The Twenty Minute VCAnthropic's Super Bowl Ad: Who Won & Lost? | Sierra Hits $150M ARR: Is Customer Support Too Crowded?
EVERY SPOKEN WORD
90 min read · 18,045 words- 0:00 – 1:06
Intro
- MCMike Cannon-Brookes
The idea that software as a category is dead is ludicrous to me. I'm like [laughs]
- RORory O’Driscoll
It's tough out there. It's gonna be hard. Welcome to the technology industry.
- HSHarry Stebbings
Now today we have Mike Cannon-Brookes, Co-Founder of Atlassian, joining us for my favorite show of the week.
- JLJason Lemkin
I just think we have to give up on TAM. We just have to let the revenue show us the path to TAM. Every category that I know of outside of engineering product is at existential risk of shrinking seats.
- RORory O’Driscoll
It's the venture capital equivalent of you can't get fired for buying IBM.
- JLJason Lemkin
Right.
- RORory O’Driscoll
You can't get fired for sticking money in with a 1X preference on the consensus winner. This is classic top of the bubble stuff.
- HSHarry Stebbings
Ready to go? [upbeat music] So excited for this, guys. We have a very special guest joining the trio in Mike Cannon-Brookes. Mike, thank you so much for joining such a phenomenal group of intellectuals. [laughs]
- MCMike Cannon-Brookes
[laughs]
- JLJason Lemkin
[laughs]
- MCMike Cannon-Brookes
Thanks. Thanks for having me.
- HSHarry Stebbings
Now, I, I wanna start...
- 1:06 – 11:33
Anthropic Predicts $149B in ARR in 2029
- HSHarry Stebbings
We, we saw Anthropic release updates which wiped billions off the stock market. I wanna start with Anthropic predicts $149 billion in ARR in 2029 under the most optimistic scenario. The question that we ask ourselves is, is this just the collective budgets of enterprises all going to Anthropic, and how do we think about that?
- RORory O’Driscoll
Well, just to me- let's dimension it out quickly. $150 billion for Anthropic, let's just say if they make that number. OpenAI's estimate for the same year I checked is one-eighty, right? So call it t- you know, three-fifty, three-eighty between them, right? You know, total US-- the total worldwide software business is $700 billion, so it's a pre-- it's a pre-- it would be a pretty big chunk unless you expand the TAM. It's the same old discussion. If you don't believe in TAM expansion and it's a zero-sum game, then if two companies are gonna do $400 billion, then we can probably assume Microsoft, who's already at $200 billion, isn't gonna roll over and die. Then yeah, they're gonna ta- they're gonna have to take the money away from the rest of us. But clearly the bet is TAM expansion, otherwise it gets really hard. I mean, that'd be the first pass.
- JLJason Lemkin
Hey, Mike, can I ask you a meta question? I'm sure you've thought about it. Does, does, does all this Anthropic revenue... A-at some point, companies only have so much budgets, especially CIOs and down. At some level, do you compete with that budget on product engineering? I know it's a boost for you, but on the other hand, there's only so much budget to get extra seats, to get extra licenses. Do you feel any, any meta competition from that or, or none at all?
- MCMike Cannon-Brookes
Let me take that second. I think you also have to work out the revenue stack here because, like, we use Anthropic a lot. It's one of, one of our biggest models. We use, you know, multiple models, um, uh, which I think is what most good SaaS vendors are doing within their customers' choices, right? Like, we use a lot of Gemini, a lot of Anthropic. We have a whole bunch of Llama and Mistral running and stuff internally and, and a bunch of OpenAI, right? And our job is to pick the best model for the best costs, for the best quality outcome and the best speed. Then we have a whole gateway that's constantly balancing that. But when we spend money on Anthropic, don't forget, we pay AWS, and then AWS pay Anthropic. So if someone spends a million dollars on the Atlassian platform and we spend $200,000 on AI bills or something, pick a number, it's nowhere near that high proportionally, but that goes to AWS revenue, and then AWS spend, what? $150,000 on Anthropic revenue. Don't forget, like, the individual revenue number is not necessarily counting the whole stack, right? Then they have to buy a bunch of chips and stuff, so the revenue stacking here gets a bit complicated, um, because, uh, like it... There is a whole set of layers underneath this, right? There's no doubt that's a big number though. Um, d-do we compete with the model providers? I think this is one of the big questions over the long term, right? I don't know y- we've yet worked out for all the model providers what they're going to do, right? We use a lot of Gemini. We're a deep partner with Google. But obviously you could argue, I don't know, Google Docs and Confluence are somewhat competitive. They're two ways you can write a piece of text and collaborate on it and change it. Mega corps in tech competing on one level and partnering on other levels, that's-- there's nothing new in that, I don't think. Um, I think we have to be good, right? I think the question, the question for underneath that is can they all afford to shut down their models, right? That, that they get so good they'll only use themselves. I don't, I don't believe they will given the competition from the other three, four before you get to China on models or anything else, right? So I'm not particularly worried about that. We have to compete with everybody that's providing our customers with the same value that we're providing them, right, in some era.
- JLJason Lemkin
There's $150 billion for Anthropic. It's a lot of CIO budget. [laughs] It does make you wonder. The more I read, the more I get confused where that money, uh, is really coming from. Um-
- MCMike Cannon-Brookes
But I think to Rory's point-
- JLJason Lemkin
Yeah
- MCMike Cannon-Brookes
... it depends on your question of whether it's zero sum, right? Like I, I don't think any of this is going to be zero sum. Like people say, "Oh, well, that's gonna so- swap software." And I'm like, well, is it really swapping for software? Like if your business is getting more productive, you're building more products and services, your, your quality is going up, your speed is going up, whatever, y-you're gonna spend money on different things. The technology budget of most companies over the last thirty years has gone up massively, I would argue, since thirty years ago when they were buying keyboards and mice and stuff like that. Uh, the, I don't think that's gonna stop.
- RORory O’Driscoll
I think the interesting thing about that, there are a ton in answer to unpack, but I just wanna highlight the you have to be good sentence 'cause when we're gonna talk about all the, oh, what happens to SaaS and all that, I think Mike's big picture comment we should remember every time, it turns out if you wanna make a lot of money, you have to be good, right? And you have to compete with everyone else for the same dollars, and my guess is that will be a recurring theme. It's not impossible to succeed, you just, quote unquote, have to be good. There's such a lot of complexity here 'cause you're right, you have the margin stacking. So you know, a classic example is you look at Anthropic, it's doing a billion dollars in revenue. You look at Cursor, it's doing a billion dollars in revenue, but it's pretty much the same billion dollars. So you have to think about the margin stacking.Then on the other hand, you have to say to yourself, if, say, you're, you know... If Anthropic hypothet- was doing $100 billion and all of it was through third-party ISVs that were also adding value and getting more money on that, it would point to the end market would have to expand a lot, right? If everyone's going to ease and grow, you're gonna have to buy into big TAM expansion. And you're right, Mike, you know, software's grown nicely over the y- My guess is for this kind of growth, you probably need, need more than the trend line of the last 20 years. You probably need some acceleration on top. Just 'cause the numbers are so big. I mean, you know, to go... If, if Anthropic goes from $4.5 billion to, and I'm not, not for a second saying I think they will, it's just like their number, to 150 bill, in a world where, you know, Microsoft does 200 bill, you're basically saying to a rounding error Anthropic is another Microsoft, OpenAI is another Microsoft, and that's two more Microsofts, which are pretty voracious mouths to feed, out of the same pile of cash. It's, you know, there better be more money coming or it's gonna get pretty kinda short around here. I mean, you know, an obvious one is when you look at the IT spend, you know, you get six, $700 billion of software. But the stunning thing is you have a billion plus or minus of... sorry, trillion of consulting service-y type stuff. And if some of the software can eat that, that's a pretty big slug of extra, you know, budget that's available for a more efficient product. So I, I kind of agree. It's, it's finding the extra money is the thing.
- HSHarry Stebbings
Do you not think that consulting services pie actually goes up? I think one of the most, uh, profitable categories right now is your Accentures on the implementation and integration of some of these systems in the largest enterprises in the world. I tweeted this. I said, "I think they will be more revenue generative than the foundation model companies in the next two to three years," as they often are in early stages of kind of cycles. But actually, I think that would grow, not shrink. No, Rory?
- RORory O’Driscoll
That kind of stuff, maybe yes. The, uh, you know, the consulting to help you implement AI, yes. The consulting to help you, you know, morph your code base from Fortran to blah. The, a market we've been looking at a lot is all the consulting spend around systems integration. You know, SAP, Oracle, NetSuite. A lot of that is pretty rote stuff. And, you know, it makes coding look hard, and there's a lot of automation that we think you'll see there. So again, it's the same thing. It's the swings and roundabouts, pl- places where it grows and places where you're gonna get scrunched.
- JLJason Lemkin
Listen, we, we all need these consultants, whether they're FDEs or Accenture, we all, we all need them, right? We need... W- I think we need them more in the age of AI. The only thing that I find lost in this, in the simplistic version of the argument is they have to be smarter than they used to be. They really do. The average agency, um, I don't, I don't know. I mean, I, I, maybe I've lost a little b- track of this at Atlassian, but traditionally in the more enterprise, Mike, there were a lot of partner agencies that were helping doing big deployments, right, of Jira and Confluence. I'm sure they had to be smart, but not quite train the agent from scratch [chuckles] smart. And maybe Atlassian's a bad example, but I can tell you only a handful of folks that we work with are really smart. And, like, this is why customer success is dead, because all these B2B companies are trying to convert their CS teams to FDEs, and I don't think even 10% of them can do it. They can't really be like product engineers. They don't need to code. So I wonder if we have enough consultants out there to really do this, to, to, to fully fu- to fully, uh, lubricate this change.
- MCMike Cannon-Brookes
I like the argument that we're heading into the death of consulting 'cause we're gonna run out of consultants.
- JLJason Lemkin
The ones that will do... The ones that are smart enough to do it-
- MCMike Cannon-Brookes
Like chips, there's just enough. We'll have to make a new factory.
- RORory O’Driscoll
Mi- Mike's taking no prisoners here. Okay. It's open season. Okay. But the thing that's gonna stop that is, look, their economic incentive, the software provider, is to make this adaptable by ordinary people. If the only people who can roll out your shit are wizards, then you're gonna run out of wizards, and then you're gonna run out of revenue. To have mass adoption, you're gonna need mass simplification.
- MCMike Cannon-Brookes
We will build those guardrails, right? We do. Most of our customers deploying agents, the agents that they deploy themselves when they start are relatively simplistic. They are small automations and pieces of software that make some business process go a little quicker. And you could argue, "Well, it's a very minor improvement." I said, "No, but it's a major leap in their learning," right? And they're learning, and they're controlling, and they're letting them out slowly, and they're getting, understanding what they can and can't do as the technology improves and as they find more business processes that they can automate with software, right? We can call it an agent, we can call it whatever we want, but, like, that's a pretty normal, I would say, corporate adoption pattern, and we're super early in that cycle, right? Like, these companies are... They'll tell you some sort of fantastic AI story, but they're not, like, having millions of agents run right over their bank account.
- RORory O’Driscoll
So how do you... Genuine comment here. 'Cause, 'cause that all makes sense to me, and I, I've said this to guys before, is like, I think one of my weaknesses as a VC sometimes, I can be too incrementalist. That makes sense to me as how I'd adopt it, right? How do you square that with, you know, the, the Wall Street/VC buzz that, you know, the entire SaaS industry was meant to implode in the last two weeks and the, and, and new company agents are gonna take over everywhere. How do you... Like, w- I don't wanna put you on the spot on Atlassian in particular, but how do y- unless you want to. But, yeah, how do you-
- MCMike Cannon-Brookes
Been on the spot for a while. [laughs]
- RORory O’Driscoll
Okay.
- JLJason Lemkin
Come on, Rory. Rory, put him, put him on the spot, Rory. Come on.
- MCMike Cannon-Brookes
24 years of being on the spot. It's fine. [laughs]
- RORory O’Driscoll
No, yeah, okay. I just wa- didn't wanna be rude to our guest, but
- 11:33 – 26:26
Mike’s Thoughts on SaaS Today
- RORory O’Driscoll
I'm, I'm game. Yeah, genuinely, how do you respond to peop- like, how did you respond to the madness of the last three weeks where people were like, you know, the entire software industry is going away and being replaced by AI? 'Cause my LPs are asking me, how do you think about SaaS today? Which... You know, what's your, what's your thoughts on that?
- MCMike Cannon-Brookes
I, I... Look, I've said it a few times, I don't think software is dead. I think software is alive and kicking. Um, I think it's confusing to a lot of people in the software industry, and maybe that's normal. Like, to take the most generous view. Will every single software and SaaS company make it through the next five to 10 years? Absolutely not. Will a lot of them continue to grow and prosper through that five to 10 years? AbsolutelyIs that any different to the last ten years? No. I keep saying internally, the competitors we had in 2000, the competitors we had in 2005, in 2010, in 2015, I went and pulled all these old documents. A whole bunch of those companies don't exist. They've been merged, acquired, gone out of business, right? And we have a set of competitors today that are, are new and upcoming, and we have to compete with those. That is the history of the technology industry, and that's gonna keep going. The idea that software as a category is dead is ludicrous to me. I'm like, [chuckles] wait a second. It, it's very efficient for businesses to buy pre-canned solutions of technology. They don't write everything with Assembly, and they probably still won't.
- JLJason Lemkin
But can I throw in one, one micro thought? I-it's-- do we have mic? I view Atlassian, and I'm just a student, I, I, I didn't found it, as above the fold. And what I mean is, um, you're not seeing seat reduction. Product and engineering is a beneficiary of AI spend, right? And whether it's vibe coding or however we-- mobile, we are creating radically more software than six months ago. Like any curve if you look at for mo- like it's exploding, right? And at, at least for a while, I think that benefits Atlassian because I need more tools, right? I need to track more issues, more tickets, more everything. I think there's plenty of other spaces that are being, that are being decimated. Empl-- I mean, if you're traditional support software like Zendesk, the, the old Zendesk is growing zero percent. Like, we are cutting humans. And, uh, to go to Rory's point, I think there's some folks that are above the fold, and there's, there's a few that, like Anthropic, that are so far above the fold we need to figure out how to scroll above the top of the monitor. But I think more are below the fold. More are seeing hits. And I actually think product and engineering is, is an island of stability today. No one is-- The idea that I-- Do you-- Maybe you see teams with fewer engineers, but when I walk into leaders... You know, I was at Replit the other day at three hundred million in revenue, three hundred people. It's, it's-- there's, like, 11 people in go-to-market. It's probably like the la- old days Atlassian, right? But a lot of engineers. Like, they're not shrinking the size of their engineering team, but everything else looks pretty lean. [chuckles]
- MCMike Cannon-Brookes
Look, w-we're-- product and engineering and software teams is a significant part of our business, right? Forty percent. It, it's a big part of our business. Um, service in general is a big part of our business. So your argument about Zendesk, service collection is a very large business. It's our largest at scale business growing very fast, faster than the overall company. Um, and that is IT service management. HR service management is, like, our fastest functional area, right? Going inside there, financial service management, just general employee service management. We just shipped a customer service offering, uh, in October. So, like, we're wading into those waters. This is crazy, right? This doesn't make any sense. No, the business is growing really, really well, right? We have to provide that software layer that makes that cheaper. There's no doubt about that, right? Like, that's, that's our job to do. I think the generalized view that customers are going away in these times, like certainly for some businesses, yes, you can say that, like some software businesses. The industry-wide phenomenon, which I think is what Rory was asking, doesn't make any logical sense to me, right? And again, we're either an example of the whole industry or we are somehow, uh, unique. And people tend to argue one or the other depending on the point they're trying to make, so it, it's very difficult. The one point I would make is, again, we're accelerating our cloud revenue, which did a twenty-six percent quarter growth rate at well north of five, six billion at the moment, and we grew our RPO by forty-four percent, right? That's also accelerated for the third quarter in a row. Now, what is RPO? That is customers who are buying three million dollars worth of software for three years, something like this. Two, two million of that goes into our, our balance of the future, right? We book a billion dollars in revenue. Ultra-simplistic. CFOs and accountants understand how it works, but that's a close enough proxy. Those others are customers making three-year bets. And so now we have people arguing, "Ah, but in year four it's all gonna fall apart." And I'm like, "Really?" Like... [chuckles]
- RORory O’Driscoll
And I think to, to-
- MCMike Cannon-Brookes
These customers aren't stupid.
- RORory O’Driscoll
Sorry. Comment. One is because of the, um, whatchama call 'em, the, um, AI and OpenAI and Anthropic, we now all are experts on RPO. So everyone has-- e-everyone knows RPO now. Talking about once, once, once someone signs a hundred billion in RPO, everyone has to figure it out. But going back to your comment. First, I want-- the software word, it's overused 'cause you're right. The, the people, "Oh, it's the death of software." But on the other hand, we're gonna talk in a while, Harvey just raised a wonderful sum of money at a high price, and that's clearly software. So software is dead is a stupid statement, right? And we should discard it, right? But on the other s- hand, y-your comment, yes, there's always an element of change and, you know, if you look at your competitors every five years, you know, some folks go to the wall. The argument here would be somewhere in the middle. It would say when technology doesn't do a step function change, you probably have an organic death rate of five, ten percent a year because that's the way capitalism works, and the winners like you guys come to the top. But every ten or fifteen years, there's an architectural shift in software, right, where it just gets, it just gets so new that instead of being a five percent death rate, you go through a two-year period where there's a fifty percent death rate. I'm just picking numbers out of my ass, right? And, uh, and that at least is a credible discussion. And so to make it kind of tactical to you, do you think that the software you guys write with LLMs is quantum different than what you did before? Or do you see it as a step function change in the kind of software you make or just an organic progression? Do you-- Does that make sense?
- MCMike Cannon-Brookes
It's, it's both. It's both. So, so the way that we are building software, and I think the irony is often forgotten here that apparently we're some sort of cavemen sitting around just banging on clicky clacky keyboards and writing assembly code, and we haven't figured out that LLMs are pretty good at writing code and can speed us up. We got ten thousand people in R&D. This is amazing, right? I'm like, sweet, we can build a lot more stuff a lot better. Do we have some pockets of the company where people just sit in Claude code all day [chuckles] every day and write cool stuff? Yes. But I don't know there are many software companies probably sitting around in their R&D department still working the old way, right? Some won't make it fast enough. Totally agree with you. You have to build new things. Some of those will work, some of those probably won't work.And I don't think it's like-- it gets very simplified in people's minds that like you're just bolting on AI features. I'm like, "No, I'm building it." I have a very, very large team at this stage building an entire substrate of context and search and chat, not to sell, but because I have to. And I have a very large infrastructure team at this point managing AI costs, right? You guys all went on about inference cost is gonna crush us, et cetera. I'm like, "Actually, it's going the other way," right? Our inference costs are going down and we're very good at adopting new models, but we're also good about knowing the features that need the old models that get very cheap. Some of our features are a thousand times cheaper to run than when we introduced them today. And the feature still works really well as an AI feature. So guess what we're good at? Optimizing infrastructure, right? Our COGS has gone up [chuckles] or rather COGS has gone down, right? Our gross margin has gone up last six or seven quarters and we've deployed a lot of AI, right?
- HSHarry Stebbings
My question is then, right, are we just throwing the babies out with the bath water? Because we've got your Mondays, your Duos, your Workdays, your HubSpots that... I mean, I-- the SaaSic is real. I'm just trying to understand, like should I just call it quits and sell my Monday and my Duo and just accept defeat like they ain't coming back or like they coming back? Mike, we have a brilliant saying on this show. Rory always says it wonderfully. Harry says, "That's great, but, um, what, what about me?" I'm like, "Help me out here." I'm looking at all my positions.
- JLJason Lemkin
We, we, we exist to help him manage his portfolio. It's a living.
- MCMike Cannon-Brookes
That's right. It's... [laughs] Or apparently AI can just-- AI will just listen to this pod-podcast repeatedly and it'll do the trading for you and you'll be fine. Uh, I think, look, there's no doubt we have a sexual rotation out of software, right? Um, uh, been on many, many therapy calls with many software CEOs and other things. Like it's, it's tricky to understand how that changes and rewrites and everything else. I would say in my view, that's definitively fear-driven at the moment and fear overrides it. Generally, fear comes from somewhere real as well though, right? Like, so will every single one of those names be bigger in five years' time than today? Probably pretty hard to say. If you listed a basket of 20 companies, they will all do that. Will the overall average be higher? I, I would argue yes. The, the fear-driven sort of average software price at the moment is there, but also you get all sorts of financial effects like people are buying chips. You know, the software versus semi chart's been around a lot, right? Like it's this thing and guess where those chips are going? Well, those chips are going to data centers to make AI inference to do all sorts of wonderful APIs and eventually that's delivered through applications at some layer and we're working out where the, the profit stack and the revenue stack gets redistributed as we talked about beforehand.
- JLJason Lemkin
Maybe I've got my Atlassian numbers wrong, forgive me, but Atlassian had a pretty good quarter. I know Mike probably doesn't wanna talk about this, but somehow we got down it. But Atlassian's growing twenty-three percent and RPO's up forty-four percent, right? That's pretty good. Okay? But more importantly-
- MCMike Cannon-Brookes
It is good
- JLJason Lemkin
... and, and I don't wanna put Mike on the s- public com-- it's accelerating, okay? Atlassian is doing better. The problem with so many peer companies, and these are the best founder-led companies. Almost all the public SaaS and B2B companies are founder-led, right? Very few are. Is they're not, they're not-- they're still decelerating. And how long do you get in my... The LLMs are open to everybody. You have a year, you know. Claude Three five, Three seven were really good. Like you've had seven months since then. Do you get twelve months? Do you get eighteen months? Like how long do we give you to recapture some growth and some revenue from the AI revolution? Because it's-- A-Atlassian's got this layer, but it's also got growth. If you, if you spent the last year with fifty thousand engineers building all this, this great stuff and now your growth is in the teens, maybe heading down to ten percent. I mean, better CEOs than me, but that's the one where, Rory, I think you should tell your LPs you're worried and it's more the public folks haven't seen no re-acceleration than half. More of them have seen persistent deceleration go-- and we're gonna see more this quarter and I wish it wasn't the case. My life would be better if it wasn't. My life would be better if SaaS was on autopilot like it was through [laughs] 2022. But you gotta show me the money in 2026. At some point all that, uh, all that, uh, infrastructure spend goes to inference has to go to software. Like it's gotta go down and you've gotta show, you've gotta show a connection to that spend or you, you may not have a reason to exist.
- MCMike Cannon-Brookes
And presumably if you look at history, some of that goes to new companies that arrive, right?
- JLJason Lemkin
You nailed it. I was actually s- You're exactly right, is that the problem with looking at the overall SaaS growth rate now is we haven't had any good ones to the top of the funnel, right? [chuckles] So we're gradually... So the, the, the survivor growth rate's going down 'cause, you know, we looked at this once and it was thirty percent for about a decade and a half, but when you went into it, that's because anyone who goes... To, to your, uh, to your point, Jason, when you go below ten you get, you get the red card, you're sent off. You're told, you know, you go off-
- MCMike Cannon-Brookes
Just GCF
- JLJason Lemkin
... PE land. But they were dropping another one in at sixty percent growth on the top, right? So it stayed roughly thirty percent median growth rate for a decade and a half and now there's been nothing good coming in so, you know, you're just seeing the bad side [chuckles] of-
- MCMike Cannon-Brookes
And, and in fact you've, you've had a lot more. I would argue there's a whole series of phenomenons. Maybe it's a great post to, to break apart. Software IPOs for the last five years have not been a category of new companies introduced, right? And to be fair, if you go talk to a Figma employee, my friend Dylan's having a fun time over there. They're a good example of a company who's like, I think they're gonna do great in the current environment, right? But you're probably not setting an example where a lot of other private company CEOs. You had Cliffy on a while, another good friend of mine actually lives like two blocks down that way. You know, he's, he's a little bit less motivated having seen what's gone on, right? [laughs]
- JLJason Lemkin
I wouldn't be rushing to an IPO there. [laughs]
- MCMike Cannon-Brookes
Well, nu-number one, number one factor is you don't have those sixty, seventy, eighty percent growers that take the average up, right? Because you've got-- you do have this moment. Number two, you've had private equity and again, a totally valid part of the capital markets come in and hoover up a ton of companies over the last five years, right? I'll, I'll give you an example. In COVID in 2020, we formed a group of SaaS CEOs. I think there were sixteen of us that got together. We'd meet on Zoom every single week, right? At one stage ten, eleven of us were public, maybe more. We all had earnings calls and you know, it was a really good therapy group for a while. I think it's like me, Eric from Zoom, Aaron from Box
- JLJason Lemkin
Toby from Shopify, that's it. They-- we're all that's left, right?
- HSHarry Stebbings
[laughs]
- JLJason Lemkin
Because almost all of them have been bought by private equity or big tech. Big tech's getting a lot better at buying stuff historically, right? Like, so all of these phenomenon lead to this weird average system, and you have companies going pri- staying private a lot longer, right? They've got a lot more capital, right? Poor Cliffy, ML. Canva would've gone public a lot longer in an old era. They don't need to nowadays as much, right? The Stripe guys, same thing. But that means when you look at a public company, you're, like, almost seeing this, like, the, the survivor bias of not small enough to get bought by private equity, not large enough to get bought by big tech. No new companies coming in. I don't-- It's, it's hard to work out what that average should be actually, right? Um, but that's not saying that's not happening. I think this is where these are all a set of forces that are happening simultaneously. We will see how much is the case. 'Cause there's one more effect that we're not talking about, which is some of those SaaS companies. And again, people have argued it's us, and we're like, "Wait a second." [laughs] Uh, that, that, that forty-four percent IPO growth is not coming from people paying $20 off Google Ads. Um, some of those have been affected also by the changes in, like, marketing channels and other things that I have talked about. That isn't... Again, I would argue if you're a multi-decade company, you get used to this, right? You've, you've moved your marketing to TikTok or some other way of the business model, right? And you get these chasms in marketing that have opened up. Some of those have also become a lot more challenged.
- HSHarry Stebbings
Yeah.
- JLJason Lemkin
Um, so there's a lot of different forces happening here, right? It's often oversimplified by people. Fundamentally though, software customers, are they gonna buy more in the future?
- 26:26 – 45:56
Harvey Raises $200M at an $11BN Valuation
- JLJason Lemkin
Yes.
- HSHarry Stebbings
We mentioned that new companies bringing, uh, enterprise value and expanding budgets. Harvey, we mentioned, they raised in December, raised two hundred million at an eleven billion dollar price. It must be quite nice to every month to fundraise. It's just like a nice hit of, like, ego, isn't it? Um, like, "Ooh, another two hundred million dollars from venture investors." Um-
- JLJason Lemkin
A nice bunch of secondary.
- HSHarry Stebbings
Ooh. Oof. Listen, Rory O'Driscoll needs to stay in business, okay?
- JLJason Lemkin
Nothing wrong with that for employees. It drives a lot of this is secondary. It drives a lot of it.
- HSHarry Stebbings
Okay. Let-let's talk about this. How do we think about this deal? They're gonna end the year supposedly at a close to six hundred. Um, the growth is pretty phenomenal from two hundred today. Um, how do we think about this?
- RORory O’Driscoll
First of all, let's just pick the obvious point. It was fun that it happened this week, 'cause if you think of what also happened this week is Claude Code produced a plugin and w- thirteen plugins, and one of the plugins was the legal plugin, and that's one of the things that's alleged to have caused the SaaS apocalypse. Oh my God, the old school vendors, Thomson Reuters and some of these guys declined, right? While at the same time, a company who, if you squint one way, is just, quote-unquote, "a GPT wrapper" or, you know, or a Claude Code wrapper, raised two hundred million dollars at eleven billion. So literally this, the, the kind of whiplash in terms of the thinking here is hilarious, right? I think all software is dead except this software, which is pretty close to the plugin from Claude, but at the same time it's worth eleven billion dollars. So i-i-it does w- so a fair amount of inconsistency there in the worldview, right? I don't think... So that, that's just worth pausing on. Other than that, I think it's all a... Look, we've discussed, it's actually very similar to the discussion we had on OpenEvidence. This is the killer, this is the lead company in the AI for law firm space. Obviously, Lagora is number two. They're both killing it. You're seeing mass adoption. And the million-dollar question, and, you know, you, you, you cited what you think they'll do at year-end. All you know for sure is what they're doing today at a hundred and ninety million a year. The question here is total TAM, right? In other words, can you compound? If you can compound for three or more years at this kind of rate, you'll do amazing. And if you top out based on the number of, you know, AM Law lawyers in the US, which isn't as large as you'd think, you could find yourself TAM constrained, and that's the bet. 'Cause they're clearly gonna get, arbitrary number, sixty percent of the market share with Lagora getting forty, I don't know, fifty, fi- well, something like that. So it's really a question of how big is the TAM and when do they hit it.
- JLJason Lemkin
If they're going from two hundred to six hundred in one year, so that's tripling. If they're magically able to double the next year to one point two, we're paying ten times to your forward revenue, right? It, it's, uh, for an asset that, uh, unlike Atlassian, I can't go buy it. So there's scarcity on top of it, right? I just think we have to give up on TAM. I think we have to give up on the... I think we just have to let the revenue show us the path to TAM. But if the numbers are there, I think, I think if Harvey does two hundred to six hundred, it's showed us the money on TAM, right?
- HSHarry Stebbings
So, so why do you think we should give up on TAM? Just 'cause it goes from two hundred to six hundred doesn't mean we should give up on TAM.
- JLJason Lemkin
Because it, because it-
- HSHarry Stebbings
It just means there could have acceleration
- JLJason Lemkin
... it's a reason to say no. You got... Because if, if you're generating it, it's a reason to say no to Databricks growing fifty-six percent at five point five billion, right? Or sixty-five percent. Sixty-five percent of five point five billion, right? You just, uh, sometimes you gotta lean into it [laughs] if you wanna make money at least. I don't know. Uh, T-TAM is a, uh, I, I've always struggled with the concept of TAM, right? Because our whole job in technology is to change TAM, actually. Like, if you think about it, the, the, the TAM of technology has changed as a whole for fifty years. I, I think Harvey is a, it's a fantastic business. But let's not forget, if anyone's been involved in legal proceedings or, uh, court cases, or even just dealt with a lot of lawyers, they're not an efficient part of an industry, right? And they deal with a lot of text. So you'd argue that there's a ripeness to do that. And credit to this, this company, maybe, maybe Harvey is a GPT wrapper. But you know what? They're a GPT wrapper that's got a product that their customers like. They've got a go-to-market model that's clearly working in a market that probably doesn't have a lot of competition to start with. Good job building a piece of technology that customers want and hence a valuable business. Whether it's worth eleven billion or whatever, okay, great, but, like, it's growing three hundred percent a year at a hundred and ninety ARR. Fantastic business.
- RORory O’Driscoll
Totally agree, and I wanna come back on two things. One is, 'cause I realized as I replay it, I was using the word GPT wrapper-As a thir-- I didn't-- That, that's not a phrase I would use. It was a phrase that was applied to the sector, and then people simultaneously were doing this. And I'm pointing out the dis- you know, the, the, the, the divergence. You can't, it can't be bought at the same time. I think that, you know, you, you can't... People are s- you know, if you're doing a deal like this, and I think it's an amazing deal, and we have a deal in a related space, I, I, I don't buy the GPT wrapper appellation is my point. I don't think it's a useful phrase, right? My point was, um, it was, uh, it was wonderful and funny that it happened the same week that Claude was deemed to be able to annex the entire legal market just by issuing a plugin, right? So my point is, the, the- those were two different contradictory ways of looking at the world.
- MCMike Cannon-Brookes
Oh, en-enti- entirely agree. And I think what I was... Sorry, I was trying to poke fun at the GPT wrapper, right? I-i-if Atlassian's just an orchestrator of humans, right, all of software is just a process wrapper. We take some business process, and we deliver a better UI to do that or a way to repeatably do said process, and we, we make money doing that, right? Is Harvey got a sus- Has Harvey got a sustainable competitive advantage that will just be eaten up? That is entirely, I assume, what their leadership team is sitting about thinking, is like, "We've got customers and distribution," and that is, in itself, an advantage, right? Like, those customers presumably are pretty sticky right now. Do they keep adding value to their customers with more GPT wrapping, or do they add more and more bits of the legal process into the UI, into the technology? I suspect that's exactly what they're doing, and that's what they're getting paid for, right?
- RORory O’Driscoll
And here's the-
- MCMike Cannon-Brookes
Any law firm can pick up Anthropic and go build their own Harvey. Are they?
- RORory O’Driscoll
Yeah.
- MCMike Cannon-Brookes
No.
- JLJason Lemkin
But, but, but, but I think the, I think the important question to ask is, like, risk adjusted and opportunity cost adjusted, is this a good place to put my dollars? And when you, you go back to Jason's argument, I'm totally with you, and I'm not shitting on them at all, Mike. Uh, fuck me, I've created a podcast. These guys have created $600 million at the end of this year, so who the fuck am I to throw shade? But like, ultimately, I can put my money in Atlassian today, which respectfully is, is obviously, as you know, down to very low levels, unfairly priced, brilliant business. Um, and I can put my money there today, or I can put my money in Harvey, which needs to triple and then double, and then I pay 10X. That, that's the-
- MCMike Cannon-Brookes
But, uh, and I to- I totally agree. I'm not arguing whether you should put a dollar in A or B. Um, and, and there'll be mispricings up and down the stack, right? I'll give you an example from history, which I'm sure the Accel guys wouldn't mind. So when the Accel guys invested in Atlassian, right, it was all secondary. They put 60 million bucks in 2010. Uh, and they bid highest of the five VCs, can I just say. They were also the nicest and had the one-page term sheet and all sorts of other things. But when they put in that... We-- I now-- We have their model. We've known them for 15 years. Rich just stepped off the board in December after 15 years of amazing service, right? Well beyond Accel's investment. Um, and they, they're legendary people as far as I'm concerned. Their expectation was that Jira would grow and Confluence collectively, I think 30% the year after they invested, then 20%, then sort of peter out at 15%. So by 2013, instead we did 50, 60, 70 or something. And they were like, "What?" And we are still growing Jira at faster than their three-year terminal rate 15 years later. Now, are they stupid and did they get the TAM wrong? No. The business just was a lot better than, than they even they understood. They were trying to get two to three times their money. They made 100 times their money. And like... But that's a success-- You're looking back at a success example, right? They, they probably did a bunch of those deals that didn't work around us, right? Um, it's very hard to predict what the management team of Harvey are going to do in building out their business over the next some years. So I assume the smart people that are putting this money in believe that management team can build a business that gets to, on current SaaS rates, $11 billion. They'd have to be what? Four times forward revenue to, like, $4 billion in revenue or something, $3 billion in revenue. [chuckles]
- RORory O’Driscoll
Because just to take your two co- I, I think your comment is correct as the entrepreneur, but I also think Harry's comment was correct as the investor. 'Cause look, when you're talking about companies that are raising at $11 billion, there's no useful sentence that says this is a bad company. They're freaking amazing companies. But as Harry points out, we're not here to say, "You're amazing 'cause you built a big company. The Harvey team are amazing 'cause they built a big company." I didn't build a big company. I'm not amazing on that dimension. But in terms of capital allocation, you have to say to yourself and compare the two scenarios. You were a profitable company. Accel stuck in 60, 60 million. You know, my guess is the revenue multiple well sub-10, right? Growth rate, you know, thinking back. I can tell you what it wasn't. Uh, you know, it w- like, what you got? Harvey's at 190 ARR now, $11 billion. That's 50 times. I can tell you it wasn't 50 times, Mike.
- MCMike Cannon-Brookes
No, no. I was gonna say it was probably 10 to 12 times forward revenue. But we were an unusual company. We were, like, 50 mil in revenue with 20 million profit or something.
- RORory O’Driscoll
And, and that's a deal that outperformed on the growth rate, and as a result, as you say, a 3X became a 50 to 100X, right? And then when you look at another deal where you're paying... You know, you just gotta say to yourself, you're paying 50 times run rate revenues. It's growing much faster than you were growing at the time. And then how do you, uh, to Harry's point, how do you think about the risk return on that, right? And it boils down to you just have to have... You were able to beat their model by just growing at 30% instead of 20, right? What do you have to do to beat the model when you're paying 50 times? The answer is you have to peg that growth rate at well north of 300, 400% a year for three or four years.
- JLJason Lemkin
Yeah, can't argue with the math.
- RORory O’Driscoll
If you do, then it works.
- JLJason Lemkin
The only thing I, I w- I, I would just add-
- RORory O’Driscoll
And this bet's worked every time so far
- JLJason Lemkin
... is just-
- RORory O’Driscoll
And that's the point. Go.
- JLJason Lemkin
Sorry. Just on the TAM thing. What I mean is that, listen, it, it-- When we started this podcast, I, I was actually fairly skeptical of AI replacing humans, not because I didn't think it would happen when I started Vibe Coding, but because I thought too many VCs talked out of their rear. "Oh, you know, we're gonna replace... AI's gonna destroy all jobs." And I thought, "This is a bunch of people who haven't, uh, done any, any work and they're just reading Twitter all day." But my mind has changed over time as we... And, and so what I mean is when you look-- It's not gonna be true in all categories, but when you say, listen, there's $200 billion a year spent in the US on non-partner lawyers, associates and paralegals. $200 billion a year, okay?You can, six months ago, you could say it'd be ridiculous to think Harvey's gonna make a dent in that. Maybe it's not ridiculous now. And so if that growth stays, if it stays, if it can literally grow at the pace it is, what you're seeing is it's happening. It has to come... To Rory's prior points, it can't come out of the legacy software budgets. It can't come out of the old, the old TAM for Bitbucket or whatever, or legal software of the old days. And so my point is, it pr- it's not all gonna prove itself. Some of these will flame out, but that amount of growth is spectacular. It's sp- it's spectacular and, and, and, and at some point, like Anthropic, you prove it. Like the growth is so stellar, you have proven that you have captured a mass amount of TAM that was uncapturable before. And so as an investor, I would just put my money in at some point, right?
- 45:56 – 1:00:58
Is Customer Support a Terrible or Terrific Investment Category?
- JLJason Lemkin
[chuckles]
- HSHarry Stebbings
Customer support is one I just cannot get my head around. And I, I know that sounds ridiculous and, and very, uh, basic, but when you look at the sheer number of players that have been funded to huge extremes, and we saw Sierra's $50M+ quarter taking to over $150M ARR now, um, it kind of... I thought of that straight away when we're thinking about net additive versus replacing things. Is this eating Zendesk's lunch? Is this adding new users that never had customer support before, or is this taking on jobs that weren't being done before? How do we think about that?
- RORory O’Driscoll
I'm waiting for Mike 'cause I didn't know it, but he has a customer support product coming out.
- MCMike Cannon-Brookes
It's already out. It's doing very well.
- HSHarry Stebbings
Thank you very much.
- MCMike Cannon-Brookes
Um, I can't, I can't tell you how well it's doing, but it's doing very well. Um, our service collection business, like our service collection business could go public by itself, right? It's a, it's a big business that's growing. It would have great numbers. Jason would be writing great posts on it.
- HSHarry Stebbings
Jason says it needs $4 billion to go public, Mike, just as an FYI.
- JLJason Lemkin
For, for a banger. For a banger, Harry. [chuckles] Banger IPO.
- MCMike Cannon-Brookes
For a banger.
- JLJason Lemkin
For a banger IPO.
- RORory O’Driscoll
Get back to the question, Mike. Let's stop
- MCMike Cannon-Brookes
It's, it's, it's a, it's a textual-based field. And, and I say that with the broadest definition of text in that voice and other things can, can quickly be approximated to text now with AI and vice versa, right? So let's assume it's a, it's a conversation-based area. It's probably three to seven percent of every business in the world on service and support. Your bank, your insurance company, your car company, every company has this. And then you get internal support and service, right? Most of the service collection revenue is on the internal basis, right? Um, Twitter or X now, whatever, has like, you know, 300, 400 service desks running on, on, on service collection, right? But that's not all internal service. So the idea of any team helping some other team in a business or any team helping their customers is ripe for making it efficient, right? All the things you talked about, Jevons paradox is totally true, but it's also a measurable input and efficiency play. So I can say I spend X, your product can very easily make X less. Is the less more or is the less that I'm s- the money I'm saving more or less than I'm paying for your product? There's high ROI. It's a sellable thing. We, we, we go around the loop, right? I think it's a great category. Whether the category will grow or not is a different question. The hard part is in year two and year three, the savings are baked into the business, so you have to be delivering continual value to the company and, and that's gonna be really interesting when we get through this set of changes in the service market most broadly, right? You got ServiceNow and us and others at, at the top end. You got a lot of legacy providers out there. There's still tons of legacy providers of service. And then you've got lots of customer service companies. Um, y- you know, Mark has Service Cloud over there. I think some people still use that. Uh, there are a lot of tools in this space. You know, Zendesk probably went private for a reason.
- JLJason Lemkin
I think, uh, Zendesk ha- says they have like three or 400, 300 million-plus of AI support revenue. It's just the legacy business. It-- that category is tough, right? So, so they've got two streams going. The, the agentic piece is exploding. Um, the only thing I would say, and, uh, you, you asked why, why the category is exploding. I mean, I just think there's... It's interesting there's just two threads helping for, for support. May- maybe, maybe not Atlassian, but overall for the-For so many of the players is one, um, I mean, if you look at Pa-- Is it Pave? I think that's how you pronounce. It's, it's an HR startup that tracks, like, three hundred thousand startups. No category has been more decimated in hiring than support. No one's hiring. Like, it's radically down. So that money is going into agentic products, okay? Traditional support. And then a goo-- a great AI support tool can do radically more than a legacy tool. Like, there are... Like, I think software in the AI age, and this is why I think so many SaaS leaders are struggling today, mature ones, is there's no more aha moment. There's no more moment when you walk in, and yeah, maybe Sierra spent a, a month configuring your demo, but literally it answers questions like you've never seen answered before in your enterprise. You wanna buy that product. And, uh, most SaaS products didn't change for a decade, and we fell out of the aha moment. And so there's budget, there's aha moment, and there's, like, the most humans we're cutting ever. It is a, it is a, a great moment. And, and then the final point, not to ramble, but we've talked about it before, but the, the super interesting thing about support is it becomes a Trojan horse to do everything else. Because when that's the main agent, if that is the main agent you're working with, you'll start using it for sales help or for research or for marketing or for other things. And a-a-a- these become more horizontal agents. So, um... But man, the hiring is, uh, it's, it's over in the space.
- RORory O’Driscoll
And bringing it back to Harry's question, Harry, I think the reason... So I think we're all saying bluntly you're wrong because you were doing the, "I don't get this market. I don't know why people have funded ten companies." And I think what you're hearing, I think it's true, is that it's not a single market. There are m-- I mean, at a high level of, you know, people hel-hel-- working with other people, you can say it's all the same, but internal help desk is different than external help desk. One thing we saw, we had a pre-LLM AI company, the B2B help desk, B2B external support has a different rhythm than B2C. B2C is lots and lots of small interactions. B2B, you might have a long-lived interaction with multiple people internally in your... If Mike's, one of Mike's best customers has a P1 bug, you don't just have one person involved. You have, you know, six or seven people involved. You're reaching across departments. The internal workflow to manage that help, that, that support is very different than, you know, thousands of people ringing about, you know, how do I change a password, uh, internally or externally? How do I get my ticket to the whatever concert, right? So there's differences there. There's difference in company size. So I think actually... And then there's difference in modalities because you got people who lead with chat, you got people who lead with voice, and yeah, they're converging. You got people who lead with video. I, I think that, I think there's a lot of different, there's a lot of different sub-markets rather than one big mega market, is my gut.
- MCMike Cannon-Brookes
And I, I think it-- Just like, just like Harvey though, there's some interesting things that it tells us about how AI is changing the world, right? I think there's no doubt that the overall service category is probably gonna have not a lot of growth in humans, let's just say, working in that field. However, I would guess, and I don't have any stats to hand, it's a very short-term field anyway, right? Like, I know my, my sister worked in, in, in telephone banking in the mid-'90s for a bank here, right? And everyone was there for a year or two. They train you, you do it, and you move. It was not a career job. It was-- It had a high turnover already. So that's, that's different to, like, lawyers, where they've done many, many years of training and they've got forty years of career, you know? So it's an interesting job field. It's pretty different, firstly. Secondly, one of the interesting things that we see both internally, I have a few examples of agents internally, but, uh, I've got a number of customers who have seen the phenomenon as well, is your AI and your agents that are helping people to i-in the case of answering a question. And service needs to be much more broadly thought about than, than just customer service like I lost my wallet in the Uber kind of stuff. But the AI that's answering the question is as good as things you have written down. So some teams you see are employ-- are deploying agents and then writing a lot more documentation, and their documentation is getting a lot more stepwise because it's less about the humans reading it than it's the agent that reads that doc and then answers the question. So you may end up with, in some areas, more writers and less people answering questions to get an overall better support response, right? We have a lot of examples of this. In the service collection, it-- the more knowledge you hook it up to, the better answers it gives. It's sort of logical. Some businesses don't have all this knowledge documented 'cause it was in the heads of the people who did the service. So that's one interesting effect of AI, probably applies elsewhere. The last thing I will say is, uh, a agent, uh, service collection is one of the areas where most agents are deployed, right, i-in terms of AI agents. And it's confusing in service 'cause we talk about human agents that answer questions, and then we have AI agents that either answer the question or help the human to answer the question, uh, uh, faster in the complex scenarios in B2B especially that, that Rory talked about. M- It's far higher deployed in that category agents for us. Of any of our collections, I think it's the highest proportional deployment. The reason is because those agents are taking actions. So service traditionally, someone's coming in to ask a question. If you think about HR service management, like, "Can I, uh, um, take these people out for lunch when I'm in the Indian office?" Uh, "I want to apply for leave, for parental leave," whatever it is, right? You're asking some sort of HR-based question. There is answers to the question, yes, you can, and then there is actions taken, "Hey, I'm gonna go and file this expense claim," or, "I'm gonna go and do that." The AI in service that's most interesting to customers often is not... We always talk about the cost-saving aspect of it. It's the ability for it to actually go and do things to make my business quicker, right? If it goes and files the parental application or it resets your password, the canonical IT sort of service thing. The actions that AI can take more accurately, the automations that we used to call them, now they're agentic automations and workflows, that expands massively, which means you not only get your question answered, you get your job done and that business moves a little quicker.To your TAM argument, what's the TAM on that? Like, it's not really a thing we had before, right?
- MCMike Cannon-Brookes
It's better than the humans.
- MCMike Cannon-Brookes
That's about the human service, so.
- MCMike Cannon-Brookes
It could be better than the humans.
- MCMike Cannon-Brookes
It enables that business to be quicker and more efficient.
- MCMike Cannon-Brookes
If, if the whole form gets filled out for you for parental leave and everything, and I don't have to do anything and it's all automated, it's bet- it's better.
- HSHarry Stebbings
Totally understand that. Rory, let me punch back at you, my friend. We, as we said, live in a resource allocation world or mindset where we have the choice to invest in categories and companies. There have been 14 companies in the last two years that have been created that have now raised over $100 million. You then have traditional players like ServiceNow, Atlassian, Salesforce, the list goes on. Zendesk, Intercom, I can go on and on and on. Okay? And then we have the new generation of very fast and public companies a la Navan or a la Airwallex, who are building their own systems. And there is a generation of technology-first companies that are building their own customer support systems to deal with very intricate and complex needs. When we live in this risk-adjusted opportunity cost world, I don't feel that is a good place to put your dollars when I'm competing against Mike, [chuckles] Mark, and the 14 companies in the last two years that've raised over $100 million with Brett from Sierra. I don't think that's a good place to be investing.
- RORory O’Driscoll
And I agree. I think, look, we looked at a number of companies that were behind Sierra and Decagon and came to the conclusion that a direct head-to-head against those companies when you're an, a smart... It's just a little bit too hard. You kind of go, there's all the air is out of the room with Sierra at the high end. I think Decagon have executed well. It's that classic, it's a big market, but you don't... In the sub-segment, you never wanna find yourself third in a sub-segment. Right? That's a bad place. You know, you, you, you can be winning in adjacent section, and then you can get unlucky 'cause the big dog can come in and decide to annex your adjacent section, and that's just stuff that happens. But agreed, there, there, there is going to be over-funding in all these sectors. And, you know, a lot of it is we're all trying to pick our points, and, you know, and if I, if I was to fast-forward, in fact, I said the same thing last time, if you look back in five years from now, you'll probably find that one of the biggest source of errors was, oh, we invested in the number one or two player in this little space here, but it turns out that this little space wasn't a thing. This big space was a thing, and the adjacent competitor just says, "I now bundle this in and do it as part of what I do." You know, suddenly Mike decides he wants to be king of service cloud, and he just rolls over us 'cause he just, you know, adds it to every one of his customers, right? So I, I hear you. I think that y- you're trying to pick... And by the way, it probably explains, I, I wanna go back to, it probably explains the Harvey financing because when you have all the dynamics that you just outlined, it's arguable despite the TAM comment I made, it's arguable that the best risk-adjusted bet, and we're seeing it happen, is screw it, I'm just gonna pay the winner at any price because if you're in the winner, you can't... It's the venture capital equivalent of you can't get fired for buying IBM, right? You can't get fired for sticking money in with a 1X preference on the consensus winner, which is why this market is way more consensus up and down the stack than it's ever been in terms of venture. You know, there's not a whole ton of people trying to be contrarian out there. There's a whole bunch... I mean, the stat I tell my partners that blows me away is, and I probably repeated it on this podcast, is of the unicorn, newly minted unicorns in Q1 of last year, by Q4, 40% of them already had one or more up rounds. In other words, the money is saying, "Once you are a winner, king make, double king make, treble king make, pile on top." It's too hard to pick, it's too hard to te- pick the guy at 50 pre that might make it. Just pile into the guy who's made it. Even if it's at 12 billion, worst case is a 1X.
- MCMike Cannon-Brookes
I think what you're gonna be amazed by is, uh, every time we get one of these new technology disruptions, everyone gets very frothy and yells and screams a lot. It's gonna change the world. It usually does. That means a lot of capital is raised and deployed, and a whole bunch of it turns out to be torched because VCs are very individual thinkers, that they pile into the two winners, and then the next 10 companies, and probably the next 15, and a whole bunch of those don't really work very well, and it takes five or six years for us to figure that out. Technology does change the world. A handful of winners are made. A lot of money is lost. Net-net, money is made more than lost in the transition to said new technology, and this has never happened before. This is a totally new phenomenon. We're in the era of AI. Everything's new and different, and, you know, th- they're not a herd of sheep following the potential next winner.
- HSHarry Stebbings
The, the, the only-
- MCMike Cannon-Brookes
And will, will that, will that Harvey round pay off? To the point of Rory, one thing that they don't say is a lot of VCs want the loose side on the wall, so when you walk into the office, on the wall is a nice logo that says, "Oh, you invested in OpenAI. You invested in Anthropic." Well, if you put money, [chuckles] $350 million, you're probably not doing the VC thing of getting on the $4 million round, but you get the logo on your wall. That's important, I think, from the VC marketing point of view, isn't it?
- MCMike Cannon-Brookes
Oh, we can put early investor on our bios if we buy some Atlassian today, can't we? Is that not-
- RORory O’Driscoll
[laughs] Early-
- MCMike Cannon-Brookes
That's right. Yeah.
- RORory O’Driscoll
Early, early in 2026. Yeah, I've... Mike, that was a little-
- HSHarry Stebbings
I feel vindicated, by the way. Thank you for that, Mike and Rory. I appreciate that you conceded that I was right on the customer support argument. That's awesome. Uh,
- 1:00:58 – 1:15:58
Anthropic's Super Bowl Ad: Who Won & Lost
- HSHarry Stebbings
but I, I, I would, I ha- I would love to finish on, on one thing, which is the Super Bowl ad. I'm sorry, we've gotta finish on this, which got the essay back from Sam, and then the CMO of OpenAI being like, "Betrayal, treacherous, epic disaster," whatever the kind of words were. How do we think about this and the response?
- RORory O’Driscoll
Maybe just, I'm gonna say what I think. Let's confirm the facts, which was that I understand it. Anthropic ran a, you know, no- basically they ran the ad... I think OpenAI was gonna do one ad. I'm not quite sure what that was again. Remind me, please. Then Anthropic ran an ad, uh, p-... trailed that they were going to run an ad that basically said, you know, um, "We don't have ads in our AI. We're good, you're bad." And they ran that ad, versions of that ad. And then OpenAI kind of pivoted and ran a very, you know, you can just build things, rah, rah ad in the actual Super Bowl. Is that the kind of chain of events there, Harry?
- HSHarry Stebbings
Absolutely. I mean ba- the chain of events really is Anthropic ran an app- series of ads laughing at OpenAI for having ads, slightly ironic in that way. Uh, and then Sam and their CMO basically came back with these, like, epic [laughs] like-
- RORory O’Driscoll
Yeah, the tweet, the tweet. I think everyone getting angry is a sure sh- is a sure sign... That's hard to say. A sure shine of tension. [laughs] Yes. I mean, but actually Brian Kim from Andreessen Horowitz just did a really good piece that basically said, "Of course they're going to run ads. It's a consumer subscript- it's a consumer product, and less than 5% of confu- consumers ever pony up for, for kind of subscription products. So if you're gonna be the consumer product, they're gonna run ads, and that's ChatGPT. And if you're gonna be the enterprise product, you're not gonna run ads, and that's Claude." 95% of people watching that game must have gone, "What are these people talking about and why is this... Why are we taking away from Bad Bunny for these morons to talk about something I don't even know what's going on, man?"
- MCMike Cannon-Brookes
Back to the pride discussion. You know, when these technology revolutions happen, and everyone pours in the capital and torches a whole bunch of it, one thing that does, is again unique about this era is the purchasing of Super Bowl ads to try to, I guess, justify ego, I think is, is largely what's going on here. Let's face it, it's human beings. They've got a lot of capital, so they make Super Bowl ads. Again, never happened in the history of technology before, except pets.com. I thought you were talking about the ai.com, the guy that bought the domain for 70 million bucks, spent $8 million on an ad, and then [laughs] is selling OpenClaude. And I'm like, that is also a weird business, but, like, maybe they're gonna... I, I... Rory's comment that the, what do they call them online nowadays? The normies, the regular people who just wanted to watch the Super Bowl are like, "What the hell is this about? Next. Give me the Doritos commercial."
- RORory O’Driscoll
No, I, I... And one thing I've, I, I've, I'm getting to know you, Mike, is like, it's the way your tone doesn't change when you move from fact-based comments to acute sarcasm with literally no variation in tone. Takes a while to adjust to, but you're so right, man. It's like when you said it's never happened again, we all flash back to '99, we flash back to crypto. This is, you know, this is classic top of t- I mean, top of the bubble stuff. You have 200 million bucks burning a hole in your pocket and you're like, "I can, I can put, spend 5 million and be in the national agenda. I'm in the Super Bowl."
- JLJason Lemkin
You know why this Cla- the ad was weird though? I'll tell you what was weird about it, for what it's worth, is, um, look, Anthropic is, I mean, it's, I mean, it's a generational, generational company. It changed coding. It changed everything. But the only place Anthropic is weak is consumer. I mean, I'm one of the seven people that uses Claude instead of ChatGPT as a consumer app, okay? So of all the things they could have done in the Super Bowl, say, you know, the, the, the, the, the, the, the, the, the engineer's pal, the, the product guy's buddy, all the things they could say how we revolutionized product creation, they talk about the one area they fail [laughs] which is saying, "We won't put ads in an app nobody uses for this use case." So, uh, it was some sort of meta dig because it's, it's, it's advertising for its worst product. [laughs] It's nothing but a dig. It makes no sense. Like-
- RORory O’Driscoll
I saw a smart tweet that made the point, yeah, the, the, the redeeming argument on this is, never thought I'd say it, but we're actually not talking to the 95%. It was two people exchanging signals to each other and each other's employees in the valley using $5 million of money to send a signal, right? In other words, we're talking Cl- you know, this is Anthropic reinforcing their we're the, you know, we are the consumer, uh, we are, so we are the enterprise good guys here. And they're really messaging to maybe 10,000 engineers they might wanna hire, and literally the other 325 million people involved are just, you know, they're just talking past them.
- JLJason Lemkin
We could just be recruiting. And plus our head of safety quit this week, so let's mask that over with a Super Bowl ad.
- RORory O’Driscoll
It's all just pos- it's all just positioning. It would be so much cheaper to buy a billboard on the 101.
- MCMike Cannon-Brookes
I, I think, but it does... To back to the original discussion, Harry, I think what's, what's interesting there is it's a sign of the times. I'm not sure we can call it a sign of the top. I don't think that's probably true at all. Um, but it's a sign of the times. But look at, look deeper at it, right? If you're burning a billion dollars a week, and people are gonna keep funding you, the ads are cheap. They don't make any difference, right? Your CMO doesn't have a constrained capital efficient, like, profit EPS calculation right now. One day they will. Right now they do not. So right now everyone is maximalist. They're trying to be in every single category all the time. What's fascinating is you go to the SaaS and software world, you have financializing going on a lot because they can't afford to be maximalist because those, you know, those, those pesky public market investors are making valid questions around, hey, profitability and growth and all these things, and you have a lot of categories that are raising tons of money and don't have that problem, hence you get these ads as one example of that. That will normalize. It does every time.
- HSHarry Stebbings
I, I think we're automatically assuming that Super Bowl ads are, I'll say, frivolous, sign of the top, not actually effective. Like Wix, for example, which is obviously incredibly hit in the public markets. I spent an hour and a half with their CMO the other day who's bought six different Super Bowl adverts over the years. This year he bought two, one for Base44 and one for Wix, and he's like, "The impressions that you get from Super Bowl, the effectiveness of this advertising channel is immense." I, I, I push back entirely. I, I don't think either of them were, like, top of market, we've got a billion dol- I think they were brilliant uses of capital.
- RORory O’Driscoll
Okay. I'm, uh, pause there. I, I'm, I'll answer that, and then I wanna come back to Mike's point because I think there's something more important in that point. But on your point, if it was a brilliant use of capital, you'd see it happen consistently across the cycle. But in fact, you only see tech comp- you only see tech startups doing it when they have money to burn, right? If you look, I'm willing to bet if you look-
- JLJason Lemkin
That's true of all marketing, Rory, I can tell you. It's true of all market... When, when they don't have capital burn, out- marketing's the first thing that gets cut, right?
- RORory O’Driscoll
Yeah, but it's not a brilliant use of capital in general. Therefore, what it is is a good way to spend the marginal dollar when you've already spent it on everything else. But I wanna come back on Mike's point because-I actually think there's a more serious point in there. You made a comment on these guys are not financialized, and the public SaaS companies are financialized. And I think there's a bigger comment in that, and it maybe applies to you. W-when I was thinking about these, these fights between public company, you know, public company and incumbent and private company, next generation player, I think one of the biggest things is the public companies have this constraint of, you know, having to make EPS, having to grow, whereas the private companies are in, you know, as you say, no marginal costing is taking place. And do you think that impacts public companies in general ability to compete, or do you think it makes them more efficient?
- MCMike Cannon-Brookes
Um, man, so many great topics. Uh, uh, first I think Super Bowl ads, just, just very quickly. Super Bowl ads are priced that way because that's what people will pay. It's, it's a efficient market in Super Bowl ads, surely, right? Doritos pay eight million bucks because it sells a bunch of Doritos. It's a good investment. Is it, like, the best use of capital? Probably. Why do Doritos and beer companies advertise all the time? So for some businesses, like Wix, I would argue, it's a totally sensible investment. For others, it's completely ego. The CEO wants a Super Bowl ad, so they go back one. That ego stuff happens when capital is not being efficiently spent in a business, right? And both of these two things happen in every Super Bowl, probably in some crypto, whatever. Um, I think there is an interesting argument of public companies and maybe why-- I mean, I know things I shouldn't know, I guess. But good public company CEOs are often founders, as you've pointed out a few times, um, because you're trying to take a long-term view and manage the short term. You are trying to do both. We have massive investments in AI. We have to deliver public company results, and that's the job is to do both. If we just focus on the public company results part in the very short term, we will not have a good business in five years' time from now because we won't be investing in building AI. But that takes usually necessarily away from something you could otherwise be doing today, and that's the balance of capital allocation in any of these businesses, right? Microsoft has to do it. Everybody has to do it, right? Capital allocation is not easy. But a good leader, I think, will allocate capital to those investment areas and allocate enough capital and then tell a story about why that capital is being invested, right? We spend a huge amount of money on R&D. We spend a huge amount on AI. I would argue if you're a public company today and you're not spending a lot of money on fundamental kind of new R&D around AI in your product category, you're probably in trouble. Now, you can't see that in any public company accounts, right? It's very hard to actually see where they are allocating their R&D dollars. But I would guarantee you a lot of them are moving more and more and more towards thinking, how is AI going to change my world? How am I going to hire in this era? How am I going to do this? And you have to tell a story to your investors and your shareholders, your stakeholders, your employees about why that's going to make a difference, why you're going to be relevant and competitive in the AI era. Doesn't mean you need to make a foundational model, but you have to be relevant and competitive, and, and you have to actually do both. Now, Rory, I think you're trying to make the point that maybe there's a world where the free capital in the private markets makes it impossible for those spends in the public. I, I don't, I don't think that's the case. You've had Adobes and Microsofts be public for an awful long time. You have to make tough choices. You have to make capital allocation choices. You have to bet on the future to some extent, and not every company is going to get that right. But I don't think that's impossible at all. I think it's, it's what you have to do.
- RORory O’Driscoll
A pr- great answer because, yeah, I mean, I-- reading the commentary after your last result, you know, listing the things that people bust your chops on and, you know, they're giving you grief about stock-based compensation, and then you're looking on the private side and you're like, "These guys are doling out SBC like it's candy," and no one even calculates it, right? It does feel... I mean, I'm, I'm glad to see that it's not doing your head in, as we'd say in England, um, but because it does feel like it's, it's two sep- it's almost like both teams are playing the same game, but one of them has to play it with different rules, which must be a little irksome.
- MCMike Cannon-Brookes
Uh, yes, but the, the difference in rules, again, I, I, I've said this to a few people. We're a better company because we're a public company. Like, we have become a better business, right? We're better at forecasting. We're better at planning. We're better at executing. What we have to do is not replace forecasting and planning and executing for strategy. I think that's where it gets wrong is where you just focus on that piece of the business. You still have to strategically compete and grow and go into new areas and invest and build things, right? You absolutely have to do both of those things. I think managing the finances of that is, is very challenging at the moment, right? For all the reasons you pointed out, totally agree with the challenge that, that, that's going on. Secondly, it's very hard for investors to see winners in that process right now, right? If I say it as generically as possible, I think that's the challenge, right? Is because where is that money going? What are those people building? Who are the... What is the talent? What is that likely to change your strategic positioning with customers over the next few years that you have sustainability and durability? That's very hard to see at this current time, right? For, for, for investors, right? If you look at any list of AI winners and losers as above the fold, let's call it, every list is different. That alone tells you people are like, "I don't know. Somewhere over here." That's our jo- that's my jo- I'm not complaining about that for a second. My job is to tell a great story about why we're a winner and then make us a winner and do both at the same time, and I have to fund that. That's-
- RORory O’Driscoll
Mike
- MCMike Cannon-Brookes
... You got to enjoy that or you should be doing a different job. [laughs]
- HSHarry Stebbings
I love you, and I'm so grateful to you for being a friend, being awesome, being so good. If the numbers are, are... They're, they're so good, but the stock price is down so much. Do you think you're doing a good job telling that story then?
- MCMike Cannon-Brookes
This gets to the CEO scorecard, right? And, and things like this is, is, uh, we had a fantastic quarter. Our numbers in almost every category are great delivery of our goals.Um, the external current time judgment of the delivery of those goals leading to future value is not in a good spot. There's no doubt about that, and we're working hard to change that, right? We have the same business we had a year ago. We, we will still have a great business in a year and two years, and my job is to make sure we have a great business in five years' time. Look, you've got the, the sort of... There's a mental health aspect of it for staff and things like this, and then there's a, we just got a lot of work to do. Let's, let's, let's get back to work and just go do that, right? And we- if we keep delivering great results, we're not short in the Bank of England here, but, like, at some point, you're like, I don't know, we got, we gotta do what we gotta do, right? And you gotta also adjust. I said this in my, in my shareholder letter. We spent a lot of time writing our shareholder letter. Like, you gotta accept reality as well. Sometimes I see people, and as I said, I do a lot of, at the moment there's a lot of SaaS CEO therapy going on. Um, one of the things I've told a few people is, "Dude, you just gotta accept reality and then, and then go build something. Go do something," right? You can't pontificate about the technology and all about creation and everything else. Guess what? Part of creation is destruction. You gotta go build value for customers. You gotta go build new products and technologies and services. Like, the way I see it, we're gonna create our way out of this problem. We're not gonna, like, hide in a hole and, like, wait for it to go away. And, and part of that is accepting the reality of what's changed, and also what's changed in a positive way. That always seems very negative. We can build things way faster and way better than we ever have been able to before. I think we talked on, about a year ago, whenever that was, like, if we refounded Atlassian today with 350,000 customers, 50,000 enterprise customers, couple of billion bucks in the bank, and 10,000 people in R&D, and a great distribution engine to get to all those customers and deliver new value, you'd be like, "It's a pretty good starting point to start a business," right? Like, let's go build some stuff, right?
- RORory O’Driscoll
You're right, Mike. When you talk about creating value, we as three VCs know exactly how you feel. Uh, we are the value creators. [laughs]
- MCMike Cannon-Brookes
[laughs]
- JLJason Lemkin
Just to be clear, it's clear when Harry's being sarcastic. [laughs]
- 1:15:58 – 1:24:28
Do CEOs Have to Work Harder Today Than Ever
- JLJason Lemkin
I would say, I don't know what you think of your... I mean, your, your SaaS group's pretty elite, Mike. But I would say maybe only the best SaaS B2B CEOs are really up for that. A lot of them are introspecting. A lot of them... I, I talked to one that quit at the end of the year at hundreds of millions of revenue and said, "I was told AI wasn't important in our space." That was, that was the goodbye message. And so, uh, not everyone has it in them to go through, to, to push through this next wave. Uh, maybe only the best, maybe only the best do. May- maybe o- I mean, you're, you're one of the best, right? We don't have to rank you.
- MCMike Cannon-Brookes
And that, and that, and that's okay, right? I think we shouldn't, we shouldn't pass judgment on that.
- RORory O’Driscoll
I totally agree. It's not even the best of the world. Totally. Look, it's the same in our industry. Some people decide, "I've done enough, I'm 50." Some people, "I've done enough, I'm 40." You only got one life, right? Someone really wanna go to Bali at 50. I, I'm totally with you, Mike, on that one. It's like, actually, it's a better call. If you don't have it in you to do it, I actually admire more the person who says, "You guys should get someone else," than hanging on, waiting to get the headshot, you know, and just call it. I mean, you know, more-
- MCMike Cannon-Brookes
I, I have to agree. That's a, that's a harder call to make, right? That, that's a very difficult decision.
- RORory O’Driscoll
In our business, o- one partner said to me years ago, he said, "Our business is a learning business, and the day you stop learning is the day you should say to your partners, 'In about a year and a half, you should be replacing me.'" Right? And it's just... And you know, you, 'cause you can't just be sitting here not... You can't take the money and not play the game. And I agree with you guys. I, I let those go. Actually, so you should tell those guys who aren't feeling it. It's really simple. Congratulations, you've made life-changing money. You don't have to do it anymore. Um, how's your number two? 'Cause he's in charge now.
- JLJason Lemkin
[laughs]
- RORory O’Driscoll
Uh, bring back that founder who left.
- JLJason Lemkin
Are you working harder, Mike, than you have in the last few years? Are you working harder?
- MCMike Cannon-Brookes
Am I working harder than I have in the last three years? Yeah, uh, well, uh, my co-founder, God love him, we had a whole bottle of wine night before last. Um, y- you know, he retired-
- JLJason Lemkin
Yep
- MCMike Cannon-Brookes
... a year and a half ago, so that, that makes, like, you know, that's a big adjustment-
- JLJason Lemkin
That alone is more work
- MCMike Cannon-Brookes
... after 20, 23 years. Um, uh-
- RORory O’Driscoll
He's set up. He's set
- MCMike Cannon-Brookes
... and he has, he's full of gratitude-
- JLJason Lemkin
[laughs]
- MCMike Cannon-Brookes
... which is really nice. He understands, right, that creates more work. And there's no doubt the era, like, man, I start working at 5:00 AM every day at the moment, right? Yes, yes, people are working harder now than they have before. 100% true, right? Because of the disruption and the speed and the change and everything, and that's, I think that's not a bad thing. That's, that's a normal thing. That's an okay thing, right? The question is do you enjoy it, and do you have enough balance? Like, again, I am the worst person to be a therapist to any of these CEOs and SaaS founders, but I, I do tell them, like, what you're saying, those people are making the choice is balance, right? Do you have enough time with your kids? Do you get out in the trees? Do you walk around? Do you do some exercise? Whatever it is that's your jam in terms of balance, stop doing that for a year or two, you're gonna be in trouble, I, I, I believe. Like, I've done this long enough. You can't shortcut those things. Secondly, are you enjoying it? And don't just tell me yes in one second. Wait, think, go away, take a weekend, drink a bottle of wine, drink a green tea, whatever is your thing. Are you enjoying what you're doing? Would you choose this job again today? Because it's tough out there. It's gonna be hard. Welcome to the technology industry. If you're not enjoying it, you know, no harm, no foul. Go do something you do enjoy, right? Move to a different arena, if you wanna use the, you know, we throw that around all the time in the tech industry. The enjoyment i- is sometimes forgotten in the, the ego, the, uh, uh, the need to win, to disrupt, to, to grow, those sorts of things. Like you said, if you built a great business, a couple of hundred ARR, whatever it is, that's not a... Do it decently. Like, you know, give your team time, give your company time, make no... You know, there's a thoughtful way to do any of these sorts of things. But I think it should be seen as a mark of, you know, amazing human achievement to, to do that.
- JLJason Lemkin
The problem is if Mike said that to most of the people I know, they'd quit.If they sa- [laughs] if you said, "Are you really enjoy-- Do you love, do you love every minute of your job as founder/CEO? Are you getting enough time with your kids? Are you walking enough? If not, you should..." I'm being a little facetious, but, but not completely, right?
- MCMike Cannon-Brookes
Yeah.
- JLJason Lemkin
But not completely.
- MCMike Cannon-Brookes
I- I'm not, I'm not being Pollyanna at all-
- JLJason Lemkin
Yeah
- MCMike Cannon-Brookes
... right? Like, there are parts, there are days that suck, there are times that suck. But over some average of a 90-day, one year, Rory's point, you got one life, right? We, we got into this. We enjoyed creating things. We enjoyed building teams and businesses and delivering value to customers. Not in a trite, like, way, but literally sitting down with customers and seeing what they do with your shit is awesome, and you're like, "Man, that's so cool. Hey, let's go do some more of that," right? So you've got to enjoy that part of the job. It doesn't mean every part of the day or the job is gonna be easy. It doesn't mean you don't sit there with your team and go, "How the fuck are we gonna deal with this?" Right? These guys are coming over the wall. But if you don't enjoy that, I don't know, there's some analogy th- that, like, every era is going to be different. The, the echoes are the same, but there's different ways. To your point of learning, y- you gotta learn, you gotta think about how you're gonna compete. You're not sitting there with bows and arrows if people are coming [laughs] with machine guns or whatever.
- RORory O’Driscoll
Yeah. You gotta be willing to ch- exactly.
- MCMike Cannon-Brookes
But I do think you can be balanced. I do think it's important. I actually think-
- JLJason Lemkin
Don't you think all founders are a little crazy?
- MCMike Cannon-Brookes
Yes.
- JLJason Lemkin
Yeah, how can you be balanced if you're crazy? Like, there's no ba- Like, you're, 'cause you're gonna be miserable or bored or you're not building. Uh, you know, I don't think... Elon doesn't look too happy to me.
- MCMike Cannon-Brookes
[laughs] There are some people, uh, who-
- JLJason Lemkin
I think all the good founders are crazy
Episode duration: 1:24:39
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