an obviously good market with a wildly quality founder who's had a win before. He sold Kensho to S&P, big brain, PhD, AI up the, you know, AI native from his first deal, which was a financial AI company. This impeccable background here, great connections. There's all, th- there's nothing not to like here, and so you're right. It's a, let me give you a clue. You, you're, you're not gonna find a discount here, people.

   13. HSHarry Stebbings44:39

       But you don't think this will be the $12 billion priced round that Brex, where the music stops and it's that last time, right?

   14. RORory O’Driscoll44:46

       It's always a tricky question, 'cause you go, if you played back, remember they had a round at three and I think a round at six. So this is the fourth time in, and every one of those rounds you'd have said, "Hmm, maybe this is the one that's going too far," right? But they, I mean, and when you step back, they 10X'd revenue this year and they 10X'd their valuation plus or minus, and so the revenue multiple's the same, right? I mean, I think that's the market we're in now, and at some point someone's gonna be left with tide... It's, it's, and you're right, Jason, it's the Brex ri- it's the, you're running the Brex risk, which is the tide goes out, it's still an amazing company, but maybe you're, you know, you're, you're doomed to a 1X. And is that, is this the round that happens? I might've said the six billion round was, just given the core TAM market size. You know, that's the bet, right? And-

   15. HSHarry Stebbings45:30

       What's so hard is in the moment it never feels that hubristic, and like we just said, that it's a no-brainer deal, great market, great market share, great founders. Likewise, I remember with Brex, I had, uh, Henrique and Pedro on the show back in 2020, 2021, and they were talking about Armax and the fragility and how they could build $100 billion business, and-

   16. RORory O’Driscoll45:49

       Yeah

   17. HSHarry Stebbings45:49

       ... 12 billion did, did not seem that crazy.

   18. RORory O’Driscoll45:52

       Does it?

   19. HSHarry Stebbings45:53

       Yeah.

   20. RORory O’Driscoll45:54

       Hubris is like that. I mean, it's-

   21. JLJason Lemkin45:56

       Well, a- and even more, these late stage deals of great companies, they're very easy to talk yourself into when times are good.

   22. RORory O’Driscoll46:02

       Yes.

   23. JLJason Lemkin46:02

       When times are tough, they're still hard to talk yourself into, but when everything's, uh, I mean, times are mixed today, but the good stuff is so good, it's so easy to walk into the partners meeting and, and advocate for, uh, OpenEvidence, isn't it? It's just so easy. Uh, guys, it's a, yes, it's a little expensive at, uh, 50,000 times revenue or whatever it is, but I mean, you can't argue that this is a, this is a generational company. And we, and Marc Andreessen says we do generational companies at any price. We just buy as much as we can. They only go up o- overall, not, not all of them, but they only go up overall. This is, this is a generational company. I know it was 12 billion last week, but I propose 1 billion at 35 billion, guys, this week. It's a generational company.

7. 46:41 – 57:24

   a16z Companies are 2/3 AI Revenues

   1. HSHarry Stebbings46:42

      You said Marc Andreessen proposed that. They released a report this week, which I thought was astounding for a couple of different things, but most importantly, one, they put out $8 billion invested in 2025. This is Andreessen's report, by the way, so to give context, Andreessen did a report. Incredible slides, I thought, actually. I thought them and Avenir did great reports this week. I'm sure Jason, you-

   2. JLJason Lemkin47:01

      Yes

   3. HSHarry Stebbings47:02

      ... um, but in Andreessen's they said about 8 billion invested in 2025, and the stat that blew me away, two-thirds of private AI revenue is generated by Andreessen-backed companies, OpenAI, Databricks, Cursor, Harvey, Replit, the list continues. I was astounded by that. I don't know if you have takeaways from it, but I thought it was interesting for the audience to hear.

   4. RORory O’Driscoll47:25

      I thought it was an excellent report, and I thought there's a lot of substantive, e- e- good economic analysis up and down the report. I thought that slide was probably the least astounding one when you think about it for longer than clearly you did. Um, because c- two, I mean, 'cause yeah, it was a, it was a great soundbite, and, and those guys are the best mark- it's a great soundbite, right? But objectively speaking, if you kind of add up all the AI revenue, you know, you're gonna get 13 billion for, um, OpenAI, 4 billion for Anthropic, and everything else is in the noise, right? 200 million for Harvey, whoop-de-do. You know, they're amazing companies, they're gonna be great, but my point is to a rounding error, the sum of the revenue is the sum of... And then actually if you were to lump a third one in, it would be Databricks, which they have a massive market share in, so that's worth one. So to a rounding error, another way of saying the same slide is OpenAI, we have money in OpenAI, and OpenAI is 40, 50% of total revenue.

   5. JLJason Lemkin48:22

      I'll tell you what I found interesting about it. This and then Gary Tan again saying that venture should be 10 times bigger, um, smart guys, right? Um, is, is this really an asset class finally? You know, the classic take in venture is it's not really an asset class. It's a weird niche of PE. Yes, the top quartile, certainly the top decile perform, but the rest is a disaster. So it's not an asset class if the bottom 75% isn't even worth getting out of bed for.If A- if Andreessen has proven this penetration and, and AUM is repeatable, right, like clockwork, and YC is doing it at the low end, i- is venture finally an asset class? If it is, that's Gary's point. Put 10 times as much money in. We have access to the early-stage funnels, right? Andreessen's saying we have two-thirds of private AI revenue. There's an asterisk and a dagger to Rory's point, right, because it's, it's, uh, it's weighted on two names. But, but still the point is, um, that, that if it is an asset class, then you can deploy the maximum amount of practical capital into it efficiently.

   6. RORory O’Driscoll49:24

      I could agree with your conclusion on it being at some level an asset class. I might even argue two asset classes. Uh, I'm not sure that I agree with your conclusion that therefore you deploy more. I mean, I think that-

   7. JLJason Lemkin49:36

      Well, Gary said that, not me. [laughs]

   8. RORory O’Driscoll49:37

      Got it. I... 'Cause look, I, actually, at the Gary level, I agree, right, to be clear. Uh, uh, 'cause at the... I mean, now we're gonna jump in a lot, but let, let's, let's digress off into Y Combinator. The, the, the slogan of Y Combinator from the day one is to make it easy, yeah, make it easier for startups to start, right? Some more elegant version of that, right? At the margin, it costs... There's no meaningful capital cost to giving someone 250 grand or 500 grand to have a go, right? So, uh, the more people who start and try new companies at the margin, it's, it's a great thing for everyone, including the people involved. Worst case, you know, people talk about risk, but worst case is you do it for two years, you fold up, and you go back to your, you know, um, m- mag-

   9. JLJason Lemkin50:21

      Your back job

   10. RORory O’Driscoll50:21

       ... salary job.

   11. JLJason Lemkin50:21

       Back to college.

   12. RORory O’Driscoll50:23

       That's exactly right. And you're golden, you're fine. So as, as far as Y Combinator is concerned and, and encour- encouraging startups, the more the merrier. I think in terms of where I disagree with you is in terms of, I think venture is actually two asset classes. Um, it's the traditional early-stage venture that's existed for 20, 30 years, and this new late and later stage venture asset class that used to be called small cap growth and is now, um, it is now privately held. So it's two asset classes. I don't think in either case they benefit from excess capital because I do believe that, you know, Martin Biggs has said it before, there's no c- there's no investing business so good that excess capital won't ruin it, right? And I do think that excess capital will m- make this business harder and to some extent it, uh, uh, erode the returns. And you're seeing that. 2020... I mean, it's funny they said that, you know, 2021 was a very active year. I think '25 for Andreessen was the most active year since 2021. We had a reasonably active year in '21, not nearly as different. We do roughly the same number of deals every year. In retrospect, I wish I'd just gone home, right? You know, if you didn't do... 'Cause if you think everything in 2021 was either priced wrong and makes a 1X or early and just totally wrong and makes, you know, less than 1X, let's just say, right? Other than a few companies that were the early precursors of AI, you know. So, yeah, excess activity is, you know, not necessarily the best thing in an investing class. I, I'm, I'm... I saw the Druckenmiller quote, and it's for public investing, but it's been sticking with me all week, where he said something like, "Most of the time we sit around here waiting, reading, and thinking." And I thought, "Hmm, that's a real investor," [laughs] right? Understands that, you know, activity is not everything. What is true for them is, is that what they figured out is that the bundled product of doing early stage really well would allow you to bundle three or four X more dollars later stage, and the combination of the two could be effectively managed and would be disruptive up and down the chain. That's the aha from them, right? That you can... I mean, I did the math two weeks ago and I, you know, do it again. If they're 18% of the funding last year, right, advertise that over two years, they're 10% of the Series As. They gotta be 10% of the good deals. They gotta be 10% of the great deals. And they've structurally figured out a way to make that happen, right? So yeah, I think that's the, that's, that's the victory lap from this. And they were... Yeah, so that was probably one of... The, the thing about them that struck me the most. And then the, the other stuff was all about, you know, w- some version of what Jason was saying, which is, we're all still fine. The valuations are fine. It's expensive, but not '99 levels. And yeah, we'll see.

   13. JLJason Lemkin53:02

       Not to be, um, a little glum, but what happens if, uh, Mark or Ben step down, especially Mark, for a variety of reasons? What happen- Can... Is that... A- another, another option is to wait them out. This is, this is, this is an eponymous firm, and things happen.

   14. RORory O’Driscoll53:19

       Good, good.

   15. JLJason Lemkin53:19

       Even, even health scares, even health scares happen, right? They do happen. A lot... Uh, people get tired. People... You think people are all, are all excited, and then Dusk and Moskovitz quits Asana out of the blue, right? You don't know. Uh, smiles, everyone smiles. You just don't know. Can, can, can Andreessen Horowitz... I, I know everyone's gonna say there's, there's Martin and there's all these great people, but can it survive at this level, going to Harry's point, at this elite level, a generational transition, right? Can it, can it survive that? Or is it always gonna end up being those three generations [laughs] to, to the gutter?

   16. RORory O’Driscoll53:53

       Yeah. Yes.

   17. JLJason Lemkin53:54

       [laughs]

   18. RORory O’Driscoll53:54

       I, I would assert vigorously the answer is can it h- survive? Of course it can. I mean, one of my favorite quotes, I think I've said it before, is, you know, the graveyards are full of those indispensable men, right? And, you know, let me just recite the names for you. Kleiner, Perkins, Caulfield, and Byers.

   19. JLJason Lemkin54:09

       Yeah.

   20. RORory O’Driscoll54:10

       Kleiner still exists. Mamoon's doing a nice job. He's not Kleiner or Perkins or Caulfield or Byers, right? You know, firms that proactively manage succession planning, you know, can make it happen. I mean, they've gone through two or three generations-

   21. JLJason Lemkin54:23

       But this one is so-

   22. RORory O’Driscoll54:24

       Hang on

   23. JLJason Lemkin54:24

       ... like the world's changed, right? This one's so iconic.

   24. RORory O’Driscoll54:27

       But on the other... Yes, but in a weird kind of way, it's harder... I'm actually gonna push back the other. It's actually, and this is I think one of Andreessen's big insights, it's harder to be someone like Benchmark, small and brilliant, and manage generational transition, which is why it's awesome that they do it, because the asset is the brains of four or five individual people.The beauty of what Andreessen are clearly trying to do, and why I think they'll be able to manage it, is they're basically trying to transcend the individual by b- just being an institution. Their fundamental bet has been that venture capital is gonna go the same way as investment banking. It used to be dominated by individuals and small partnerships, and now it's dominated by Mr. Goldman, Mr. Sachs, and used to be Mr. Salomon Brothers, right? And they all went public, and they're all just a very different business. That's the bet they're making. So, cynical comment, if anyone has a rational economic incentive to manage generational transition, it's, it, it's that firm. Because Mr. Kravis and Mr. Roberts can settle into a comfortable retirement drawing off the management scene from KK&R, provided those fine 40-something Ivy League graduates that they've hired to run their firm can keep it on the straight and narrow. And the economics to anyone building that kind of, you know, as I say, equivalent of the investment bank that is, that goes public, they have every incentive to do it.

   25. JLJason Lemkin55:48

       Oh, yeah, yeah. I'm not saying that, that, that if, if there was a, an unexpected transition that it- people wouldn't make money, right? The question that, that Harry had, this do- this apparent dominance right now, could that survive the loss of MrBeast, right? Could it survive the loss of Elon Musk, right? The, the, the-

   26. RORory O’Driscoll56:06

       Now, that's a different-

   27. JLJason Lemkin56:06

       ... the core, the iconic core.

   28. RORory O’Driscoll56:09

       I just want to make sure. That, that's a very different question.

   29. JLJason Lemkin56:09

       I'm not sure. I don't know.

   30. RORory O’Driscoll56:11

       Like, yeah, I would not like to think of the Tesla stock price if Mr. Musk decided to move back to South Africa and retire.
8. 57:24 – 1:12:19

   Wealthront IPO Disaster: Is $1.5BN IPO Too Small?

   1. HSHarry Stebbings57:24

      public markets, 'cause we saw eq- we saw EquipmentShare IPO pop 33%, $8 billion market cap, uh, growing 47% at 4 billion in revenue. Great IPO. IPO market's open. We feeling great about this?

   2. RORory O’Driscoll57:40

      I think it's a good IPO. I think that, again, it points to, I, um, I think it points to the need for scale, profitability. And it's a very different IPO, obviously. Just for everyone's background, EquipmentShare is a kinda technology-enabled equipment rental company for construction. So if you're a builder, a construct- a builder in, you know, pick a, any US city, and you need, you're doing a job and you need to rent diggers, conveyors, whatever else, other equipment you need, these are the guys to go to, right? A great story, 10-year story, real critical mass, making money. Not a, it's not, it's inherently a physical business with a digital overlay. In the end of the day, there's nothing digital about a construct- piece of construction equipment. It's a large yellow or green painted thing that digs up dirt and moves it around. So it's a grounded business, but they seem to have built kind of, you know, in, in large part using digital technology to become more efficient. They seem to have built a pretty compelling business. So go team. So the, so it's probably good news for the, all the other $2 billion digital, uh, digital construction companies out there, right? But, um-

   3. JLJason Lemkin58:43

      Growing 47%-

   4. RORory O’Driscoll58:44

      Yeah

   5. JLJason Lemkin58:45

      ... at that scale and profitable.

   6. RORory O’Driscoll58:46

      Ex- growing 47%. I think it's-

   7. JLJason Lemkin58:47

      If you're, if you're at, if you're at billions in revenue growing 40% and profitable, right, um, and out- and outlier margins for your segment, then you can IPO in an effortless fashion. Like, this, I, I view this as an effortless IPO, which was interesting. It was effortless. It's really oversubscribed. You just IPO. You trade up. There's no drama. The, the, it's just, this is what an IPO is supposed to be.

   8. RORory O’Driscoll59:11

      And fun to see. It was a Y Combinator company from my attendance in 2015. I, I would love to go back and look at everyone's notes as they sat through Demo Day 2015 and what they said about the, you know, equipment rental company from the heartland, 'cause those guys killed it.

   9. HSHarry Stebbings59:25

      YC and Lead Edge both made a lot of money on that one. Um, does this start a floodgate of this size of outcomes going public? And do they see the 33% pop and a good IPO, as Jason said, and say, "Okay, market's ready now for us"? Will this start a flood?

   10. JLJason Lemkin59:43

       Well, Rory, I'll say, I m- when I p- pointed out in the notes, I, I thought the contrast to Wealthfront was here's one that wasn't good enough for the markets.

   11. RORory O’Driscoll59:50

       Yeah.

   12. JLJason Lemkin59:50

       And a very good company, a company whose software we admire, who, uh, i- has, has done a good de- some good deeds in the world, uh, made more efficient investing very, very easy for people. Doesn't seem to rip consumers off in a lot of ways. A lot of, it's not, you know. And, uh, and it tr- and it, this was an IPO that the market said shouldn't have happened. It's a deeply broken IPO. You know, it's trading down, what, 30% or 40% from its IPO. And it's subscale. Like, it's worse. It's subscale, right? The markets are saying, first of all, this wasn't worth remotely what we IPO'd it at. Um, it's only worth 1.3 billion, not two-point-something billion. Um, it's down 36%, which sounds bad, but it's also subscale. A billion dollars, you know, that's nothing for OpenEvidence, um, or Friends, but that is not, that's bar- you're barely public. There, you lose the liquidity, you lose analyst. You, we can say they IPO'd, but it's gonna be a long haul for inv- for everybody to get their money out of this company, right? For employees, maybe it's fine, right? Um, but it's barely public.

   13. RORory O’Driscoll1:00:49

       I still have a more than vestigial affection for this company. And, you know, I, I, yes, it, it, it does kinda suck, and, you know, some part of it may be temporary, but it does point to the low-endOf the market cap space is a perilous one, 'cause you fall a little below it and you w- you do end up in that, you know, 1.2. 1.2 bill- There are companies doing 5 million in ARR that are raising at 1.2 billion, right?

   14. HSHarry Stebbings1:01:13

       [laughs]

   15. RORory O’Driscoll1:01:13

       And here's, you know, poor Wealthsimple, hundreds of millions in revenue, you know, billions under management at the same space. I think they will compound out. I actually like the company and have a mental note here to go check on it and see the valuation and maybe buy some. But you- Jason is right. It- it- it's not going to be a liquidity event in the short term because there's just not going to be liquidity. Again, it gets back to the un- you know, you can say it's fortunate or unfortunate, but it doesn't matter what your kind of subjective opinions are of it. The- the objective fact is 3 billion plus or minus appears to be the point at which you're, you know, it's easy to go public, and it gets a lot easier the more you go up from there, right? Maybe three is the cutoff, right? And when you do something at two, and then you slip even a little bit, you're down into who cares land, which sucks.

   16. HSHarry Stebbings1:01:58

       My worry is honestly if companies are, um, created, maintained, grown by the people within them, do the best talent really wanna go to Wealthfront in a 30 to 40% down IPO? I didn't mean that horribly, but it's just, is that a magnet for the best talent today given the many options they have, and if not-

   17. RORory O’Driscoll1:02:16

       Genuine comment, I think if y- Look, if you're an AI engineer, no. If you're actually interested in finance and investing, I think it's a very compelling space to go because I think the things they're doing are super interesting. You know-

   18. HSHarry Stebbings1:02:29

       Do you really? Is it, is it a, is it a top five place? Like, no offense.

   19. JLJason Lemkin1:02:33

       Well, let me give t- c- can I give two... I, I think two things could happen. If you have a deeply driven and charismatic CEO on a mission, you will at least find a way to attract a handful of leaders to even a company s- with that struggle. You will find a way if you're utterly tenacious. I believe you will. They may, they may be failed founders themselves, which is like the hottest recruiting category in tech right now, right? Failed founders. You may find them other places. But you will find two or three folks that can move the needle, and it's all you need. You only need two or three leaders at, at, a, a company of any scale. You- The best ones will find two or three. Um, at the same time, I have to tell you, when I talk to companies like this, and I've done, like, several of them recently for, for the start of the year, I feel like people are just blinking at the camera. Like, they join these companies to not work.

   20. RORory O’Driscoll1:03:20

       Oh, no.

   21. JLJason Lemkin1:03:21

       They join these companies so that I had to argue with one of these companies I'm, uh, uh, that I'm just friends with that, you know, they didn't wanna get a, get a big release out this year. There was a lot going on to get a big release out this year. You're gonna get destroyed by the competition. So on the one hand, you can do it, but you better be, in my opinion, you better be this CEO on a mission and reboot the company and find those folks. But realize 90% of your folks, if you're not careful, are just gonna be blinking at the camera. They're just gonna be blinking at the camera. Oh, we need to slip that release. Well, these next quarters look soft actually, Harry. But Q4 is looking great at the end of the year. This year, I know, I know Q1 and Q2 are gonna be down, but we'll make it all up in December.

   22. RORory O’Driscoll1:04:01

       I, I, I'm gonna push back on this. Because we live in a power law out- in terms of outcomes, we say only a few outcomes matter, therefore, all the other outcomes don't matter, right? Which is, yeah, which is mathematically true about company results, 'cause that's the distribution curve for outcomes. But the distribution curve for humans, just for the record, is actually pretty much a bell curve, right? So the idea that, you know, even in a good company, not everyone's gonna be exceptional, right? Uh, yeah, there's, there's an, there's an implied statement behind what you're doing, Jason, which is all the great people are in a great company, and everyone in the okay companies is mediocre. I actually think they're two different distributions, right? Probably the great companies skew a little better than the, the average. But most of the time, once you're up to 1,000 people, you have a fairly representative sub-segment of whatever, you know, class of people you're hiring, right? So I don't believe all... That's along with Harry's got his confused face on, and I can't explain it better right now. But I don't believe all the people in something like, well, you know, a solid outcome company like a Wealthfront or even an EquipmentShare are, you know, mediocre and not trying. I, I, I don't think, I don't think that's-

   23. JLJason Lemkin1:05:12

       No

   24. RORory O’Driscoll1:05:13

       ... I think it's overgeneralization.

   25. JLJason Lemkin1:05:14

       A- a- and of course, you're right. The reality is even at the best, 80% of folks are not contributing significant value-

   26. RORory O’Driscoll1:05:19

       Exactly

   27. JLJason Lemkin1:05:19

       ... mathematically. But, but, um, you, you, you gotta have these epic leaders and ICs-

   28. RORory O’Driscoll1:05:25

       Yes

   29. JLJason Lemkin1:05:26

       ... to, to compete today.

   30. RORory O’Driscoll1:05:26

       That's true. You've gotta have a great leader.
9. 1:12:19 – 1:17:42

   Salesforce Wins $5BN Army Contract: The Last Laugh for SaaS

   1. HSHarry Stebbings1:12:19

      know what? If, if, if we're gonna end, uh, I, I do think a hat tip deserves to be given to our, our friend of the show, Mr. Marc Benioff, who Army-

   2. RORory O’Driscoll1:12:26

      Yeah

   3. HSHarry Stebbings1:12:26

      ... just awarded Salesforce-

   4. RORory O’Driscoll1:12:28

      Yeah

   5. HSHarry Stebbings1:12:28

      ... a $5.6 billion contract over 10 years. Like, Mr. Benioff, hat tip. Well done.

   6. RORory O’Driscoll1:12:37

      Totally.

   7. HSHarry Stebbings1:12:39

      Yeah.

   8. RORory O’Driscoll1:12:39

      Yeah. Yeah. Software, SaaS is not dead, and now SaaS has an army. [laughs] I love it, man. SaaS has the army, right? Yeah. Take that. Take that, Daros. No, I, I... And it was, first of all, you're exactly right. Great outcome, and someone, so- some sales rep in Salesforce is getting the mother of all commissions here, and good luck to them. But I also think it speaks to the, you know, the, the whole, um, zeitgeist of AI's gonna eat everything, and I think the correct pushback has been, I think-And you mentioned the Avenue. The correct p- the, the people have been saying, "It's all g- all these systems of record like Salesforce are gonna get replaced." Yeah, o- o- obviously wrong, 'cause that's not what's going to happen because it would be an incredible waste of talent to do that. You should just layer off the systems that have. And I think this is an example of that. It's in... A, a separate piece, comment, the Avenue piece is, how much value can you build in the A- AI first world as a system of record? That's a totally legitimate question. You know, can Salesforce get its mojo and growth back, or is it a, the utility of SaaS stocks for the next five years? That's a fair question. But I think deals like this put to rest the anyone who thinks that they're gonna vibe code their way to a product that can replace a $500 million Army order solution.

   9. HSHarry Stebbings1:13:52

      I'm really sorry. I'm, I'm dumb as rocks still, um, after many shows with you. My question to you is when AI, AI-

   10. RORory O’Driscoll1:13:58

       Continue

   11. HSHarry Stebbings1:13:58

       ... when AI sales reps work and you have distribution to the scale that Salesforce does, I don't see how they don't regain growth and be a, a dominant force again.

   12. RORory O’Driscoll1:14:09

       Interesting you should say that, 'cause I was commenting on the people who are extreme, who are kind... Look, the market is saying r- again, right now, um, the market is saying, "Oh my God, SaaS is dead," you know, trade, the multiples are down. And you're saying almost the exact opposite. Again, I would remind you that you can take some of your ill-gotten gains and bet them on the public markets if you wanna. I, I think I'm kind of in the middle. I don't think they go away, but I think i- it's what Jason said. They don't go away, but it is hard to do that innovation that gets that new product out the door.

   13. JLJason Lemkin1:14:36

       One thing that we do get confused about is we, we, we think it's all directly AI. And AI is the biggest issue because the lion's share of the new CIO's budget is going to AI, right? That's where all the discretionary budget is, and price increases, okay? And price increases is almost self-defeating because it, it, it only works so long. And so if you're not tapping into the AI budget, that's, you know... Mark, when he was on this show and his own show, was saying how much better a deal Palantir got. I think that was echoed in some of these Army contracts, 'cause maybe he had to take a haircut on those deals and get the budget where it is. And so it's there, it's just there are so many other issues, unfortunately, that are attacking SaaS. The, our seat contractions are existential. Workday said seats are perpetually under pressure. We are- Shopify has held headcount flat for three years and grown 40-something percent in that time. We're not hiring anybody, and we're gonna hire less people. Price increases have become destructive because, uh, SaaS, uh, price, products are up 40% the last three to four years, and that's great for a CRO to make their plan this quarter, but it crowds everything out. There's no room to upsell or anything when price increases take up everything. Um, and so there's, like, all these different issues. If we're not buying as many seats and we're radically increasing pricing, there's just multiple ways the old model's getting attacked. And if it were just as simple as adding an agent, that'd be hard enough, but it's not. Um, and our workforces are shrinking, and what we expect from our workforces is shrinking. And so SaaS will adapt, and we, sure, we will get, um... But just magically charging per token doesn't necessarily change the fact for many pr- for many pr- providers. You know, ver- ch- tweaking pricing models doesn't change how much folks want to spend for a product, right? That's a fallacy. That, that's what consultants do. They're pricing consultants. It's great, but if no one wants to s- pay more than 20 grand a year for your product, you can't force them to with a clever pricing model. So we are, there's a lot of issues to deal with, um, uh, that the new guys don't have to deal with today.

   14. RORory O’Driscoll1:16:42

       So you end up in that boring kind of quadrant of it ain't going away, but it ain't exploding, and that's-

   15. JLJason Lemkin1:16:47

       It's just there's so many threat-

   16. RORory O’Driscoll1:16:48

       Yeah. I agree

   17. JLJason Lemkin1:16:48

       ... it's so hard because there's so many threats attack... If it was just AI and it was nothing else, yeah, you put 2,000 people like Mark did on Agentforce and it works, or it doesn't, but it mostly works, right? But if at the same time folks are contracting seats, right? If at the same time they're cutting budget for existing investors, right? If at the same time you're beholden to price increases to make your plan, um, you're just, the, it's just, it's, it... I worry for all but the best, it's too many daggers out. It's just, it's just being attacked from so many sides, um, that it's hard. We, we just got used to these 130, 120% NRR years that were magical, that often didn't even rely on price increases, right? Slack never raised prices and still grew at 140% NRR. I don't know those days are ever coming back, n- no matter how good our agents are.

   18. RORory O’Driscoll1:17:39

       Okay. Boys.

   19. HSHarry Stebbings1:17:41

       Time to wrap, baby.

Episode duration: 1:18:04