Jake Saper, GP @ Emergence Capital: "We Sold Salesforce Early and Lost Out on Billions"

1. 0:00 – 1:21

   Intro

   1. JSJake Saper0:00

      (upbeat music) ... dollars in capital. We've returned a little over $8 billion (cash register chime) in cash. We did this analysis on how have our deals fared in terms of, like, certain graduation metrics relative to market. Nine out of ten of our deals have gone on to raise successful follow-on rounds. One out of five have gone on to raise rounds at north of a billion dollars. One out of ten of our early stage investments have gone public.

   2. HSHarry Stebbings0:21

      Ready to go? (upbeat music) Jake, I am so excited for this, dude. I loved our walk around London last night. I actually walked around and I was like, "You know what? James Corden does Carpool Karaoke."

   3. JSJake Saper0:41

      (laughs)

   4. HSHarry Stebbings0:41

      "I should almost try and do this around London."

   5. JSJake Saper0:43

      Dude.

   6. HSHarry Stebbings0:44

      It was great.

   7. JSJake Saper0:44

      I was thinking, this is a PSA for anyone who visits London, you give the most enchanting walking tours of this place.

   8. HSHarry Stebbings0:50

      (laughs)

   9. JSJake Saper0:50

      Like, some might say romantic. Just, like, incredibly beautiful, such appreciation for the history of this thing, so thank you.

   10. HSHarry Stebbings0:56

       It was when I took you down the prettiest street, and I was just like, "No, this is getting a little bit romantic." (laughs)

   11. JSJake Saper1:01

       But we were able to talk about my wife in that moment.

   12. HSHarry Stebbings1:03

       Th-th-this is ...

   13. JSJake Saper1:04

       Which made it feel better.

   14. HSHarry Stebbings1:04

       Exactly. Listen, I loved it because I also got so much context that I wouldn't normally get, even in like, you know, prep calls, which I think are generally bullshit, to be honest. Um, but I wanted to start with Zoom.

   15. JSJake Saper1:16

       Yeah.

   16. HSHarry Stebbings1:16

       This was your first deal at Emergence, and I just want to start there.

2. 1:21 – 7:57

   The Zoom Investment Story

   1. HSHarry Stebbings1:21

      Talk to me about Zoom. How did it come to be?

   2. JSJake Saper1:24

      We aspire to be a thesis-driven firm, and before I even joined Emergence in 2014, in 2013 the firm had developed a thesis around the fact that there was an opportunity to replace Webex. That Webex was a tired product that didn't, wasn't very good. In fact, when I was interviewing at Emergence, the case they gave me to interview at Emergence was for a company called Fuze. Fuze was video conferencing software, an early competitor to Zoom, and I was supposed to diligence that case and then make the recommendation, should or shouldn't invest, and they were gonna hire me based upon that. Did a bunch of work, ultimately concluded we shouldn't invest, made that case. Fortunately, I made the right call, that was also the decision they made and they hired me. Fast-forward a few months, I join the firm, and the very first deal that we're pursuing, where I'm tapped to lead diligence, is Zoom. So, the good news was, we had a prepared mind around the space. We also saw incredible early product-led growth. The company was around two or three million in revenue, it was growing very quickly, but obviously very, very early. And we believed in Eric. Eric was the VP of Eng at Webex before, so knew a lot about the space. And he'd rebuilt the core technology called the Codec, and it worked really, really well. My partner, Santi, who ultimately led the deal, is from Argentina, and he used the product to call his parents, or to call his family back in Argentina, and discovered like, "Hey, this thing works way better than everything else on the market. This Codec is real. We should take this really seriously," and we paired that with the growth, and we were like, "Let's dive in." However, the deal was not straightforward. And the reason the deal was not straightforward is it was going to be the largest check we'd ever written, at amongst the highest prices we'd ever paid, and the company was incredibly early. So, for context, it was gonna be a $20 million check, out of a $250 million fund, which is a lot of concentration.

   3. HSHarry Stebbings3:02

      That's a lot of concentration. For people, that's, what, 7, 8%?

   4. JSJake Saper3:05

      Yeah, it's huge.

   5. HSHarry Stebbings3:06

      That is huge.

   6. JSJake Saper3:07

      It would've been, it was gonna be priced at $200 million post-money valuation, and this, again, remember the company was at around two million in revenue. And this was 2014.

   7. HSHarry Stebbings3:15

      So, 100x revenue.

   8. JSJake Saper3:16

      In 2014. Right? This wasn't 2021 peaks, this was pre-AI, all the rest of it. But we really believed in the thesis, we believed in Eric, and the, the product-led growth was really strong. Even though it was early, it was super strong. So, I'm tapped to lead diligence, um, but the numbers are really gonna matter here, just because of the scale of this decision. I flew out to Boston because I was visiting my then girlfriend, Dani Herzberg, who was an employee at HubSpot at the time. And I'm sitting in the HubSpot cafeteria, frantically trying to build a financial model for this company to justify the investment. Brian Halligan walks over, who was then the CEO of HubSpot, and gives me a hard time. The first time I met him, that added to the stress of the whole experience. Um, I wasn't, I don't have a background as a banker. I was a, you know, I was a, an operator and a consultant before, so I didn't really know much about how to build a financial model. So, I'm stressed out trying to build this thing, I'm trying to make the numbers tie, and some numbers just won't tie, specifically the churn numbers. So, Eric had given us a bunch of churn data on his business, and I was trying to figure out how that ticked and tied with the numbers that I was calculating, and it was just off. So, fortunately, the way our firm operates is a fairly collaborative approach, so I reached out to my, my teammate, Joe. Uh, Joe, who has a private equity background, and was a math Olympiad child kid, and I was like, "Help me." Um, and Joe dove in and figured out that the numbers that Eric had given us around churn for the business were wrong. Eric himself was miscalculating churn. Specifically, he was counting upgrades from, you know, low tier to high tier as churn, he was counting pausing as a churn, and so he was, he was unnecessarily burdening the business with churn. Eric thought the business was worse than it was. This is the only time in my venture career where that has been the case (laughs) , when you dive in and discover that the founder actually doesn't know how good his business is. So, we go to Eric and we say, "Look, we found this. Um, the business is actually better than you think." This was sort of a interesting choice, because we did this before we had finalized negotiations, we gave him more leverage, but we thought it was the high integrity thing to do. Eric realized that, and was like, "I wanna work with you." So, we signed the deal, we were the first institutional investor. Life-changing, obviously.

   9. HSHarry Stebbings5:19

      Was it very competitive?

   10. JSJake Saper5:21

       It was competitive. It was competitive both because the, the, there was early growth, but also 'cause the company was profitable, and so we didn't have to raise capital, which is part of the reason why the price got as high as it did. Ultimately, I think the reason why he chose us is because we committed to him that we would help him build out a proper enterprise sales motion on top of his product-led growth motion. I think that's a really important point, which is, as exciting as bottoms-up PLG is, all PLG companies eventually need to layer on enterprise software motions to be sustainable and enduring. And Eric, while he was great technologically, didn't know how to do it. So, we committed to helping him doing it. We hired, um, a guy named Dave Berman after, uh, we made the investment from RingCentral, and we built out a proper enterprise sales motion, and the company's off to the races.

   11. HSHarry Stebbings6:04

       There are so many things that I have to unpack off the back of that. The first is, you mentioned Eric's background.

   12. JSJake Saper6:09

       Yeah.

   13. HSHarry Stebbings6:09

       Um, VP of Eng, phenomenal technical mind. When we actually look at that, I often think, what is better? Is it someone with, like, intense domain experience like Eric? Or is it a 22-year-old founder who's building with a naive but fresh mind?

   14. JSJake Saper6:26

       The, the honest truth is, both work.Right? And that's why, that's what makes our job so hard.

   15. HSHarry Stebbings6:29

       Do you have a preference?

   16. JSJake Saper6:30

       We've made a lot of money on the domain expert. Um, Peter Gassner from Viva, also a domain expert when he made his money. But we're also doing pretty well with some of these early stage, you know, smart, young people as well, be it, you know, Eric at Bolt, or, you know, Austin at UniFi. These folks, like, you know, there's some naiveté coming into it, which helps them break rules.

   17. HSHarry Stebbings6:48

       On another one, you mentioned that he really chose you 'cause you helped on GTM Enterprise Sales. Honestly, I don't want a founder to need me.

   18. JSJake Saper6:58

       Yeah.

   19. HSHarry Stebbings6:59

       I, I often think about Keith Rabois, "The best founders don't need you. They're made better, but they don't need you." How do you feel about that?

   20. JSJake Saper7:06

       I think the reason why a founder chooses a VC is because they believe that you'll help them bend the odds of success on the journey. And that can be in all sorts of ways, right? It could be in helping them with something like go-to-market. It could be them, you know, helping bring them people to hire. It could be helping give with advice. It could be because you're a, a great therapist to the founder. There's lots of ways where you can help bend those odds, but I think ultimately, that's why someone chooses you, 'cause you, you need a reason, right? You need a reason to be chosen. I agree that, in general, if the founder doesn't need to rely on you a lot, then, you know, that's great. But the reality is, the odds of success of these things are so low, that if you can even bend the odds of success incrementally, it matters a lot.

   21. HSHarry Stebbings7:44

       Was Eric good at sales?

   22. JSJake Saper7:46

       Eric was not an experienced salesperson when he made the investment.

   23. HSHarry Stebbings7:50

       (laughs) Wow, and you're a politician.

   24. JSJake Saper7:52

       (laughs)

   25. HSHarry Stebbings7:53

       We're learning a lot about each other. Uh, another thing. You said about, like, the prepared mind around

3. 7:57 – 10:26

   Founder, Market, Traction: Rank Them

   1. HSHarry Stebbings7:57

      the space.

   2. JSJake Saper7:57

      Yeah.

   3. HSHarry Stebbings7:59

      I honestly think that's kind of bullshit from large, multi-stage firms who-

   4. JSJake Saper8:02

      Yeah.

   5. HSHarry Stebbings8:02

      ... kind of like to present these packages, and actually, they can lead you to the wrong conclusion. How do you feel about the benefits of firms having prepared minds versus actually just packaging on a venture product?

   6. JSJake Saper8:14

      The reality is, I don't think any venture firm makes all their money on prepared minds. I just think that's, that is bullshit. I do think, because I've lived it, that you can have a pre-, prepared mind, and it can help you get there sooner or faster than others. I mean, in the Zoom case, it's a great example. They literally gave me my interview case on a competitor.

   7. HSHarry Stebbings8:31

      You must've just been like, "Ah, d- boom. I've done this before."

   8. JSJake Saper8:34

      Yeah. So when we got the real thing, I was like, "Oh, great. I've already studied for..." Like, they basically gave me the test before the test. So, it is true, we have had prepared minds. But sometimes, it's not always obvious. In the case of Chorus, for example, so Chorus.ai-

   9. HSHarry Stebbings8:45

      Yeah.

   10. JSJake Saper8:45

       ... is a, was an early competitor to Gong, um, that was acquired by Zoom Info for a little less than $500 million. We led the seed round. We were the, the early investors there. It was sort of the first voice AI company. We had some prepared mind, uh, around, like, we thought voice would matter. My partner Gordon really thought voice would matter in the enterprise. But we didn't have, like, a full conception of what was going on. We just liked the young founder, and we thought there might be something here. So we made the investment. Ultimately, it grew nicely and was acquired a little early, but it was acquired for a nice outcome. And that helped inform a broader thesis that we've since developed around voice AI. We made a bunch of investments in Bland and Regal and Assembled, and a bunch of vertical-specific ones as well. I personally, I think we more broadly, develop prepared minds from the portfolio company investments we make. Like, what is the thing about what's happening at Chorus that informs a broader thesis beyond the, the sales-specific use case that Chorus was focused on, that could help inform how we invest more broadly? I, I think that, I mean, that's real 'cause I've lived it.

   11. HSHarry Stebbings9:40

       Can I be honest? Do you make much money from a Chorus? Like, you do the seed. It gets bought for half a billion, which is great, and I'm not bla-, but is that in stock? Is that in cash? Like, so many of these deals, like, actually behind the scenes, you kinda make 3X, and it's, like, not as good as it looks.

   12. JSJake Saper9:54

       We made, I forgot the specific multiple. It was definitely more than 3X on that one. Um, I don't remember the specific number, but I think it was north of 5X. The challenge with that is, when you have a fund that's of a certain size, even if it's a 10X, it's still not gonna necessarily move the needle. That fund, I believe, was Fund 3, which is the same fund that, uh, has Zoom. Uh, it's the same fund that has some other really large outcomes. And so that fund is already at a, I think it's a 16 times DPI. And so, even with a 10X on the Chorus investment, it's not necessarily gonna move the needle.

   13. HSHarry Stebbings10:24

       It's unfair of me, 'cause it's like, kind

4. 10:26 – 30:07

   Lessons from the 16x DPI Zoom Fund

   1. HSHarry Stebbings10:26

      of in the details, but how much of the 16X DPI is Zoom?

   2. JSJake Saper10:30

      By far the most of it. But what's interesting is that fund also had SalesLoft, which was the biggest outcome that, uh, it was the highest multiple ever paid by private equity for a software company. Company was acquired for $2.3 billion.

   3. HSHarry Stebbings10:42

      Mm-hmm.

   4. JSJake Saper10:42

      Bisa paid 2.3 for it, and we were the, uh, Series A investors there. So that was a very good, good outcome. But that turn, returned the firm, the fund a few times. I can't remember how many times it returned it. But Zoom returned it, you know, more than 10.

   5. HSHarry Stebbings10:55

      Wow. Fuck. I, I mean, okay, so more than 10. Uh, I always try and understand, like, in the power law dynamics, like just how much your fund returns are in those. When-

   6. JSJake Saper11:03

      The cool thing about that fund, though, is even if you took Zoom out, it would still be a top 10 sale fund.

   7. HSHarry Stebbings11:06

      Because of SalesLoft and the others?

   8. JSJake Saper11:07

      Because of SalesLoft, because of Chorus, and there's a bunch of others. And there's some that, there's still a bunch that are still gestating. There's companies like DroneDeploy and others in that company. We just had a big, uh, crypto outcome in that company called Zapo that just distributed, uh, I think it was a, a large multi-billion dollar distribution.

   9. HSHarry Stebbings11:21

      Can I ask you? You mentioned Chorus there, and there's Outreach, and there's also Gong. When I enter markets, I often like to think about, like, dy-, like, the distribution dynamics within the market in terms of, is it a winner take all? Is it relatively evenly distributed? How does this market play out in terms of Uber, Lyft, or actually multiple providers all kind of distributed evenly? Do you think about that? And like, I don't want to be in a market where kind of everyone gets a little bit like Chorus and Gong and Outreach. No offense. I don't think it's a great market.

   10. JSJake Saper11:53

       I think you can make money both ways. So let's take, let's take the winner take all market. So, network effect businesses generally obviously winner take all. I think, in our experience, we invested in a company called Doximity, which is, like, it started as LinkedIn for doctors. Are you familiar with this one?

   11. HSHarry Stebbings12:06

       Yeah, it's a fucking beast.

   12. JSJake Saper12:08

       It's a good company.

   13. HSHarry Stebbings12:08

       And no one knows about it.

   14. JSJake Saper12:09

       Yeah, it's crazy. Um, so we reled, we led the Series A there. My partner Kevin led that Series A. Um, Kevin's still on the board there. And that company is just absolutely hitting it. It continues to hit in the public markets. Like, ch-, read up on it, it's amazing. That's a winner take all business, because it's, it's LinkedIn for doctors. And so-... having, you know, a number two there doesn't make any sense. Uh, so that investment, we definitely underwrote to that, and it worked. But let's take the Bolt, Lovable, like, that, that dynamic, uh, that we were talking about last night. So, for, for folks who aren't aware, these are companies that help you build web apps with no coding experience. So, you can go to bolt.new and you can write, "Build me a website for the new 20 VC product and have it blue and put these buttons here and make it do this, this, and this," and then it just happens. It's kind of astounding how easily it happens, and it puts a lot of questions around, what are the knock-on effects of, of that in our economy? But those businesses will clearly disrupt the Squarespace and the Webflows and the etc., etc., etc. And what's fascinating about that space is that there are many, many very large players in the incumbency, which supports the fact that there could be s- multiple large players in this next generation as well.

   15. HSHarry Stebbings13:12

       So, help me understand, uh, and we're so jumping around, but I love a conversation like this, so help me understand what happens to those players. Do they consolidate? Do we have P providers come in? What happens to the Webflows, the Wicks, the Weebly's? There's a lot of them.

   16. JSJake Saper13:25

       There's a lot. There's a lot.

   17. HSHarry Stebbings13:26

       Webflows, Wicks, Weebly's, Squarespace, just to name a few. And then there's the unbundled providers who are much more vertically specific.

   18. JSJake Saper13:32

       Yeah.

   19. HSHarry Stebbings13:33

       What happens?

   20. JSJake Saper13:34

       I think, um, there will be consolidation, there will be private equity, and there will be a few that, that reinvent themselves, that there will be a few that are nimble enough to figure out how to adapt to, to the new era. But I think most will get consolidated.

   21. HSHarry Stebbings13:47

       Do you think we overestimate private equity as the savior?

   22. JSJake Saper13:50

       It's a really good question. Uh, savior's too strong of a word, because most private equity outcomes don't generate incredible returns for the VC. So savior's not the right... Uh, maybe savior in the sense that, like, we'd get your money back. The SalesLoft outcome was an awesome one, but that was an exception, where private equity was willing to pay, whatever, 20 times ARR. But most cases, they're paying, whatever, three to 5X. So, it's a different thing.

   23. HSHarry Stebbings14:11

       Totally get that. Thank God, love that. I mean, but I do look at your Anaplans and your Coopers and I think, "Well, how the fuck are they gonna get their money back?"

   24. JSJake Saper14:17

       Yeah. Again, some of these companies, like, catch a second wave. And we talked, last night we talked a bit about, like, what about the even smaller ones, the ones that are at, you know, 50, 100 million ARR?

   25. HSHarry Stebbings14:27

       This is what really worries me, are funded in the last five to seven years.

   26. JSJake Saper14:30

       Yeah, what happens to those? So, I think all of those companies are in this existential moment to figure out, "Okay, what do I do? How much do I invest in agents? How real is it gonna be? Are my customers gonna adapt it? How complementary is that to my core product, or am I just kind of, you know, shouting in the wind?" Um, and the honest truth is, most of them aren't gonna make it, unfortunately.

   27. HSHarry Stebbings14:50

       Do you think they are structured for embracing the next wave of AI?

   28. JSJake Saper14:54

       Some of them are. Um, so I work with one called Guru, which is a knowledge management software company.

   29. HSHarry Stebbings14:58

       Rick.

   30. JSJake Saper14:59

       Rick, who's-
5. 30:07 – 37:53

   Why Does Every Partner Do Reference Calls on Every Deal?

   1. HSHarry Stebbings30:07

      because I like just take everyone off on like a different tangent. So go back into that, like why everyone's involved, because-

   2. JSJake Saper30:11

      Yeah, yeah, yeah.

   3. HSHarry Stebbings30:11

      ... they're all in on the diligence process.

   4. JSJake Saper30:13

      Yeah, yeah. So let me explain the diligence process, but let me just finish that last thought. I really do believe this, this helps change outcomes. Like, so we just raised our new fund, and as part of that we did this analysis on how have our deals fared, uh, in terms of like certain graduation metrics relative to market? Nine out of ten of our deals are early stage investment seed series A have gone on to raise successful follow-on rounds. One out of five have gone on to raise rounds at north of a billion dollars.... one out of ten of our early stage investments have gone public. So we're good at picking, and I also think we're good at bending the odds of success, and I think part of it comes back to this model, the fact that we do the work together as a team. And so, back to your question, the way we do the work together as a team, we- we- we have them, we have the founder come in and present to our partnership relatively early in the process, and also all the partners get to know the person, the founder. And then we have this discussion afterwards like, "Is this something that we're excited enough about to make a priority deal?" And those are holy words within Emergence. When you say the word priority deal, everyone's calendar gets blown up. Everyone's week, whatever you thought you were doing, you are now doing something different. It basically means everyone is focused on doing diligence for this deal. So what it means is that for every investment we make, every partner does reference calls. Every partner calls customers, every partner calls management references, every cu- partner does back channel references, and many partners do on-site ref- uh, visits, where we actually go and we spend time with a team, we see what's happening in the kitchen so we kind of pick up on all the less structured datapoints. And by having multiple people make that trip, multiple partners make that trip, you're collecting a bunch of first-party data. So then when it comes time to make a decision, when you're staring at that What You Have To Believe sheet, it's not just two people in the firm who have made this What You Have To Believe sheet. Literally everyone has contributed to that, and one person can say, "You know, I heard this customer say this." And the next person can be say like, "Yeah, but this customer I heard in their voice, like they sounded a little more i- wishy-washy." And then there is this process of seeking truth. In contrast to most firms, and I've worked in other places, it's- which, which tends to be much more, um, an associate and a partner doing a bunch of work and then defending their investment against an onslaught of questions and doubters, and then if you survive that onslaught, you get to do the deal. Our process truly is a process of seeking truth collectively that I think allows us to pick better, and hopefully once we make the investment, help the company better.

   5. HSHarry Stebbings32:29

      I, I think one of the biggest mistakes that firms make is when they get associates to just go and do the reference calls.

   6. JSJake Saper32:33

      Yeah.

   7. HSHarry Stebbings32:33

      I mean, I'm nothing against associates but there's so much in tonality, in the pause, in the facial expression. I completely agree with you.

   8. JSJake Saper32:39

      It's a human business.

   9. HSHarry Stebbings32:40

      I- completely. Uh, one thing that really struck me there is, that is time, and we don't always have time, Jake.

   10. JSJake Saper32:46

       Yeah.

   11. HSHarry Stebbings32:46

       I would love to do multiple on-site visits. I would love to do all the-

   12. JSJake Saper32:49

       Yeah.

   13. HSHarry Stebbings32:49

       ... time compression's real in deals. How do you do an engaged and diligent process when you have real time compression-

   14. JSJake Saper32:56

       Yeah.

   15. HSHarry Stebbings32:57

       ... and the end of the week to make your decision?

   16. JSJake Saper32:59

       Yeah. So there are ways in which our process hurts us there, and there's ways in which it helps. So it hurts obviously 'cause you have to coordinate lots and lots of schedules, which can be a pain. It helps because we can do seven diligence calls in the same slot.

   17. HSHarry Stebbings33:13

       Mm.

   18. JSJake Saper33:13

       So if you just have one person or two people doing diligence, then yeah, their- their calendar is booked out. But if I have seven of my partners plus principals and senior associates and everyone's working on this, you can do an incredible amount of work in a day. I've been amazed at how much work we've been able to do in a day when you have seven people doing it or 12 people doing it, and you have one quarterback who's the- the diligence lead, which is the role I played at Zoom, pulling it all together. What it requires is trust. It basically means if I come in with a founder and you meet the founder for an hour, but you don't know anything else about this person or the deal, you have to trust me that there's enough there that you are willing to blow up your schedule for the week, even though it's not your sponsored deal. And that culture of trust is what the founders build in Emergence, and I think it's really special.

   19. HSHarry Stebbings33:59

       How do you do knowledge management across partnership? And so what we do, for example, is we record calls so that I can listen to the call Jake had with the customer and I'm there in the room. How do you do that shared knowledge across diligence process?

   20. JSJake Saper34:12

       Yeah. So we do record the calls. We also send out really detailed notes from every conversation, and then every night, we send out an email with a summary of what's going on. So it's like, "Here's what we learned today. Jake did this call. Harry did this call. We talked to this customer. Here are the outstanding questions. Here's what everyone needs to dive in on, we need help with," et cetera. And so it's this constant stream of information that's bookended with these nightly emails. The other thing we do is we have a lot of calls at night. So one thing we realized is that if we're having these diligence calls, like particularly the internal calls where we're processing all the information, if we're doing that during the day, they get compressed because we have 30 minutes and we're just getting into the meat of it in m- minute 27-

   21. HSHarry Stebbings34:50

       Yeah.

   22. JSJake Saper34:50

       ... and then we have to go do something else. The reality is like if you do the call at night after kids go to bed, after you've had dinner with someone, whatever, you have theoretically an unlimited amount of time on the back end.

   23. HSHarry Stebbings35:00

       Yeah.

   24. JSJake Saper35:01

       Which means like the reality is we do a lot of late-night calls discussing what we've learned and trying to synthesize, you know, the day.

   25. HSHarry Stebbings35:07

       You mentioned the on-sites, the in-persons.

   26. JSJake Saper35:09

       Yeah.

   27. HSHarry Stebbings35:10

       Love that. COVID meant that that was impossible.

   28. JSJake Saper35:12

       Yeah.

   29. HSHarry Stebbings35:12

       Do you think quality of amassing went down dramatically in COVID?

   30. JSJake Saper35:16

       That's a good question. We actually still managed to do some on-sites during COVID. So I can tell you kind of the-
6. 37:53 – 55:37

   Where Will Value Accrue in a World of AI?

   1. HSHarry Stebbings37:53

      I wanna be their person.

   2. JSJake Saper37:54

      Yeah. Yeah. Yeah. No, it's true.

   3. HSHarry Stebbings37:55

      Do you worry about that too?

   4. JSJake Saper37:56

      Yeah. I think there, there are situations where that can, that can happen. I think the reality is-

   5. HSHarry Stebbings38:00

      Especially young B2B AI founders.

   6. JSJake Saper38:02

      Sure. Yeah. Yeah.

   7. HSHarry Stebbings38:03

      They are not gonna be doing that process.

   8. JSJake Saper38:06

      Well, I mean, the reality is, we have won a lot of deals doing this, even with those young B2B AI founders. Austin Hughes is a great example at Unify, right? Austin came from Ramp, his co-founder came from Scale AI. They're, you know, prototypical young hot AI founders. We led their founding round. Um, we co-led the founding round and then led their series A, and I think part of it is, like, Austin really believed in the product that we were selling. Why are you laughing?

   9. HSHarry Stebbings38:28

      Founding round. (laughs)

   10. JSJake Saper38:29

       Whatever. What do you wanna call it? The first one, the inception, the whatever.

   11. HSHarry Stebbings38:31

       I don't know, like, a pre-seed round?

   12. JSJake Saper38:33

       It was like, the reason I call it founding round is, like, we... It was one of those situations where we agreed on terms before they had incorporated the company, and so we, we couldn't send them any materials f- for legal reasons until they incorporated the company.

   13. HSHarry Stebbings38:44

       Oh, so that's a founding round?

   14. JSJake Saper38:45

       I don't know, but you call them what you want.

   15. HSHarry Stebbings38:47

       Oh, no, no, no, no, no.

   16. JSJake Saper38:47

       You're the seed investor.

   17. HSHarry Stebbings38:47

       No, totally.

   18. JSJake Saper38:47

       (laughs)

   19. HSHarry Stebbings38:48

       I've, I've done founding rounds then. Do I, can I put founder on my, their thing?

   20. JSJake Saper38:51

       Yeah, yeah, you should... Totally should put that on there.

   21. HSHarry Stebbings38:52

       That's amazing. I love it when it's like, I'm the founding designer in residence-

   22. JSJake Saper38:57

       (laughs)

   23. HSHarry Stebbings38:57

       ... in London, and I'm like, "What the fuck is up?"

   24. JSJake Saper38:59

       What does that even mean?

   25. HSHarry Stebbings39:00

       Yeah. I got a load of shit though when I put social, it's like, "Ah, you take away all our titles, ah."

   26. JSJake Saper39:05

       (laughs)

   27. HSHarry Stebbings39:06

       Um... (laughs) You were like, "Do people like you?" "Eh, less so over time." Um-

   28. JSJake Saper39:10

       (laughs)

   29. HSHarry Stebbings39:10

       ... you mentioned zero to one and a half and it being like, "Wow." 100%. And I was so brought up in the, like, SaaStr, Jason Lemkin on what great companies are, zero to 10 in, like, two years I think it was, it was great.

   30. JSJake Saper39:22

       Yep, yep.
7. 55:37 – 1:02:23

   Three Reasons Why AI Will Not Replace Vertical SaaS

   1. HSHarry Stebbings55:37

      degradation on AI-enabled, given the fact that you own the full vertical and you have to kind of ingest that all yourself?

   2. JSJake Saper55:43

      It depends on pricing. So, this is a really interesting question. So, if you're pricing on, um, labor basis, which is generally how most services are priced today, um, you, in some ways, are taking the risk upfront, right? Because you're saying, like, "Okay, it'll chart... Uh, if- if it's gonna take me, you know, this long, then, you know, I'll pay y- uh, I'll- I'll charge you this." But if you- if your AI doesn't work, then you could be in a world where your margins are really degraded upfront. If the AI does work, then you actually capture way more margins. And so, you have to be really thoughtful about how you price, and you're basically taking a bet on yourself. Like, how good is my AI?

   3. HSHarry Stebbings56:17

      Can I ask you, when we look at this distribution in an AI kind of wave, who does it benefit most? Is it incumbents with incredible distribution advantages? Is it startups with none of the technical debt, the ability to move fast, integrate quickly? How do you think about that?

   4. JSJake Saper56:33

      There's a third category, and I don't know how to describe it. We talked about it a bit earlier, which is, like, these, like, growthy stage companies.

   5. HSHarry Stebbings56:39

      Which is like your Notions of the world?

   6. JSJake Saper56:40

      Notions, the ironclads, like the companies that are above 100 million ARR, growing nicely, like, and still dynamic and young enough to make changes, but, like, they're not startups anymore. Um, I sort of segment the world into those three kind of buckets, just-

   7. HSHarry Stebbings56:52

      Yeah.

   8. JSJake Saper56:52

      ... way oversimplifying. The biggest thing I've changed my mind around in the past 12 months relates to that, to this question, which is, I was fearful when the power of LMS came out, that all of- most of the value would accrue to the incumbents because of their data and distribution advantages. What I, um, underappreciated, which is just the recurring lesson of startups, is the value of focus. The reality is, like, it doesn't matter how much distribution Salesforce has, how much data they has, have. If you are a startup who's just focused narrowly on solving a very, very specific problem, if you're UniFi, you know, helping with the go-to-market stack in much more narrow way than Salesforce is, you're gonna run just way, way faster, and customers are gonna want your product more. And that's, we're seeing that play out. And so, the thing I've changed my mind on is I'm- I'm less fearful that incumbents will be able to accrue most of the value. The reality is, like, it's still early days in this game, and things could change, but thus far, the startups are outpay- the focus startups are outpacing the incumbents. The growth ones, it's more of a mixed bag for lots of reasons. Um, there's ones that are a little more ossified and aren't necessarily taking advantage of this stuff, and there's ones that are still young and dynamic enough to actually pivot and take advantage of it.

   9. HSHarry Stebbings58:03

      I'm- been phenomenally impressed with the speed of incumbent shift. When you look at your Adobes of the world-

   10. JSJake Saper58:07

       Yeah.

   11. HSHarry Stebbings58:07

       ... I think we always said, "Oh, they're so slow, they're so slow." Actually, incumbents are shipping fast now, though. I've been very impressed by that. How do you think about the, "Oh, Google could just build this"? We've been investing for years to, like... Everyone's like, "Oh, email auto-complete. Oh, Google could build that," whatever it is. How do you feel when you hear that?

   12. JSJake Saper58:24

       This is where I go back to solving a narrow problem. Like, start by solving a narrow problem, because Google's not gonna solve that narrow problem as well as you will. And you can expand from there. I mean, Veeva's a great example. When we made the investment in Veeva, a CRM for pharmaceutical companies, the entire market for that was $400 million globally. That's not big enough to build a multibillion-dollar business.

   13. HSHarry Stebbings58:43

       For context, Veeva today has a $35 billion market cap.

   14. JSJake Saper58:47

       That's right. So, they obviously found a way to expand. So, they started narrowly.

   15. HSHarry Stebbings58:51

       (laughs) You think?

   16. JSJake Saper58:51

       Right? And then they became the board-level vendor to the world's largest pharmaceutical companies. And that's a really important phrase I think most startups don't think about. How can you become so important to your customer that you're discussed at the board level? And if you achieve that, your ability to upsell is obviously much higher. And so Veeva's now upsold all sorts of stuff to these massive pharma companies and has a $35 billion market cap as a result. The same is true in the AI era, right? If you're building an autocomplete tool in Gmail, if it's a horizontal tool, yeah, you're probably gonna have your lunch eaten. But if it's for a very specific use case and it works really, really well, then you earn the right, theoretically, to expand to sell that s- same buyer some other thing. So, you can use it as a landing wedge and then expand to sell something that perhaps is more defensible.

   17. HSHarry Stebbings59:37

       I also find that you continuously underestimate how big the landing wedge is.

   18. JSJake Saper59:41

       Yeah. That's right. Particularly if you're really good at solving a problem, and if the pain point is really big. If the pain point's really big, you not on- you not only have customer demand for it, people are willing to pay a lot of money for it. The other thing that's true is in the AI era, a lot of these businesses are able to capture some labor spend in addition to software spend. And so that narrow wedge, while it may be narrow from a software spend perspective, may not be narrow from a total spend perspective.

   19. HSHarry Stebbings1:00:02

       Do you buy that? You know, Sarah Talbot's written before about, you know, paying for the work, not just for the software. Do you buy that? And I'm not n- n- disagreeing or agreeing with her, but I'm saying, do you buy that transition? I think a lot of buyers will find it difficult in their minds-

   20. JSJake Saper1:00:15

       Yeah.

   21. HSHarry Stebbings1:00:15

       ... to justify paying for labor, when it- it is software.

   22. JSJake Saper1:00:19

       So, what I've seen thus far, and it's still early days, is that most buyers of this stuff aren't firing people. What they're doing is not hiring new people, and so they're trying to be more efficient with whatever they currently have. Like, I just invested in a voice AI company in- in healthcare, and, uh, we talked to a bunch of their customers, and the customers, uh, were like, "We love this thing. It's amazing." And we're like, "Okay, great. How many headcount did you reduce?" And they're like, "None." I'm like, "Wait. Then why do you love this thing?" And he's like, "Well, I love it because I've grown my business three times with the same headcount." And so, I think right now, and I think part of it's emotional. People don't want to fire their people, understandably. But I think the- businesses are able to grow more efficiently than they were in the past because of this stuff, and therefore these- these software vendors should be able to capture some of that las- labor.

   23. HSHarry Stebbings1:01:03

       We mentioned Salesforce multiple times. In the next wave of AI, respectfully, everyone on the show has said that Salesforce would be one of their biggest shorts.

   24. JSJake Saper1:01:12

       It's not mine.

   25. HSHarry Stebbings1:01:14

       Why?

   26. JSJake Saper1:01:15

       Um-

   27. HSHarry Stebbings1:01:16

       What would the bull case be for Salesforce?

   28. JSJake Saper1:01:18

       So, I think that the incumbency advantage of Salesforce that we talked about before is very real. The fact that millions and millions of people use that product every single day, you can't underestimate that.

   29. HSHarry Stebbings1:01:28

       For such core fl- workflows.

   30. JSJake Saper1:01:30

       For such core workflows. So, like, I- I- I, that's not the one I'd short. If I were to short a stock publicly, it'd be IBM.
8. 1:02:23 – 1:10:02

   Why is Jake Worried About AI’s FTX Moment?

   1. HSHarry Stebbings1:02:23

      dominance of still, uh, (laughs) companies, as you said, with, like, refrigerators, um, running their software-

   2. JSJake Saper1:02:29

      Yeah.

   3. HSHarry Stebbings1:02:29

      ... do you think we overestimate adoption of AI in the short term?

   4. JSJake Saper1:02:33

      My guess is there'll be a little bit of a trough of disillusionment, just like there always is in technology adoption. Right? Where it's sort of a lot of, you know, everyone's trying everything right now. The good news is there's a lot of movement from experimental budget into real budget in these enterprises. But the bad news is, a lot of these companies that aren't actually delivering or drawing value are gonna get cut, and there'll be some buyers who say, "This thing didn't work as well as I- I want," so I'm a little disillusioned. The other thing that could happen is there could be sort of an FTX moment in B2B AI as these agents come out. And what I mean by that is, these agents are incredibly powerful, and they do things for you. They send emails, they buy things, they, you know, they can take action, which is very powerful, but with great power comes great responsibility. And it's very possible, in fact likely, that some big enterprise is gonna deploy an agent, and the agent's gonna do something really bad. Right? They're gonna send a bunch of emails to customers or prospects that they shouldn't. It's gonna buy a bunch of things that shouldn't. Like, you, it's- it's not hard to imagine what could happen, and there could be a bit of a backlash to say, like, "Oh, wait. This isn't good. We shouldn't do it." And the reality is, like, we do need to figure out the guardrails for these products so that they're deployed safely.

   5. HSHarry Stebbings1:03:40

      You mentioned disillusioned there. We've seen a huge amount of disillusioned talent within venture firms, leaving.

   6. JSJake Saper1:03:47

      (laughs) What a transition.

   7. HSHarry Stebbings1:03:48

      I- I- I'm pretty good at this, yeah.

   8. JSJake Saper1:03:49

      (laughs)

   9. HSHarry Stebbings1:03:50

      I've done a couple of these shows, you know?

   10. JSJake Saper1:03:51

       Impressive.

   11. HSHarry Stebbings1:03:52

       Honestly, you know, it's like 3,000 in, I can do a transition.

   12. JSJake Saper1:03:55

       (laughs)

   13. HSHarry Stebbings1:03:57

       But (laughs) I'm glad you noticed that one. Um, but th- there is, there's a huge amount of disillusioned partners. We've seen it with new firms, we've seen it just with departures, uh, whether fundraising, uh, more than ever. Christ. And they're hugely undifferentiated, and they're just starting another firm.

   14. JSJake Saper1:04:10

       Yeah.

   15. HSHarry Stebbings1:04:11

       Um, and my question to you is, you've never lost a partner, which is nuts. What do you do that no one else has been able to do?

   16. JSJake Saper1:04:21

       We grow them from within. That's-

   17. HSHarry Stebbings1:04:24

       Um, why is that important?

   18. JSJake Saper1:04:25

       So, most venture firms, th- I'll explain how most vent- venture firms work, and then I'll explain how we work, and the difference. So, the way most venture firms work is, um, when you're looking to hire investors, you hire two profiles. You hire either, um, seasoned, often ex-CEOs into the business who have, you know, presumably a great network and a great brand and what have you, and/or you hire an army of junior people, and you give them a checkbook, and you say, "You've got two years. Prove to me that you're good." And the incentive that creates is those people write as many checks as they can. Of course, that's the incentive. And at the end of the two years, you know, one of two things generally happens. It's- it's almost always never enough time to really see if these investments are good or bad, and so the person often leaves. They either leave because the firm says, "These investments aren't trending, so you're out," or their investments are good, and the person s- looks up and says, "You know what? If I build my career here, there's no chance I'll ever be an equal partner." Because that is how most firms work. Most firms don't have an equal partnership. Most firms have founders that retain carry after they depart, and as a result, if you're really good and you pour your entire career into something, you make great investments, you don't ever get to capture a portion that's fair. And so what you're seeing is a merry-go-round in venture capital. And what that means is that you've got a bunch of people that leave, and they, and they go from firm to firm, or they start their own firms because of these dynamics, and it is really, really bad for our founders. 'Cause what happens is these founders become orphaned deals.

Episode duration: 1:33:55