Gokul Rajaram: How to Analyse for Durability and Defensibility in a World of AI

1. 0:00 – 1:03

   Intro

   1. GRGokul Rajaram0:00

      I call it the eight moats. Data moat, workflow moat, regulatory moat, distribution moat

   2. HSHarry Stebbings0:04

      We're on number five. I'm loving this. [laughs]

   3. GRGokul Rajaram0:06

      Ecosystem moat, network moat, physical infrastructure, and the eighth one I would say is scale moat. And I think anything four or more, you're pretty damn secure.

   4. HSHarry Stebbings0:15

      [air whooshing] I'm thrilled to welcome one of the best operator turned investors of the last two decades, Gokul Rajaram.

   5. GRGokul Rajaram0:21

      You cannot be a single product company. Vertical products, you've got to really own full stack. It's harder otherwise to be a 10 plus billion dollar company.

   6. HSHarry Stebbings0:28

      What's the biggest miss? Is it Banter?

   7. GRGokul Rajaram0:30

      Most recently, Quince, but to be honest, even bigger miss than that in some ways. It's not a miss in terms of investing, it's that-

   8. HSHarry Stebbings0:36

      [clapperboard snaps] Ready to go? [upbeat music] Gokul, I've wanted to do this for years, and you have... I mean, you've coyly played hard to get, let's put it mildly, uh, after my continuous WhatsApp messages. But thank you so much for joining me today, man.

   9. GRGokul Rajaram1:01

      It's my pleasure to be here, my friend. Thank you

2. 1:03 – 7:41

   Lessons from Google, Facebook, Square & DoorDash

   1. GRGokul Rajaram1:03

      again.

   2. HSHarry Stebbings1:03

      Now, I wanted to start with how some of your prior companies that you've worked at have shaped your investing mind specifically, and I wanted to start with Google. When you reflect on your time with Google, how did that shape your mindset for the types of companies that you like today?

   3. GRGokul Rajaram1:20

      I think the best way to think about my, the Google experience is Google taught me that ultimately the best companies have a remarkable product at their core. Google was a remarkable product. Google was definitely a philosophy of build it remarkably and they will come. Uh, GTM was not Google's specialty, but what Google was really good at was building amazing products. Sometimes the go-to-market worked, sometimes it didn't work. So but at the core was a remarkable product. So I think I... Ultimately, my core investing thesis is that if there is not a remarkable product, all the go-to-marketing distribution in the world will not save you. So that's-- I look for what the remarkability is in the core product or value proposition of the company. Is it 10X, 100X better than the alternative? I'll tell, I'll tell you a story at Google. When I joined in 2003, there was a project going on called, um, Caribou internally. I was like, "What the hell is this?" This was web email which gave one gigabyte free storage, and back then Yahoo Mail offered 10 megabytes of storage, so it was 100X. I thought it was truly... I was like, "There's no way it's possible." And it turns out it was, and it was released on, if you remember, April 1st, 2003, and that people thought it was an April Fool's joke, but that was Google literally taking something that was unbelievable and making it reality. And so that's, that's the kind of products I like, something remarkable, something unique, something powerful.

   4. HSHarry Stebbings2:39

      I like it. It reminds me of actually Neil Mater, who talks about kind of jaw-dropping customer experience as one of his kind of core monikers for thinking about companies and investments. [laughs] Next, we have Facebook. How did Facebook impact the types of companies that you like?

   5. GRGokul Rajaram2:52

      What is interesting is that even if you have a remarkable product, uh, you still need distribution. Facebook taught me the power of distribution. Mark, I think is, uh, Mark Zuckerberg is probably the best, um, I would say, uh, distribution genius in the world. He would look at a product and say, "This is how this product is not going to work." And it taught me the power of multiplayer products in particular. I think, uh, most software products are single player, and as soon as you make them multiplayer, there is a uniqueness in switching distribution, et cetera, that comes about. Facebook, by nature, you can't use it if you only are one person on Facebook. And so I... When I saw Figma, the power of Figma, I felt, was it was not just that a person could use it, but it was much easier to share with other people in your company. And I think the best B2B software companies are those that you can use m-multiple people can use, and it increases defensibility, so the power of distribution in multiplayer products.

   6. HSHarry Stebbings3:49

      What about Square? Square was an amazing journey. What did you learn from Square that you've taken to your investing?

   7. GRGokul Rajaram3:55

      The power of a multi-product portfolio. I think at Square when I joined, we were a single product company, payments and payments only. Uh, when I left, we had I think 11 products each doing more than 50 million in revenue. And one of the interesting metrics was we went... Our key North Star metric went to median number of products used by a seller, by a merchant. Turns out that the more products that a merchant uses, the more retentive they are, the more sticky they get. So this is the other thesis I have. I mean, this is obviously very clear now. You have to have... You cannot be a single product company. Uh, you've got to make sure... And, and most importantly, your product number two needs to emanate very naturally. It can't be like this completely separate product. It has to be very adjacent to product number one. For Square, it was a product called Square Capital, which was basically a cash advance product that really came from the fact that Square controlled the payment flows and knew exactly the, the merchant's credit history and could underwrite based on basically money going in and out. And, um, it was a beautiful product. And the, the, the interesting thing about having a multi-product portfolio is that not every product needs to generate profit. I think there is a, uh, s- people are always like, "Oh, it's not making money." Square Capital didn't make much money, but it was very good for retention. Some products are good for making money, profit. They're part of the profit pool, and some are good for retention. Companies need to be very clear which are the profit pool products and which are the retentive products. If you confuse the two, your teams don't know, and they build for the wrong outcomes. But the power of a multi-product portfolio and being able to have pro-products with different goals, retention versus profits.

   8. HSHarry Stebbings5:34

      I l- I love that in terms of it doesn't need to be profitable. I also just see so many investors today being relatively inelastic in terms of their mindset on margin. Whereas like, "Oh, the margins are shit." [laughs] And it's like, I don't... You know, going to a next company, DoorDash-

   9. GRGokul Rajaram5:45

      We're at negative gross margins for the first, like, s- first year, I think. Uh, negative gross margins.

   10. HSHarry Stebbings5:51

       Dude, I, I don't think DoorDash had great gross margins for the first years either. I think... I don't think Deliveroo did, who obviously DoorDash acquired. And so it's just funny that we kind of repeat the same mental cycles of, "Oh, the margins are shit," and it's like, yeah, so were the best companies' margins. Spotify didn't have [laughs] great margins for a very long time, and their margin increase has been amazing actually. Dude, DoorDashWhat is Atlassian from DoorDash?

   11. GRGokul Rajaram6:12

       It was the most operational of all four companies. I thought I was a good operator. When I got to DoorDash, I really realized what operations means. And so a lot of my philosophy is around how to truly operate in a hard, hard and hard mode have been shaped by it. It really was the apotheosis or the epitome of how-- I think how product and operations can work together in the physical world. So how it shaped my, uh, my investing philosophy is the kinds of people that, that came out of DoorDash, I think they are-- I, I just think they are excellent, and I try to get them. It's really around hiring, it's around talent, it's around picking really hard problems. And something I'll never forget when COVID hit, as you, as you know, most restaurants were shut down for the first, for the first couple of weeks. And so DoorDash had to make a very hard call around how to basic-- what to do, how to get these restaurants open. And ultimately, we decided to not take any revenue share from these restaurants for a month, uh, even though we were a private company, we had some amount of cash on the balance sheet, and that really hurt. It was the right thing to do in the long term, but it was extremely painful in the short term.

   12. HSHarry Stebbings7:18

       You spoke about kind of the skill of operators to work both in a physical and in a software-based environment now with DoorDash. You know, with Project Europe, which we chatted about before, we're seeing all of our hardware companies be so freaking popular right now because everyone's just terrified that bluntly, Anthropic's gonna eat their lunch. As we keep seeing with Anthropic doing security and security stocks

3. 7:41 – 8:47

   Is the “SaaS Apocalypse” Real? Why Markets Are Overreacting to AI

   1. HSHarry Stebbings7:41

      plunge. I wanna talk about the SaaS apocalypse, because my job with this show is to learn from people much smarter than me, and I'm lucky to do that here. Is the volatility that we're seeing justified, or are we in a manic hype oversell environment with emotional volatility?

   2. GRGokul Rajaram7:58

      Well, as all of our software portfolios are deep red, right? All of us have some software stocks, and the reality is the public market has decided that since code is becoming free, uh, at the low end and becoming much easier to generate and create at the high end, uh, the market has decided that every software company is going to zero. I think this is one hundred percent an overreaction because not all software companies are created equal, and we can talk about what the differences are. I actually, um, have spent the last few days thinking about the different-- not even last, last few months. This is the-- I mean, both you and I think about this a lot. What are the characteristics, uh, of a durable software company? And I think there is, there's a few that we can talk about. But yeah, I do-- I think it's absolutely-- I think everything has been painted with the same brush at this point. It is absolutely an overreaction.

   3. HSHarry Stebbings8:46

      You're gonna

4. 8:47 – 12:25

   The 8 Moats Framework: How to Identify Durable Software Companies

   1. HSHarry Stebbings8:47

      leave me with a cliffhanger, Gokul. You're like, "There's some very durable characteristics. We can talk about them if we want." I wou- I would love it if we could talk about them. Can you please help me understand?

   2. GRGokul Rajaram8:56

      It's basically a play on Hamilton Helmer's seven parts, but it's slightly different. I call it the eight moats. The first moat is data moat, which we all talk about, but it truly has to be proprietary. It has to be data that nobody else has access to. I think Spotify is a good example. If you look at their, uh, their Discover product, it uses a decade of listening behavior across hundreds of billions of people. You can't create that listening pro-- that, that Discover product easily. Second is the workflow moat, which a lot of people argue it's a weak moat. I agree. By itself, it's a weak moat, but the deeper you're embedded in the company, running their operations, moving their money, the, the deeper the workflow moat. Just by itself, I don't think it's enough in perpetuity, but the deeper your embedding is, for example, NetSuite is an ERP that runs your business. They have a much, much deeper moat than, say, Zendesk, which is a lighter workflow moat. So that is a moat. You can say it's one, maybe Zendesk is zero point, NetSuite is a one. Third one is regulatory moat. So licenses, uh, capital require, multi-year procurement contracts. Coinbase, where I'm on the board, is a great example. They have MTLs, Money Transmission Licenses, state by state. They raised with the FinCEN, all of those things. It makes it impossible for a company to use anybody else than Coinbase to custody their crypto because of that reason. Fourth moat is a distribution moat, uh, where you have proprietary exclusive distribution. Intuit is a great example. Anybody who wants to build an accounting system think about Intuit. I remember when I started a company, it was after Google. I basically tried to use this company called Xero, X-E-R-O, and I was like, "Let's use Xero." It's like the new... It had just started. It seems like a cooler interface. My, my, I-- my accountant said, "No, I'm sorry, I don't use Xero." He shut it down. I had to cancel Xero and go to QuickBooks. What a great distribution moat where you've trained a network of CPAs to only run QuickBooks. I don't know if they have a commission or what they get, but that's a proprietary distribution channel that these guys have. Very hard to displace them. Ecosystem moat. If you have a platform or ecosystem where many third parties have built on and rely on, you have a moat. Shopify is a great example. You can wipe code an e-commerce hosting platform, no problem. But can you wipe code the hundred thousands of developers and third parties who built all these applications on Shopify? Every Shopify merchant I know uses like at least five or six other third-party apps. That's a huge part of the Shopify ecosystem. That's a moat. Sixth one is a network moat. That's classic DoorDash. I think, uh, DoorDash has many other moats, but w- AI can wipe code, uh, the ability to access restaurants, but it can't wipe code liquidity, career density, reputation history, all of those things. So marketplace density is a network effect, which is, which is structural. Seventh one is the thing you mentioned, physical infrastructure, right? Atoms. Wherever you have atoms, it makes for a moat that's hard to displace. Uh, you can't... Again, I think humanoid robots will maybe at some point start taking, but it's probably a few years away. And the eighth one, I would say scale moat. If by virtue of your scale, your costs are so low that it's hard to replicate. I think Amazon is a great example. TSMC in semiconductors. Scale moats. So those are the eight moats, basically. Uh, data, um, workflow, regulatory, distribution, ecosystem, network, physical, and, and scale. And so what you do, I think any one of these moats is not enough, uh, but what you want to do is you want to take a company and score it across them. Maybe you assign one point to each moat they have.And I think anything four or more, you're pretty damn secure. But if you have a two or three, it's a weak moat. And if you're one or less, you probably need to really build some more moats or you're not-- you need to do something, um, to make up for. If you have zero, you're, you're

5. 12:25 – 19:19

   Atlassian vs Monday: Which SaaS Companies Actually Have a Moat?

   1. GRGokul Rajaram12:25

      screwed basically.

   2. HSHarry Stebbings12:26

      I, I'm just thinking and thought out size. So we have Atlassian, and we have Monday. They're both down kind of seventy-five percent. Um, I've had both their CEOs on the show. If you look at them, and you put them across this eight kind of rules, you would probably say that Atlassian is being massively oversold and that Monday, as awful as it sounds, is maybe being rightly priced in this environment.

   3. GRGokul Rajaram12:51

      I agree with that. I think Atlassian has-- you could argue they have proprietary data. Now they need to use that data to build products. They have unique proprietary data on all the code out there because it's being checked in. We-- There's a lot of stuff they have which, which they need to use for better. They have a workflow moat. Uh, they don't have a regulatory moat. I don't know about distribution moat. Need to think of whether they have something there. Ecosystem moat, I think there's a lot of third-party things that are built around them, so they at least have a score of three here. Uh, they have a network moat. You could-- Do they have a network? No, I don't think... They're not a network effects company the way you think about it. They don't have a physical moat, and they don't have a scale moat. So they have a score of three. Monday probably has a score of one, I think. They have a workflow moat. I'm not sure if they have the other moats. So you're right, Monday, in theory, has a much weaker, um, um, score, I guess, than, than Atlassian on this.

   4. HSHarry Stebbings13:42

      This is so unfair of me. How would you think about Klaviyo or Klaviyo in this way? Like when you look at bluntly the ability for public companies to build good agent products, it would seem very obvious that Shopify will bluntly build Klaviyo now in the need to re-accelerate. How would they rate?

   5. GRGokul Rajaram13:59

      I don't think Shopify will build it. Shopify is an investor, and Shopify, I think, has decided, at least in my opinion, that this is... Shopify has these things called missions, and I think they decide this is not part of their mission to build this product. So I don't think the risk is Shopify. It is that it, it has become easier to build, build Klaviyo now, uh, than it was, you know, a year ago. So it's easy to build Klaviyo. They do have... I haven't talked about brand. I think brand is no longer a strong moat. I explicitly ex-excluded brand. I don't know how strong Shopify's promotion of Klaviyo is. I think a lot of it depends on whether the proprietary distribution they get from Shopify is how strong and tight it is. If Shopify is actually going to promote them as a, you know, when you, when you search for, uh, messaging or communications, if they are... Just like, you know, Google has a moat with Apple. When you use Apple, you basically, Apple products, you get Google Search engine. If Klaviyo is a preferred product, and they have a relationship that makes it work, I think it's very hard to displace them. It's hard to at least displace that part of their business.

   6. HSHarry Stebbings15:03

      Did you just throw a grenade in and, like, don't expect me to pick up on the I think brand moat is not so relevant anymore? I just actually had, uh, Lena Verna, who's the head of growth at Lovable, on our 20 Growth show, and she said that actually brand is the most important thing, as you commoditize technology and it's easier and easier to create, how people resonate with a brand is the most important. Why do you think brand moat is not as important?

   7. GRGokul Rajaram15:28

      Businesses are much more rational, uh, in thinking about it, less, less irrational. I think, uh, and the alternatives are going to be much stronger. I think on the consumer side, consumers are much more like dollars and-- There is, there is dollars and cents, but there is a natural inclination to just trust brands. I, I think on the business side, it is going to get weaker. I think... I, I actually disagree a little bit because switching costs are so much lower, right? One of Ha-Hamilton Helmer's seven powers is switching costs. I think switching costs is just going to go to essentially zero because over the next one or two years, ability to port data, your data, as a business or consumer from any ecosystem to another ecosystem is going to be very easy. And then people are gonna be able to replicate almost pixel by pixel the experience you have with one product in a different product. You'll have clones popping up left, right, and center, and data portability is going to be easy. In that case, what is that brand really? It's like in, in professional sports, you know, you kind of cheer for... Do you cheer for the player or the team when they, when they switch teams?

   8. HSHarry Stebbings16:30

      I need your help because the one that I continuously oscillate on is, is Salesforce. Um, when you say about data portability being increasingly easy, we had Seb from Cron on the show. He said agents would make data migration from systems of a record increasingly easy, so they wouldn't have the lock-in that we think or, you know, it reduces switching costs. But then I look at your, you know, eight factors, and I'm like, "Well, they have workflow. Hmm, they have distribution. They have ecosystem. They have scale."

   9. GRGokul Rajaram16:59

      Well, they don't have scale. Their, their scale means that it is cheaper for them to produce. I think they have a score of three because that's the thing. Software earlier was a scale game where because you had produced a lot of software, it was cheaper for you to produce a lot of software. Guess what? Now everybody can produce software as cheaply as anybody else. If they had their own data centers like hype-- I think hyperscalers are the ones that, that basically are able to say confidently that they have scale or people in the physical world. A pure software company can't get that scale moat. But yes, they are very similar to Atlassian, where they have a score of three, I would say.

   10. HSHarry Stebbings17:32

       So do you think Salesforce and systems of record like Salesforce are inherently attractive or less attractive given the data portability increasing?

   11. GRGokul Rajaram17:42

       They are more attractive than most companies, most software companies. But if they don't build, um, agentic workflows and commoditize a complement by giving-- by figuring out where their profit pool is. I think they have to figure out, is the profit pool in the data, profit pool in the data or the workflows? If in the workflows, they need to make data storage free and basically change pricing to an outcome-based model based on workflows. If they feel the profit pool is in the data, then they need to give away these workflows for free. And so they need toReally commoditize all the agentic companies that you and I know that are trying to build on top of them and charge for that. They need to build better products using their data and make it free. And I think that's the way that a NetSuite or a Salesforce as a record needs to operate. They have to commoditize a complement. They can't just wait around for other people to build on top of them.

   12. HSHarry Stebbings18:30

       We're seeing buybacks like, like never before for your Workdays and your Salesforces of the world. Is that truly indicative, do you think, of like internal company confidence, or do you think it's a necessity to externally show the world that we are confident?

   13. GRGokul Rajaram18:44

       It's both. It-- they are confident internally, but they need a signal to show that they are confident. I think the founder buyback is the most, the strongest signal. It's not just the company, but also the founder.

   14. HSHarry Stebbings18:55

       Did you see ServiceNow CEO's three million buyback? [chuckles] And then they saw that his garage of, you know, classic cars was like three times as much.

   15. GRGokul Rajaram19:03

       [laughs]

   16. HSHarry Stebbings19:03

       I was just like, "Oh, that's a bad comms move." [laughs]

   17. GRGokul Rajaram19:08

       Yeah. I think, uh, there are, there are buybacks, and there are, there are buybacks with a capital B. You want the capital B one. You want a CEO of a large company to do a twenty, fifty million dollar buyback to show confidence.

   18. HSHarry Stebbings19:18

       I completely

6. 19:19 – 25:26

   Bolt-On AI vs Real AI Products: Why Most Companies Are Doing It Wrong

   1. HSHarry Stebbings19:19

      agree. D- we've seen... We've mentioned Monday. We see companies like Notion, like Amplitude. I'm mixing public's and private's. But kind of growth, uh, stage companies and even private's, um, uh, do bolt-on strategies. "Hey, our core product with a bolt-on of AI." How do we determine bolt-on AI strategies that work versus bolt-on AI that doesn't?

   2. GRGokul Rajaram19:42

      I think the bolt-on AI, it's an interesting thing. The bolt-on AI strategy by itself has a real ceiling, but I think the companies where the bolt-on really works are the ones that reframe what the product does, not just add the capability. So I think you, you know, for example, if you just add AI search, uh, as there's one thing, you just add AI search, or you build search as an experience with new UX primitives. I think one is just an upgrade, the other is doing completely something completely different. So I feel you got to... So Notion, for example, I think very highly of them. I think Notion is adding AI. You, you mentioned they're adding a lot of AI agents, and I'm hoping that the way they've added it, I've actually played around with the product, I think it's pretty good, but the AI agents need to now get better based on how the user interact with it, and they need to tune the model for their customer base. Most bolt-on players are not doing it. They're simply using a GPT or, or, or Anthropic model, and they're basically just adding a thin layer. You have to rebuild the entire experience end to end. And I think by-- you do that by identifying something where AI doesn't just improve the margin, it changes the experience and the economics. Document processing was a good example. I think recently, you know, you couldn't actually extract structured information from, uh, unstructured documents till about six or nine months ago. Now you can reliably read dense legal contracts, so your experience around documents needs to be fundamentally different. If you're just getting someone to upload a document in a flow, you need to instantly, like, give them immediate insights from the document while they're uploading it, versus, like, the same document upload thing. That's crazy because now you should be able to infer any document that enters what the hell is going on instantly. So you need to reevaluate every single interaction and see what has changed. That's, that's the biggest difference in product development today. You know, model capabilities are improving every six months. Because if you have too long a product roadmap, you're going down a program and the model comes and just blows it out of the water. So you've got to really understand what the capabilities are of each, the new generation, and make sure you can't have too long a roadmap because your roadmap is gonna be blown out by the next, next model, uh, iteration.

   3. HSHarry Stebbings21:48

      Speaking of being blown out by the next model iteration, how do you as an ambassador stay? Educate me. How do you ascertain safety from model intrusion versus in the way of models and you will be eaten with the next update?

   4. GRGokul Rajaram22:03

      If you have some of the other ones with your physical and so on, it becomes easier. If you're a pure software companies, which of those apply to you? I think Fintech is a good one. I think we used to... Fintech goes through these cycles, right? I think Fintech, especially at Marathon, we invest a lot in Fintech. We actually think, "Oh my god, Fintech is one of the best ones." If you're moving money, you're generally in a good place. So anything touches money, we feel there's a very strong moat there, uh, much more defensible. And so data and workflow moats are the two things you're really hanging your hat on as a software investor because, like, uh, if you're not doing Fintech, um... And then I think at early stage, it's too hard to know what a distribution moat is unless they have some hack, and these hacks never really stand the test of time. Ecosystem, too early to say. Network effects, too early to say. So you really, physical infrastructure, they don't have any software company scale. They don't have any... So it's really about, okay, go deep into what is the data asset you're creating. Does it get better with time? Do I believe it get better with time? Are you building your own model over time? Are you fine-tuning a model and improving it over time? And then how deeply are you truly embedding the workflow? How deeply are you... Are you just a lightweight thing that the underlying system of record could create, or are you building so the mo- So these are the two things that you have to hang your hat on, a data asset that gets better with every interaction and then a workflow. It's hard, man. I think pure software companies are hard. I think application and software companies are. You've got to really believe that the founders can ship with great velocity, uh, to basically build that, uh, and see proof of that compounding.

   5. HSHarry Stebbings23:33

      I got in trouble in the partnership the other day. I'm quite grumpy, generally speaking. Um, but I'm-

   6. GRGokul Rajaram23:39

      You? Whoa.

   7. HSHarry Stebbings23:39

      I, no, no, yeah, I know my Twitter is getting grumpier and grumpier. I know. Uh, anyway, um, but you know, I've met like, you know, support agents, you know, vo-voice agents for auto manufacturers, for dentists, for chiropractors, for the... And I'm like, "Guys, this is like OpenAI, Eleven Labs for, and then all of these different verticals." Would you say, "Harry, no, no, no, you're wrong. They're building verticalized data, um, over time. Uh, they're able to fine-tune their own. They are deeply embedded in workflows." Uh, they might have distribution or you're like, "Yeah, the kind of like dentist cool agent is a little bit..."plaster on top of a wound

   8. GRGokul Rajaram24:21

      I do think these are viable businesses. I don't think they're gonna be big businesses. Um, I think as soon as you do vertical, I don't think you can do a, a one function within a vertical. I think what you want to see there is the ambition and ability to truly own the full stack, build the whole product for the vertical. ServiceTitan, for example, is a canonical example. It went public last year, great outcome. It's still a sub $10 billion company or something like that, and they own like 30... They have-- If you look at their S1, they have 32 different products, and even after selling 30 different products and really being, at least in the US, for any service pro- service, like, phy-physic- field services company, they are the canonical company. They're still are a $10 billion company, and I think, uh, you've got to-

   9. HSHarry Stebbings25:05

      You know what's, you know what's astonishing when you compare that to a Robinhood is Robinhood has 13 product lines now doing over $100 million in revenue. 13.

   10. GRGokul Rajaram25:13

       Yeah, Coinbase has 12 doing $100 million in revenue. Exactly. You're a horizontal product. You're serving a broad base. I think vertical products, you've got to really own full stack. I think it's harder otherwise to be a 10 plus billion dollar company.

   11. HSHarry Stebbings25:25

       I'm going for spice.

7. 25:26 – 28:11

   Can Vertical AI SaaS Still Build $10B Companies?

   1. HSHarry Stebbings25:26

      In a world of 2026, can we as venture investors do vertical SaaS given the fund sizes that we have?

   2. GRGokul Rajaram25:35

      I think you can. Uh, maybe the mega funds, uh, might say, "Look, it might not be a hundred billion dollar outcome," uh, but I think, uh, if you're a, if you're a $200, $300, $400 million fund, you can absolutely create a $10 billion company. Because remember, one of the big changes is that vertical SaaS does take over labor, um, and so vertical software, right, is no longer SaaS. It's basically, I did software as a service, but it is services, so you're going after the services spend. So one of the interesting things, as you know, is that verticals mostly, especially if you're selling to small businesses, they spend some amount of tooling, but they spend a tremendous amount on both BPO as well as on human capital, human labor. So you need to basically target those two spends, and, and I think if you do that and you're committed to building the whole product, you can, absolutely.

   3. HSHarry Stebbings26:23

      You very kindly said before the show that you like the show that we do with Jason and Rory. Uh, it's very humbling when I do the show for 10 years and then I find out that it's actually much more popular when I actually bring other people on to do it instead of me. Uh, [chuckles] always good for the ego. But Rory always says to me with AI, very simple, we need to see the transition of spend from software budgets to human labor budgets, and if we do, the TAM obviously opens up immensely.

   4. GRGokul Rajaram26:46

      That's right.

   5. HSHarry Stebbings26:46

      Do you think we will realistically see that and maybe are seeing it already, or do you think we will actually remain in software budgets as we have been in some categories?

   6. GRGokul Rajaram26:56

      No, we are seeing that. We are seeing that. I think the first one, most businesses don't want to lay off people. So the way we are seeing it, the first thing that's happening is businesses are outsourcing to third-party BPOs, many of them in India, Philippines, et cetera. That spend is the easiest to cut because now you can offer the same service higher quality, faster, and 20%, 30% cheaper. The second thing they do is when somebody leaves, they don't replace that person.

   7. HSHarry Stebbings27:20

      Mm.

   8. GRGokul Rajaram27:20

      And the third thing they do is lay off. So I think layoff is still maybe a little bit a while away, but you're seeing absolutely BPO spend. All the call center companies that you mentioned, all the next generation AI, um, AI customer service companies, they're going after BPO budgets. I was shocked when I was doing work in this space how many different verticals, doctor's offices, et cetera, use call centers outside the US. They already have budget clearly allocated, and there's a better service. So, so I think it's BPO spend first, don't replace the person second, and then potentially think about, uh, laying off, um-

   9. HSHarry Stebbings27:54

      Do you know Goldman Sachs and Barclays, both financial institutions, both have over 30,000 people in India each?

   10. GRGokul Rajaram28:01

       I didn't know 30,000. I thought there were like a few thousand. I didn't know 30,000.

   11. HSHarry Stebbings28:05

       Isn't that nuts? I was so shocked when I heard about that. I, I, I wanna understand, uh, but

8. 28:11 – 31:44

   What Happens to Slowing SaaS Companies Valued Too High?

   1. HSHarry Stebbings28:11

      two different types of company profiles and what happens to them. We've got private companies, um, and I don't wanna pick on them, but it is helpful to give examples. I'm sorry. They're my friends as well, so I can kind of do it and they'll l-love me hopefully regardless. Um, but like, you know, your Sneaks, amazing security business that's got great customers who love it, but it was valued at $7 billion and it's now $300 million ARR growing 15%. What happens to that cohort, which is a great business and serving great customers, but 15% growth, $300 million ARR, and you've got a s- very high price? What happens to that private cohort?

   2. GRGokul Rajaram28:50

      There are two outcomes for these companies. All of us have those companies in, in our portfolio. A bunch of them are going to become zombie companies and, uh, they're going to try to add AI features as a last resort, not succeed and, uh, and be sold to PE. Even the problem is even that may not be a good outcome now because PE itself is struggling to digest the companies they bought a couple of years ago and the prices are reset. They do have good assets. Um, you know, I think they might... I, I am seeing in some verticals there are companies merging, uh, with each other. Um, I think we'll see if that happens just to create more scale, but it's, it'll be interesting. But the, hopefully the better outcome that many of them go to is with strong leadership, you basically can burn the bridges and create a completely new AI native product. I think you had the Intercom person, uh, Intercom CEO, right? Fin. Great example. Podium, another great example. Both of them with their new products have grown to 100 plus million in a couple of years and basically just burned the bridges. This is legacy software. I think the more you fixate on how do we fix the business, the less you're gonna focus on how do we create a new business. So you've got to create a new business from scratch. You have customers. You almost got to say, "I'm going to be ruthless about migrating the current customers from the current business to the new, new product, even if it's, even, even if it, it's lower price." It's a bright thing to do, and you've got to have a sunk cost. You've got to, uh, abandon sunk cost fallacy.

   3. HSHarry Stebbings30:15

      Help, help me on Podium. Is it 100 million agent revenue? Okay, it triples, 300 million, and then it triples again, 900 million.If the price today is five billion that I'm paying, I'm, I'm paying for two years of treble treble ahead of time for that asset, for that's what it would be priced in public markets. For this business to work, we need the multiples in publics to be way more than they are now, do we not?

   4. GRGokul Rajaram30:46

      I think you need to assume that they will take over, uh, huge parts of the service budget in the businesses and that they will not just be a billion-dollar company. I believe that they'll be a multi-billion dollar company because earlier I think they were limited to one part of the stack and they were folk-- they were on top of a bunch of systems. Now they're taking over the entire software stack, and that's the thing I like about... You want founders who are ambitious enough to go after the entire stack, not just the earlier piece of the stack they were in. And you want to be the only product, uh, that the company uses, and you want to replace as much of the digital labor as you can possible. That's the ambition. So what you want to say is, what's your market size here? How much, in all your customers, how many people that, uh, do they have that are doing digital work? And do you have the ability to replace all of that payroll over time and all of the other things they are doing, and take a part of the payments transaction revenue? And if you think that's a big enough opportunity, that's when you invest.

9. 31:44 – 33:32

   Seed Pricing vs Outcome-Based Pricing

   1. HSHarry Stebbings31:44

      Do we see the total death of seat pricing, my friend? I hear you completely in terms of that movement into services. Does seat pricing die and we actually have consumption-based pricing as the primary pricing mechanism?

   2. GRGokul Rajaram31:54

      Uh, seat pricing doesn't die. You know why? If you look at ChatGPT Enterprise, C-ChatGPT Enterprise is priced based on, uh, priced based on seats because seats provide predictability for enterprise buyers, um, but they don't drive expansion revenue by themselves, so you basically have to bundle a lot more into each seat. So Ch- uh, uh, ChatGPT or OpenAI sell seats based on different tiers where they have different functionality. I think Figma sells three different types of seats. You're going to see different kinds of seats. Now the big challenge is seat-based pricing, which you alluded to, is it breaks when the product's core value is not about access, uh, but it's about a, uh, something doing the work on your behalf. So at that point, charging per user doesn't make sense because user isn't a constraint anymore, it's a work output. So at that point you've got to go to outcome-based pricing. So for example, if I'm something like Harvey, I don't know how Harvey prices, I bet that they price based purely on how many contracts, uh, they process versus how many people are using it. For example, even if a hundred people are using it and they process zero contracts, in theory, they should get zero. So I think you have two kinds of products. You have access products and you have work products. Access products, um, are, is basically seat-based, uh, like I think ChatGPT Enterprise is a good example, and then work products like Harvey are probably more outcome-based and not seat-based.

   3. HSHarry Stebbings33:17

      You mentioned Harvey there. We are seeing increasing competition within certain categories. If I think about, you know, law, it's Harvey and Lagora. If I think about customer support, Sierra and Decagon, and there are dominant funded

10. 33:32 – 36:04

    Is "King Making" Complete BS?

    1. HSHarry Stebbings33:32

       players. How do you think about the ability for firms to king-make? Is king-making complete bullshit? Is it not? I'm just intrigued to get your thoughts on that.

    2. GRGokul Rajaram33:42

       King-making is a thing. I think it is a thing. You see, uh, earlier and earlier companies are getting these rounds that are valuing them, you know, at, at valuations which really are eye-opening. That said, I think it won't work unless the, the company executes on the promise. I think, uh, other firms can take it as a signal and decide to pile on or not, and you know, but, but ultimately the, the company has to execute on the vision. If it doesn't, then it's just a bad bet. So yes, it is there, but it by itself, just because you're king-making doesn't mean they are the king. They still have to execute and justify it. If not, then I think the reality is everyone's playing different games, right? You and I know being venture capitalists now that, you know, somebody with a ten billion dollar fund is playing a fundamentally different game than somebody with a four hundred million dollar fund. Um, and if you try to play the same game they are, you're gonna lose. You've got to play the game that you're best equipped to play. Benchmark plays a different game than, than say Andreessen Horowitz, but both of them play different games and both of them do well at their game.

    3. HSHarry Stebbings34:43

       We mentioned Podium earlier and going to a hundred million with that agent first product. The growth is incredible and the growth across this cohort of companies is... Dude, we were doing this eight years ago when, you know, you went from one to ten at Slack and it was like, "Holy shit! That's amazing." Now it's like one to ten is, is still great, but there's a quite a few who've done one to ten. How does your mindset change around growth expectations for the companies that you invest in? Is a world of triple, triple, double, double dead?

    4. GRGokul Rajaram35:11

       It's not dead, but it, you, it's no longer elicits the jaw-dropping, uh, awe that it used to a few year, few years ago. As you said, I mean, you know, the one to ten is becoming more and more common. Uh, and, and you know, those numbers will basically get you... I mean, LowCode could probably go public with that kind of trajectory. Now the bigger question for me is, uh, durability. Um, and it's not even quality, it's durability because like you and I discussed, margins can improve over time and will improve over time. So it's not about margins, it's about is this revenue durable? And so retention is, is basically very important for me to understand. Are people using it as... I think we saw in the first wave of AI, we saw many, uh, ChatGPT, like there was a company called Jasper, not to pick on them, but they went from one to forty and then they came back from forty to ten or something like, or maybe one to a hundred and a hundred to forty within a very quick

11. 36:04 – 44:17

    Why VCs Consistently Get Market Size Wrong (Shopify Example)

    1. GRGokul Rajaram36:04

       timeframe. So there's a lot of tire kickers out there, especially in prosumer products, who test the product and then move on to something else. So what you want to look under the hood beyond, behind all these numbers is two things, which I think are the fundamental indicators of business quality: customer retention or gross retention, and then net revenue retention. Um, basically if those two I think-Are the biggest indicators of quality. I would always take a company that just, just, I should say just is crazy, doing a triple, triple, double, double with excellent growth and excellent net revenue retention than a company that's growing 10X in a year with really bad customer retention and less than one hundred percent or less than ninety percent net revenue retention.

    2. HSHarry Stebbings36:44

       How do we think about ceilings on those markets? And I'm specifically thinking about one that haunts me, which is Granola. I was one of the first investors to meet Chris, and clearly Granola has crushed it, and it's an amazing product. But customer retention sky high, revenue retention sky high. Honestly, if Anthropic or OpenAI did an enterprise product that's note-taking and it's connected to all of the different suite of products that they have, I think that heavily threatens the market size that Granola is able to expand into, into large enterprise. How do you think about the worthiness of those retention numbers if there are alternative factors like that that could impact it?

    3. GRGokul Rajaram37:24

       Yeah, I think you want to keep-- you want to basically weigh the retention in the light of what they have encountered. You're absolutely right. I think you want to see-- Just like you want to weigh the growth of a company, uh, in, in light of have you gone through any seismic events? If they've not gone through any seismic events, you got to then take it with a grain of salt. What competitive threats have you faced? Has a single competitor come out? Have you been able to ward off that? Has your retention stayed strong in light of that? I do think-- I think some of these, some of these products like Granola, et cetera, have, uh, we'll see if they are the case, but they are these unique products that really open up non-consumption markets, which means that I would never have actually bought a note-taker before, uh, a separate note-taker out-outside of Zoom or something, 'cause Zoom comes with its own note-taker. Gmail comes with a note-taker. But Granola is so powerful that it basically got me to consume a separate note-taking product. And it's probably true for many of us, and, and I think that just changed the market opportunity for them. I think Uber and so on are great examples where they just are non-consumption markets.

    4. HSHarry Stebbings38:26

       Also do Gamma. You've got Google Slides built into Gamma.

    5. GRGokul Rajaram38:29

       Think about that. Exactly. Great. A very good parallel. Non-consumption market. You would never assume-- Why would you ever buy a PowerPoint thing or a presentation thing separately? It's a non-consumption market. It's a zero market. But the product is so good, so remarkable, that it gets people to, to buy it separately as a separate SKU. Power to them. More power. I think we need more of these standalone remarkable products. Intuit is a great example. As you know, Microsoft tried to crush Intuit again and again and again back in the '80s and '90s with bundling everything into Office. But Intuit TurboTax survived and thrived.

    6. HSHarry Stebbings39:00

       Okay, but does that go against what you said earlier about the need to be multi-product? You know, what you've done with Gamma is you've taken Slides out of Google's G Suite and made it on steroids amazing, very deep, feature rich in a way that they didn't-

    7. GRGokul Rajaram39:13

       They will need to be multi-product. They can't just be a single product and go. They will need to have a second product. I'm sure of that. They will need to have a second product. Intuit has multiple products.

    8. HSHarry Stebbings39:22

       Okay, well, but what's, what, what, what's Granola and Gamma's multi-product?

    9. GRGokul Rajaram39:26

       I don't know why Gamma would not create a s- s- just like they've, they have taken their riff on P-PowerPoint, why can't they have their own take on documents or slides the same way? I have to assume it's basically the different kinds of content that people create. Or even websites.

    10. HSHarry Stebbings39:41

        [sighs] It's hard to see. Um-

    11. GRGokul Rajaram39:44

        Hard to... We'll see.

    12. HSHarry Stebbings39:45

        Both, both of them are in a wave of incredibly hot, attractive companies which have lower margins than we are used to in traditional SaaS minds. How has your mindset changed or stayed the same around margins? How should I think about margin assessment when looking at companies today?

    13. GRGokul Rajaram40:03

        Yeah, I think, uh, inference costs are dropping, so you automatically, uh, assume that margins in theory should go up. Uh, but I think it's, it's not about margins in year one or two. The more defensibility or leverage you have, uh, in some ways over your customers and what choices they have, uh, the more pricing leverage you have. So I would rather see margins go up with price increases than cost decreases. A good example is PayPal. Roelof Botha was on our board at Square, and he told us that PayPal back in the day raised prices five times in three years because there's such stickiness. They knew their customers really couldn't do anything. And you see, I mean, those are... I mean, Uber, I have to say, I don't know how-- if they have raised price or not, but I know that they have basically changed the economics of how much they pay drivers over time so that their, their margins have just expanded continuously. And they've also raised prices in different ways. So I think you... Two ways of increasing margins. F- so first of all, you and I both, we don't look at margins in year one and two. I mean, it doesn't make sense, even, even years four and five. But you want to have on one side the ability to increase prices. On the second side, you want the ability to cost to get lower. I think that second thing is happening by d- by nature. What you want to see is in addition, the ability to have such a good product and ideally multi-product, a story which makes switching really hard and you can raise prices.

    14. HSHarry Stebbings41:25

        Can I be blunt, dude? In the environment that we're in today, the two things that you said there, ability to increase prices and margins in years three, four, and five. Dude, the world is changing so much. I have no idea about their margin structure in years three, four, and five. [laughs] I, I... It'd be poetry if you-

    15. GRGokul Rajaram41:42

        So you don't, you don't look at margins. You look, you look to see whether or not they have, they have a product that is compelling enough. For example, I think obviously Disney+ is a... Disney+ for every year, I think they increase prices on me. Like, they've gone from twenty dollars to thirty to forty or something like that. Amazon Prime is another one. But this takes many years. But you want the potential, you want to evaluate the potential. Do they have the potential? Do they have the ability to increase prices in the future?

    16. HSHarry Stebbings42:07

        My dear friend, if you haven't shopped in-

    17. GRGokul Rajaram42:08

        Margin is much less... It's not something I worry about. I think durability and defensibility is much more of a worry. I think good companies, if they are defensible, they will have the ability to increase margins. That's what I was saying, actually.

    18. HSHarry Stebbings42:19

        Have you ever shopped in Chanel, Gokul?

    19. GRGokul Rajaram42:22

        Uh, [laughs] I, I have gone into... I, I think they do have stores or mini stores, yes. I've never shopped myself.Life as, yes

    20. HSHarry Stebbings42:30

        I buy my mother every year a Chanel handbag for Christmas and birthday. Do you know what they do every six months?

    21. GRGokul Rajaram42:36

        No.

    22. HSHarry Stebbings42:36

        Prices up 10% every six months. 10%. Dude.

    23. GRGokul Rajaram42:42

        10% and for the same product?

    24. HSHarry Stebbings42:44

        I, I used to buy a handbag and it was £500, now it's 10,000.

    25. GRGokul Rajaram42:47

        Holy cow.

    26. HSHarry Stebbings42:49

        My question is how to- we should invest in LVMH, clearly. Um-

    27. GRGokul Rajaram42:54

        Durable, defensible, 100-plus years, right?

    28. HSHarry Stebbings42:57

        100%. And dude, in a world of increasing wealth inequality, actually, awful statement, can you have good businesses selling to non-wealthy people? You've worked in fintech before. You, you are-

    29. GRGokul Rajaram43:12

        I think Robinhood's a good example. I think you've got to have massive scale. I do think a, uh, I, I'm an investor in a company called Atlas, which sells to billionaires, it's the opposite. It's a great business. It just, you, you need massive scale. You need a veg product that is almost cheap or free, I think Robinhood, you have to have free canonically in your thing. Robinhood obviously offered free stock, stock trading for a long time, and that was their core pitch, and that allowed them to basically get a lot of people. You need to have something free or some hook that is really low cost that allows you to expand. But it is a harder business because you can't make the ARPU, or the average revenue per user, is low enough that you need millions, if not tens of millions or hundreds of millions of people. When you sell to very rich people or wealthy people or large enterprises, look at Palantir, which is the business equivalent of selling to wealthy people. They have, I think, what? Less than 1,000 customers, maybe even less, and each customer pays them 20 million or 30 million or 100 million or a billion. It's an easier business to... Obviously, it's a very hard business, but you can s- I like those businesses. I mean, it's, uh, look at Veeva. They sell- they went public with four customers. Four

12. 44:17 – 1:03:05

    How Series A Investors Survive $300M+ Startup Valuations

    1. GRGokul Rajaram44:17

       customers. [laughs]

    2. HSHarry Stebbings44:18

       Do you bother to do market sizing today, given the transience of markets? As you said there, some of the best companies make you pay for things you never thought you'd pay for. Do you bother to do market sizing?

    3. GRGokul Rajaram44:29

       I think non-consumption is the biggest challenge, but yes, you can't not do market sizing. I do bottoms-up with a specific segment, and I always know, I think any customer base that has more than 10,000 customers or a few thousand customers, you've got to segment them. There'll be a few different segments, so you want to understand within each segment what the bottoms-up propensity to pay is, what's the problem you're trying to solve with them. Then you've got to talk to them to understand what the budget is. You've got to do the work.

    4. HSHarry Stebbings44:55

       What's your biggest misread on market size and how did it shape-

    5. GRGokul Rajaram44:58

       Shopify. Shopify. I remember seeing Shopify at a billion, and I was like, "How many, how many e-commerce merchants are there really?" Um, and that... Or maybe even before a billion, one of the early rounds. Tam felt really concerned. I think what I missed was that Shopify was not just selling e-commerce, it was basically allowing anybody to sell. So it basically changed any entrepreneur on the planet, anybody who wants to sell something went. So it, it wasn't just existing e-commerce merchants, and that's what you want platforms to do. They literally make it possible for every person, every person to think of the possibility of selling or renting their home out or taking a ride, which they never would've thought before, or, or installing a part, buying a new presentation app or a note-taking app. They are the biggest hits. They're also the biggest misses. If the bet doesn't play out, they're screwed. If the bet plays out, they could be bigger than anything else. Google, non-consumption. Many of them are non-consumption market. They're new behaviors that didn't exist before. That's in some ways what venture is all about. It's not about existing, it's about new behaviors and betting on them. Facebook, non-consumption market. Who, who the... I mean, right? I mean, think of all of these iconic companies.

    6. HSHarry Stebbings46:02

       The thing that's amazing with Facebook is the ease for you to dismiss it for being the 52nd social network. I mean, uh, we forget now that Friendster and MySpace and everything before it had been bluntly... There'd been so many, and like-

    7. GRGokul Rajaram46:15

       But the biggest difference was identity. On Friendster and MySpace, you didn't know who the people were. They didn't have their real photo. They could come up with their, uh, thing. I remember when Facebook tried to go into Japan, Japanese cultural norms were that all the Japanese social networks back then were incognito. You couldn't, for some reason, maybe saving face or something, you could not share, um, your, your real name or your photo. So everyone said, "Facebook, you've got to adhere to Japanese cultural norms. You've got to change Facebook and make it similar." Mark said, "Absolutely not, even if it takes us longer." And they, they succeeded. They succeeded.

    8. HSHarry Stebbings46:48

       How do you prevent prior wins or losses impacting future decision-making? My biggest mistake is I lose all my money in a market, and it inherently makes me attracted or not attracted to it in a way that could subvert decision-making. How do you avoid-

    9. GRGokul Rajaram47:03

       Well, this is, it's very hard. I think it's a mental thing where you've got to take every, every opportunity at first principles. We all struggle with it. I think the, I think the best venture capital... I... Someone asked me, "What are the best venture capital bets?" I talk about a paradoxical one. I think it's Mike Moritz betting on Instacart. Why? Because he lost 370 million on Webvan less than a decade ago. He burned it through. Same space, Apuva comes to him, he bets on it. He bets on it after losing hundreds of millions of dollars. It was not all Sequoia money, but he, the whole thing burned to the ground. And think about the first principles thinking needed and the courage needed to make that bet. I think it's brilliant.

    10. HSHarry Stebbings47:43

        You've got, you've got to laugh at being a Sequoia partner. You're going, "Dude, not this shit again. Come on, Mike." [laughs] Like really?

    11. GRGokul Rajaram47:50

        [laughs] We can... I'm so curious to see how he, like, just incredible.

    12. HSHarry Stebbings47:54

        You're, you're like, "We know you did Google, and, like, we love you, but come on, not food delivery again." [laughs]

    13. GRGokul Rajaram48:02

        Not online grocery shopping, exactly.

    14. HSHarry Stebbings48:05

        Dude, market is one way we trip ourselves up. Oh, market's too small. Market's too small. The other one that I always make mistakes on is price.Uh, how do you think about when you reflect on you've done so many good deals, are the best deals the most expensive in your experience?

    15. GRGokul Rajaram48:21

        I think there are two ways I've now realized af-after many years of doing this. At seed and A, price almost doesn't matter if you're right about the company. So I think you just invest at whatever the price is. I, for example, I invested in the seed round of Fair at, back in the... this is about eight, nine years ago, twenty million, which is very expensive for a seed round at that. That was the highest price YC deal at that point. I think it's been 100 or 200X for me. So I think you, you invest in a company which is great, you have conviction, you invest. Now, I think the B, I think B plus that's when starts- price starts destroying returns. I think by then you've got real revenue, real traction. You've got to... You can pick a generally good company and still get crushed. For example, one of my friends invested in this security company at basically at, uh, when they had 100 million in revenue, he invested in them at four billion. I think they've gotten to five hundred million in revenue. But guess what? They're still at four billion. Uh, and so basically they will not make 1X the capital they invested. And so that's a challenge, I think. But guess what? Even in WeWork, Benchmark made money. Benchmark made money at WeWork because they invested early enough. So I think at sub hundred million, and maybe that's an arbitrary number, you can-- if the company is good, you'll make money regardless.

    16. HSHarry Stebbings49:36

        You mentioned WeWork there. We'll get to selling because I used it in an, as an example in a show we did with Miles Clements from Accel. Um, but I just wanna touch on like the A market there and you saying about pricing kind of where it matters and where it doesn't.

    17. GRGokul Rajaram49:48

        Mm-hmm.

    18. HSHarry Stebbings49:49

        I'm with you 100%, but we're seeing 100X ARR for three million revenue companies, and they're being priced at three, four hundred million dollars in this new environment. How do you advise me as a Series A lead investor to operate in a market where As are, are not 10 to 20 now or on 100 to 150, they're actually 300 to 500 and 30 to 50 million rounds?

    19. GRGokul Rajaram50:14

        I don't think an A, a, a investor can do... There are two kinds of deals that A investors have to do. One is I think where there is less legibility on the company, where you're betting on there is some early product market fit. There's not three million in revenue, there's half a million in revenue, and that's, like you said, when you get it basically for 50 or sub hundred million, a million or so. But then as soon as it gets to three or four, it gets... You-- maybe you can do a couple of deals like that, but I don't think you can build a Series A fund doing deals at three or four hundred million, uh, because there's not gonna be enough ownership. These, some of these are going to fail, et cetera. But most deals, I think you, you gotta, you gotta have double-digit ownership. You gotta invest slightly earlier. It's a tough, it's a tough game, but gotta be patient. I think the good news is, like I said, I think, uh, it's... Concentration is your friend in some ways. It probably can be your friend because then you don't feel that you've gotta do 10 deals a year. You, you can do four deals a year and do 15 companies in the portfolio.

    20. HSHarry Stebbings51:11

        Dude, you've got 250 million bucks in the fund. You've got 200 million when you actually look at investable cash. If you don't have any reserves, you've got, say, $10, $20 million Series A checks if you're wanting to get ownership, double digits that we all say that we want. Is that enough? I, I'm not being cynical. I'm asking for my own advice. Is that enough?

    21. GRGokul Rajaram51:31

        Well, but you have to have reserves. We have 35% reserves, so you have to have a mix of-

    22. HSHarry Stebbings51:35

        No, that, uh, no. That, that's not cool.

    23. GRGokul Rajaram51:37

        That's right.

    24. HSHarry Stebbings51:37

        Come on, we need a bigger fund. This doesn't work.

    25. GRGokul Rajaram51:40

        You've got to have a mix of, you've got to have a mix of seed and incubation bets and a mix of Series A bets. So the incubation bets are bets you take on founders who are basically the best in the world at what they've done. A good example, I think, was, um, investing in a company, this was before Marathon, but with my Marathon partners who were Ma- part of the Marathon, they led the round with Vinod, Vinod Khosla and, and Mickey Mullka at Ribbit and a company called Lead Bank, which was my colleague Jackie Reses's latest-

    26. HSHarry Stebbings52:06

        Yeah, I, I interviewed her. She's amazing.

    27. GRGokul Rajaram52:08

        Oh, yeah.

    28. HSHarry Stebbings52:09

        What a beast.

    29. GRGokul Rajaram52:09

        So that was this inception round at like some crazy valuation. I mean, very strong valuation. Not a crazy valuation, but a strong valuation because Jackie was Jackie, and she had built the bank at Square. She built this bank again. So you want somebody in a industry where they know the inner workings of better than anybody else in the world, and you say you back those people, and that's a much, much better risk reward there. So you want to do a few of those in addition to you want to do a few incubations and seed in addition to, uh, in addition to Series A. I think you're doing that, right, in some ways. I think you got to mix it up. As an early-stage fund, I think every firm, I, I think every early-stage firm, I think you've got to have an access to founders, and they... you're their first call when they go to start a company. And then you meet founders, you don't know them but before, you're kind of betting on traction and so on. You've got to have a mix of both kinds.

    30. HSHarry Stebbings52:54

        Do you buy the proprietary founder access? Again, this is where I get grumpy as fuck, but I've done 3,000 shows, dude, you know. At some point you have to get cranky. Like every venture investor sells the proprietary now.
13. 1:03:05 – 1:11:47

    When VCs Should Actually Sell

    1. HSHarry Stebbings1:03:05

       anyway, we mentioned WeWork earlier. I used WeWork as an example with Miles Clements about selling. I'd love to hear your thoughts on how do you think about when to sell? Obviously, we have investors. You have LP stake. They care about DPI stake more than ever. How do you think about liquidity, and when's the right time to take chips off the table?

    2. GRGokul Rajaram1:03:24

       As an angel, I used to hold till IPO. So Figma had many liquidity opportunities during the years, but I kept, kept holding it for thirteen years till it went public. And, uh, I think at the IPO, it was actually priced very nicely. Unfortunately, after the IPO, it has been, uh, it has been more challenging price-wise. Uh, but I think as a, as a fund investor, it becomes interesting. I think there are two situations. One of the things I think most early-stage firms get wrong is they just focus on MOIC, they don't focus on IRR. And MOIC is multiple on invested capital. I think IRR matters a lot, as you know. And so you can have... S- an LP told us about a firm that gave them a 7X MOIC over twenty years, and that was a teens IRR. And that is like, okay, you know, there's something crazy here. I mean, that is an, a venture, venture cap- venture firm. And so you've got to look at go-forward IRR and your projection. If your go-forward IRR at every liquidity opportunity is lower than what you're basically promising your LPs or what you think your fund should have, I think you should sell. I think you have an obligation to your LPs to at least sell. I, I like Fred Wilson's, uh, strategy around selling, which is sell a third, hold a third, and trade a third. This is when the asset is completely liquid. Uh, but in this case, I think you want to sell at least part of it, especially if the asset is a, uh, is a, is a, is an e- is a, is a company that'll return a chunk of your fund. So if it's gonna return twenty, thirty, forty percent of your fund, I think you, you, you owe it to your LPs, uh, to sell a piece of it, especially if the go-forward IRR is not, um, is not compelling.

    3. HSHarry Stebbings1:04:59

       On top of that, you then have the hold period after the IPO where you have, you know, obviously your stock.

    4. GRGokul Rajaram1:05:04

       Exactly, and you don't have... Exactly, and that's another uncertainty. So I do think the secondary markets have been one of the best or most interesting developments over the last few years. And so now all these great companies have pretty liquid secondary markets where you can sell, sell shares. Obviously, there's row for and so on the company has. I do think, uh, there are these hyper-liquid periods in the market, and now is one of them. So I do think one should be very careful and thoughtful about what the go-forward IRR is, uh, for any asset one owns and really think carefully about whether one should sell or not.

    5. HSHarry Stebbings1:05:38

       Can I ask you, when you look back at the Angel portfolio, what was the biggest regret?

    6. GRGokul Rajaram1:05:42

       Pattern matching too much. I think a good example is Quince recently raised a ten billion. I saw Quince four years ago when it was at a hundred million valuation. And I was like a D2C company. D2C companies are kind of on the downswing. How, how good can this company be? What do you... You know, so I, I literally just dismissed it. I didn't even look deeper into the company. And, you know, I think, um... Yeah, I think I... We talked about pattern matching.

    7. HSHarry Stebbings1:06:08

       So what's the take, what's the take, what's the takeaway from that then?

    8. GRGokul Rajaram1:06:11

       The takeaway is that you can't just take an industry and say it's good or bad. Within every industry, within every category, there are great companies and there are mediocre companies, and you've got to understand each company's remarkable and differentiation-Quince, for example, had an incredible thirty-five to forty percent repeat purchase rate which was, like, higher re-retention than most consumer apps. And so I should have paid more attention to that versus dismissing it. It was literally in the blurb, and I was like, "Okay, you know, so what? How big can this get?" They were-- And so that's non-consumption.

    9. HSHarry Stebbings1:06:44

       What, what I didn't like respectfully when you said about kind of your trend style of investing is actually some of the biggest misses I also have is when there's an amazing founder that's clearly amazing, but operating in a bad space, and they pivot three months later into a good space, but I turn them down when they're in a bad space. And I'm like, I, I don't care what they're building, I don't care what trend it is. Gokul, you're amazing. If you're selling pillows, I'm in. Why am I-

    10. GRGokul Rajaram1:07:11

        If you're a seed investor, if you're a pure seed investor, I think you have to do that. I think that's what YC does, right? I think that's actually the right way to do pure seed investing. First Round Capital, I think, is a, one of the best seed firms. Guess how many companies they have in their port- each fund? Eighty companies. Why? Because you've got to take eighty bets, which means that some of them... And YC, of course, best seed investor of all time or pre-seed. I mean, you've got to take hundreds of bets because most companies will pivot. But I think as a consolidated portfolio, you've got to basically understand the business and you've got to bet on both the business and the founder, unless, again, the founder is an N of one founder in a space. I, I, I think there are two categories of-- actually there's three categories of founders in some way. There are repeat founders who know a space exceptionally well, who've done it before, you're betting on them again and again to do it. The security is a great example. Security is full of repeat founders. They know the market, they know the, they know the history, uh, they know the customers, all of that. Uh, but then there are consumer companies. Consumer internet is full of first-time extraordinary founders. Mark Zuckerberg, Larry Page, all of these are just first-time founders. So those are two archetypes. The third archetype that has come up is AI labs researchers. Uh, uh, and so I think you, you know that, that one is a more interesting bag where you have of, of course, Dario and, and, and, and the OpenAI folks, but then you have a bunch of other labs that came up and ultimately didn't turn out to be anything. Um, so you want to, for these kinds of folks, you as a, as a seed investor, you just want to blindly write a check into them, a brilliant young person, uh, who's done something extraordinary, um, a repeat founder or maybe an AI labs researcher. You just wanna bet-

    11. HSHarry Stebbings1:08:52

        Will you do, will, will you do a frontier model, uh, a Neo lab, uh, Periodic Labs, uh, uh, Ineffable, where they're clearly fucking amazing people, pedigreed to the hills, but the price is in the billions?

    12. GRGokul Rajaram1:09:07

        Not possible. I don't think with our fund it's possible. I think the ownership is just literally the first round for these companies is, like you said, a billion dollars. So I think it's just too high a... the risk reward is just not worth it.

    13. HSHarry Stebbings1:09:20

        Are you seeing the mega funds cannibalize the business model of our Series A?

    14. GRGokul Rajaram1:09:24

        Uh, they're playing a different game. I think, uh, smart founders are... Look, I think, I, I think very highly of the mega funds.

    15. HSHarry Stebbings1:09:32

        Yeah.

    16. GRGokul Rajaram1:09:32

        They've basically gone and they deploy fifteen million dollar checks almost as an option and a lead, lead generation for the, for the next round. And the strategy is obviously to have an index at the A of every single good A company, um, and then double down on the ones that truly matter and triple down and quadruple down and do SPVs in them and, and do specialized funds in them and so on. And I think it works. It works for LPs in some way. It's a different asset class than the funds that the early stage funds. But it's different. I think smart founders, good founders have started to look beyond just the fact that they can get ten million very quickly from a mega fund and say, "What am I getting here?" We see many examples actually in mega funds of, um, partners leaving the fund, um, and the companies orphaned within the mega fund because their partner has left and now they don't have a single person to advocate for them in any way, shape, or form, and they're adrift. And anybody who... So repeat founders, actually, what is interesting is repeat founders are most likely to, uh, essentially know, uh, and see behind just the glitz of a mega fund in some ways because many of them have gone through, especially the ones that have started a company in the, in the last five or six years. Uh, we have many stories where the, the mid-level partner at a mega fund has left, who was their partner, and then they're like, "Okay, shit," you know. "I basically don't have an advocate in the fund, and I now am left with a person who I don't know, um, and they don't know me, and, uh, they're joining the board, my board." And that's a tough one.

    17. HSHarry Stebbings1:11:06

        You've seen Niko Bonatsos, you've seen Matt Gazor, you've seen Araf Janmohamed, you've seen... Or are we just seeing the start of this continuing wave and there will be a huge amount more spin-outs, or do you think we're gonna see that catel?

    18. GRGokul Rajaram1:11:19

        I think we are going to see a more spin-outs. I do th- I do think there is a limit, but I do think you're going to see the... You're going to see these mega funds train, again, more waves of investors, and these investors are going to realize that being a mid-level partner at a mega fund is not all it's cracked out to be. So they're going to spin out and go back to, you know, the way of doing things that venture used to be twenty, thirty years ago, which was a small group of partners, uh, building a deep relationship with entrepreneurs.

14. 1:11:47 – 1:17:55

    Quick-Fire Round

    1. HSHarry Stebbings1:11:47

       Uh, listen, dude, I wanna do a quick fire. So what have you changed your mind on in the last twelve months?

    2. GRGokul Rajaram1:11:53

       I used to think pure remote would, uh, would scale for early stage companies if you had the right culture, but I don't think that anymore. I think you've got to be in person at least a few days a week.

    3. HSHarry Stebbings1:12:01

       What, what, what, what made you change your mind there?

    4. GRGokul Rajaram1:12:04

       I think just seeing a few companies where literally the companies died because the founders were unable to agree. They had everything going, but the founders were just not in the same place, and they were just not able to move fast enough and agree and align on the strategy and change things. So iteration speed just suffers massively if you're pure remote. It doesn't need to be five days a week, but at least three days a week.

    5. HSHarry Stebbings1:12:24

       Biggest advice to a young person leaving university today.

    6. GRGokul Rajaram1:12:29

       I know it feels exciting to start a company. Everyone's doing a startup. AI is the new wave. But my strong advice is to first get two to three years of work experience at a company, at a good company. You won't regret it. You learn a lot. Both the experience and the network of people will be invaluable for you. So just two or three years, don't be impatient. Life is long. Work, get some work experience before starting a company.

    7. HSHarry Stebbings1:12:50

       You've got to answer an unfair one. You've got to invest in three different types of funds, a seed fund, a Series A fund, and a growth fund. Which three are you choosing? And they can't be mine and yours.

    8. GRGokul Rajaram1:13:01

       First Round Capital, First Round Capital and Benchmark where I've been, I've been an LP in both, and then Green Oaks. First Round would be the seed, Benchmark would be the Series A, and Green Oaks would be the, would be the growth.

    9. HSHarry Stebbings1:13:13

       Wow, that wasn't a hard one, was it? You thought about that. Most, most people are like, "Oh, I can't do that."

    10. GRGokul Rajaram1:13:17

        Do you know what? LPs asked us this question. Uh, they basically said... I don't know whether they were asking us for, they literally asked us, "Okay, what's the..." So I- I've actually answered this question [laughs] with LP before.

    11. HSHarry Stebbings1:13:27

        Dude, that's fantastic. What has been the hardest decision that you've made in your career? You've left amazing companies. You... What, what's been the hardest decision?

    12. GRGokul Rajaram1:13:36

        Leaving Google. Leaving Google, I think there was a saying, you leave Google only once. So leaving Google to start a company. I was on a pretty incredible trajectory there. I was learning a lot, really enjoying it. It was really tough to leave Google. I don't regret it, but it was very, very hard to leave Google.

    13. HSHarry Stebbings1:13:49

        Who's the best CEO you've ever worked with?

    14. GRGokul Rajaram1:13:52

        All four of them, Larry, Mark, Jack, and Tony, and now Brian Armstrong, um, Bill and Ben at Pinterest. It's a hard one. I think all four of them are different superpowers. I would say the best technical CEO, Larry Page. The best growth-centric CEO, Mark Zuckerberg. The best design-centric CEO, Jack Dorsey. And the best, uh, physical world operational CEO, the most likely to be Jeff Bezos next, Tony Xu.

    15. HSHarry Stebbings1:14:16

        I'll take that. That's a good one. What's the biggest miss? We've said Banter. Is it Banter?

    16. GRGokul Rajaram1:14:21

        Quince. Quince, man. Uh, well, most recently Quince, but to be honest, even bigger miss than that in some ways, it's not a miss in terms of investing, it's that I couldn't predict that Facebook could be a $2 trillion company. When our company was gonna be acquired by Facebook, I was arguing with the corp dev team at Facebook, and we were arguing over the terminal value of Facebook, and we had to put China into the mix saying, "Basically entering China will get us to 40 billion in market cap." And we were arguing whether it was 20 billion or 40 billion in several years from then. This was in like 2010. And turns out in less than 10 years, 11 years, it was a trillion-dollar company. So when these things work, they work in a, in a scale that is unimaginable. Um, even at Google, I remember very well after the IPO, I was there doing the IPO, and we were sitting around with a bunch of PMs, and we were saying, "Man, the, the company's valued at 30 billion. It's too expensive. Too expensive." And so you just... These things compound and, uh, it's just incredible to see these things become trillion-dollar companies. So Facebook and Google in some ways are the biggest misses in terms of not being able to predict that they were going to be multi-trillion dollar companies.

    17. HSHarry Stebbings1:15:19

        Which angel investment is the highest multiple?

    18. GRGokul Rajaram1:15:24

        Figma.

    19. HSHarry Stebbings1:15:26

        What was the multiple?

    20. GRGokul Rajaram1:15:27

        Of five... Of... Between 500 and 1,000 X at the time of IPO, but it has sadly gone down since then. [laughs]

    21. HSHarry Stebbings1:15:36

        Oh, 500 to 1,000 X. Jesus Christ. Um, tell me, final one. What most excites you about the next 10 years? I like to be optimistic. I think we have too much pessimism. What are you like, "I'm really freaking pumped about this"?

    22. GRGokul Rajaram1:15:50

        The most ambitious entrepreneurs are finally tackling the hardest problems. I feel, uh, there is the ambition with A- AI especially has unlocked is just incredible. So, uh, the ambition of entrepreneurs tackling the hardest problem facing humanity and society is just absolutely incredible. How can you not be optimistic when you have, you know, Elon going? I mean, I think we have now these entrepreneurs who are role models who are not just, you know, building these, you know, small companies, but they're truly taking on humanity problems. So the answer to Peter Thiel's question of, we were looking for flying cars, and we got 140 line, you know, what are 140 word, uh, uh, 140-character apps, I think has been... It's finally, I think we're get- coming, it's coming into focus.

    23. HSHarry Stebbings1:16:33

        I've got to ask one more, but you said about Peter Thiel there. Obviously, he has the Thiel Fellowship and a preference for young ambitious founders. We're seeing this massive movement towards very, very young founders. We mentioned Macaw earlier, who are brilliant. Are you in line with the shift to the earliest, youngest founders? And how do you feel about that shift to super young founders?

    24. GRGokul Rajaram1:16:53

        I think, um, I, I actually am a huge fan of it. I p- I feel even at companies, I feel some of the companies that are not hiring young people, they're making a huge mistake because young people are more AI maxed, as you could call, like looksmaxing, AI maxing, than, uh, than anybody else. Uh, in fact, uh, I think the younger people are adopting tools better, and they just live and breathe differently than, than others. Um, so I, I'm a huge fan. I've actually invested in more dropouts as an angel now over the last, uh, few months than I have invested in, um, in, in, in the rest of the last 15 years I've been investing. So I don't think it's a right thing, to be honest, for mo- many of them to be dropping out and starting. I do think they could benefit socially, emotionally, et cetera, but some of them are just exceptional. I don't think all of them are, but I do think this crop is going to produce some incredible founders.

    25. HSHarry Stebbings1:17:44

        Gokul, dude, I so appreciate you. I've got so many notes. I had to go on different sides. Um, this has been fantastic, so thank you so much for being so amazing, dude.

    26. GRGokul Rajaram1:17:53

        My pleasure, my friend. Look forward to doing stuff together.

Episode duration: 1:18:05