The Twenty Minute VCFigma's 250% Pop - The Greatest IPO Mispricing Ever? Meta & Microsoft Blowout Quarters: Broken Down
EVERY SPOKEN WORD
95 min read · 18,960 words- 0:00 – 1:04
Intro
- RORory O’Driscoll
The people who said, "Oh, Fig- Figma left $3 billion on the table." The $98 price only happened because the IPO happened at $38. The discussion they were having on the day was, let's call it, the Halligan discussion of do I go two bucks more and exclude Fidelity, or two bucks less and take Fidelity? And it's a good, useful discussion. And had someone walked in and said, "I know this IPO is gonna price at 100 bucks a share to open tomorrow morning. Let's raise at 80." They wouldn't have had a book 'cause no one has bid at that thing. So that money wasn't accessible.
- BHBrian Halligan
Run, Forrest, run. The market's wide open. The valuations are good. There's a lot of demand. It's very seasonal. Timing really matters. If I were Canva, it's an amazing company, I'd be lining everything up to go public.
- HSHarry Stebbings
Ready to go? [upbeat music] Guys, I am so excited for this. You know it's always the highlight of my week, and we have a special guest this week in Brian. I mean, it's gonna be better than ever. And we also
- 1:04 – 24:03
The Worst IPO Mis-Pricing Ever: What Really Happened at Figma
- HSHarry Stebbings
have unbelievable news. We're just gonna start and dive in with the Figma IPO. We saw the most unbelievable mispricing. It went out at $33. It went up to around $145. I would like to throw this out there to some of the greatest minds in this business. [laughs]
- JLJason Lemkin
[laughs]
- HSHarry Stebbings
How did we an- [laughs] Don't laugh. How did we analyze this unbelievable pop?
- JLJason Lemkin
What was... I should know. What was it at HubSpot, Brian? There was, there must, had to have been a pop, right?
- BHBrian Halligan
We had a pop. Uh-
- JLJason Lemkin
Yeah
- BHBrian Halligan
... HubSpot's was-
- RORory O’Driscoll
You priced at 25 and you opened around 30.
- BHBrian Halligan
Y- we priced 25. I think we opened at 33.
- RORory O’Driscoll
Yeah.
- BHBrian Halligan
Um, it might be worth just talking about, like, what happens behind the scenes on this shit. Uh-
- JLJason Lemkin
Yeah, everyone's talking out of their rears on, on X-
- BHBrian Halligan
Yeah
- JLJason Lemkin
... aren't they? Like they know everything.
- BHBrian Halligan
Yeah. Yes. I don't know everything, but I can share, like, what actually happens and how you make that decision and what the, the pressures are. So first of all, you're making the decision on the price and who the investors are the night before the IPO, and i- and in this state, you're, you have never been as tired in your entire life as you are when you're making this decision. You've been on the road for the last two weeks. You hit 12 countries. You had six pitches a day. Your battery is on red tired, and then the investment bankers sit you down and say, "You got two big decisions to make. One is who are the investors going to be? Like, who are we picking?" Because we were 27X oversubscribed. Um, you know, Figma was 40X oversubscribed. Who are they gonna be, and then what's the price? And for the whole process, the founders are very well aligned, we had Morgan Stanley as well, with the investors, like perfectly well aligned, until this one, like, one-hour meeting the night before the pricing. And you're all of a sudden like, "Oh, actually, we're, we're, we're across the table from you." And the first thing you're across the table from is they give you the book of all the people who wanna buy your stock. Again, 27 times more demand than, uh, you have supply. And in their version of the book, they have a lot of their hedge fund buddies, uh, in there with pretty good allocations. And we also have some of the, quote-unquote, "long only," we can talk about that too, Fidelity and Wellington and Capital Hero in there. And what HubSpot wants is just the long onlys. You wanna keep the hedge funds out. Morgan Stanley wants that too. They wanna keep them happy, but they also want their hedge fund buddies in there 'cause they make a lot of money on there. So that's a negotiation, trying to get all that, squish the hedge funds down and get the long onlys up. And then it's the price. And in HubSpot's case, it was a very interesting dynamic. Um, we had raised the, the, the range throughout the roadshow over the previous two weeks, and Morgan Stanley... We wanted to go out at 25. Morgan Stanley said, "We should go out at 24, and the reason we should go out at 24 is Fidelity has told us that they're in at 24, they're out at 25." Okay. And you really want Fidelity 'cause Fidelity's [laughs] has trillions of dollars, and they could own, you know, they could be a massive anchor. And so then you have, like, a debate in your head, like, how bad do you want Fidelity? Um, you know, how mu- you know, how much do you wanna sell for? And we, we were oversubscribed, and we were like, "I think Fidelity's gonna come in anyway. Uh, it's a really good thing. I think they'll come in. We're gonna stick with 25." So we pushed back. We said no, and we priced it at 25. And I don't think there was collusion going on, but definitely Morgan Stanley and, and Fidelity were on the same side of the table trying to get us to sell at a lower price. That's kinda how it happened behind the scenes, and then I can talk about the next day and how it all develops, but that's-
- JLJason Lemkin
So there are, there are these micro conflicts, but they rear their head at the last minute in particular, right?
- BHBrian Halligan
Yeah.
- JLJason Lemkin
At the last minute they come up.
- BHBrian Halligan
It's really just the very last minute. Um, and it's fine, you know. And, and by the way, there's a lot of talk around, you know, the pricing, and it pops so much. Whose fault is it? Morgan Stanley's fault. The founders make the decision on what the price is, so Dylan decided at the end of the day. And by the way, if you're Dylan, and you're in, in, in your Figma, you had a very limited amount of shares that were selling. They were mostly secondary. So it's just very few shares to sell and a lot of demand from it, and if you're Dylan, that, that's gonna drive the price up. The second thing is you want... Here's who you really want. You want Fidelity. You want T. Rowe Price. You want Wellington. You want Capital. There's like six big long only funds you want in there, and they're pissed because they're not getting a big allocation. And so that created the, the demand environment that was a little tricky for them 'cause they wanted to buy more shares, and that's what pushes the price way up. The s- the supply is low. The demand is very high. Um, but it's an interesting little chicken... You play chicken with your investment bankers and some of the long onlys real- like seven o'clock the night before the IPO.
- JLJason Lemkin
But there's no one dumb at Figma. This is the other thing about social media. You, you, you think Dylan and his whole finance team and CFO, like, they've never heard of these issues before? [laughs] I mean, everyone's trying to, to bal- weigh everything and come out with the optimal outcome, right? No, no one was... No one massively mistakenly underpriced this deal, did they? We're not talking about rookies here, are we?
- BHBrian Halligan
I don't think so. I think there are a lot of smart people around the table giving them advice, and they wanted to make their investors happy. So part of it also is you want a pop. You want Fidelity and T. Rowe and these long-only folks to come in and right out of the gate feel good about their investment, and you want them to hold for decades and decades and decades. So there's a little bit of that. It probably just popped more than he thought.
- RORory O’Driscoll
A-a-and that's the active sentence, right? Until that, Brian, everything Brian said is correct, and the stunning thing is they clearly give the same speech every time, 'cause I've [laughs] been in the room I think five or six times, and they give... And it's always Fidelity or one of the other two. It's like, "You want Fidelity, it's only another dollar," right? That whole speech is exactly right, and you want a little pop. The interesting thing that Brian said at the end was, the odd thing here is instead of getting, let's call it the designed 15, 20% pop that makes everyone feel good, you ended up with this absurd 250% pop, right? Which is clearly off the charts. I mean, I think it's the largest pop since 1999. So what you're really saying is you're trying to engineer this small explosion, and then every once in a while inadvertently you create a big explosion and you look like an idiot, right? So the question is, are we arguing about do we need small explosions which happen all the time, in other words, the classic HubSpot 20% pop, is that a problem or not? And that's all about a $1 discussion with Fidelity. And then the separate problem of when you get it massively wrong, what causes that? There are two s- I think we should talk about them separately, 'cause they're almost two separate issues. Does that make sense? 'Cause, 'cause, 'cause Brian, 'cause-
- JLJason Lemkin
You know, there's one small thing I've heard nobody talk about on X on this.
- RORory O’Driscoll
Yeah.
- JLJason Lemkin
So it- when my first startup job, they gave me the job, and this is the only IPO I'll ever be through as an employee, okay? They gave me the job of handling the director's chairs program. It was my job to hand them, only the employees, not the, not the external ones.
- RORory O’Driscoll
Yeah.
- JLJason Lemkin
Okay? And I went around, and there was a lot of drama because people had to come up with, like, 50, 60, 70 grand to buy their stock. This is not a lot for folks that had no secondaries, okay? There was no secondary.
- RORory O’Driscoll
Yeah.
- JLJason Lemkin
And everyone in the company basically made 100 grand that day, okay? And it was a magical thing. Now, was it, was it underpriced? Da, da, da, da. But we forget about the... Employees don't care about dil- they don't even know what dilution is. [laughs]
- RORory O’Driscoll
Yeah.
- 24:03 – 35:45
Why CEO Compensation is Broken
- HSHarry Stebbings
I, I, I do wanna kind of stick on that. You said your net worth went from X to 100X. I think an element that we chatted about, texted about before, Brian, that not enough people are talking about is actually kind of the package that's in place also for Dylan, which is obviously kind of this kind of $2 billion moonshot like grant kind of Elon Musk style. And Brian, we were saying that we don't talk enough about CEO comp. I wanted to... Why don't we start with you, Brian, on this, given you're the best person here to speak about it. How do you think about this, and how do you analyze that?
- BHBrian Halligan
Yeah, I think CEO comp is pretty broken, uh, at the moment, and there's two things that I think are pretty broken about it. Um-The first is just everyone really relies heavily on RSUs. And when I grew up in the industry, I hate to be like that, be like, "Back in the old days," um, it was mostly ISOs, it was optioned. Un- until 2006, some regulations changed and the expensing of that changed. So the world kind of moved to RSUs. It just creates sort of a risk-averse behavior in the CEO. Like, it's basically cash comp, goes up and down a little bit, let's say. But an ISO, you're swinging for the fences. Like, you've got a strong incentive to swing. And so it's had, really had a dampening effect on the risk-seeking behavior of a CEO that I think more companies should want, and I-- it's kind of pervasive across the industry. So I don't like this RSU comp thing. That's the first problem I see with all this stuff. The other problem with comp is almost every company looks to CEO comp and, and the way it works behind the scenes is, you know, HubSpot's got a compensation committee, everyone's got a compensation committee, and HubSpot wants to pay the CEO, let's say, at the 75th percentile of what her peers make. And so we look at 20 different peers of similar-sized companies, Atlassian, blah, blah, blah, blah, and we peg her at that 75th percentile, which in her case is, you know, it's 20 million bucks, a lot of money. Now, if you did that for Dylan, which would be in our comp group, similar market cap to HubSpot, he'd make 20 million bucks a year. But if you think about it, that's less, that's like 0.3% of Dylan's market cap, of his own personal net worth. It doesn't move the needle an iota. It doesn't matter at all to him. And so you have to get kind of creative. And so I actually like what they did with his comp. Uh, they used, PSUs very heavily, not RSUs. And I like the idea of not pegging your comp to your peers, but you kinda have to peg the comp to the net worth. Same thing with Elon Musk. Like, if you paid Elon Musk like Mary Barra, Mary Barra makes $29 million a year. You think Elon cares about $29 million a year? So you have to kinda comp it to the, the, the CEO's net worth as opposed to just the peers. So that's what I like about this.
- RORory O’Driscoll
But the comment, I broadly agree, especially on the process side. And you're right, the PSU, so which, Harry, you were gonna come in, and I'll just save you the trouble. A PSU basically-- An RSU is like an option but with zero strike price, so it's guaranteed money. And Brian's right on all the negatives on that. So PSUs, performance stock units, have evolved to effectively make the RSU more like an option, because what you say is it's guaranteed money, but only if something happens. And the typical thing that people are pegging it off in the public markets, even though I, I don't agree, and I'll come back to it, is stock price, right? So you're right. A ve- so in other words, instead of saying, "Here's 10,000 shares no matter what," it's, "Here's 10,000 shares, but you only get them if the stock price is forty." So what you've bizarrely done is recreated options [chuckles] because they got regulated out of existence in 2006, so now you've effectively recreated them. So the PSU is an R- is, is making an RSU more like a stock option.
- BHBrian Halligan
I like that.
- RORory O’Driscoll
I, I know. And in general, I do too, but watch this. The problem with the Dylan comp package, I'm gonna say it, it didn't work. Because if you look at it, the problem with stock price triggers for compensation is it sounds rational, but they put this in place before the IPO, and if you read the triggers, they've already achieved the triggers. So the weird thing, I, uh... And I'll tell you why they do that in a second, but the weird thing about all these triggers, effectively it said, um, you've got a whole bunch of price tags up to 118 bucks a share, I think. And you, you-- They're probably, when they were making those triggers, like literally two months ago, they were like, "Yeah, this is gonna be great for the next three years." But totally out of Dylan's control, just because of the way things have priced, he's made all the triggers already. So in retrospect, now he still has-
- BHBrian Halligan
He built the company
- RORory O’Driscoll
... he still has to vest over seven years, so it's not like he takes all the money and runs, right? But the performance element vanished very quickly, right? Because of the pop. And the aha for me is I prefer performance-based to not performance-based. Whenever you ch- I would have preferred f- even for a public company to do them on tangible goals like revenue and op income and all that over multi years. And I see Brian shaking his... The problem, and the reason you don't end up doing that is because, A, you have to disclose them, and B, things change, and when you change comp on a public company, the ISS and all the whiny ba- babies give you a whole lot of shit. So what happens, and I've been in the room, you said yourself, "I would love to pay Brian Halligan for thirty-five percent revenue growth and thirty-five percent EPO gr- EPS growth for the next seven years, and we'd pay him a billion bucks." But if we put that on the table and then circumstance change, we have to disclose it. So then all the analysts will start saying, "Oh my God, they think they can make thirty-five percent, so if they only do thirty percent growth, Brian missed." So it just becomes problematic, and what they do in the end is they screw it, we'll just do stock price targets. Which are better than nothing, as Brian says, because it's more swing for the fence-y, but sometimes you have this weird... Like, if you look at all these packages that were put in place, all the ones that were put in place in 2018 worked and gave the shareholders what, gave the employee what the, the CEO what they wanted, 'cause the stock price went up. And all the ones that were put in place in 2021 are stranded because all those price targets, like the Airbnb price targets, ain't ever gonna happen now. So it's a pr- it's an imperfect mechanism, as comp often is, but directionally the right approach. I mean-
- BHBrian Halligan
I am not in violent disagreement with what you're saying. Because usually the way HubSpot does it is on net new ARR-
- RORory O’Driscoll
Nice
- BHBrian Halligan
... um, and another, like a floor earnings number. Um, and that's where we... By the way, none of this is, none of this is like, "What's the least bad you can do?" And I kinda like the way we ended up on it.
- RORory O’Driscoll
That, that is really nice. Do you guys do-- I'm curious, do you... And you have to disclose that. Do you get angsty about disclosing that because you're kinda hinting what you think you can do?
- BHBrian Halligan
Yes, but people can figure out net new ARR and they can figure out what your bottom line is.
- RORory O’Driscoll
Yeah, okay.
- BHBrian Halligan
We t- what, what we used to do was net promoter score-
- RORory O’Driscoll
Oh
- BHBrian Halligan
... and stuff like that, and that gets really tricky having to disclose all that.
- RORory O’Driscoll
I really like... I, very few CE- very few comp committees do what Brian does, 'cause you always... I, I think that's so much better than just stock price.
- JLJason Lemkin
Every growth round that I've seen in my little portfolio, all of them have had moonshot packages. So they're going in earlier, and they are becoming a standard part of how growth, many growth funds win deals. They go in and, uh, and, yeah, I'll do the deal at a billion, um, but I'm gonna give Harry s- another 7% of the company, and they're always at least 10X. Like, there's a quid pro quo. It's not 10X, it's 10X from what I'm paying as a growth investor. Fine, I'll do Clay at $3BN, but if you hit th- $30BN, guys, you guys both share another 10% of the company. And so I think this is getting institutionalized earlier and earlier as valuations go up. So it may not m- like, may not matter what any of us think because the growth guys are adding this to the standard term sheet.
- RORory O’Driscoll
The slimiest version is where you literally say to the, the CEO, "I'll, I'll reinve- effectively give you options back for the dilution you're taking on the round." This is a little more high class than that 'cause it's saying at least you gotta achieve first. But I will say what ten-
- JLJason Lemkin
So usually you get more.
- RORory O’Driscoll
Yeah, agreed. No.
- JLJason Lemkin
What I'm seeing is instead of a growth fund saying, "I'll give you another 2% back," right?
- RORory O’Driscoll
I'll give you six.
- JLJason Lemkin
Forget that. I'll give you seven or eight. I'll give you a massive package, but I gotta make my 10X, right? I... It's their version of the Elon package, right? Um-
- RORory O’Driscoll
Yeah, and I, and I think that what happens there, uh, my prediction is... And again, I'm, I'm often disagreed with on this on comp committees, 'cause I've done s- some of these where I've tried to make them on tangible targets. What will happen when you do the stock price ones is if the company's doing really well but the stock price isn't achieved, the CEO will be sitting down two years from now and he'll be asking to waive some of the criteria. I can just see the movie now, right? And, you know, so be it, right?
- JLJason Lemkin
Maybe. I'll bet you nickels to dollars it, that doesn't happen because s- founders are just signing up. I don't know what, Brian, you see at Sequoia, but founders are signing up for crazy stuff these days. They're signing up for massive stuff. And I don't think a lot of grouchy VCs are gonna waive it. I just don't, I don't think it's gonna happen. I hear your point, Rory. I just don't think it's 2024 anymore.
- HSHarry Stebbings
Brian, you are, you are an amazing coach to founders. I speak to Pat and Drew Reed a lot, and they say that founders love your coaching, mentorship advice. When they have big growth rounds like these with performance-based incentives like we're talking about, how do you advise them? Is it what you thought you'd see now on the other side?
- BHBrian Halligan
I like all this stuff for the founders. Um, when I c- uh, uh, when I came through, it was pretty rare that you would... The, the other thing I like is, is founders taking a little bit of money off the table on the way. I think, like for us, when we did our round, it was Sequoia. Sequoia came to us and said, "We'd like to buy some of your shares." In retrospect, it's a horrible financial decision for me, but it was, it was good at the time. And I saw, I forget, a couple million dollars worth of HubSpot shares, and my co-founder, a few people did. And what, uh, what I liked about that was, uh, you know, Salesforce came knocking and wanted to acquire HubSpot. Like, it stiffens my backbone a little bit. So it's good for the founder, it's good for the VC. I think it gets a little wobbly when it's a $50 million secondary in the Series B. But in general, I like, I like what's going on in venture. I think, I think the valuation is very high right now across venture. Um, so we'll see how this thing plays out. I think it's a little bubbly right now, but, um, I generally like the trend that's going on in terms of the secondaries happening for founders, and I like these PSU-type rounds when the... It's particularly, there's a lot, there's a founder I'm working with right now who's a terrific founder, who j- just took a while, like four years to, like, get it going, and now is ripping. And he'd been massively diluted, and so I'm like, "Well, let's figure out a way to give you a nice big grant."
- RORory O’Driscoll
And I, I go back to, yes, I agree with all that, and I do think, though, that valuation is the imperfect metric. And Jason, I think you're wrong. I think investors will, and grouchy VCs will recut because, 'cause the, 'cause CEOs are smarter than us in comp. What I've learned is this: I have Brett, but they are running their company, and they obsess about it day and night. And let me tell you, if, if you've got a CEO who doubles revenue for the next two years, and the only reason he's not making his extra 3% is 'cause we overpaid three year, two years ago, and now revenue multiples are normalized, and therefore I'm not getting my 5X, he's gonna come into the comp committee and say, "I have nailed running this company. We have 3X'd revenue. We're op-income positive. Give me my damn shares." And I'll sit there going, "I knew we should have done a revenue and op income target like Brian has at HubSpot from day one." 'Cause I think, 'cause what we're doing right now is we're taking what Bob Brian correctly calls high-end valuations, and then we're 10X'ing them, and we're basing comp on that. Brutal co- We're, we're basing comp on a chimera. It's never gonna happen. It's like all... Look at all those 2021 value mult- moonshot publicly disclosed ones. Most of them are like, "Ooh, what were we thinking? We thought that we'd go from 200 billion to 2 trillion. Hmm, maybe
- 35:45 – 38:28
Is Canva Next? Why Founders Should "Run, Forrest, Run" to the NASDAQ
- RORory O’Driscoll
not." Anyway.
- HSHarry Stebbings
And if we think, if we think about going from 200 billion to 2 trillion, there's gonna be a boardroom that's gonna be thinking, "Huh, should we take some action now?" If you are Canva, are you looking at this going, "Forrest Gump, run. Let's head to NASDAQ"? How do you think about the impact of this on Canva and subsequent companies' willingness to go out?
- BHBrian Halligan
Yeah. Run, Forrest, run. The market's wide open. The valuations are good. There's a lot of demand. It's very seasonal [chuckles] and, um, oddly seasonal, and timing really matters. If I were Canva, it's an amazing company, I would be f- I'd be lining up, you know, lining everything up to go public.
- JLJason Lemkin
But the founders have already given away, pledged to give away the majority of their stock. It's not about money for them. Companies are profitable-
- BHBrian Halligan
But they're gonna give it away to good cau- they're gonna give it away to good causes, and they want those causes to get as much as possible.
- RORory O’Driscoll
Yeah. Yeah. Yes.
- JLJason Lemkin
Yeah, I just, I'm, I'm not saying I know the answer. I just think it's more complicated than someone that needs the money or ha- all the, all the early stage investors have had chance to trade at tens of billions, right? And the founders are n- and there's just a lot of liquidity already there, company's massively profitable. I just can't... I'm not smart enough to predict how those factors stand together, right? Um, this clearly isn't a Musk empire that's being built at Canva, right? It's, it's very different, right?
- RORory O’Driscoll
I, I, I think you have... I mean, I've been thinking about it. You have all the idiosyncratic personal things. You have people who say, "I don't wanna go public for a long time," and you have people who need to go public early, right? And all those are idiosyncratic. But if you zoom out one level, because I actually had this conversation with an LP, they were asking when does it open? It's like in the end, price clears all markets, and for the longest time, the private round, the money in the private round was cheaper and less hassle for the last three years than the public's. So no surprise, we did more private. Let me see, five times revenues with a bunch of people in New York busting my balls versus 10 times revenue and I never get to talk to these growth stage guys except once a year. I'm doing option B, right? Now you have a situation where f- you know, maybe at the IPO price for Figma, 2010, 15 times rev- actually be 18 times revenues. You kinda go, "I can get that privately." You can't get 80 times revenue privately. So if you're now looking at where things are trading today, I think at the margin those prices are higher than the private things. So as a kind of, as I say, stepping back for the idiosyncratic stuff, at the highest level, the cheap money is now in the public markets, and Brian's right, you'd be an idiot not to go for it. Like, if you need to raise money in the next two years, now would be a really good freaking time.
- BHBrian Halligan
Can I just, uh, build on that? Like,
- 38:28 – 47:27
The Case for Going Public: VCs Are a Bigger Pain Than Public Markets
- BHBrian Halligan
in Silicon Valley there's, I think it's kind of described as really, uh, beating the drum on this, like, "Why the heck would we ever go public?" There's sort of that sentiment out there 'cause there's so much private capital, you can do secondaries. I, I, I don't have a violent disagreement with you, but I think it's just people are, are nervous about what's on the other side. And my take on it was, like, when we were a private company, we had a bunch of quirky, slightly misaligned venture capital investors who were definitely in our shorts. Then we flipped to public, and then all of... Then we got rid of tho- those VCs. Now we had a bunch of quirky, slightly misaligned public investors who were less in our shorts. It's actually better in a lot of ways [laughs] than being private. And public investors, like, there's so much written about the, what happened with Zendesk or Autodesk or these really bad things that happen. It's pretty rare, and I have found the public investors to be pretty rational. If you paint them a picture of what will happen over a long period of time, if you, you know, are pretty conservative with your numbers, they're rational, and they'll stick with you. Uh, I think they're underrated and I, I think people think it's, like, scary, something scary over there. It's not as scary as people think.
- HSHarry Stebbings
I have a lot of founders who say, "I'm terrified of the activist investors. I'm terrified about what happened to Jeff at Twilio. This is my company. This is my life. I don't wanna have that happen to me." What would you say to that founder?
- BHBrian Halligan
It's pretty rare what happened to Jeff. Um, eh, I mean, J- everyone talks about Jeff, everyone talks about Autodesk, everyone talks about Zendesk, but [sighs] it's pretty rare. And, you know, that company was having some issues. Um, those companies-
- RORory O’Driscoll
Yeah
- BHBrian Halligan
... were having some issues.
- RORory O’Driscoll
I, I, I agree. I, I agree, Brian, and I am a we- people should go public person. I think that, I think, I think it's a little overwrought. I mean, it, yeah, some of these issues do happen, but it's overwrought. I do think the activist VC, 'cause we were, we were one of them, um, yeah, d- 15... I, I do think in the last five... Yes. [laughs] No, go on. Yeah. Um-
- BHBrian Halligan
I mean, VCs are a much bigger pain in the ass than public investors.
- RORory O’Driscoll
We, we are much... A- a- agreed. And I-
- JLJason Lemkin
Let's add that to the B roll.
- RORory O’Driscoll
Yes. I, I think VCs are a much bigger pain in the ass than the typical public investor, and slightly less of a pain in the ass than the public activist investor, right? I remember saying that to one who went, "Believe me, I, I'm, I'm pretty sure on that one," right? Um, I'm gonna defend us there, Brian, right? Um, yeah, most times the public guys are benign, though I will say in the last five years on the venture side, definitely the benign content has ramped up, right? So just kind of if it wasn't even 10 years ago, y- I think the marketing in the last 10 years on the venture growth side has very much been we are benign, we are more benign than the public. So and I think that might be misleading, that might not be true, that might be reliance on preference. So I think you're right that it's a healthy trend to realize that you can go public, you get this liquid stock, it's not as terrifying as you think, and you have liquidity every day, not just once a year by appointment only. I'm a big IPO should happen person, and I think that-
- BHBrian Halligan
Here, here, here's what, here's what's underrated about the IPO is it's very stressful, you're exhausted, but the day you go public is going to be one of the top two or three days of your life. It is an amazing day. You'll go back to your company and two days later you'll have a party with your company. You will cry, you will laugh, you will hug. You worked so hard. There's something about that that is really, really special that, uh, people miss.
- JLJason Lemkin
Having said all that, I've only lived through it on the employee side when it was great, right? Uh, the next, the day after that was weird going back to your desk 'cause the world's changed. The next day is really weird. But if I could IPO at 30 billion or sell my company 30 billion cash, I'd much rather run the company, don't get me wrong, rather than sell, right? But if it were just a financial decision, I'd rather have the [laughs] 30 billion on one day than wait a decade for it to drip and drabble out, right? So there is a conflict there as a founder-
- RORory O’Driscoll
Yeah
- JLJason Lemkin
... like-
- RORory O’Driscoll
Yeah
- JLJason Lemkin
... you know, selling is tough for 98% of founders. I'm sure at Sequoia if you ask, you know, only 2% of founders say, "That was the greatest experience of my life selling my company." But man, getting it all at once if it's the same, even with a net present value, like, it's just a weird trade-off, the between the two, the journey and the, and the economics. It's complicated.
- HSHarry Stebbings
I just wanted to butt in there, Jason, 'cause you said that about getting it all at once versus drips and drabs.
- SPSpeaker
Yeah.
- HSHarry Stebbings
I'm super naive here, Brian. You said about it going from like X to 100X. When you do go public, is it drips and drabs over years?
- SPSpeaker
It is.
- HSHarry Stebbings
How does that-
- SPSpeaker
Yeah
- BHBrian Halligan
Is it drip and a drab, and if you- you can look at the way I do it, I sell the same number of shares every month since we went public. And the reason I do that is I don't want people to think... I don't wanna signal something. If I make a big buy or a big sell, it's gonna signal something. It's funny. People will look at it, the investors look at it. So I just have had the same, [laughs] same exact number of shares I sell every month. It's on autopilot, and but it's drips and drabs. You're, you're definitely right.
- HSHarry Stebbings
Do you know how much you have left?
- BHBrian Halligan
Yeah, I've got plenty left 'cause I got more shares. Here's the thing that I didn't understand as a founder. You get more shares as time goes on.
- SPSpeaker
[laughs]
- BHBrian Halligan
[laughs] I actually didn't know that when I started HubSpot. I was like, "Well," I just, I thought the pie would get smaller. Actually, the pie got much smaller, and then it started growing a little bit.
- SPSpeaker
[laughs]
- HSHarry Stebbings
[laughs]
- BHBrian Halligan
[laughs]
- 47:27 – 54:40
Can AI Even Work for SMBs? Why No One’s Cracked the Code (Yet)
- BHBrian Halligan
The whole... And I mean, it is actually worth riffing on that 'cause we have the king of SMB on this call with Brian. I mean, you know, the interesting thing about HubSpot was the way they built, you know, a $30 billion market cap business in SMB, you know, starting with, you know, sub 50 person employee companies. And you're right, Jason, it was very counter-consensus wisdom at the time, and you... Any thoughts on that, Brian? What, what, what are the... What was different about H- did you ever wanna go up market? The reason we bet on SMB was I had spent my entire life doing the soul-crushing exercises of selling to CIOs, and it's just-
- SPSpeaker
Nice
- BHBrian Halligan
... soul-crushing work. I didn't wanna do it. And I also felt, at least back when we started, the internet kind of disproportionately benefited small relative to large.
- SPSpeaker
Yeah.
- BHBrian Halligan
And your success was much more about the width of your brain than the width of your wallet, and so we had sort of a play on that. And we also just looked at the consumer business like, "Actually, the P&L is a shitty way to look at these businesses. Let's look at CAC and TLV," uh, and kind of convinced ourselves that that worked. And one of the interesting thing about HubSpot SMB, the other SMB company that's done amazing, even better than HubSpot, is Shopify, and they're both outside of consensus land in Silicon Valley. Um, yeah. I, I, I think there's an e- there's a big echo chamber in Silicon Valley and big negative bias towards SMB. But you can make it work in SMB. HubSpot and Shopify have shown it. Block has shown it.
- HSHarry Stebbings
monday.com as well.
- BHBrian Halligan
Yeah.
- HSHarry Stebbings
Massively anti-consensus. Totally agree.
- SPSpeaker
Yes.
- BHBrian Halligan
Yeah. I think they're moving to the enterprise, but yeah.
- RORory O’Driscoll
A- yeah, I, I, yes, they are in a way that you guys hadn't. And then, and then the other, I just gotta say it while I have you, Brian-
- JLJason Lemkin
But would you have made the choice today, Brian, in AI? And, and, and the reason I ask, right, is, um, I mean, to make a lot of great AI products work, you need training. You need a upfront, you need forward deploy engineers. You need daily tr- even if it's SMB, every day someone's gotta be your AI orchestrator. If you were doing all that today, would you go, go a little bit more M? Um, because these S's don't have time to train their, their AIs.
- BHBrian Halligan
Yeah. I, and in fact, here's one of the interesting things about, um, a- about my life, is all these founders come to me and say, "How did it happen with HubSpot? Like, how did you do marketing?" We talk about our website grader and content marketing, inbound marketing. How'd you take on Salesforce? I kinda came under him freemium. And like, we learned a lot. We innovated a bit, and a lot of what we learned just wouldn't work today. You gotta keep innovating. You gotta keep turning that over. And so I'm careful to give people, like, what about your culture? Like, people need to find new things, um, because I'm nervous, I'm nervous when I give people advice and tell them what we did at HubSpot, 'cause it worked at the time. It was really innovative at the time. Um, but a lot of what we did on go-to-market, a lot of the freemium stuff, a lot of PLG stuff, a lot of the interesting culture stuff, our SMB play, like, you know.
- JLJason Lemkin
Some of it works, some of it doesn't, I think, right?
- BHBrian Halligan
Some of it works and one doesn't, yeah.
- RORory O’Driscoll
Do we have... Jason, I'm gonna, I'm just, literally this is me exploring, not knowing the answer. What are the great S- uh, is there a great SMB AI product out there today where you go, that, well, lovable. St- stupid question, Rory. I mean, you could argue that what... I mean, you, you, you seem to imply that it's harder to do enterprise kinda SMB-level apps in AI 'cause of the need for training data, and then I'm trying to think, what are the mass-adopted enterprise apps? And obviously, you know, you're the, you're the Lovable and Replit guys, so there are some. I don't think- are there any others?
- JLJason Lemkin
Maybe. Even the exceptions sometimes prove... I mean, I'll tell you, I, I learned a lot of AI from Brian's AI. Like, I copied it and made it better, right? And when Brian built his, his clone, uh, we and I were talking in the very beginning. He's like, well, I'm like, "Brian, it's pretty good." I c- I had some fun, cathartic conversations with Brian, Brian's AI, and I had some fun ones, and I'm like, "It's pretty good. Mine's better 'cause it's-"
- RORory O’Driscoll
Yours is better.
- JLJason Lemkin
"Only because it's trained on more data. Mine is better."
- RORory O’Driscoll
Yours is better.
- JLJason Lemkin
But I didn't get it. I asked Brian, "Why is yours so good?" It's like, I spent a lot of time training it and, and this is, this was six months ago. There's a lot of time and e- and I didn't get it, right? But now when I look at every AI c- true AI company, if it's, uh, it's hard to train it, right? And so this is a quandary for SMB investments, right? And I just, I want, what I'm looking for SMB companies in AI is how do you self-train? How do you solve the unsolvable issue? How do you solve the fact that it can take six months to roll out a Palantir-grade deployment? How do you do that in 60 seconds? And any founders that crack that code, I want to invest this hour, this second. Um, and I'm pushing every startup I work with that's SMB to be more AI, and sometimes they push back on this, right? But you gotta do it, right? You gotta, 'cause it's how do you train, right? How do you train the training? It's, it's, it's, uh-
- BHBrian Halligan
I kinda, the stuff I see, Jason, is there's a ton of prosumer stuff that's working. Lovable's working, Replit's working, Gamma's working. Like, so many prosumer things seem to be working, and then enterprise is working. I re- you're right, I haven't seen much in between so far.
- JLJason Lemkin
But there's no training in the... I mean, we use Gamma too. We love Gamma, but you don't train Gamma. I mean, you train Ga- you do train Gamma a little bit. Don't get me wrong. But you sort of accidentally train Gamma by uploading your templates and your things, right? Replit and Lovable, I mean, I'm Mr. Vibe Coder, right? Um, those are AI under the hood, right? Um, the training is weird though, right? It's AI, AI under the hood. So I just think this AI B2B SMB is something that hasn't been cracked, to Rory's point, and I think we should all just rush all our capital into that. Listen, if you can train an AI, it's easy. HubSpot just put out this report on AI with SMBs, right? It said like 80% of folks have an AI team to do this. [laughs] Even with what they called SMB and VC, 80% have a team. SMBs don't have a team, right? Owner doesn't, owner-restaurants, one restaurant that, that Brian and I invested, they don't have an AI team, right? At Brian & Jason's Sandwich Shop, there's no, there's no, there's no AI team. [laughs]
- RORory O’Driscoll
As I say, I opened the door to a non-prepared topic, so I'm winging it. But my sense is two comments. One is it may well be it takes a year or two longer, 'cause if you think about even the HubSpot journey is that what tends to happen is the big companies with loads of money fart around, kinda mentally defining these apps and figuring out what it should be, 'cause they can afford to, right? And then when the features lock in, the SMB guys go, "Oh, we'd like that." And then you, you don't have to do so much in the case of that last generation trying to figure out what is. In the case of this generation, you probably come with a very much pre-trained app where, you know, if it's call answering or something like that, most of it's already done and you just have to configure it at the SMB level, right? And it may be over the next year or two, 'cause I do believe, and this is, I think, one of the reasons we love HubSpot, anything the big companies have, the small and mid-sized companies want too. They're not different. They just need it packaged tightly and priced tightly so they consumable, consume of it in bite-sized chunks. So over the next couple of years, it may well be, as I say, for things like phone answering, simple order dispatch, that there'll be a whole mu- whole bunch of pre-canned, pre-baked, this is how it works, Mr. SMB. Just turn it on and you too can sound like a big co. So I'm, I'm optimistic. It won't be trained on a company-by-company level, but I think it will deliver big ass value.
- 54:40 – 1:01:54
Meta’s Monster Quarter: Growth, Cash Burn, and the Real AI Strategy
- HSHarry Stebbings
You said there about big companies with lots of cash. I do wanna progress this because there is something I'm fascinated to hear you guys' thoughts on. I mean, Meta, what a freaking ripping quarter. It was like 38% year-over-year increase in adjusted EPS, 22% revenue growth, uh, but 22% drop in free cash flow. How did you guys read... How, how long does this go on for? Is this the start? Is this near the end? How much patience do people have? It's-
- RORory O’Driscoll
It's funny you led with the how long does it go on for, 'cause two weeks ago when I said, "How long does it go on for?" You looked at me like I had two heads, right? Um, and I-- But I do like your take-
- JLJason Lemkin
You see the shit I put up with, Brian.
- RORory O’Driscoll
Yeah, well-
- JLJason Lemkin
I just take it.
- RORory O’Driscoll
Well, no, I, I, I actually-
- JLJason Lemkin
I take it, 'cause I'm poli- I'm, I'm polite. I don't give it back. I just take it.
- RORory O’Driscoll
So-
- JLJason Lemkin
And I will take-
- RORory O’Driscoll
And I will say, you know, on all of these things, the, the, the, the takeaway, and I, I like the way you framed it here and not the way you framed it in the note you sent me prior. This isn't a AI's enabled success. This is, I have an awesome existing business, and it kicks off so much money that I'm allowed spend that money on building this great AI vision, and I can probably do that for as long as my existing business kicks off cash. So my big aha from this week's earnings, and I would say I got broadly AWS right and I broadly got Microsoft wrong. My big takeaway is not all the AI stuff is working for the hyperscalers. My big takeaway is all their existing businesses are working so well and kicking off so much cash that they can keep doing this for the next year, and they've said they're gonna keep doing this for the next year. It's like because they wanna play in the new game. That's the takeaway. Real men with $70 billion in mark-- $70 billion of free cash flow get to spend $40 billion of that on servers. It's a great country.
- JLJason Lemkin
Is there any nervousness at Sequoia, Brian, at all that the good times might end soon? Is there any-
- RORory O’Driscoll
Yeah
- JLJason Lemkin
... draft Sequoia memo-
- RORory O’Driscoll
[laughs] Ready
- JLJason Lemkin
... version three waiting to go out? Just search and replace and Gamma. Just have Gamma please dust off the, the rip good times and update for the AI. Any discussions at the, uh, partner meetings you've been in about that? I mean, David Cohen wrote the piece about the gap-
- RORory O’Driscoll
He did
- JLJason Lemkin
... chasm between CapEx spend and revenue.
- BHBrian Halligan
Yeah. I think there's a, there's-- I mean, we're in a kind of a, a... Like, one of the questions is like, are we in a bubble or not? Um, and the argument against the bubble is sort of just look at Anthropic and ChatGPT, and their growth rates are [laughs] really ridiculous. Or you look at even Harvey or so many of these companies that are app level. It, it-- What I kind of like as an investor looking at this stuff, I get nervous about tech companies selling to tech companies, and Silicon Valley companies buying from Silicon Valley. There's a lot of trading going on, and there's a lot of growth in there. I sort of like what a, what chat-- with the-- I love what ChatGPT is because it's like mere mortals are using that thing. I love what Harvey's doing. They're selling to lawyers. I like what Rogo's doing selling to investment bankers, stuff like that. I get nervous because I think 2001, and definitely in 1999 and 2000, it was just Silicon Valley companies buying and selling from each other, and it created kind of a-
- JLJason Lemkin
Well, 2022 though. 2021 too, a lot of it, right?
- BHBrian Halligan
For sure. Yeah, for sure. So I kind of like these ones selling to mere mortals.
- JLJason Lemkin
But it has to be a bubble at some level. The CapEx, this is where-- The CapEx bubble c- it can't last forever, right? We c- that's w- that's Harry's point. Look, AI is bigger than the internet, most likely, right? Bigger. So the, the, the investment makes sense, but when you see the f- Meta's cash flow decreasing, I mean, it-- there's, there's some kind of bubble here, right? Uh, hopefully we all, we all, we all get out, but, um, but it's some kind of bubble.
- RORory O’Driscoll
Bubble is, I, I think, a laden word, right? It, it implies a... I, I, you know, I just think you invest y- y- I mean, it's the usual two things. There's a ver- there's an enormously inf- enabling technology. It's getting massive traction at the apps level, as Brian mentioned. But you still add up all the apps revenue, and it probably comes to $25, $30BN maximum. And the CapEx to build that is running between four and $600BN. So you're investing four to $600BN a year to enable a $25BN ecosystem to go and keep doubling, and maybe next year it's 50. So my takeaway is the long-term trend is almost certainly real, and if you fast-forward 10 years, that 25, 30 billion of apps revenue could easily be three, $400 billion. So that's why in the long term it's not a bubble. There's probably gonna be a period where things get ahead of themselves, right? And you're gonna, you know, the, the, the marginal player will get caught, just like the marginal player got caught in 2001, right? The over-levered player who's taken on too much debt, finances, will get caught and get burnt, and the big guys will retrench for a year or two and then just grow into it. That's the most likely version of the movie, which is, you know, some pain at some point in time. And it, it's boring because it's neither one-- It's not like it's amazing AI maximalism, and it's not like it's bubble doomism. It's just like we're doing what we always do with a new technology. We're spending like crazy because it's the only way to discover the, the frontier, and there's-- and until you discover the frontier, you're not investing enough, right? So we do it as, as an organization, as an organism almost. Yeah, capitalism is working. We're spending money trying shit that works. Some of it won't work, but unless you try, you just end up like Europe. Sorry, Harry. Um, [laughs] I just mean-
- JLJason Lemkin
You're Irish
- RORory O’Driscoll
... I just want to-
- JLJason Lemkin
You, you always, you always shit on me. You, you're so Irish.
- RORory O’Driscoll
Harry-
- JLJason Lemkin
It's like-
- RORory O’Driscoll
... we've had 800 years-
- JLJason Lemkin
He talks more, he talks more European than you do, Harry.
- RORory O’Driscoll
Harry-
- 1:01:54 – 1:06:59
CEO of the Year? Why Jensen Huang Leaves Zuck & Satya in the Dust
- HSHarry Stebbings
Rory, I know you love unfair questions. I'm gonna give you the chance to grant an, uh, CEO of the Year award, and you can grant it to Satya or Zuck. Which one do you give CEO of the Year to?
- RORory O’Driscoll
You know, I'm deciding, I'm now gonna be the new humble me. It's inappropriate for me, a mere voice comment, a little grasshopper, to comment which of those two amazing CEOs are the best. They're go-team.
- BHBrian Halligan
I think the CEO of the Year is Jensen.
- RORory O’Driscoll
Yes, that's-- I'll go with that.
- BHBrian Halligan
Yeah.
- RORory O’Driscoll
Yeah.
- BHBrian Halligan
And I like the-- But the other thing I like about Jensen is he's sort of rethinking the role of the CEO. He's rethinking the CEO playbook. I think he's a pretty good inspiration for CEOs out there today. I'm gonna give you-
- JLJason Lemkin
He's certainly gone as long as you can go, right?
- BHBrian Halligan
He's, he's the number one on my CEO list right now.
- RORory O’Driscoll
Because I think of the two-- I mean, the, the reason the two people you've cited are now like in, well, in one-- It, it's very much existing business carrying and doing something in the new world, whereas I think you, someone like Jensen or OpenAI, you say, or Dario, we've created the new world, right? I think the, the two people who have-- The, the two categories are in the stack that didn't meaningfully exist at scale in SaaS and cloud land that exist now are the GPUs, which is all Jensen, and the models. Neither of those kind of categories even existed, and obviously, um, not only do they exist, but they appear to be dominant relative to the other parts of the category, either apps in AI land. So I, I think Brian's right. Those are, those are the contenders for CEO. The other guys are contender for managing the cash machine brilliantly at scale and keeping it up and to the right, which turns out to be a pretty lucrative way to spend your adult life.
- JLJason Lemkin
I'll tell you why you absolutely have to go for Satya over Zuck, like, m- by far. It's a sim-- It's a, it's, it's more a structural reason, and this is certainly what I learned in my tenure as a VP at Adobe. As a, as a founder, this stuff's easy. It's du- you just call the troops together. Zuck can do what he wants. Satya, having to get-- I, I just watched, um, a, a, a, Adobe just trying to go to the cloud took three years of convincing everybody, okay? So what Satya's done inviting and, and, and, you know, inviting Sam Altman back in, doing the deal, managing the deal, investing the ma-- doing this kooky deal to buy forty-nine percent of OpenAI, investing all in on Azure for AI. Like, he doesn't have the power to do this on his own, right? I mean, Brian Yamani and Dharmesh can get together, and honestly, you guys can just decide what you wanna do it. I mean, I know I'm being simplistic, but I, I would bet you'd agree, right? For Satya, man, this is like the, the amount of meetings and orchestrations [chuckles] and stuff you gotta do as a non-founder, I give him credit 'cause it's much harder.
- BHBrian Halligan
He's like a re-founder. He's an-- He's basically acts like a founder. He gets stuff done like a founder. It's, he's just super impressive.
- RORory O’Driscoll
If you accept the constraint that you can't build the core technology internally, which is what Microsoft had to accept, and he accepted, right? Execution since then has been perfect. You found the only other per- people that had the technology, you gave them a convoluted deal, you suck a lot of value out of them, you have the ability to resell it, right? All those things are awesome. At some level, you must kinda wish, as the CEO of Microsoft, there must be a little part of you that says, "If my guys were only smart enough to build the shit that OpenAI was building, I wouldn't have to do all this crazy stuff." But maybe that's the nature of being smart enough to accept that this large bureaucratic company can't get it done and live with the f- maybe that's the answer why it's awesome. He's lived with the reality of, "I wish my people could do this, but they can't, and I'm not gonna keep banging my head against the wall. I'm gonna do this very hard thing for a non-founder to do. I'm just gonna cut this weird deal with these other dudes, give them ten billion dollars, own forty-nine percent, and basically ride the-- insert myself into the AI business without actually having the core model that you should have had to be able to do it." It's kind of a one-man... It's like literally he must feel, maybe the wheel sound bite in his head is, "Thanks a fucking lot, the rest of you guys. I had to figure this out with one BD guy while all you guys were sitting on your ass not shipping AI," right? [chuckles] Maybe that's what he deserved the medal for.
- JLJason Lemkin
Not easy.
- RORory O’Driscoll
Not easy.
- JLJason Lemkin
Not easy. And he has to suffer for-- And he has to take forty-nine percent of the losses.
- RORory O’Driscoll
Yes.
- JLJason Lemkin
Massive losses flowing through their financial statements, right? I mean, you could argue asterisks and daggers, but it's not cost-free, right? It's not, there is a cost, right?
- RORory O’Driscoll
Yes, but t-three percent of the OI, they'll be fine. I mean-
- JLJason Lemkin
Yeah
- RORory O’Driscoll
... three percent of the OI in return for, you know, probably a trillion dollars in the market.
- JLJason Lemkin
But you get criticized for this as a non-founder CEO. You get criticized-
- RORory O’Driscoll
Yeah
- JLJason Lemkin
... for every line versus Zuck. They're like, "What are we gonna do?"
- RORory O’Driscoll
Yeah, just being ballsy enough. You're right.
- JLJason Lemkin
[laughs] What are we g- what are we gonna do with Zuck? What are we, what are we gonna do? [laughs]
- RORory O’Driscoll
You're, you're, you're exactly... Just being ballsy enough to write a ten billion dollar check for something weird is in and of itself, you know, heroic.
- HSHarry Stebbings
Now, Brian, do let us know when you have to go. I know you have the time.
- BHBrian Halligan
Oh, I have to go.
- RORory O’Driscoll
[laughs]
- 1:06:59 – 1:12:32
Cognition's $15B Deal & Mass Layoffs: The Most Savage M&A Move of 2025
- BHBrian Halligan
Thanks for inviting me.
- HSHarry Stebbings
Guys, I do just wanna go to a couple of private rounds, just 'cause they've really stood out to me. We said about, uh, companies that we've talked about before. Cognition is now rumored to have done a round at fifteen billion dollars. Um, the new combination being obviously Cognition and Windsurf. Um, both had eighty-five million in revenue, so combined you're at one seventy, being priced at the new fifteen billion dollars. How, how did we think about this?
- RORory O’Driscoll
They didn't.A ton in the sense that what you're saying is the rumor was it was being done at 10, and now the rumor is it's being done at 15.
- JLJason Lemkin
Yeah.
- RORory O’Driscoll
I mean, you know what? The cynical ca- it's pretty much the same as the Anthropic rumor. It's done at 100, and now it's being done at 170. 100 billion, and now it's what? I think what it says is demand is high for premium assets. So it's a little like it's the private IPO. You float a price of 100, and you end up at 150. You float a price of 10 billion, you end up at 15. I think there's just a lot of demand for premium, perceived premium AI assets, and price is how scarce assets get allocated. So there you go.
- JLJason Lemkin
What's, what's the question? I just thought this, this, this layoff buyout thing was just crazy.
- RORory O’Driscoll
Separate question, but yes.
- JLJason Lemkin
Well-
- HSHarry Stebbings
Unpack, unpack that, Jason
- JLJason Lemkin
Well, I gue- I, I guess today Cognition laid off 30% of the folks they bought, and they offered to buy out all the other 200 employees. They gave them a nine-month package. They told them they either had to work 80 hours a week, six days a week in the office, or they should take a nine-month package. So, uh, this was a he- and listen, no criticism, great people here, right? I, I, I've, I've-- Some of my best portfolio companies use Devin, which is pretty interesting when I talk to them, right? But doing this hero acquisition, then laying off 30, and then telling everybody to either work 80 hours a week in the office or take a nine-month package, the story keeps getting i-i-i-- And then finding out that, that the founders and the investors put in the 100 million, Google didn't. The story's very comp- much more complicated than it looked at first, right? It, it... There, there's not quite as many white hats and b- everyone's a gray hat, it turns out.
- RORory O’Driscoll
Agreed.
- HSHarry Stebbings
Okay, but let's just unpack that. Why make the acquisition then if they're gonna get rid of 30 and then say, "Hey, all of these terms posted," if you're buying the team?
- JLJason Lemkin
I don't think they were buying. I think it's clear they weren't buying the team. I think it's clear that... Listen, my limited, uh, Devin is, uh, an AI engineer, okay? And I talk to all the folks in my portfolio. The two actually toughest problem CEOs are using it, okay? Stuff that where they're reluctant to use AI. They like Devin, but it only does a little bit. It don't-- They, they pay for it, it's fine, but they're not deploying it across their whole team like Claude Code or something. So they have a niche product that's done well, and they want access to a top platform to get into everybody, a broader platform. And so they bought a brand. Um, they bought 80 million of revenue to maintain, right? And they saved themselves, who knows, three months to nine months, and, um, basically did a deal that looks non-dilutive at the end of the day at this 15 million. And maybe there's just a lot of spin on a deal that was just for brand and, um, a- an accelerated market entry. Um, and, uh, I don't know. That's, that's... The fact that they're, they're offering to let every single employee go certainly means they don't see a lot of value in the folks that are left. [laughs]
- RORory O’Driscoll
Oh, there's an implicit cultural statement. And again, I, you know, they're basically saying, "We're all wor-" They're, they're doing the, "You were all working, you know, nine to nine, time six, and you guys aren't. If you wanna sign up for this, do. If not, leave." I mean, you're right. There's an element of clarity to it. And remember, they made this decision a week-
- JLJason Lemkin
They've got until August 10th, all employees-
- RORory O’Driscoll
Yeah. Yeah
- JLJason Lemkin
... to decide whether they're staying or going. [laughs] It's a lot of change from the last pod. [laughs]
- RORory O’Driscoll
But, but all predictable. I mean-
- JLJason Lemkin
Bye, guys. [laughs] I'm not laughing 'cause the human, the human implications here are so stunning, right? I mean, Google's such a jerk. We don't want anybody... We, we want the company to die. Then the investors and the founders having to take the 100 million out of their own pocket and leave it in Windsurf. Google didn't do it. They had to do it after the deal was handshaked, apparently. Then it all happens. Then they get, then they get bought at the 11th in a, a half hour, and now everyone gets a buyout package. It's just, it's... I mean, e-even in a nine, six, six world, it's too much. [laughs]
- RORory O’Driscoll
Yeah. And what you don't know is, because they all made the comment prior to that they got their equity cashed out, what you don't know is how that compares to, you know, taking that 100 million, closing the company down, and splitting the money. So yeah, you, you don't-- I genuinely don't know how they ended up.
- JLJason Lemkin
Crazy.
- RORory O’Driscoll
But what it sa- I mean, look, what it says is this: If you're not one of the key players, the minute you move away from the cap table to p- you know, making it up as you go along, if you're not one of the key players, you're very vulnerable to, you know... You're basically depending on the kindness of strangers, as Blanche DuBois would say, which is always a mistake, right? You're depending on arbit- people arbitrarily deciding, quote-unquote, "what fair is," and people's decisions on what fair is change over time, right? Versus in a normal M&A where, you know, you know where you stand. It's a Delaware corp or a Nevada corp, and you, you get what you get. I think the lesson here-
- JLJason Lemkin
Yeah
- RORory O’Driscoll
... is once you get away from that, it's all, well, all, everyone's just winging it, and it's hard to know from the outside.
- HSHarry Stebbings
Did you quote Streetcar Named Desire?
- RORory O’Driscoll
Yes, I did.
- JLJason Lemkin
[laughs]
- HSHarry Stebbings
In a, in a VC pod. My respect and love for you-
- RORory O’Driscoll
Yeah
- HSHarry Stebbings
... has gone through the roof, Rory.
- 1:12:32 – 1:17:41
Ramp’s $22B Raise: Genius Move or Suicide Round?
- RORory O’Driscoll
Yeah.
- HSHarry Stebbings
Well, there's two more things that I wanna discuss. Ramp raised a $500 million Series E at a $22 billion price. Iconic led it. This is, like, the fifth or the sixth round they've raised in, in, like, 18-month period. So is this aligned to company progression, or is this late-stage capital really trying to find a home?
- RORory O’Driscoll
It probably a bit of both, 'cause remember, Ramp, unlike most software companies, part of what they do is lend money. I mean, they're a c- you know, they, they basically give people corporate credit cards on which they earn the interchange, and the way you earn the interchange as the issuer is, you know, you, you, you, you... Someone has to fund them for, um, that period of, you know, the 30-day float period. Now, I don't know in their case, are they funding it themselves, or they have some kind of flow-through. But in any event, issuing a corporate credit card by definition is way more capital intensive than simply, you know, building a software company, and they're building a so- they, and so they're doing both. So it probably consumes more capital than the typical software company. Just, and the faster you grow, the more capital you consume.Right? So at some level, there's gonna be just a capital need for that. Then, yeah, on top of that, you obviously have the phenomenon of it's a wildly hot, successful company, perceived dominant in its category, and by virtue of that, it's just gonna attract a lot of venture capital interest. And if people keep offering you money at increasingly higher prices, you're probably gonna take some. So probably a bit of both.
- JLJason Lemkin
You know, the other thing, these rounds, when I look at Ramp, $22.5 billion, right? Very quickly. But $500 million, it's only 2%, right? Clay, Clay just did a round at $3 billion, which is stunning growth too, right? But they sold $100 million, right? So these little tiny rounds, the absolute dollars may sound large, but they're not even rounds, right? When we're talking about 1% dilution, 2% dilution, um, and the VCs get a markup out of it, there, there's a weird, also a weird set of do they really count, right? I remember back in the day, I had a markup at $3 billion in investment, right? And I asked my anchor, but it was a very small number. My anchor said, "Don't, don't, don't, don't recognize it. It's not big enough. It doesn't count," right? "It doesn't count. Don't, don't just... Don't..." And, and he was right. [laughs] I'm not saying that's the same here, but these are-- If I'm Ramp and I could sell 1% in a series of rounds, there's no, there's, I mean, there's no cost, is there?
- HSHarry Stebbings
But do you actually think these are good rounds for companies? You know, I think they've been called suicide rounds before, where you raise, like, $100 million at, like, a $3.1 billion valuation. It just sets a really high price for the company to grow into with actually not that much money going into the company.
- JLJason Lemkin
Well, that's the downside, right? Maybe it is a suicide round. [laughs]
- RORory O’Driscoll
You know, I, I, I think if you need the money, you have to get the money, and if you need the money at a high, a high price, it's better than a low price. I don't-- But, you know, people always say... You, you... It's, I don't think raise, raising, raising money at too high a price is only, quote, "suicide" if you have to raise again, right? If you don't have to raise again and all you do is have some investors who've overpaid and then take four or five years to grow into that valuation, well, that's tough shit for the investors. But from the company's perspective, it's fine, and you're glad you got the money, right? So I, I, I think the number one q- what you don't wanna do is raise-- Let's take the $100 at $3 billion. You don't wanna raise $100 at $3 billion when you needed $400, and then you go back out six months later, you haven't had the growth, and in theory, you're only worth $1.5 billion, but then people get the cognitive dissonance of it's a down round and you're screwed, right?
- JLJason Lemkin
Yep.
- RORory O’Driscoll
If, if, if you really-
- JLJason Lemkin
That's a suicide round.
- RORory O’Driscoll
That, that's a suicide round. But if you raise $500 million at $2 billion and, you know, even three or four years later you go public at $1.5 billion, well, tough shit on the guys who paid $2 billion, but life goes on.
- JLJason Lemkin
Yeah.
- RORory O’Driscoll
You know? I don't-
- JLJason Lemkin
But Ramp's raised $1.9 billion, so it's just gonna keep consuming this capital for one reason or another, right?
- RORory O’Driscoll
And as I say, you, you, you can mult-- I mean, I, I used to have the number in my head. You can, you can actually work it out if someone had the time. Like, if-- I've heard they're doing roughly $700, $800 bill- million dol- million dollars. Interchange is a good slug of that. You get 2, 2.5% on interchange, so you can work out their total transaction volume, and you have an average probably of a 15-day rotating balance. So you probably have four to five times revenue in terms of floating cash amount. In other words, to do $700 million in revenue, you might have a $3 to $4 billion capital requirement because you're floating all these... I mean, you're replacing Amex, so you- you're floating-
- JLJason Lemkin
Yeah
- RORory O’Driscoll
... all these guys on their credit cards. So, you know, you do need the money.
- JLJason Lemkin
I mean, I get like 20 emails a week from Brex telling me to deposit more in my account.
- RORory O’Driscoll
Yes.
- JLJason Lemkin
Maybe it's not a coincidence.
- RORory O’Driscoll
Yes.
- JLJason Lemkin
I'm constant- constantly, "Jason, your borrowing may go down below $2 million. We need money instantly today." [laughs]
- RORory O’Driscoll
Totally.
- JLJason Lemkin
I'm like, "Leave me alone, guys."
- RORory O’Driscoll
Yeah.
- JLJason Lemkin
Just leave me be. I'm fine. [laughs]
- RORory O’Driscoll
That, that's exactly right. No, I mean, in the end, fintech companies are fin, and fin-
- JLJason Lemkin
Yeah
- RORory O’Driscoll
... is, you know, at some point you need... One of the non-negotiables is to have low-cost capital, and, you know, you do it when it... And at the moment, bizarrely enough, venture equity is the lowest co- is lower cost capital than pretty much anything out there, as Jason said. 2% dilution or get a banking license. Hmm, I'll do the 2% dilution.
- 1:17:41 – 1:28:25
CRV Shrinks, Benchmark’s Bet, and the Future of Venture Strategy
- HSHarry Stebbings
The final one that we, we just have to discuss, I thought this was really interesting. Going back to venture land, CRV raised $750. They shrunk the team. They're not raising their later stage select fund. So is this a sign of a more rational venture landscape? Is this a sign of LP appetite being less willing to do opportunity funds? How do you guys think about and analyze this move?
- RORory O’Driscoll
I think they do early stage well, and they probably decided the best way to make money is to do the thing you do well, and then do it well, and keep the message clear. I actually thought it was very smart of them, right? Look, I mean, there are some firms that are pulling off these multi-platform strategies, but it's just a step function increase in complexity, right? And, you know, if you can do it, and obviously we all know the names who have, great. You have a multi-product firm. But if you're gonna be marginal at it, the non-negotiable thing is to at least do one thing well, right? And CRV clearly decided that rather than, you know, muddying the waters, trying to do h- this multi-strategy thing, just execute really well on great early stage investing. So I thought it was, it was probably smart in a world where you just want to have a clean message. And, and to your comment on is it a sign of wider LP appetite, no. I think what you're seeing is the LP appetite is varied. I mean, you can, you can say, "Hey, I'm really glad, CRV, that you focused your message down," and the s- and next day you can say to Founders Fund, "You got the most amazing growth rate fund on the planet. Let me give you another billion." And the day after that, you can say to Elad Gil, "You're just amazing. Let me give you $1.5 billion on your own." Right? They're trying to figure it out too, and they're just trying to figure out... I mean, maybe the takeaway is the whole industry has changed so much that there's a lot of different ways to play the game. And I think more than anything, what they wanna see is people know what game they're playing and playing it well, right? Rather than trying to... You know, what you don't wanna be is the person who has envy of someone else's game, right? And trying to... And by CRV saying, "Hey, this is what we do, and we're doing it well," you can say, "Okay, I know what I'm getting from that." Right?Does that make sense? I wouldn't want to-- Yeah. Vers- Keep it clean.
- JLJason Lemkin
I mean, look, the other thing is, I mean, now, I mean, we're, we're in an age of everyone raising as much capital as they can and deploying infinite capital as startups stay private forever. But-
- RORory O’Driscoll
[chuckles]
- JLJason Lemkin
De-deep down, but deep down, i- you know, if you're in it for carry over fees, if you are, if you are, you wanna get into carry mode faster.
- RORory O’Driscoll
Yes.
- JLJason Lemkin
I'd rather have two seven hundred and fifty million dollar funds split in half like Founders Fund did than one one point five billion dollar fund, right? It's just, it's better for GPs, isn't it?
- RORory O’Driscoll
Yes.
- JLJason Lemkin
I'd rather have-- I'd rather get into carry mode faster.
- RORory O’Driscoll
Got it.
- JLJason Lemkin
And I, I... You know, I don't know CRV's results, but they've had some good investments. If they're looking at their-- Especially some partners who maybe generated more carry than others are like, "I'm not in it for a million bucks a year, in, in two million dollars a year in salary. I'm in it for big carry checks, and I don't-- and I wanna get this thing deployed in twenty-four months, thirty months," right? And so I know this, we've lost this the last-
- RORory O’Driscoll
Agreed
- JLJason Lemkin
... eighteen to twentyfo-- But if we look back on all of Harry's guests, i-you know, normal times you wanna optimize your fund size to achieve the maximum carry you can at a given time, right? And then just go raise another, right? In a, in an ideal world, you might even raise a fund a year, right? So you can get into carry mode as quickly as possible. You lose a lot of things. You lose time and others, but, but, but you wanna get to carry mode fast. You don't, you don't wanna leave it all to your grandkids, do you?
- HSHarry Stebbings
Jason, come on, man. Do you regret doing an opportunity fund?
- JLJason Lemkin
I don't regret it 'cause I'll make money, but the... But if that's why CRV-- So listen, it's not, wasn't worth it for me to do the opportunity funds. It's not enough. Like, I'll make, like, fifteen percent more money. It's not enough money, right? If I had a five hundred million dollar opportunity fund and could deploy it, that'd be different. So maybe CRV looked at it, and maybe they did some of their deals that didn't make a lot of money. It was a lot of hassle, and they're like, "Hey, I only made ten percent, fifteen percent more carry. My LPs don't love it because I burned a lot of capital from them. Let me concentrate where I make a lot of carry." That's my guess. And for me, Harry, it's the same thing. Like, ninety percent of my carry will come from the main fund. So I'm like, "I don't want the drama in my life." So sort of, but, you know, I'll still make maybe three X, but that's it. On not a lot of money.
- RORory O’Driscoll
I think that's what the math... Interestingly enough, I think a lot of the math runs out there because you look at it and you go, "Yeah, how many deals do you have in your main fund? How many of them are amazing? How much can you get in?" You know, maybe only twenty percent of them are amazing. How many of them can you deploy late-stage dollars in? You know, maybe only half of that because the round, the late-stage rounds get pricey very quickly. It turns out that unless you end up with one of the very few companies that are not just amazing but are super amazing, where they can be a twenty billion dollar outcome, your ability to deploy lots of capital relative to your early-stage fund is actually much smaller than you think. So the, the size of the opportunity fund that you can deploy just within your entities is smaller than you think. And you're right, Jason, then you end up saying, "Is it worth it?" Now, you can decide, as some people have, "No, I'll build a whole late-stage growth strategy and then knock yourself out." You can do anything, and you can put billions to work. But then at that point, you're becoming a different thing, right? So I think it just-
- JLJason Lemkin
Plus maybe less discussed, maybe CRV is too big for this, but almost every seed manager that we know that's been successful, they can spin up an annex fund. Like, it's not so simple. If all of a sudden you, you know, you, you, you got into Anthropic early and it's turning out pretty good, you c- you could raise a couple hundred million dollars in an a- in an annex fund or [chuckles] an additional fund. It's okay. It's not a, it's not a permanent decision to not fu- to not raise another vehicle.
- HSHarry Stebbings
Do you not think, though, that Benchmark's capping or discipline on fund size is one of the core reasons why maybe they've lost some talent this year when you look at the likes of, say, a Miles or a Victor leaving?
- RORory O’Driscoll
I, I, I don't know if I agree with the characterization. I mean, I think they've had... I mean, my s-- Jason did the list. Actually, w- either you or Jason did the list last time.
- JLJason Lemkin
Harry did it.
- RORory O’Driscoll
Harry did it. They've done amazing deals. If being left behind is that set of deals that they've done, uh, I don't think that's challenging, right?
- JLJason Lemkin
But you're both right.
- RORory O’Driscoll
Yeah. I know.
- JLJason Lemkin
But, but you're both right, right? The numbers... Th-they've picked extremely well, right? A-a-incredible investments. On the same time, if you look on social media, Benchmark isn't listed the way Andreessen and Sequoia was like it was a generation ago. It's just not. Does it matter? Uh, Har-Harry's built a big brand. He's concerned it matters. You could argue both sides, but when the industry was smaller and Brian Halligan had to drive up and down Sand Hill to get a deal done and it took months, uh, brands were just different, right? Brands-- It's still, it's still an S-tier brand, but, but it's not in every conversation on X, right? It's YC, Sequoia, Andreessen. That's it, really.
- HSHarry Stebbings
But if you were maybe scaling fund size and scaling strategy, do you not think that would have increased the likelihood of being able to keep great talent like Miles and like Victor from leaving?
- RORory O’Driscoll
I think it's presumpti-- I'm not gonna tell Benchmark how to run their business. They've done it. I've been in this business. I remember them starting in '95 and talking to them then. They've done a pretty damn good job of running that business. They don't need my help. Um, I think it's what Jason said. The, I mean, stepping back from the individuals, right? The, the meta question you're asking is, let's deem, because I think it's true. What we're asking is, is the very best specialist fund able to compete in this market with the very big, you know, full stack firms? That's really the meta question, because I'm willing to stipulate, and there's a lot of data that says it, that Benchmark have been among, if not the best specialist fund. So I think this takes it away from individual commenting on people, which gets personal very quickly, and more is that the meta question you're asking is, is the right strategy specialist fund or do you need to be a full stack player to matter, right? And there's no doubt that if you're full stack, you have more coverage, you have more news, you have more news flow. And there's also no doubt that... I mean, you know, I cited the data, like, from the Rotman guy at DST a while back. Your picking goes down a little, but your volume goes up, right? [sighs] I don't know. I, I, I think the biggest risk you face as a s-- I mean, it, it, there's, each side has a risk. The risk you face as a specialist is you get crowded out by the noise and people don't know you're amazing enough, and therefore you, you lose some of the at-bats to the people who have more brand. The pe- the risk you face as a brand is in your wild urge to put all the money outYou end up overextending yourself and you get subpar returns. And you fast-forward five years and you look back and you go, "Oh, we had lots of noise, lots of good individual deals," but as Jason said, it didn't add up to compelling returns because we had so many other deals. And I think the truth is both strategies will work if executed well, and both strategies [laughs] have their risks. I think the sloppy, big... I mean, and I, I know that's kind of a stupid answer, and y- and you're right that it is, but I think there's lots of ways to make money. The one thing you don't want to do is be inconsistent. You, you have to have a strategy that plays to your strengths and that w- can work for you, and you have to understand the risks that your strategy entails and the risk of a specialist strategy. And we see it every day. Look, when you're competing against the guys who have infinite deals and infinite deal flow and infinite money, it's hard, and sometimes you lose, right? Equally for those guys, you put, sometimes you put $100 million in something and it just doesn't work. Unless you have an outlier to cover all those mistakes, it's, you know, that's gonna be their problem.
- HSHarry Stebbings
Guys, I want to wrap up with one final question. It's we had Halligan today. He was fantastic. Who would you most like to have as our VIP guest on the show next time?
- RORory O’Driscoll
You guys are so much better at this than me because you interview for a living. I don't have an opinion. I thought Brian was an excellent guest because he brought a different perspective to bear as a CEO. He was strong on the things he knew. Obviously, we knew him from the deal. So any... Like, you guys, both of you have- do way more interviewing than me because I do none. So by definition you do more. So whomever you two think, I have, I'm totally willing to try. How about that? I, I, I, I'm sure.
- JLJason Lemkin
I think it would be great to have Marc Benioff. I think he would do it. He'll be different than Brian, right? Um, but my idea that I didn't have until today was we-- Jeff Lawson would be really fun.
- HSHarry Stebbings
I thought the same. I thought Jeff would be fantastic, dude.
Episode duration: 1:28:36
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