Is DPI The Only Thing That Matters? with Sam Lessin, Jason Lemkin & Rory O’Driscoll

1. 0:00 – 0:54

   Intro

   1. SLSam Lessin0:00

      Will we look back in 20 years and say OpenAI was a fundamentally important company? Maybe

   2. RORory O’Driscoll0:04

      The hyperscalers have taken very good cash efficient businesses and they would break Mr. Buffett's heart because they've turned them into CapEx hearts. Public company investors are just mean VCs on steroids. We turn on a dime from, "I can't believe you're not spending more," to, "What the frick do you mean you're spending so much money?" Every company's market share is up for grabs when there's a platform shift.

   3. HSHarry Stebbings0:26

      Will Elon be out as Tesla CEO before 2027? Ready to go? [upbeat music] Guys, I am so excited for this. We had so many, uh, interesting things that we wanna dive into this week. I just wanna start with diving in actually on the deep end on a series of Chamath

2. 0:54 – 8:06

   TVPI Is Bullshit?

   1. HSHarry Stebbings0:54

      tweets, and Chamath basically said, "Hey, uh, TVPI is bullshit vanity metric. You can't eat IRR. You can only eat net DPI." When you read this and when you read his quite opinionated stance, how did we feel?

   2. SLSam Lessin1:11

      I mean, I hate agreeing with Chamath on principle, but I agree with him.

   3. JLJason Lemkin1:16

      Well, well, you know what's interesting? If you read the Wall Street Journal article-

   4. SLSam Lessin1:19

      That's just Rory answering

   5. JLJason Lemkin1:20

      ... on, on, on Thoma Bravo, they just raised a $34 billion fund, right? Harry, your, your buddy. What it's... So what the Wall Street Journal said, that's a record fund for PE $34 billion. It's a record. But Q1 was a low point. No one ev- no one raised a $5 billion PE fund because of lack of liquidity, right? So it's kind of ties to Chamath's point, which is if you have the liquidity in today's world, you're gonna get the capital, right? Thoma Bravo had, had $30 billion in distributions last year. $30 billion. I think that exceeds most guests, right? 30 billion in distributions, not paper markups, but distributions.

   6. SLSam Lessin1:53

      Look, from my perspective, this is simple, right? Which is there's two very different games that are called venture capital or even, you know, private capital in general. One game is actually making people money, finding companies early, making the right bets, you know, paying the right prices, and selling, and that is a DPI game, and all that matters is DPI, and that's the game I like to play. That's the game I think I value and I respect. There's also an asset gathering game, right? Um, and the asset gathering game does exist, and here's the thing. I say this as a seed investor with full transparency. As a business, the asset gathering game is actually a better business. Like, if you're just in it to make money, right, and, like, that's... You're, you know, you're... Then, like, you're an asset gatherer. Like, that's what the market wants, and we can talk about why and the, and, like, the whole nine yards. The public market wants that. They care about fees, et cetera. So i-i... Uh, the problem is, like, I just am an intellectual snob, and I have no respect for asset gatherers. Like, I think it's a stupid game. And so for me, it's like it's, you know... I, I think they're just two very different things that are called the same thing, and you just should be really sober about what game you're in and what you're trying to do.

   7. RORory O’Driscoll2:57

      I think it's really fun that we had this conversation, and we ended up thinking that Chamath's on the side of good. Nice job, Sam.

   8. HSHarry Stebbings3:04

      I mean, I-

   9. SLSam Lessin3:05

      Like, I, I'm the, I'm the first to say, like, I think that's wild that I agree with Chamath. My default instinct is to completely disagree with him on whatever he says, but, like, in this case, I happen to agree with him.

   10. RORory O’Driscoll3:15

       I, I'm comfortable disagreeing with him. I honestly thought it was kind of a trite comment. It's one of the... It's a very typical Chamath comment. On first glance, it sounds smart, but on deeper analysis, it's kind of vaguely right, but not useful. I mean, and you... 'Cause obviously for... You know, he, he cited his 2013 and '15 vintage funds. Obviously at that point, DPI is the only thing that counts. If you're 10 years in and you're still selling promises, then you're in trouble. So it's... That's a trivially obvious comment. But at the end of the day, you know, to say TVPI doesn't count, the truth is venture is investing in illiquid assets for five to seven years with the expectation of making a greater return. That means that for five to seven years you don't have DPI. You've consciously-

   11. SLSam Lessin4:01

       You can just say one thing

   12. RORory O’Driscoll4:02

       ... Let me finish. You've consciously un-DPI'd yourself. You've taken money, and you've given it to them to tie it in the ground. So in that period of time, you have two choices as an investor gauging these guys. You can say, "TVPI means nothing. I'll stick my head up my ass, and I'll look in seven years. I'll see how they're doing." Or you can use TVPI for what it is, a proxy, a loose proxy for performance.

   13. SLSam Lessin4:24

       Here's the upshot. You have to understand that LPs are just incentive driven, right? And from an LP, the... What you should do as a rational human being, if you were... It was me investing in a fund, you say, "Yeah, the money's in the ground for five years, and after that we'll see where we're at, and that's all that matters, what you deliver." I know full well, I know this as an investor, that the marks that you made up or the marks that SoftBank listed something somewhere are completely irrelevant. In fact, the negative signal in a lot of cases. So, like, the marks are irrelevant and stupid. Now, here's the reality, is institutional LPs are people too, right? There's some junior guy who wrote the check, right? And he wants to get promoted, right? And he exists in an organization that's trying to deliver something. He doesn't wanna wait seven years to get promoted, right, for making a good call or a bad call. And so it really is just a marketing thing where you're saying, "Hey, I'm gonna give the person who wrote me the check some marketing thing they can then use for their own internal purposes," 'cause everything in life is about get laid or get paid.

   14. RORory O’Driscoll5:21

       [laughs] I think that... I mean, there's no doubt that part of, um, kind of having a positive TVPI is all that marketing. But I think at some level... Look, let me ask a question here. If you had two funds three years in, and one of them had no markups and one of them was a 2X TVPI, would you regard those two funds as exactly identical?

   15. SLSam Lessin5:43

       No. What I would regard them as, though, and this is how I actually do regard them when I look at my own portfolio or things like that, is very simple, which is how many credible things do you have that are gonna be fund returners? That's it. Just give you a list of four things.

   16. RORory O’Driscoll5:56

       Yeah.

   17. SLSam Lessin5:56

       I don't care where they're marked. Like, you either have a set of true legitimate shots on goal for important companies and important outcomes or you don't. If a company has a two... Uh, uh, is marked at 2X where it went inSoftBank, some crazy person marked it up and some crazy mark-up

   18. RORory O’Driscoll6:10

       Same with Sequoia. My point about the Chamath comment is to say it means nothing. Let- to say it means nothing is a gross exaggeration. There almost certainly is some signal in that data. Let's, let's kind of take it. Let's go right down into TVPI means nothing. I am willing to bet if you got some kind of machine learning algorithm and looked at all the funds that four- three or four years in had a TVPI of 2X, and all the funds that four years in had a TVPI of .8 X, and then correlated that to the ultimate outcomes, I bet you there would be data in that signal that says it has some value. Therefore, Chamath's statement is incorrect.

   19. SLSam Lessin6:45

       I think the doc who was actually murdered-

   20. RORory O’Driscoll6:46

       It's not the only, it's not the only source of data. You're right, there are better source of data if you're in a position to evaluate better data. But as an LP, in the absence of anything better, there is signal in the data, which means the comment is wrong.

   21. SLSam Lessin7:00

       It would be, it would be fun, it would be fun to, it'd be fun to look at. I actually bet that firms that hold positions at zero or cost or even are willing to mark down positions that are more honest about it in reality might actually outperform. I don't know. We can look at it. But the reality is I think there's this incred- I mean, I, as an LP in many funds, you have funds, you get their statements, and you laugh.

   22. RORory O’Driscoll7:19

       Totally.

   23. SLSam Lessin7:19

       Because they hold everything at ridiculous val- the high-water mark they can possibly come up with or these numbers that make no sense. And you look at it, you're like, "This is, like, kind of funny." And, like, the numbers look... But you're like, "Uh, this is not real," right? And I just think that, like, it's because there's no, like, 'cause everyone has methodologies all over the board, it's all marketing, right? And I kind of, unfortunately, I hate being with Chamath. I hate it, right? Like, I've known Chamath a long time, not well, but casually, and I gotta say, it drives me nuts that I have to be. But with him, it's like-

   24. RORory O’Driscoll7:48

       Okay

   25. SLSam Lessin7:48

       ... all I care about early is give me five names that matter, and all I care about after you've had enough time is did you make me money or not?

   26. RORory O’Driscoll7:56

       Okay. [laughs]

   27. SLSam Lessin7:58

       But I get your point. Like, it's a, it's, it's zero is an extreme statement, but, you know, we live in an age of memes.

   28. RORory O’Driscoll8:04

       Yeah, that's a real... Yeah. Go,

3. 8:06 – 14:55

   Mid-Tier VC Funds Are Getting Annihilated

   1. RORory O’Driscoll8:06

      Harry.

   2. JLJason Lemkin8:06

      We said we're living in this kind of two dichotomy world or this kind of, uh, binary world of venture. I- in the middle, you know, SVB did this great analysis, and they were saying that middle of VC funds is getting really hollowed out. In other words, your kind of mid-tier firms in terms of size are really falling apart. What happens to them? Is it a game of the very small and the very large, do we think, when we look at this report?

   3. SLSam Lessin8:27

      I mean, you got... Yes. Like, there's no middle. You can't be a billion-dollar venture fund.

   4. RORory O’Driscoll8:34

      Is a billion middle?

   5. SLSam Lessin8:36

      Well, I'd say this. I mean, we're, we try to raise... Well, we, we target, call it $200 million early-stage funds. That's what we do every few years. I'm very confident we know how to deploy that. Like, I believe there's a market where you can, from a, a DPI perspective, make money on that. It's not a great fee business, but it's a great, it's a great DPI business. I don't know how you make multiples on a billion dollars consistently, right, in VC. I think once you're doing 10, you're playing a completely different game of asset gathering and asset deployment where you no longer have the same goals. So I personally think that the billion-dollar zone is, like, the death zone.

   6. RORory O’Driscoll9:08

      Gotcha. Good to know as a $900 million fund. [laughs]

   7. SLSam Lessin9:12

      Yeah. [laughs] It's a tough one.

   8. RORory O’Driscoll9:13

      But no, actually, so I did actually look at the SVB data. First of all, I w- I was thinking, are, are they, are they throwing me under the bus, too? I checked the data, and they were actually saying that 2 to 500, um, was the middle zone. So then I felt even more depressed. Now I'm a bohem- now I'm a small behemoth, which is even more degrading. [laughs] I'm kind of a, a low-rent, um, conglomerate. But I, I saw the stuff. I, I don't buy it. I mean, I think your statement is... I think in the end you have to be sized for the stage you're playing at and to achieve the portfolio construction you want to achieve. And I'm pretty confident that, you know, our typical check size is 20 to 30 million in f- you know, 30 to $40 million rounds. We wanna get 30 checks. The math works, right? Um, 30 kind of deals total. So I, I, I think y- you have to be sized for the game you're at, right? It still doesn't mean you can't get it wrong. And I do think, to your point, one of the things I've, you know, Jason and I have been kind of batting this around over the last kind of eight weeks is I do believe the impact of the conglomerates has made everything harder, including it's harder for us to make money. I, so I, I totally buy that. The existence of people with $10 billion to spend makes it very hard for people with $900 or $500 or $600 million to spend to do that rationally in a way that probably, and I'd love to hear from Jason on this, in a way that if you're putting out 100 or 200 million, you're probably a little more inured to it.

   9. JLJason Lemkin10:40

      Maybe the more interesting question is for founders, right? If, if, if... I, I, I think the SVB report which I wrote up, I don't think it was really saying 800 to a billion was the hollowed out middle, but I guess, I guess it is part of the analysis, right? Um, that they're not raising funds. If, if, if, if that is true, then every founder wants to raise 20 or 30 million in their A now. No one wants to raise an eight... The $8 million Series A is now three safe notes, right?

   10. RORory O’Driscoll11:04

       Yeah.

   11. JLJason Lemkin11:04

       So does that mean in a couple years your candidates outside of some scales are gonna be limited to mega funds? Like, are they the only people that can't be able to write Series A checks because 20 to 30 million isn't even a large Series A today, right? It's a normal one. So if, uh, if there, if there is no one in the middle, then we're all stuck with mega funds to do, to, to fund the seed companies, right? I mean, I guess it's an obvious point, but founders just, they better get to know folks with 5 or $10 billion funds before demo day.

   12. SLSam Lessin11:32

       Or they're all going bankrupt, and these are all bad companies. Like, I, like, I think that's the other way to look at this is, like, I've... You know, I know a lot of people are pulling out of Series As entirely 'cause they're like, "These are completely mispriced," and, like, "These make no sense." And, like, I, I think that the other possibility, right, is that we're in an era where there are good companies to be built, and there are places to make money, right? And if you are going into corners of the economy or funding things that other people won't, and so you're an N of 1 or an N of a few looking at spaces that are kind of really novel, there are places to make lots of money. Um, but I think we also have to look at the other way, which is, like, there's just a massive amount of capital being massively misallocated right now.

   13. RORory O’Driscoll12:10

       It's always funny when people simultaneously have the worldviewThat, you know, the big funds are going to win everything, but all the money's being wasted. I mean, at some point-

   14. SLSam Lessin12:18

       Well, I don't, I don't know that. I, I... Well, I think the thing that with human mind is like, I don't even know the big funds need to make that much money, right? Like, the, because they're asset gatherers, right? Like, they need to g- make enough money to generate gathering more assets, and they need to justify their own existence, and it's a good business, right? That's different from saying you're trying to make a lot of money in venture capital.

   15. RORory O’Driscoll12:40

       Broadly agreed. But I actually think, Jason, I wanna go back to what you said, 'cause I thought it was spot on. It's like, you think if there's only, to, to take the, if there's only $200 million funds and billion-dollar funds, then you're exactly right. Logically, those 20, 30, 40, $50 million checks are gonna come from only 10 names who are writing 40 of them a year, not eight like us, right? And it's, I... That's possible, but it's just a weird fund construction, 'cause those people are then gonna be writing, you know, 40, 50, 60 checks of this size. You're gonna have a very spread out partner base. I don't know if they'll be able to meet the founder needs where it is. So I do believe-

   16. HSHarry Stebbings13:17

       Is that not what your insights have today, though? I mean, we, we've mentioned before kind of the outcomes that they have with your Hinge Health is returning 400 million on a 6 billion fund, and them having, like, hundreds of positions-

   17. RORory O’Driscoll13:28

       Yeah

   18. HSHarry Stebbings13:28

       ... and actually that being the de- construction they have.

   19. RORory O’Driscoll13:31

       It might be the construct- Yes, it is the construction they have. But at some point, it gets easier when you're running big sums to put big money in a smaller number of companies than try and, you know, diversify away. You know, if we're trying with 900 million to have 30 As or Bs, someone who's running 9 billion, if they were trying to do the same thing, would have 300 As and Bs in three years. It would be silly. So at some point, it becomes a part of their business, but not all of their business. And then I think Jason's right. There, there won't be... I mean, it's so funny. We're gonna talk in a few minutes about, and Sam mentioned earlier, this idea of your, a lot of As are struggling to be raised. I mean, the only way that worldview makes sense is actually what Sam said, is that if you have a world where people with, with, can I call them mid-size funds, quote unquote, "can't survive 'cause of the big guys," and the big guys are, quote, "stealing all the good deals." And at the same time, we're also saying many companies are struggling to make a Series A, get a Series A raised. Those things are coming almost opposite to each other. One says capital is scarce, and one says capital is plenty and the big guys have it all.

   20. SLSam Lessin14:35

       I would say, actually, the way you resolve that illogical-seeming statement is quite simple, which is every generation there's only a few companies that matter.

   21. RORory O’Driscoll14:43

       Yes.

   22. SLSam Lessin14:44

       It's very simple. So most of the money in Series A is completely wasted, right? And they might want it in larger quantums. That just is, like, kind of, it's kind of a war of attrition, right? It's just more money being lit on fire.

4. 14:55 – 24:37

   The Impact of Mega Funds on Startups

   1. SLSam Lessin14:55

      Now, the mega funds will just win, can win 'cause they can say, "Okay, look, I'm gonna plow a gajillion dollars at almost any price in," and because of AI or whatever argument they wanna make, you know, the, there's no upper bound, right? And so they say, "We make lots of money just on lots of money being deployed," and that can logically make sense. Seed funds are fine because you still have to be in winners, right? But it's just a multiples game, right? Which is if you're in it at zero, right, then, like, you know, you can make a bunch of checks and, like, make the math work from a DPI perspective. You also have a nice benefit, which I very much appreciate, which is I really strongly believe private to private is an important future, and I love being early and small and first because I actually can sell into the private markets in a way that you can't if you've written a $30, $40 million check into the Series A. You're too big, right? So I think those two things survive, but-

   2. RORory O’Driscoll15:43

      What do you think about... So for selling, if selling early, right, selling in secondaries, unicorn secondaries, how do you think about the goals? Is the goal... We talked, is it one extra fund, two extra fund, half is, is it just risk allocation? Because this, this is, I think if you have a smaller fund, it's really, it's interesting-

   3. SLSam Lessin16:00

      It is interesting. I think the main reason-

   4. RORory O’Driscoll16:02

      Because, because you get a, like, I, just the other day I had a 1X exit opportunity to return the fund once, and one of my anchors was, I also brought them in as part of the deal, and we talked about it, right? They followed me, so it was less for them, but for them it would've been very high IRR and me a 1X, right? That sounds good on, on the internet, right? But then it's gone. [laughs]

   5. SLSam Lessin16:21

      Yeah. So look, I mean, I just-

   6. RORory O’Driscoll16:21

      It's all gone. There's no more, there's no more returns. [laughs]

   7. SLSam Lessin16:25

      In the end of the day, there's a few things that matter, right? And the number one rule as a fund al- an allocator is you cannot sell the things that matter. Rule two is, right, 'cause I, you know, we were one of the first investors in Allbirds, right? Like, or Astra Rockets or plenty of things that got out and people were excited about, but thesis broke, right? And so I think you have to be really honest with yourself, right, and honest, and, and you're gonna make mistakes. You know, I think one of the things I always say is, as an early stage investor, you get hundreds of shots to buy. You get really good at buying. You have so fewer shots at learning to sell that it actually takes much longer to learn to sell well, right? But it's still as important as learning to buy well. And I think you just have to be really honest with yourself, which is like, is this an infinity shot or is it not? And the second the thesis is broken, and if not, if there's a buyer at a price that makes sense because someone else has different fund dynamics. Maybe they already own a lot, and for them it's, like, about rounding down their average end cost. Maybe it's their net capital allocator and they don't care as much about the negative return. Like, they have different goals. There are opportunities that work for everyone.

   8. HSHarry Stebbings17:26

      Rory, can I ask you, if it's not one of the companies that matter, is it lighting money on fire in the kind of binary way that-

   9. RORory O’Driscoll17:34

      No, I'm glad you came back to that, 'cause I would say, again, respectfully, I disagree. And it's a matter of degree. But no, I don't think that's a correct statement, right? I think that you... It is true that, and how do you explain, in every decade you look back and you go, the vast bulk of the value is driven by one or two companies. It's a power law. We all understand the math. To a rounding error, there was a decade where it was Google and then everything else, right? So you could s- And that's true, and it's intellectually absolutely true. So you sh- could say to yourself, "If I didn't do Google, I must have lit the money on fire." But then when you make that sentence a few times, then you go and you look at your Schwab account and go, "Oh, I have money in there."So I mustn't have lit it on fire. There are more wins than the biggest win. It is a power law. I would prefer to have done on Google than any, whatever I made money on in 2000 to 2010, but I'm damn glad I did that one too, right? And the over extrapolation of the only three deals make money, so therefore everything else at Series A is burning money is just... I mean, it's true in that you prefer to be in Google, but it's not the only way to make money. I mean, just in the last couple of weeks, we've had, as you've mentioned, a couple of decent IPOs, Hinge Health, um, we're gonna have Chime. We had something else, Mountain last week. We have another one this week. Take Hinge Health. Someone made $400 million for their investors. 20% of $400 million is $80 million. I say this every time when someone at the office says, "Oh, it's just a 3X." Every single one of you will cash the fucking check. Every single one of you. If I left them on the counter there, you'd all take them home with you, right? $80 million is still real money in America, right?

   10. SLSam Lessin19:14

       And Rory, that's almost my point, but just to put you on Chime, like Chime's a great example of this, right?

   11. RORory O’Driscoll19:18

       Yeah.

   12. SLSam Lessin19:18

       Like, if you're an early stage investor-

   13. RORory O’Driscoll19:21

       Hmm

   14. SLSam Lessin19:22

       ... you're very sad you didn't sell last round in Chime, right?

   15. RORory O’Driscoll19:25

       Yes.

   16. SLSam Lessin19:25

       And I would argue at $25 billion, wherever the last round was done, when you look at that rationally, you'd say, "Look, it's a cool company, right? Is it an infinity company? Right? Am I betting on this for infinity? Or is this a really great place where I did my job, which was to fund it early, to find it early, to fund it when money was scarce? And now we have capital allocators who are making a different assessment." I think the answer is you clearly would have wanted to sell last round, and I think it's in- incumbent on investors-

   17. JLJason Lemkin19:50

       I, I only know it's in the S1, but I didn't see any of the early shareholders make the cut on the, on the, on the principal stockholders. When I look at principal stockholders, there's dilution, but I don't see any of the seed guys [chuckles] on table. So that says to me they probably sold the 20... [laughs] A, a, some amount at $25 billion when I literally only see-

   18. SLSam Lessin20:07

       Right, which is good. And that means that they did their-

   19. JLJason Lemkin20:08

       ... DST, Crosslink, and Menlo. [laughs]

   20. SLSam Lessin20:11

       That means they did their job. That, that did their job.

   21. JLJason Lemkin20:14

       Well, not if it's a te- $250 trilli- billion company at that point.

   22. RORory O’Driscoll20:16

       There's two separate things floating around, and I want to disaggregate them. First is I'm gonna fight in defense of mid-tier, right? The, the mid-tier investors who didn't do the seed but didn't do the $25 billion round, are they happy they did that round? The round that Menlo did, I think was out of the B or C. It was a couple hundred million. Can't remember what the pre was. They're damn happy they did that round, right? And that's a classic example of a mid-sized venture firm making a savvy bet, doing good stock picking long after the seed, but still making good coin. So that's, uh, to me, that's the first point, which is the validation that you can, at that fund size, probably it was a 4 or $500 million fund then, make really good coin and move the needle at the fund level. Second comment to your point, Sam and Jason, you're right. You look back and go, "Hmm, I might have been marginally smarter if I had bought at 2, 300 and then sold at 25 billion, rather than holding and selling at 12." But the big advantage they have is they'll still book probably 10 or 20X. Now, 40X is better than 20X, right? So they've made good coin in a situation where, as we discussed before, the kind of $25 billion round's gonna lose money. So I think that's proof... It, it goes back to the-- That's proof that you can make perfectly shrewd A to C bets, sub a billion pre, and make very good money in a non, quote-unquote, "generational company." Chime is an extremely good company. It's not one of the-

   23. SLSam Lessin21:39

       I agree with all that, Rory. And again, I'm obviously trying to be provocative on purpose, but I think we directionally... Here's my point, is to bring it full circle to DPI though, right?

   24. RORory O’Driscoll21:47

       Yes.

   25. SLSam Lessin21:47

       Which is when you think about how I relatively value DV- DPI versus TVPI or any other metric, right? If I'm an early stage fund or really anyone, and you said, "Hey, I sold my Chime stock at $25 billion for American dollars, like for cash, and I gave it to you years ago," right? Like from an IRR perspective and a cash perspective, that is a great move, right? Versus hanging-

   26. RORory O’Driscoll22:10

       You're, you're a cash buyer.

   27. SLSam Lessin22:10

       Yeah. Versus it hanging out in the wind.

   28. RORory O’Driscoll22:11

       No, I'll agree with you on that.

   29. SLSam Lessin22:12

       Yeah. And so that's, I think, the thing to keep in mind when we go back to all of this is like, you know, again, we're talking pretty deep cuts on the, the game of VC right now, right? As opposed to the game of company building. But, like, I do think, like, when you come back to this, like, this is why I believe the Chamath line, unfortunately, and it's gonna get clipped and I'm gonna be upset about it, but, like, whatever.

   30. RORory O’Driscoll22:29

       [laughs]
5. 24:37 – 38:25

   The War on Relevance: What Companies Truly Matter?

   1. SLSam Lessin24:37

      I think in venture capital, it is unbelievably difficult to know what anything is worth, right? And if you're Menlo or you're anyone in the middle, my God, you have to price things properly, right? If you're plowing enormous amounts of money and staying late on the infinity dream, price doesn't really matter, which is how you get these ridiculous prices, right? Like, and, like, the reason is, is very simple. It's like, it's like what is OpenAI worth? It's like, who the hell knows? But, like, it's, like, one of those things where people can dream, right? You can have a trillion-dollar dream, and that means that, like, there's very little pricing discipline. It's basically a game of pissing of who can pay more or who's willing to go further. And at seed, nothing's worth anything, right? And so you just have to have pricing discipline and remember that. The problem with Menlo is I don't know how you know. Like, the, the... I, you know, I say this as someone who started my career at Bain & Company. I think with these private companies, catching the right price and the right dynamic and being right at series A/B is, like, the hardest game.

   2. RORory O’Driscoll25:35

      I think some parts of that are true. I think price, y- y- you are right that the seed investor... I mean, I always say, you know, we typically do As and Bs, and I always say we're at the first point where you can start to do some analysis versus just people and market, which is what you have to live on, on broad directionality, right? You've got at least some pitiful facts to look at and try and-

   3. SLSam Lessin25:56

      Well, I have no facts. I, I exist in a fact-free zone.

   4. RORory O’Driscoll25:58

      Yeah. A- yes, absolutely, and we live in a fact-thin zone. So I do agree that we have to be a little... Yeah, you have some data to bring and it's ha- but I don't agree that our pricing, I don't agree that pricing for us is, quote, "harder than pricing for the late stage." I think late stage, on average, it very, it's... I think it's much harder to price at that late stage, 'cause on average you'll be wrong. And we're seeing a whole bunch of down rounds where the last round loses money, and every other round prior to that makes money. So I actually think price discipline is even more important the closer you get to an exit.

   5. SLSam Lessin26:34

      No, they don't lose money. They just get their price cut.

   6. RORory O’Driscoll26:37

      Well, w- w- we've, we've thrashed that one to that. In Chime's case they're gonna lose money 'cause they don't have protection.

   7. SLSam Lessin26:41

      That's a fair eye roll, Jason.

   8. RORory O’Driscoll26:43

      But, but-

   9. JLJason Lemkin26:44

      [laughs]

   10. RORory O’Driscoll26:44

       ... but I think the more important thing is, the interesting thing is we always say, and I, I think Anthropic, by the way, I think Menlo doing Anthropic was a genius move, right? So we'll come to that in a second. But-

   11. SLSam Lessin26:51

       I think it's a genius move, too.

   12. RORory O’Driscoll26:51

       Totally. I, I think, look, there's always some deals, and it's very surprising, that even at that two, three, five billion valuation level, there's still another 10X from there. Now, there's not many of them. There's literally one maybe every second year. But if you do that one, you, you right, you, you can, you can price like it's an A or a B, but deploy money like it's an F and make a return, you know, 10X plus return as if it's an A or B. It's an awesome deal. There's, as I say, one of them every couple of years. Anthropic was one. OpenAI was one. Probably Android was one. But the average late stage deal isn't that, right? And there's just less degrees of freedom on the average late stage deal to compound. So I think you have to be a little... When I look at the people who do it well, like the Meritechs, like the IVPs, there's a fair amount of shrewd price discipline in what they bring to the table.

   13. SLSam Lessin27:39

       Or what the product they're selling is, you know, a, just a different product, right? The product they're selling is access to this pool of companies that are late for people with too much money or that need private access, with a cherry on top of infinity, right? And they're actually not in the business of-

   14. RORory O’Driscoll27:54

       I think that's probably not as true for the names I cited, but I think you're right. Um, there are people who are, there are funds who are playing that game where, you know, it gets back to the whole when all the cute, sexy stuff is private, there are ev- eventually going to be entities whose sole goal in life is to put public investors in contact with those sexy private companies.

   15. JLJason Lemkin28:13

       The one thing I will say on Chime and the 25 billion is every single round in the billions for Revolut, everyone was saying, "Well, how much more can it be? How much more can it be?" I think everyone is realizing now that Revolut will quite likely be at least $100 billion company-

   16. RORory O’Driscoll28:25

       Yeah

   17. JLJason Lemkin28:25

       ... and likely 150 billion. If you sold at 25, you would be grossly underestimating-

   18. SLSam Lessin28:31

       Totally

   19. JLJason Lemkin28:31

       ... and missing 125 billion of gains in a European neo bank.

   20. SLSam Lessin28:35

       But it also just depends what business you think you're in, right? Like, you know, again, like I don't, I don't... I think that there's a very... Like, I don't look at myself-

   21. JLJason Lemkin28:41

       Aren't you in the business of making as much money for your investors as possible, Sam?

   22. SLSam Lessin28:44

       No. Well, so I think there's another real debate, I think, which is, which is a tough one, which is, look, I would argue that there's a strong case to be made that as a venture capitalist, you should not have an opinion about the public markets, right? That, like, you're not paid to have an opinion about public markets. People can have their own opinions about public markets, right? And, like, you're paid, your job is to, to manage the private markets or private pricing. And then once something's public, it's like, look, that's, you know, the game should be over. Now, there's all sorts of people that juice that or, like, decide they do have opinions about the public markets. But, like, I don't know. It's something I've gone back and forth on, to be totally honest with you, about whether VC is just thematically should be doing that, or whether you say, "Look, you know, we can turn over shares. You guys figure out what to do," right?

   23. JLJason Lemkin29:27

       But I would probably sell Revolut and Chime right now. Right now. I'll tell you why, and you can criticize it. I'm just, I'm still learning, right? I'm gonna be a student, uh, for too long. I'll be out of this game while I'm still a student. But both of them h- have about 15% market share. True TAM. If you're trying to decide when to sell, right, or whether you, they have infinity runway, um, market share is a limiter, right? Um, and, um, I mean, Revolut, there are folks that can get to 100% market share, but for a lot of apps, 15% I find is a little bit of headwind. Like, you start to see, you start to s- and I, and a lot of times in B2B when the market's smaller, it's, it's even before 100 million in revenue. You start to get to double-digit market share, and just when it gets good, 'cause you, everyone's heard about you and all the leads come in, it's like, ah, [laughs] all the easy... 15% market share is a lot.It's a lot if you're, if it's not a monopoly, if it's not a monopoly

   24. SLSam Lessin30:18

       That is the classic thing. Everyone comes, you know, as an early stage investor, people come to me like, "Well, the CAC is blank, but it's gonna go down." I'm like, "Nope, CAC only goes up." Right? Like, people just consistently get this wrong, right? And so I think that like-

   25. JLJason Lemkin30:28

       Almost always up at scale, right?

   26. SLSam Lessin30:29

       It's like this is how the world works. I'm like, you know, the, the kind of argument that you're gonna get good at something and all of a sudden it's gonna get cheaper is just wrong, so.

   27. JLJason Lemkin30:37

       Chi- and Chime's an interesting one. Their CAC has fallen a bit, uh, because they track, uh, brand, brand awareness and virality, and it took a while for Chime to be big enough to have enough viral propagation or word of, word of mouth. I don't think it's viral. Word of mouth. But now, it's only since 2022 they said word of mouth is their number one source of customers. It's just sort of interesting 'cause it's, it's the only way you can scale, right? Otherwise, your CAC goes up-

   28. SLSam Lessin30:58

       You just zoom out. You zoom out

   29. JLJason Lemkin30:58

       ... goes to infinity.

   30. SLSam Lessin30:59

       You zoom out.
6. 38:25 – 40:31

   Mary Meeker’s AI Report: What Everyone Missed

   1. SLSam Lessin38:25

      Bye, guys.

   2. RORory O’Driscoll38:26

      The thing that I do wanna go to though now is actually I thought a phenomenal report which, Jason, you did brilliant work on, which was Mary Meeker's AI report. So I wanna go to it though. You posted an incredible thread with 10 fantastic takeaways. I wanna hand over to you on which takeaways you found most striking and why, and just start there.

   3. JLJason Lemkin38:47

      Look, some of it was obvious. The one I first started off, which is obvious, but I'll tell you why I put it in there anyway, was that ChatGPT is the fastest, even though, even though as Sam Lessin said he's not sure it's important, it's the fastest, uh, gain of users in, in the history of the world. Zero to 800 million in 17 months, okay? That's... It took, it took Netflix 15 times longer. It took TikTok five times longer, the rate of adoption. I talked to so many folks, especially in B2B here, they're like, "You know, I, I don't know. I don't know that AI can really replace a, a, a good hardworking marketing manager or a, or a good PR person." Or they say, "There's too many..." You know what they say, Rory? There's too many hallucinations. To me it was a reminder of the rate of change. I don't think as humans we can process the rate of change of AI. That was my point. I don't f- it's so fast that we don't understand almost how quickly it's changing. That was the main point I tried to bring in. So whatever you think, whatever you think AI could do three months ago, it's like super dated. [laughs] The second one, maybe Rory, you know... you could help me. This is the second one I'm struggling with. I've been struggling with this in AI for three years, okay? The second Mary Meeker one was showing that the infrastructure spend is unprecedented in the history of internet, right?

   4. RORory O’Driscoll39:55

      Yeah.

   5. JLJason Lemkin39:55

      That the Big Six, uh, spent 212 billion on CapEx.

   6. RORory O’Driscoll39:59

      Yeah.

   7. JLJason Lemkin39:59

      Um, and yeah, the top line's great, but the spend here is insane. I'm just still a little confused where it's going because it's early at the application level. Where is... At the, at the application level, is this all going to coding and support? Is it all going to, to custom data analysis? Is it all going to subsidizing our ChatGPT 20 bucks a month? I just don't, I, I just don't know where all this infrastru- I think it's, I think it's laying a foundation that is transformational, but I just... It feels so far ahead of the application level.

   8. RORory O’Driscoll40:30

      I, I think you're

7. 40:31 – 53:34

   $600B in AI CapEx - Where Is the Revenue?!

   1. RORory O’Driscoll40:31

      right. And the hyperscalers have taken very good cash-efficient businesses, and they would break Mr. Buffett's heart because they've turned them into CapEx hogs, right? Microsoft, Amazon, Google, Facebook all have had CapEx as a percentage of free cash flow go up significantly. Now, as you pointed out, the good news is in the last four or five years, free cash flow themselves have grown, so your cash flow hit hasn't been enormous. It's only been about a 10% decline in free cash flow, right? It hasn't been horrific. In a less generous economic environment, the shareholders of Microsoft might well be screaming and saying, "You wow, 60 billion are nothing to show for it, guys. Come on here," right? So it's been perfect timing. It's been... It's a little actually in that respect like '98, '99. The overall economy has been favorable. The performance of the hyperscalers' existing businesses, not their AI businesses, have been pretty damn amazing. And as a result of that, the market's been able to say, "Guys, knock yourself out. Spend $260 billion. You know, I'm sure something will come of it soon." The $600 billion question is where are the apps, right? And you know, since then, you know, and it kind of implied though, didn't say, "Oh my God, there's gonna be a correction." And obviously since then there hasn't been, right? Everyone is just plowing on, right? They're investing the capital, and the revenue's coming. But, you know, relative to the spend, if someone said to you, you can finance a $600 billion CapEx business and, you know, 10, you know, four or five years in you'd have 10, 15 million, billion in revenue and 400 [laughs] and $585 billion in losses, you'd probably say, "Ah, no, I don't need that right now," right? But that's where we're at.

   2. SLSam Lessin42:10

      We say that on the revenue side, but then, you know, I think end of year next year OpenAI's gonna be at 25 to 30 billion.

   3. RORory O’Driscoll42:15

      Yeah.

   4. SLSam Lessin42:15

      We saw Anthropic cross 3 billion in revenue up from a billion just five months ago. Three X from a billion in five months. It always takes time when we're laying infrastructure. Revenue comes later.

   5. RORory O’Driscoll42:27

      The variable that we're missing in this discussion in my view is time.Right? I totally believe that all the apps will come to fill the space available for it with all this CapEx. I believe the LLM guys will make amazing shit, it'll be impressive, and businesses will find a way to use it. But to Jason's point, I think if businesses adopt in two years and then the revenue comes quickly, it'll all be fine. If businesses take four or five years to get there, you know, it could be... You could be looking at a more extended period of, you know, you're, you're having the costs but not yet the revenues. I think that's the as-yet unknown. How quickly will apps revenue fill the gap?

   6. HSHarry Stebbings43:05

      When you look at percent of free cash flow, you said they're 10% and actually investors being okay with that.

   7. RORory O’Driscoll43:10

      Yeah. Yeah.

   8. HSHarry Stebbings43:11

      There's a ceiling to what they are okay with. If it is five years out, and that is now 30, 40, is there a ceiling to what investors are okay with Satya, Larry, Sergey, you name it, spending?

   9. RORory O’Driscoll43:23

      I'm sure... Yeah, I, I, I'm sure that, look, you saw... I mean, yes, there is, is the answer. And it seems inconceivable today, 'cause everyone's like, "Ra, ra, go for it," but, you know, public company investors are just mean VCs on steroids. We turn on a dime from, "I can't believe you're not spending more," to, "What the frick do you mean you're spending so much money?" And we've lived through it in '99 where, you know, you'd call the team in and say, "Double the burn," and without blushing you'd call them in six months later and say, "Why are you spending so much money? Let's cut." Right? If the economy slows down, if your core growth rate starts to decline or slow down significantly, I think you'd see mild to, to reasonable-level pressure on, um, all the hyperscalers. I mean, an interesting example would be, in a different market, you know, Meta changed its name and wanted to go all in on VR. They're two years in, there's no return. There was a little bit of pressure, and I think Zuckerberg heard the pressure and pivoted nicely to, you know... I mean, still spending a lot on virtual reality, but not as much, and there was kind of a little bit of a belt-tightening there. So when the pressure comes on, I think, yeah, I think CEOs respond.

   10. JLJason Lemkin44:30

       You know, it's funny, I do... I, I said this when we chatted last time, that if you really... One of the things I admire about Sam Altman, some things I don't understand but admire, is how he, he's telling you the future even though, y-y... If you just gotta listen. [laughs] Like-

   11. RORory O’Driscoll44:41

       Yeah

   12. JLJason Lemkin44:41

       And, and, you know, when he started talking about Stargate, that he alone needed $500 billion just to get going and up to $5 trillion, right? [laughs] And we kind of, I'm like, "What's Stargate? Wasn't that a movie or a T- [laughs] What do you mean $500 billion?" But he's socializing the whole market, right? That it's gonna be an order of magnitude bigger, right? He's socializing the market here. Because, because it's n- this isn't Amazon. Not only is the size bigger than Am- the classic Amazon investment losses, but you need everyone to go all in on this. You need all the big participants to say, "We're going all in on this, on this big bet." It's not just one company making a, making a big bet. This is all the hi- the big companies making a massive bet.

   13. RORory O’Driscoll45:18

       I, I think the interesting question is, you know, there was a time when Amazon stock was perilously low and a whole bunch of banking analysts were sneering and saying they'll go bust, and obviously in retrospect they didn't and all those banks did. And [laughs] Jeff Bezos got to say, "Neener, neener." But there will be bumps along. Intuitively you just know when you're spending half a trillion dollars in advance of revenue, at some point in the next two or three years there'll be at least one scary moment, right? And that could be actually an interesting opportunity to invest, but it's hard to believe it's up and to the right from here.

   14. HSHarry Stebbings45:50

       What, what is a scary moment? Can you just help me visualize that? When we see the commoditization of models, they're all becoming very efficient, they're all becoming really bloody good. What is a scary moment?

   15. JLJason Lemkin46:00

       Maybe if OpenAI just misses, misses, um, a growth plan, right? If it's just 30 or 40%, if they have two rough quarters for whatever reason, right? Some sort of saturation we're not anticipating. That would set off a mini panic, I think.

   16. RORory O’Driscoll46:12

       Agreed. And you know, I was just looking at their numbers. It's interesting, exactly 20 years apart, their numbers versus Google's numbers from 20 years ago. So literally 2002 is the same as OpenAI's t- 2022. 2003, I think, I'm doing it from memory, is about 1.3 billion for OpenAI, 1.4 billion for Google four years ago, or 20 years ago. This year, 2005... Uh, 2004, sorry, 3 billion and 3 billion, so roughly the same. And now what's interesting is the projections for OpenAI now start to, as yet unrealized projections, start to pull way ahead of Google. In other words, OpenAI was, it was the Google of its day until now, and it's projecting to become twice the Google of its day for the next four years. Now, maybe it will, 'cause I think it is a more impressive piece of technology when you use it, but maybe it won't. And if all it is... Let's be, let's make the statement clear. If all OpenAI is is just as good as Google, then it's gonna miss its number next year by about 40%. I'm simply saying that the expectations are so high that anything less than fricking amazing could feel like a fail, even though in any logical terms it isn't. Just as Amazon wasn't a fail in 2001, 2002. It was just, in retrospect, minor growing pains that a panicky market interpreted, "Oh my God, they're going bust." No, they're just building a business where it's gonna take $3 to $4 billion of losses to get to cash flow break even, and then you're gonna make billions every year.

   17. JLJason Lemkin47:43

       Yeah.

   18. RORory O’Driscoll47:44

       Right?

   19. HSHarry Stebbings47:44

       J- Jason, just to be clear, we're gonna do a visual of Rory looking mean with "OpenAI doesn't matter." No, no one else in the frame.

   20. JLJason Lemkin47:53

       [laughs]

   21. HSHarry Stebbings47:53

       No one else in the frame. [laughs]

   22. RORory O’Driscoll47:54

       Can I... You're such a dick with your captions, Harry. I just want to say that, and you'll get me into trouble. But I've given up.

   23. JLJason Lemkin47:59

       Oh, you gotta, you gotta do it.

   24. RORory O’Driscoll48:00

       Well, I recognize how-

   25. JLJason Lemkin48:00

       You wanna, you wanna, you wanna hear the third point? 'Cause it's kind of interesting, the me-

   26. RORory O’Driscoll48:03

       Yes

   27. JLJason Lemkin48:03

       ... that I brought up.

   28. RORory O’Driscoll48:03

       Keep going. No, keep going.

   29. JLJason Lemkin48:04

       'Cause this is when we stop talk- Like, Elo- E- you know, you can make f- you could, you could have opinions on Elon Musk, right? But now that he's out of government, man, the guy is direct, right? He was direct today. He said this, this, this spending bill is ridiculous for all parties, right? And he's been talking about China with AI, right? And Mary Meeker's number three point was we're missing what's happening in China, which is natural. We're not even connected to them on the internet. We have different internets, right? Her point was, you know, it was X months ago we thought DeepSeek was gonna change the world. It didn't, right? But 93% performance at the time of OpenAI's o3-mini for a fraction of the cost. Alibaba, which we can't even use here, right, outperforms both.Baidu Ernie, which I don't even know, .2% the cost of GPT 4.5. And, um, I don't know what to make of it, but pe- people smarter than me are worried about China and AI. That was kind of her third point. And we, we, we've stopped talking about safety, and I think we've stopped talking about China.

   30. RORory O’Driscoll48:57

       I mean, the simpler point is probably some version of, you know, I think ChatGPT will, will be the Apple-level quality product, but there'll be a whole bunch of Android-type quality products that are out there that will just keep pricing honest, um, if they're commercially available on, you know, uh, uh, universally. And I don't think, to Jason, to your point, obviously, if the models are built in... There's, there's two separate issues. If the models are built in China, we won't be accessing them here, uh, just even if we will, even if legally allowed, my guess is corporate America wouldn't want to, right? But the interesting thing about, the, the meta point about DeepSeek was that it was possible to get quite close quite cheaply, and a whole bunch of... And, you know, you're gonna see that independent of China just in terms of competition here. But I think the undeniable fact is we ain't a monopoly anymore. It's not two or three companies monopolistically producing LLMs. There are four or five companies the other side of the pond cranking them out, and I think Mary made that point.
8. 53:34 – 1:04:24

   The Existential Dread Missing in Most B2B Startups

   1. RORory O’Driscoll53:34

      Nobody cares.

   2. HSHarry Stebbings53:34

      I thought it, I thought it was fantastic. I had, uh, Varun, the founder of Windsurf, on the show.

   3. JLJason Lemkin53:37

      Yeah, he was great.

   4. HSHarry Stebbings53:37

      It released on Monday. Uh, and he said, "Listen, startups beat incumbents because of existential dread."

   5. RORory O’Driscoll53:42

      Yes.

   6. HSHarry Stebbings53:42

      If you are in a startup and you don't ship great product and it converts to sales, you lose. If you are in an incumbent-

   7. RORory O’Driscoll53:48

      Yep

   8. HSHarry Stebbings53:48

      ... and you don't ship great product that converts, and you're a great engineer, you're definitely getting reassigned and re- reallocated. You're not gonna lose great engineers. You're just gonna put them on different products. See it all the time-

   9. JLJason Lemkin53:58

      You know, that's the problem with B2B today versus where Varun is. I don't see enough existential dread in most B2B startups. I don't see it. Aaron has it. Uh, Yamini had it when she was on stage. She's... Y- Aaron and Yamini at SaaStr this year, I mean, Rory, Rory, scales investor both. They both said the same thing, "We're so excited, and we're scared." I don't see enough existential dread in B2B startups. I don't see it. I see it, you know, a little bit of it, some discussion. I wanna walk into a board meeting and, and see a, a little bit of shaking, because there's so much going on in the world, and they just had yet another hackathon this last weekend, and they're rolling out AI voice agents on Wednesday. Like, if that's not you, I, I honestly-

   10. RORory O’Driscoll54:33

       Totally

   11. JLJason Lemkin54:33

       ... think you're gonna fail. You want dread. Dread... Varun's right, 'cause Varun, I mean, Varun at, at Windsurf, he has, he's had three different companies in 18 months, right? And every month he's at risk of being displacedEvery month, right? He-- And he's honest about it. He was honest on 20VC, right? We need more of that in B2B, not this slow roll, right?

   12. RORory O’Driscoll54:50

       Yeah, no.

   13. JLJason Lemkin54:51

       So the other point she made, which, which we knew if you want, but I really think for B2B this is super interesting. 'Cause she... A lot of stuff she said like, like pricing and, uh, uh... But this is one to slow down on. Um, uh, and, and Harry sometimes jokes that he's old, but this is where Harry is old, for, for real. Her point was the next... 32% of the world is just coming online right now. They will all be AI first. She says they'll use voice agents, agent-driven interfaces, and national language interactions. I think that is to 2025. I think... What I do know is that this generation will not use the internet remotely like we do. They will not use lead contacts and opportunities. They will not use files. Files are disappearing overnight. Kids do not know what a file is. It does not matter. And it, it will... E- everything will be MCPed or AIed, and, uh, this is an existential threat. Like, if I'm Aaron or Yamini, like, these are S-tier SaaSios, I gotta worry about AI today, right? I gotta worry about agents, I gotta worry about automation, and then I gotta worry about what happens when no one uses these applications remotely [laughs] like they use them today.

   14. RORory O’Driscoll55:56

       Oh, yeah.

   15. JLJason Lemkin55:56

       Like, you really think that the next iteration is gonna, like, uh, like, even understand what a Salesforce UI is? It won't even make sense to them. They'll never use it, right? My, my son helped us at SaaStr Annual this year. We have a, a, a, a, a, a SaaStr platform we use for, like, tickets and stuff. I- and, uh, he's like, "Wow, this is the first time I've seen software like this." [laughs]

   16. RORory O’Driscoll56:16

       Wow.

   17. JLJason Lemkin56:17

       And he codes every day. [laughs]

   18. RORory O’Driscoll56:20

       And I, I do think that is true. I, I think in front of every system of record, there's gonna be some system of work that does it, and it'll sit on top of the system of record for now. And if it does a good job, it will gradually displace, make irrelevant, or replace the system of record if they allow that to happen.

   19. JLJason Lemkin56:40

       Yeah.

   20. RORory O’Driscoll56:41

       Right? The AI that's doing the work... And I, I can never take the... The AI that's closest to you as the worker, if I'm the worker, if the, if the thing that I interact with every day that helps me do my job, over time, that's just become the most important thing in my life, and anything back behind that doesn't matter. So if I'm a sales rep and I have a lot of, uh, uh, yeah, automation, voice automation, AI, SDR, whatever, telling me what to do, doing things for me, act- where I'm acting as a controller of the agents, that's just going to become mentally my model of what a CRM is. And back behind that, yeah, there might be some database called Salesforce, but I just won't care, right? And that's-

   21. JLJason Lemkin57:18

       Yeah, and there might even be multiple ones you won't care. You won't care if the company's using Salesforce and HubSpot and Adio and its own database.

   22. RORory O’Driscoll57:24

       No. I think the smart companies can reimagine what those workflows look like and build to it, and that's obviously what they're trying to do. But if you s- if you fail, if you're not relevant in terms of how your next generation of workers use AI, you will eventually be displaced. I mean, it might take a long time. I think, as I've always said, I think Salesforce instances will be there at scale long after I'm dead, but the value accretion will all go to the technology that's helping me do my job, not the technology that's count, keeping score on how well my job's been done.

   23. JLJason Lemkin57:58

       The one I'm really struggling with today, and I, I have asked Aaron and others this, right, um, is, um, I think that it's, it's, it's early, but it's... I think MCP is an existential threat to almost every SaaS app. And now you can MCP into Notion, you can MCP a little bit into HubSpot, but it's very limited, right? You can MCP into Google Calendar. I just don't know why, if I can just talk to my, my AI, my Claude or ChatGPT, and do everything I want to do at HubSpot elegantly, I don't know why I would ever log into HubSpot or ever even learn what HubSpot is.

   24. HSHarry Stebbings58:32

       And that's Harry's perspective though, isn't it, really? Which is that, you know, in an agentic-first world or an agent-first world, you basically have all of these applications that become databases, and then agents basically become the data transporters, and you never need to engage with the core database then.

   25. RORory O’Driscoll58:46

       Yeah.

   26. JLJason Lemkin58:46

       I thought it was too nerdy when he started saying it, right, and too technical, too Microsofty. I thought it was too Microsofty, right? But time goes by, and now that I can see MCP applications just starting... And the problem today is you need a... Listen, I'm not an expert, but everything that I've tried, you need a key. So a key is annoying, right? I gotta go to some website, I gotta get a secret key, and I gotta add it to my thing. But when those keys go away and I can just talk to all my apps through my, through my ChatGPT or Claude, man, I just don't think we're ready for this world. I don't think we're ready for this world. And I'll give you an, an ex- a personal example. Like Harry knows, there's a company I invested in, um, that I, I love called Mangomint, okay? And it's, it's, it's next generation SaaS for spas, doctor's offices, and the like, okay? They're coming up on 25 million. Love the CEO to death, would do anything with him. Like, he was all over MCP the day he could use it, okay? And he's like, "Here's the problem for me. Let me be clear." Right? And he's the best in his space, that's why they were able to do it, right? Not a huge TAM, lots of issues. Like, now let's say I want a, I want a, an appointment at, uh, what, what... At Watercourse Way in Palo Alto, right? Where, where Rory goes to decompress after a, after a tough, tough pod.

   27. RORory O’Driscoll59:50

       Tell me.

   28. JLJason Lemkin59:51

       And let's say... But right now he might have to figure out which application they use. Do they use Mangomint? Do they... Which of the vari- what do they use? If MCP, it, it can just abstract away, and you'll have no more relationship with this application. And like, he's like, "I could become a pipe overnight," right? And he's already completely changed his value proposition because of that. Because it's like, if I don't change what I'm doing today, no one will even know which of these applications... And Harry's invested in, in some adjacent companies, not in this space. But you might not know. You might not know which restaurant application it is, which spa application. It might not matter, and it's very difficult for me to imagine you can increase your prices in that world. [laughs]

   29. HSHarry Stebbings1:00:27

       I can, I can-

   30. JLJason Lemkin1:00:28

       Maybe you can increase your prices
9. 1:04:24 – 1:09:32

   IPO Market Is Back: What Actually Matters Now?

   1. HSHarry Stebbings1:04:24

      There've been a, a lot coming out in terms of M&As and IPOs. There's Chime obviously this week. There's Grow filed for an IPO. It's an Indian IPO. Sh- uh, Shein moving IPO from London to Hong Kong, maybe finally getting that one out. Omada Health coming out for a $1.1 billion price. Circle files for IPO at 8 billion. Salesforce acquires Informatica at 8 billion. Of those, free for all, which one do you think is most interesting?

   2. RORory O’Driscoll1:04:52

      I'll, I'll, I'll hit two. I do think Circle's interesting, right? Just 'cause it's a fun business model. It's basically, it's a, it's like a Bitcoin-enabled money market fund, and, you know, they get your money, they're able to invest it in treasuries, they get a nice yield. They have to share some of that money, um, with customers, with distribution partners, and they build a perfectly nice business there, right? And, you know, valuation at around 18 plus or minus reasonable. It's just an in- it's an interesting business. It's got like... It's like a $43, $44 billion, the way to think of it, a $44 billion money market fund where they're getting roughly 4% or 5%, so just under 2 billion in revenue. And then they have to share a lot of that with distribution partners and, you know, so th- they have a net interest margin. It's just like a little mini bank type thing, and then they have OPEX and they make a couple hundred million bucks a year, right? Perfectly good business. It's the boring version of crypto. Crypto, but safe. I think it'll be an interesting IPO. You know, I think it's bounded in terms of value because there's no magic explosion thing. It's very clear how the model works. Anyone financial can figure it out and value it, but I think it's interesting. Jason, over to you. What you like?

   3. JLJason Lemkin1:06:01

      The question was the most interesting M&A or other transaction, Harry? Was that it?

   4. HSHarry Stebbings1:06:04

      Yeah. Yeah.

   5. JLJason Lemkin1:06:05

      I'll tell you the one to me that was the most interesting, although I'm still trying to fully understand it, right, was that Snowflake bought probably an almost pre-revenue startup called Crunchy Data, which is a Postgres implementation, right after Databricks bought its own Postgres database company, Neon, for a billion.

   6. RORory O’Driscoll1:06:21

      Yeah.

   7. JLJason Lemkin1:06:21

      Okay? And pr- I assume Neon had some real revenue, right? Um, I, 250 million for Snowflake suggests to me they're buying, um, d- some distribution. But the fact that trying to understand to this conversation how AI shifts the battles, that Snowflake and Da- and Databricks now need to be database companies to some level in a year or two could be f- like fundamental change and all these lines blurring, right? Instead of Snowflake, it, it figured out how to work with all these different Postgres providers and open sourced and forked versions and all the different databases. Now they're database companies. Yes, they need their own custom databases so their agents can efficiently work on all the data that's been laked and stored here, but-Pretty interesting within 60 days, including one yesterday, they both became database companies. It's a big change. It's a big change

   8. RORory O’Driscoll1:07:10

      Snowflake would be a data warehousing company, but I think what it really is, is feeling the need to support all the different types of data structures and, as you say, mo- morphing from a world where the, the typical Snowflake's data with, you know, data warehouse type data to now the kind of data used for AI. So feeling the need to support a wider variety of data types and data structures. Yeah. The bo... And it actually segues to, those are the two, you know... I, I nearly said... This is funny. I nearly said, "Those are the two publicly traded companies." And then I remembered Databricks isn't publicly traded, it's just as if it was a public company, and it should be, of course, and it will be. But you've got Snowflake in pub- as public, you got Databricks, and then, Harry, you're gonna ask about it in a second, but companies like ClickHouse, which are, you know, exploding company in the kind of database space, column or database, that's really seeing explosive growth and just raised a big late-stage round, I think around 6 billion from, you know, a host of who's who. All of them kind of... This is... The AI plumbing business is a great place to be, right? And if you're even adjacent to it, like I would argue five or six years ago, Snowflake wasn't in it, they were adjacent to it. So they're trying to fearlessly move into it. I think the Databricks advantage was they were in it from the start. It was kind of their thing, moving data and then ultimately, you know, using, moving data which enabled for AI. So venture guys make really good thematic bets about the next 10 years and are pretty horrible at assessing how the market's gonna react to the next quarter's data. Hedge fund guys are the exact opposite. They literally, some of them, you know, the overnight traders, don't even wanna think about the big picture trend. It's just like, is this EPS number over or underestimate, and will the stock go up or down? And that's just a different skill set. I'm no good at that. Proof that we're all no good at it. It's a fun thing you can do when you have a public company. You're on the board of a company, you have some interesting results you're about to announce. Some things are better than expected, some things are worse. You can go arou- I've seen this over and over again. You can go around the boardroom and ask people, "Here's what we said. Here's what we're going to announce tomorrow. Will the stock go up or down?" At best, 50% accuracy. Often... I've seen it over and over again. It's like, "Hmm, we think these things are great," and then you go out and everyone gloms onto the other thing. Sometimes the stock goes down and you thought it was going up, and you wanna cry. Other times it goes up and you're like, "Hmm, okay." So it, it, it's kind of like two worlds talking past each other sometimes.

10. 1:09:32 – 1:13:34

    YC Startups at $60M Valuations: How Should You Play It?

    1. HSHarry Stebbings1:09:32

       Can I ask one more final one for Kalshi Quickfire, which is just, um, well, I see obviously new batch is out this week and they're raising. And everyone's doing 10% dilution for the round total. You guys are much more experienced than me. I'm very lucky to learn from you. I appreciate our relationships, really. Like, how do we play in a world where the total round is 10%, our fund sizes are bigger, and really you've got seven and a half for a lead and two and a half for angels? Jason, how would you advise me? You do YC very well.

    2. JLJason Lemkin1:09:59

       Well, first, I think at YC it's not 20. I think the new deal they're trying to do with a lot of startups is at least 50 to 60 post for, for even pre-revenue. There's a ton of deals in this batch at that level. So that's what they're pushing toward. And no criticism. Like, you gotta, you gotta see YC as a business or this stuff will drive you nuts. You have to admire the game that's being played on the field, right? Which is, you know, when YC went to 15, people thought it was crazy, and then 20, and now it's, they're trying to get everyone to 50 to 60 that are AI, that just have AI, which is 70% of the batch. That's the goal. That's... As far as I can see, there, there are plenty of folks raising it 50 to 60 or more with essentially no revenue, right? With, with very little revenue. Um-

    3. HSHarry Stebbings1:10:37

       So I didn't blame them for not seeing it on the field

    4. JLJason Lemkin1:10:38

       ... so that doesn't change the ownership question-

    5. HSHarry Stebbings1:10:40

       Yeah

    6. JLJason Lemkin1:10:40

       ... but it does make it all even harder, right? Because, because then the A has to be at like, you know, 200 for, for the math to really pencil out, right? Uh, this is, this is what, what I taught investing is like for, for, for seed investing to really make sense, the next round should be 3X to justify the risk. And for A or B, it's got to be 2X or you should just wait. You should just wait for the next round [laughs] because... Not that it's that simple, but intellectually it, it seems about right, right? So... But, uh, I don't know. I think you gotta... You can either play that game and buy as much as you can or you can cry on it on, on, on the internet. Um, all I can tell you, my little analysis of YC is I've ended up owning about a little less than half of what I would have. That's one guy's analysis. 'Cause y- I bought more, I bought more in RevenueCat, I bought a lot more in RevenueCat, I bought more in Algolia, I bought more in others that have done reasonably well. You can buy more in the next round, right? But, but it only works... Unless you have a massive fund, there's only so much you can buy in the next round, right? I mean, you run out of, you run out of money, don't you? So you're gonna end up owning maybe half. But Gary would tell you, since 30% of the batch is unicorns, it don't matter.

    7. RORory O’Driscoll1:11:46

       I think, Jason, first of all, I couldn't... Interesting. Could not agree more. I think it's what you said right at the start about they're doing their job and they're doing it well. It's one of the best business... Their value proposition to founders is, we'll take you, two unknown guys or gals from unknown place, and we'll turn you into something that, God bless these people in Silicon Valley, they'll value at 20 to 40 to 50 million pre. And their success is a function of the more they can do that, the more people are gonna wanna come in, the higher quality people they're gonna be able to attract. They're doing their job and they're doing it well, right? So you're right, bitching and moaning is a waste of time, right? All you can do is do your job well, right, in response. And, you know, it's n- it's obviously not the stage we play at. We typically play at a round, round and a half later. But the only weapon you have on your side of the table for the- if you're gonna pursue those deals, is picking. You obviously have to be way better at picking or you have to find other sources of deals, right? I mean, you know, by definition... I mean, what's happening is, as the pricing goes up, they will be correct. On the winner deals it won't matter, because it never matters on the winner deals. But, you know, if your rule is only do... I mean, if, if your, if your advice is only do good deals, it's not really that actionable. I mean, I'm trying to only good, good, do good deals, but it's really hard in practice, right? You know, the truth is, when you're paying significantly more per unit, it's just a lot harder to make money. Your picking has to be much more fine-grained.Right? That's just... Yeah, they've done a great job representing their side, which is, I mean, again, going back to I give them credit, the Paul Graham stated intent, make it easier to found companies. He's making it easier and more profitable and more attractive for entrepreneurs to found companies. More c- companies will be found. Founded, sorry. Founded. It's working.

    8. JLJason Lemkin1:13:32

       I don't, I don't think it's... I think

11. 1:13:34 – 1:17:39

    Why 3% Ownership Could Still Work—Maybe

    1. JLJason Lemkin1:13:34

       the own- the thing is, li- listen, I guess it's the same math, right? But there's plenty of ways to justify paying 60 million in a seed round, okay, i- if it's, if it's a generational company. What's harder, even though the ma- you, you can do it on a spreadsheet, if you have a fixed fund size, it's harder to take the low ownership. The low ownership crushes you, right? And so you can say, "Listen, this is low risk and this is the best team ever," but when you end up with 3% ownership with a large fund-

    2. RORory O’Driscoll1:14:00

       Yeah

    3. JLJason Lemkin1:14:00

       ... that's the one... And, and that's where I think there's the slight fallacy in the YC data, and I love Gary and I love the team, but that's a model that for folks that either are angels or have tiny funds or don't need to have a fund returner or a material impact, right? It's just the math works better if it don't tie that to fund size, I think. I don't know how you do it to make, return a lot of funds with 3%, though.

    4. RORory O’Driscoll1:14:21

       At the end of the day, until... The only thing that makes the, this whole process work and kind of normalizes errors and kind of corrects for overvaluation is ultimately returns. You know, correction on this kind of issue is a lagging is- i- is a lagging indicator. If these, in fact, are on average overpriced, then five or seven years from now, the people investing them will slowly realize they've made a mistake and, you know, pricing will come down. But the weird thing about venture is it just takes a long time. Takes a long time. You know, it'll take 10 years to discover if the $8 billion funds work and deliver an acceptable return. It'll take eight years to figure out, can you pay 60 pre for an AI Y Combinator startup and make money on average? Along the way, there'll be an anecdote of one company that worked, but the real test is does the overall asset class work for those prices and deals? And so far, and Gary's exactly right, he cites the data. The data from the earlier batches has been obviously amazing. But, you know, the cynic in me says, if it worked at 20 and gave you a 3X and then you pay 60, [laughs] you do the math here, people. You know, your return's gonna go down by the same amount.

    5. JLJason Lemkin1:15:29

       But not for YC. And the founders get 6 million instead of 2 million.

    6. RORory O’Driscoll1:15:33

       It's great.

    7. JLJason Lemkin1:15:33

       There's a, there's a lot of conceits for venture, and I'll, so many VCs are like, "Hey, guys, take less money at a lower valuation. It's less risk." There's a con- VC conceit in that. One, a third of the money is riskier if you, if you don't burn it.

    8. RORory O’Driscoll1:15:44

       Totally.

    9. JLJason Lemkin1:15:45

       Right? Which is a... If, assuming you don't burn it, three times as much money for the same dilution de-risks your, your life as a founder.

    10. RORory O’Driscoll1:15:51

        Absolutely.

    11. JLJason Lemkin1:15:51

        Right? The second thing that the grouchy people miss is one of the other things that YC has quietly normalized is if you do this round next week at 60 or last week, right, at 60 post, and you have to do the next round at 20, it's okay.

    12. RORory O’Driscoll1:16:05

        Yeah.

    13. JLJason Lemkin1:16:05

        It's actually, they're all... The safes are a beautiful vehicle. Like, yes, you'll, you will... The, the, folks will end up... Every time safes convert, there's 11,000 different prices, right? There's my best friend that invested three weeks before the batch, then there's the alumni price, then there's the price Harry paid, then there's the price Lemkin had to pay on demo day, and then there's the poor price Rory had to pay two weeks later, right? So when these notes convert at 11 prices, and then there's another set of notes at f- 14 [laughs] other prices, nobody cares. Nobody cares that one was at 60 or one was at 20, as long as Rory gets his ownership in the Series B.

    14. HSHarry Stebbings1:16:38

        Um, listen, guys, is there any other IPOs, anything that we've missed that we should discuss?

    15. RORory O’Driscoll1:16:43

        No. Honestly, I think the most salient fact is that they're happening. That the window is open, that normal IPOs... I mean, I think normal IPOs are taking place. You know, normal service has been resumed.

    16. JLJason Lemkin1:16:55

        I know we glossed over it in the beginning, but I do think Thoma Bravo raising a record fund this week is a good sign, too. That's $35 billion to buy B2B companies. Almost entirely B2B, right?

    17. RORory O’Driscoll1:17:05

        So, so, something a friend of mine used to say years ago, and it's always struck me, it's just so true, price clears all markets. In other words, if you're, you know, you can get deal... It's, and what we're seeing it now is you can't get your deal done at 25, which is the price you- billion, which is the price you paid for the last one, but there is a price at which most decent companies can get public at, you know, above a certain critical mass. Price clears all markets. That's what price is meant to do. And what you're seeing now in it is a degree of realism creeping in, and as a result of that, transactions are taking place. It's totally healthy.

    18. HSHarry Stebbings1:17:38

        I agree.

12. 1:17:39 – 1:27:02

    Kalshi Quick-Fire Round

    1. HSHarry Stebbings1:17:39

       All righty. We're gonna do a Kalshi quick-fire.

    2. RORory O’Driscoll1:17:41

       Sure.

    3. HSHarry Stebbings1:17:41

       As I said, this is like the prediction marketplace my team adores. So we're gonna go with the first one. Will OpenAI Jony Ive device have a screen? Yes or no?

    4. JLJason Lemkin1:17:52

       Well, I... Your team didn't ask when, right?

    5. RORory O’Driscoll1:17:55

       Yes. Thank you, Jason.

    6. JLJason Lemkin1:17:57

       So-

    7. RORory O’Driscoll1:17:57

       You got it

    8. JLJason Lemkin1:17:57

       ... so here's my thesis. Listen, if you read the internet, it says that it'll be a, it'll be a pendant on your neck and it'll have no screen, and even Sam's alluded to that, right? It's gonna be a, a voice interaction device. I think, though, and I... This is just... Now, now I'm, I'm not a consumer guy, but I, I'm pretty into this stuff, okay? I think the only thing that makes sense, and this is why you buy Jony Ive, is it's everything. So it's a pendant on your neck, it's an app in your phone, it is listening on our computers, it is listening on our laptops, it is a ring like Oura, and importantly, it's a, it's a, it's a AirPod, right? Because AirPod is great. AirPod already does all this. And if you build all of them, and the sunglasses like Meta, if you build all of them eventually, like some combi- and a watch. You gotta have a watch. So you, you just... People do watch. If you do all of them and they're all Jony Ive level, you solve this problem. Because we're not all guys sitting in a coffee shop with three things on the bar and our d- triple espressos. So, so my, you know, my son's r- wears AirPods 12 hours a day. Rory probably will do the necklace 'cause he likes that kinda open the button shirt, hang out at, with the necklace, gold chain kinda look, right?

    9. HSHarry Stebbings1:19:02

       The Hawaiian shirt vibe. Yeah.

    10. JLJason Lemkin1:19:03

        Um, Harry will have the sunglasses.

    11. RORory O’Driscoll1:19:04

        Yeah.

    12. JLJason Lemkin1:19:04

        The Polaroid sunglasses with his, uh, with his AI.

    13. RORory O’Driscoll1:19:07

        In the land of no sun.

    14. JLJason Lemkin1:19:08

        So yeah, yours will have AI. Now, there may be a screen in it. So I think the an- so I, I'm just having... This, I have thought about it. I think that the w- the first thing that comes out will be no, but ultimately it will be all of it. It'll be yes. It'll have audio, it'll have screen, it'll be everything. It'll be in those sunglasses. Um, because I don't think anyone's gonna figure out a new paradigm. He's just gonna figure out how it's all elegant. I don't wear a, a, iWatch or whatever you call them, right? But I might wear his, his watch, right? Where I-

    15. HSHarry Stebbings1:19:32

        Jason, you're saying, you're saying yes

    16. JLJason Lemkin1:19:35

        I, I think the hit, the, the, the family, the family of devices will have a screen. Rory?

    17. RORory O’Driscoll1:19:42

        Yeah, I'd probably go with Jason's answer in an uninformed way. I think the when question is more interesting and will it work? I mean, the interesting question would've been, will the device sell more than 5 million units in the first full year of shipping? And I would take the under.

    18. JLJason Lemkin1:19:57

        It might be 50 bucks, though. That's the thing. You could-

    19. RORory O’Driscoll1:19:59

        Okay

    20. JLJason Lemkin1:19:59

        ... they have enough money to subsidize it.

    21. RORory O’Driscoll1:20:01

        This is true. Um [laughs]

    22. HSHarry Stebbings1:20:02

        I, I-- Dude, I, I would, I would take the over on that and-

    23. RORory O’Driscoll1:20:04

        Okay. See, that's a fun bet. Right?

    24. HSHarry Stebbings1:20:06

        I'd absolutely do that. You wanna do that as a bet?

    25. RORory O’Driscoll1:20:09

        Yeah, fine. Done.

    26. HSHarry Stebbings1:20:10

        Great. Amazing. What are, what are we gonna bet?

    27. RORory O’Driscoll1:20:13

        We'll figure it out.

    28. HSHarry Stebbings1:20:14

        You know what? You can buy me the device when I beat you.

    29. RORory O’Driscoll1:20:17

        Sold.

    30. HSHarry Stebbings1:20:18

        There we go.

Episode duration: 1:27:12