The Twenty Minute VCMichael Burry Shorts NVIDIA and Palantir & Has Defensibility Died in a World of AI?
EVERY SPOKEN WORD
85 min read · 16,762 words- 0:00 – 1:06
Intro
- JLJason Lemkin
Tools are great when the AI is part of your team, for real, not VC talk. The amount of revenue that it's accessible is so high
- RORory O’Driscoll
Sell shit to the people who are making AI, and if they grow, you'll sell more shit too.
- JLJason Lemkin
You just can't take that early first month explosion as seriously as you used to. It's not as defensible.
- RORory O’Driscoll
The pace of evolution is so fast. If you decide what I knew six months ago is still useful, you're probably gonna be wrong very quickly, right? That's what I find the most stressful about right now.
- JLJason Lemkin
Ready to go? [upbeat music]
- HSHarry Stebbings
Guys, it is so good to be back with you. I've just come back from my AGM, and it's a humbling thing for me because for 10 years I did this show solo, and then I go to my AGM, and do you know what everyone says? "Oh, we love Rory and Jason. We love Rory and Jason." And I suddenly realized that I wasn't the star of the show. It wasn't, wasn't that-
- RORory O’Driscoll
Well, just kick us off. End this now.
- HSHarry Stebbings
[laughs] Well, okay, fine. I'll kick us off with,
- 1:06 – 7:31
Sequoia's Leadership Transition
- HSHarry Stebbings
uh, big, big venture news. We've said before about, you know, Sequoia being the kings of venture. Um, leadership transition at the top. We saw Roelof Botha moving out as steward, uh, after a three-year tenure and being replaced by Pat Grady and Alfred Lin, which was I, I think quite surprising news to the venture ecosystem. I'd love to hear how you thought about it, and let's start there before I lead the witness.
- RORory O’Driscoll
Sure. It just brings home how tough venture is right now. This is the best firm in the world, and they're feeling w- what's going on in AI that they're behind, right? And, you know, let's be hon... I, I'm, uh, you know, I would say all of us are feel... I, I think everyone in venture, especially if you have bought a large existing portfolio and you're trying to compete, you know, these new deals in the last three years, everyone is feeling stretched, everyone is feeling tired. Everyone is feeling it's brutally competitive. And, you know, sometimes, I mean, this is gonna sound kind of... It's not schadenfreude, but it's more reassuring in a way. I'm, I get up and I go, "God, we need to do better. We need to sort this out." And then you realize the best firm in the world is having exactly the same feelings.
- HSHarry Stebbings
Why do you think the leadership transition is showing that they're behind in AI?
- RORory O’Driscoll
Look, whenever you have a CEO change happen [laughs] in a venture, it's 'cause something is wrong, right? And again, if you wanna kinda go down in the weeds of the interpersonal stuff and people's perceptions of other people, we can talk about that later. But my outside in reading is in part this is dissatisfaction about how the firm is doing relative to the competition. Look, I'm not saying they are behind. I'm saying there's a perception internally that they could do better. They missed some rounds and some deals. They passed on some great companies. That can be frustrating. I mean, when you're top dog and you feel for whatever reason that you're not quite batting, you know, performing at your best, it, it, it can be frustrating.
- JLJason Lemkin
Well, maybe two thoughts. One is, um, you know, it's just, uh, maybe in general, in general, more people should be stepping aside today. I think more people, VCs, uh, executives, founders. And I'm not saying this is exactly what happened at Sequoia. I mean, that, that's the articles, right? It's about AI and missing Cursor and missing, uh, these deals. May- maybe that's true, but I just think, um, the, the... most folks from the last decade or 15 years are not the right people for the next decade. I generally believe it. Across my ecosystem, I, I struggle to even recommend a lot of the CROs and executives I know for roles today. I just struggle to find them a job. They're not the right people anymore. And so I think I could only imagine we don't even need half the VCs we have today for the, the AI world. Maybe they'll spend the money. Maybe, maybe they'll throw a few nickels into Cursor at 30 billion, get a few logos on the website. But the, the old playbook don't work, and the pace is so fast. Take your coins, take your, take your NVIDIA shares, and buy a beach house. [laughs] Seriously, check out. Check out. It's a good time to check out, guys.
- RORory O’Driscoll
One of the things I admire most about Sequoia is their toughness and their willingness and ability to evolve, right? And in this case, I'm not saying... I'm not commenting on the merits of the case, but if the internal group... 'Cause I don't know enough, right, to say it was a role or it was a... But if the internal group feels they need to make a change to continue to execute, what they did not do is that fatal error, which we can talk about in politics in a second, is, you know, it's someone's turn, and they said, "It's so-and-so's turn, so we'll leave him in." They did the exact opposite. They ruthlessly said, "If we're gonna compete, we need these people, not those people," and they made a change, right? All they needed to do was call a vote and have a discussion and, you know, uh, sit down with the partner in question and have a discussion. I, I think that's healthy, right? I think some of these orgs where so-and-so can't be touched, you always say to yourself, y- does that create a, does that create a false sense of security when you just can't afford to have that in this market?
- HSHarry Stebbings
To, to me, I think it's like a specialization in leadership that's kind of c- correlated to actually the winners and losers in venture in the next 10 years, and I think the winners are Walmart, which is your mega platforms. It's your Thrive, it's your Lightspeed, it's your GC, it's your Walls of Money, and it's your boutiques, which is your Chanels. Walmart versus Chanel, and the, the boutiques are your benchmarks, your USVs, your specific products. And I think when you see this splintering of leadership between Alfred Lin and Early on Early and Pat Grady on Growth, I wonder if it's this kind of attempt to play into one of those, because right now I, I do see them, and I love Sequoia and, and respect them intensely, but actually in the middle, which I think is quite a hard place to be.
- RORory O’Driscoll
They are more like a manager of managers. You, you have an early stage team and a late stage team. What that means, by the way, and I wanna talk about this for a second and then come back to the megafund comment. What that means is the person on top is no longer even a manager of venture firm. He's a manager of managers of venture firms. One of the big ahas is being on topOf those organizations where you have these structures underneath, it's just a very hard and precarious place, right? If you're not actually running one of the groups that's putting out the money, if you, if you've allowed your job to become helping other people do things who in turn are managing money, y- you- you're more removed from being able to eat what you kill, and it just becomes a more precarious position.
- JLJason Lemkin
Having watched venture firms and law firms and others, I really can't think of something more dysfunctional in many ways than partnerships. One of the reasons just partnerships are dysfunctional, and maybe it does tie to this and then w- maybe we could move on, is that it's almost impossible for performance to tie to economics, right?
- RORory O’Driscoll
Mm.
- JLJason Lemkin
If, if Harry and I are equal partners, if the three of us are equal partners, and I have all the winners, it's all fun the first year, but the second year I've got the winners, and then Harry made that big bet and it blew up on us, and we're, we're friends, but, like, but our carry is equal, and then we're raising another fund, and we have to argue over carry in the next fund. I just-- My limited, my limited experience is in partnerships, the daggers are always out, and I love your kumbaya v-v-v- uh, view, Rory, but I haven't seen it in the real world yet.
- RORory O’Driscoll
I wanna push back hard on that and say, I didn't say the daggers weren't out.
- JLJason Lemkin
[laughs]
- RORory O’Driscoll
I think, again, respect... Look, respectful professional people-
- JLJason Lemkin
I've seen them out-
- RORory O’Driscoll
'Cause, 'cause seriously, let's talk about this. In the end, economic performance drives change. One of the things about Sequoia you gotta admire is they didn't do the, "We've made this decision, let's stick with it for five or six years." They did the, "It's not working, let's make a change." It's very Sequoia. It's very on brand.
- 7:31 – 14:38
Michael Burry's Big Short on Nvidia and Palantir
- HSHarry Stebbings
Listen, I wanna discuss Michael Burry, uh, famed for Big Short, pulls another big short. A big short from Michael Burry this time, $1.1 billion short on NVIDIA and Palantir. Had some pretty significant ramifications on market. How did we think about Michael Burry and the subsequent downfall that it caused?
- RORory O’Driscoll
Zooming out, I, I, [sighs] I think there's an-- You look at the AI CapEx spend and you go, at some point this is gonna overshoot, and then there's going to be a downturn. Big uncontroversial statement, even Sam Altman would say it, right? Because I ac- And I did the numbers 'cause it's not my normal, but I actually did-- I decided in this case I've been opining on AI CapEx, and I said to myself, what would it look like to make Michael Burry's bet? And let's make it real here, right? Actually look at the numbers. NVIDIA stock on Monday was a hundred and eighty-eight bucks. If you wanted to buy puts at one eighty, which means these things have no value unless your stock is below one eighty, right? You can bet, and let's just say you buy December of this year, so you got forty-seven days for that stock to go down, right? You know, y- for every nine dollars you bet, right, you make two X your money if the stock goes to one sixty. So you gotta call it, it's at one eighty-eight now, you gotta get one... And you make eight X your money if it, the stock goes all the way down to a hundred. In other words, almost halves, right? So you got, you only got f- if you're betting on, if you're buying puts, you're betting that in the next forty-seven days, you gotta have that stock go from one eighty-eight to one sixty just to make a two X on your money. And remember, if it doesn't go down, you lose it all.
- JLJason Lemkin
You don't even get a quarter.
- RORory O’Driscoll
Yeah. It, it, you lose it all. It's not like a stock. So that's, I look into that and I'm going, "Hmm, I've gotta get it right to make a two X," and that's pre-tax, right? I'm saying, would I have the, would I have the guts to do this? I believe the CapEx is over-invested. I believe at some point it'll correct. Would I take that bet? Would I put a million dollars in where I could get two million dollars if NVIDIA goes from one eighty-eight to one sixty by December twentieth or whatever it is, and I lose it all if it stays above one eighty? Hmm. Hmm. Eh. No. Right? One of the interesting things he did was he released, Michael Burry, he released his s- filing early. In other words, he didn't have to disclose it until the last day, I think it was forty-five days after the end of the quarter. He disclosed it early, and to me that was probably him trying-- 'Cause if you're taking a very tightly coupled time bet, where you've only got forty-seven days to be proven right, you wanna-- This is where Karp is right. You have every incentive to pile out the bad news and shit talk the stock to try and move it down, right? So that's, you know, so you're not just a passive investor. You're actively trying to say, "Hey everybody, look, this is a pile of shit. It's gonna go down." And um, and, and, and, and that's what he was doing in a very polite way by giving people the information earlier than he legally had to. And as someone pointed out, he's filed on the last day every other time, and this time he filed early. So this was someone saying, "Hey everyone, look, this is my bet." Right? So that's what it takes. And I, I just did the other ma- interesting math is if instead you decided, "No, I don't think it's gonna crash in forty-seven days," right? "But I think it's gonna crash over the next two years. So I'm gonna buy these long-dated options, leaps. So I'm gonna buy puts." Same thing. I'm gonna buy puts. Stock's at one eighty-eight. I wanna buy puts at one eighty, right? And they're gonna cost a lot more. They're gonna cost like fifty, fifty-five bucks per, per trade, right? And now you lose money unless the stock in two years gets to below one fifty. And to get a two X, to get that same two X, it has to go below a hundred, right? So it brings home how inc- I mean, you know, people talk about shorting, and obviously shorting is more risky than buying puts m- but it just brings home how hard a business it is to bet against AI CapEx. That was my big takeaway.
- HSHarry Stebbings
I don't understand as an asset allocator how you can rationalize that as an economic decision to make. Like, it just, uh, against other asset classes, what you have to believe for that two X to be real, risk-adjusted, it's not a good decision to make.
- RORory O’Driscoll
Yes, it's a very hard decision to make. Like, I mean, there will be one moment where if you get the timing just right and you see-- I mean, remember, we did see a eighty percent NASDAQ decline in two thou-- If you time it right, you look like a genius, but it's so hard. I agree with you. On average, the return, especially to amateurs like me trying to do options, it's just net negative because it's a zero-sum business. Unlike equity investing, where there's an intrinsic overall return, for every winner in options, there's a loser. For every idiot like Rory, there's a smart guy the other side of the table who prices it better. So I agree. I struggle-To think how most people can make money shorting, which is why, to your point, Harry, in some weird kind of way, it's kind of good that there's some guys like that out there. Was it, uh, was it Jason you made the point, just keeping the whole system honest? I mean, that's an expensive way to be a policeman. You gotta bet your own money to police the system.
- HSHarry Stebbings
That's bold. It's courage. [laughs]
- JLJason Lemkin
If you're, if you're great at it, well, Rory's point is it's almost impossible to be great at this. If you are, you get leverage. You do get leverage on your investment. So there's... It's a great way to get leverage, but man, you better-
- HSHarry Stebbings
Be right
- JLJason Lemkin
... you better be really good at it, right? You better be-
- RORory O’Driscoll
You gotta be right. Jason, you have to-- The thing that really impressed me when I did this money, this analysis, is you not just gotta be right, but you gotta be right on timing. I think it's easy to be roughly right. I'm gonna say it here, I think Michael Burry, it's very hard to imagine a company trading north of 110, 120 times revenues like Palantir, growing at 50 or 60% last quarter. Great, amazing quarter, kicking off cash. It's very hard not to imagine in the next two years that doesn't have a significant correction. It's very hard to imagine that the AI CapEx boom doesn't have a significant correction. But going from that kinda arm-wavy bullshit podcast statement to actually being able to make money on it, that's damn hard.
- HSHarry Stebbings
You said about kind of, you know, the excitement waning from AI and, you know, air being let out of that kind of bubble and excitement. You know, that's all predicated around, oh, well, will the revenue show up? Will the revenue show up? Well, the revenue is showing up. Altman says OpenAI is gonna hit 20 billion ARR this year. Anthropic projects 70 billion in ARR by 2028. The revenue's showing up in the billions.
- RORory O’Driscoll
Agreed.
- HSHarry Stebbings
Are we not answering our own question? And do you think we're almost being overly negative in asking where's it showing up, where's it showing up, when it's already showing?
- RORory O’Driscoll
Agreed. And you are. And they're upticking their estimates, not just a few. I mean, I regard if you're changing a 2027 estimate up, I don't care. But the real fact is, if you're changing a 2025 estimate up as the year goes on, that's an enormously positive signal. And I think Anthropic in particular has been doing that. So you're right, the revenue is showing up. The growth rates are showing up. And even when you look at, funny, CoreWeave's had a little bump today, um, but their problem is not lack of demand, their problem was, "Oh my God, we couldn't get the data center up and running." So right now, it's very hard to make an intellectual case right now for anything other than there was massive demand for compute and there was massive revenue traction. So what you're left with is saying some version of I don't think it'll grow quite as quickly as other people think. It's all in the hypothetical. Right here, right now, the revenue
- 14:38 – 28:39
Gamma Raises $100M at a $2BN Valuation
- RORory O’Driscoll
has shown up.
- HSHarry Stebbings
And we look at Gamma announced last night. You know, I was, I was reading at midnight after my AGM, Gamma raising $100 million at a $2.1 billion valuation, having hit 100 million in revenue with 50 people.
- RORory O’Driscoll
The-
- HSHarry Stebbings
2 million ahead.
- JLJason Lemkin
Yeah, we, we run-
- HSHarry Stebbings
That's-
- JLJason Lemkin
... Gamma. It's great. Every day we use it. It rocks.
- HSHarry Stebbings
And so I guess I'm just asking, are we being overly British?
- RORory O’Driscoll
[laughs]
- HSHarry Stebbings
Are we, are we looking for a problem that's not there?
- RORory O’Driscoll
First of all, I'm definitely not being over British, and that, i-i-if that's what's happening, it's time to end this show now. Um-
- HSHarry Stebbings
[laughs]
- RORory O’Driscoll
Sorry, Harry. Well, I think you're right. Actually, there's, there's wisdom in what you're saying. I mean, look, it's the... I've seen it, loads of people have quoted it, but, you know, cynics sound smart and optimists get rich. This is a great, enormous mega trend. It's the biggest mega trend we've maybe since the early days of the internet, maybe it's even bigger. It's an enormous, ginormous mega trend, and leaning into it is the only sensible thing to do, and playing against it is dumb as rocks. The only reason you even have the discussion is you have to have the second order comment says, you know... I mean, to make a, to make your question useful, because on an overall trend basis, you're of course right, the demand is huge. It's some version of the question, are we gonna sign 80 billion of CapEx for next year or 40 billion? Now, both of them are still huge. Both of them are still the trend is exploding. Both of them are still everything's amazing. But one of them is 40 billion more than the other. And that's where you do have to start saying, you know, things are enormously great, but are we over-extrapolating? So I don't think it's being negative to simply say in a hyper-growth company exactly how much, how sh- much should you lean in, how much risk should you take? That's all that's going on here.
- JLJason Lemkin
Let's talk about Gamma, and I actually did a all-company meeting for Rep last night. I mean, they're, they wanna end the year 250. I can tell you what I learned from both. But we use Gamma at SaaStr. And the folks may not have heard of Gamma. Folks talk about it as like an AI PowerPoint, but they miss the point. I'll tell you how we use it. So we use it now instead of when we have, we have, you know, we have to close 8 million of sponsors at SaaStr a year to keep the lights on. Instead of sending them the same dated prospectus, which we did before Gamma, the same crappy thing, now Gamma automatically pulls all of our data from Salesforce and our marketing automation system. It, if they've been before, it knows the exact number of leads and ROI from the calculation. It knows who their competitors and similar companies are, and makes a fully dynamic piece of collateral for them in about 10 minutes. Okay? And that, and we spend, uh, now it's actually a great deal. We spend 100 bucks a month for Gamma, okay? Now, a couple ways to think about that. One, it ain't much for what I just described, is it? Um, but it's 1,200 bucks a year. How much do we spend for Google Slides? Zero. It's built in. How much do we spend on PowerPoint? I don't even know where my key is to Microsoft Office. So it is a, it is a stealth TAM expansion that we're spending $1,200 a year on PowerPoint, but we are because the AI is a s- I mean, I, Gamma, I'm, I'm, I'm the biggest super fan. It's all over SaaStr because it is... You can do epic things that we would have to wait for a market- a marketing ops team three weeks to never do and do a crappy job of. Now we do it in 10 minutes. And, um, so we are on, like, I see why if they keep going, it's a billion-dollar ARR business. 20X revenue doesn't sound expensive compared to some of the deals we've done, does it? It doesn't sound expensive. Is it one to 100 in, in, in 11 months at 20X revenue? Sounds cheap.
- HSHarry Stebbings
And profitable.
- JLJason Lemkin
Yeah. Now I, look, there's some meta issues. I think we're gonna see a lot of these folks-You know, adding revenue teams, adding sales teams, adding marketers, never at the ratio of 2021. We'll never see those, those, those le- those levels of staffing of humans. But, you know, more power to Gamma getting to a billion with no sales team. Um, I mean, Canva got pretty far, right? But knowing a few folks on the team, the B2B use case is pretty small today, what I'm describing. As that blows up, they're gonna add a whole GTM team, right? So it ain't gonna be... They're gonna need 100 people to service it. Um, but yeah, I think, I think we are, we are underestimated. And for what it's worth, the other thing, I did, I did this present- So I've been vibe coding for 126 days. Feels like a lot of change. So I did this presentation, all hands at Replit, 125 days and 10 apps. I launched 10 apps in 125 days without an engineer, and I, I shared the data and most of the stuff that went well and a few, few areas to improvement, and I learned a lot of things, including the engineering team there is really, really, really good. Um, but it occurred to me in the middle of this while I was talking that the agent now, the Replit agent, of all the agents we use, we use about 20 agents, 12 real ones. The Replit one, the V3 one, is the first one that is literally part of our team. Not making us more efficient like our SDRs and BDRs. Replit is part of our team. Um, it now has essentially infinite context window. It remembers everything I've done for the last month with it. It remembers all of it. We talk about it. We talk about our mistakes. When I fi- And I... So I'm doing the presentation, I'm like, "Oh, I have this new idea. I want to build a page that spotlights all the AI apps we've s- we've spotted, we've spotlighted on SaaStr. I want to rank them, um, and I want to do links and everything so you can go discover these, all the ones we talk about." So I, I fired up Replit. I'm like, "Here's my idea." And he remembers, "Yeah, that's what we did on the other one. That's how we're gonna do it this one." In 15 minutes, we're in production. Like Copilot, the lame thing about Copilots is they were just tools. I mean, tools are great. When the AI is part of your team, for real, not VC talk, the amount of revenue that it's accessible is so high. We- If you go to our office, we, we have little signs we make fun of. We have Replit for Replit. We have Arti for Artisan, which is an SDR. We have Quali for Qualified. You can see how clever we are in our nicknames, right? Arti, Replit, Quali, and they all have these little desks where there's no human at it anymore. It's kind of weird. But Replit V3, this latest agent, is the first one that jumped the line to not, to not being one of the parts of our team, but literally being part of our team, just like a human being. And so that is just gonna unlock so much revenue. So much revenue. It's just, that's just starting to be capable now, right? When Gamma is part of your marketing team rather than a marketing tool, I mean, there's a lot of revenue expansion if they can pull it off. Lot of revenue expansion, right? So I think we've just got... I know this is VC triteism, but I realize being deep in the trenches, we literally have just gotten going because these agents are so much better than 90 days ago. It's, if you're not doing it, it's hard to see how much better it is. I think people miss... They're, they're, they're not doing it, and so they're missing when we cross the line when AI is part of your team. That's what's coming in 2026. We're missing this. The agent was the story of 2020. The Copilot was the 2024 story. It didn't work. It was a rip-off. At, sp- spend $30 more a month on Office.
- RORory O’Driscoll
Didn't work at all.
- JLJason Lemkin
Like no one wanted the rip-off. It co- You know, the, the... This year, OpenAI and, and Claude finally actually got good. That's why lovable Replit, Gamma exploded. These... Gamma was founded in 2020. It had no revenue before this year. Replit was founded, like, in the 1800s. It had no revenue until this year. Vercel had no revenue until this year, right? And they exploded. That was this year, was the AI works, right? Next year is AI as part of your team, not replacing folks or layoffs. It is literally embedded in your team, and I've, I, I talked about it, but now I see it, and that's where we should be investing. That's where we should be investing as VCs, as humans, as leaders, is what happens when AI is good enough to be part of my team? Part of my team.
- RORory O’Driscoll
And you distinguish that. I, I'm, I want to go down because I'm actually here to learn, too. Is that you distinguish that from just being, having an individual aid. What, what's the difference between this Replit as an agent or what, uh, um, Arti as an agent versus being part of your team? What, how do you distinguish that?
- JLJason Lemkin
It is significantly autonomous, knowledgeable, and powerful to complete material high-value tasks on its own with some daily discussions, just like on our team. You've got to check in. Like some folks, we, we can check in just once a month, like that's enough, right?
- RORory O’Driscoll
Okay.
- JLJason Lemkin
But we, uh, it does need some oversight and some discussion like a human does, but the level of autonomy and capability. Gamma, go out. We, we've got 20 sales calls this week, Gamma. Go into my Google Calendar, create prospectuses and sales collateral for all of them. Pull all the data on them last year from Salesforce and HubSpot and Marketo, put them all apart, review them once, and then distribute them to the team. Um, and if you can, join the meeting, right? When Gamma can do that, Gamma's part of our team. It's not that far away. It's not that far away. Not just make me PowerPoint. Not, not just, you know, oh, Gamma's the AI, the, the PowerPoint for AI. That's not so interesting, right? Microsoft will figure that out. Canva actually has a, a Gamma clone now that's not bad. I mean, a lot's changed ev- AI is so fast. When Cliff was on the show, like I, I accidentally was a little triggering on Gamma. I didn't even really think of them as competitors, but that was the only time Cliff got a little thoughtful. I mean, he was always thoughtful. But now, like that wasn't even that long ago, was it? Now, like their version of Gamma is pretty good. [laughs]
- RORory O’Driscoll
Yes, which is why you got... Yes, which is why Gamma's got to keep swimming and add all that other functionality-
- JLJason Lemkin
Yeah
- RORory O’Driscoll
... which they are.
- JLJason Lemkin
That also goes back to the beginning of this, of course. That's why investing is so stressful today.
- RORory O’Driscoll
I think that's the real answer.
- JLJason Lemkin
It's so stressful today.
- RORory O’Driscoll
I'm glad you said that, Jason, because I'm sitting here. We, we were talking last weekend in a partnership about technically what you really need to understand is what the im- what the improvements in the last 12 months, I think it's what you're saying, and the changes in the model in the next 12 months means in terms of what can be done that wasn't doable even 12 months ago. And that requires a quantum of time to just get your head around it, right? And it is so stressful because just finding that timeYou gotta make the priority to find that time to know where it's going because it's, the pace of evolution is so fast. If you decide, well, what I knew six months ago is still useful, you're probably gonna be wrong very quickly, right? That's what I find the most stressful about right now, right, is m- making sure you actually know where the technology is right now versus your opinion 12 months ago. You went, uh, you look back at what things people said 12, 24 months ago and they're laughably wrong, right? Like the whole Copilot thing. I mean, right, that was like, "Thank you for sharing, but no." Right? And that's just so done. And just trying to have clarity on the next 12 months just to be able to play and, 'cause without it you're just bes- you're betting blind and you're gonna get it wrong.
- JLJason Lemkin
There's that. What I think is even more stressful for seed, maybe by B it's a positive.
- 28:39 – 40:09
Does Defensibility Exist Today When Copying is Easy
- HSHarry Stebbings
But that's where I think vertical specialization does accrue benefits with scale. An example is, you know, I did a deal in Solve Intelligence's, uh, AI for patent law. The more patents that go through their algorithms, the better they are at writing, editing, predicting, and it's a very specific use case that gets better with more and more data ingested. You don't get that with horizontal products.
- JLJason Lemkin
No, and data's gonna be defensible in the age of AI. Data's gonna be defensible. But, um, but those patents are public, right? They can still be ingested by other people, can't they?
- RORory O’Driscoll
Yeah. And just for the record, I don't know if it's... Yes, they can. I don't know if it's true that you don't get it with horizontal. And I think you probably do. I mean, I think that, you know, w- would you do... Let take a hori- take Cursor as a horizontal product. Would you fund another company now from scratch to do exactly the same thing? I, I, I think not. I, I think there does come a point when you do pull away, is I don't think it will remain unstable forever, right? In the sense of I don't think you'll, you'll have these 200, 300 million outcomes and then someone else doing roughly the same thing come and displace them. I just, I, I, I think there's this uncertainty period at the start, but I could be wrong. I'm, I'm processing in real time here.
- JLJason Lemkin
Well, I think that Harry's point, Harry's point about the patent one, let, let's step away for a minute-
- RORory O’Driscoll
Yeah, yeah
- JLJason Lemkin
... that I think is interesting is, you know, the, the, the classic question in B2B, maybe all venture, but certainly B2B venture since we all started is how important is it for something to be defensible in the early days, right? And we've debated this for years, right? Since the, since the inception, and we've all known deep down no product that can be built in 60 days-
- RORory O’Driscoll
Right
- JLJason Lemkin
... can be all that defensible. But we told ourselves the team had domain expertise or this or that. Um, and-The question is today, has the bar gone up? Should you, should we either give up on defensibility for seed investing, just give up that, that that is a criterion? Or should we radically raise the bar, forcing us to go into verticals, corners of the market, areas where there aren't 11 agents, already 100 agents? Harry tweeted about support the other day. I can tell you when I invested in support in the early days, Talkdesk, Gorgeous, Front, no one wanted to do support in the early days. Everyone thought this was the dumbest category. So go find... Now it's trendy, don't do that, right? Maybe go find something the cool kids aren't in. [laughs]
- RORory O’Driscoll
I think it's simple. I don't think you can have a major defensibility team in any of these horizontal or verticals at the seed or even frankly the stage we're investing at, right? The defensibility theorem emerges at scale, right? In other words, if you s- I do believe what's true in most enterprise businesses, once you become the anointed winner, once a market coalesces and there's two or three people, at that point in time, you know, it's yours to lose. You can still screw it up, but provided you have great engineering and stay on top of the, the trends, on top of the technology, you should be okay. I think the idea that at the seed stage you're gonna find a defensible way to do code gen or code testing or so forth is absurd, right? And you just have to internalize the game you're in, which is you're gonna have to, you know, for most of these deals, unlike deep tech, you're just gonna have to awesome team, run fast, be superlative on technology, get your distribution early, and then rely on that. And then as you scale up, then you just, you become the winner. You can't be anointed the winner up front. Get over it, everybody. It's a high-risk game. Right.
- JLJason Lemkin
But is that okay at 50 post for a seed round or a pre-seed round? Do the outcomes justify it? That's the thing. Sure, Rory, if the deal's at three post or five post and I can spread my 500K checks around, I get it. If I have got to spread $5 million checks around at 50 post, it's tougher.
- RORory O’Driscoll
That's a much better question, 'cause now we've gone from the abstract of is defensible to the actual nuts and bolts of money, right? We've recognized the game we're playing has more variance, we think, than the last time and has to run fast, and there's probably also more competitors. Are you getting paid for the risk? Yeah, we, I wrestle with the same thing around later at 100 or 200 million pre, right? Am I getting paid, you know? And we, we have this constant dialogue. If I look at, you know, we do As and Bs, and, you know, the early product market fit A, you probably still don't know who the winner is, and the B, when you know who the winner is, it's gonna cost you a fortune. And which of those is the better bet? Right? We don't do pre.
- HSHarry Stebbings
But do you think at the B you even do know the winner? We look at the B, you mentioned my customer support tweet. Most of those companies had raised Bs. I got no idea who the winner is in that category, and I don't think anyone does, to be quite honest.
- RORory O’Driscoll
I think you can have-
- JLJason Lemkin
We don't know. We don't know.
- RORory O’Driscoll
No, I, I, I'm gonna push on that. Um, uh, I think you can have... Somewhere between the A and B, you can have a much better hypothesis... Put it this way, you can know a lot more than you know at the seed or the early A.
- HSHarry Stebbings
Do you, when the Bs are preemptive on 3 to 4 million of ARR, which they are for hot companies today, do you?
- RORory O’Driscoll
It's interesting 'cause this is absolutely what we have to know to do our business, right? Because a- at C, Jason can't know. He can just believe, right? But somewhere between the A and the C, you have to know, otherwise we're all ludicrously overpaying. And I think if you look at all these markets, like for example, you mentioned your patent company. I think, you know, without naming it, I think we have a rough sense of where all the companies are. I think your company's doing very well, Harry. You should be glad to know. And that doesn't mean I know where the market's gonna end up 10 years from now, but I can... Once the horses are running and once they round the first furlong, you can actually see the rank order of where they're running, right? In a way you can't at the early A, right? $2, $3 million in revenue, you, you know, you, you, you, you're drawing on small pieces of information, but you can see rate of change, and, you know, differences emerge pretty quickly, right? So I, I, I disagree. I think you can have a pretty good idea. Look, it's hard, but-
- HSHarry Stebbings
Do you think... What, what, what, I mean, uh, uh, genuinely, I, I didn't wanna be d- rude, but, like, can you give me an example of where you think at the B you have had a clear understanding of a winner?
- RORory O’Driscoll
Take co- code gen. There was a bunch of people doing... There was 10 to 15 companies at the A or earlier. I think it emerged Cursor, I think it emerged, uh, you know, kind of Windsurf, and then to a different extent, Cognition by the B, and it was obvious that those were the names.
- HSHarry Stebbings
I would push back on you there and say that I don't think we know at all. I think Codex is making incredible ground. I think Claude Code's making incredible ground. Cursor's very good. But then y- as you said, you've got Cognition, you've got the Replitz and Loveables kind of coming from the kind of prosumer, less developer-centric. I think that's still an entirely up for grabs. I think we know more-
- JLJason Lemkin
I think also we didn't... If we look back, 'cause we've talked about this earlier in the show, I think looking back and no, uh, nothing but kudos to the team, right? But I think when Windsurf sold, whatever happened, it di- it, it wasn't clear it had a sustainable mode of any sort. It wasn't clear it truly had... It, it was a darling of a slightly more enterprise version of Cursor. People did love it, but ultimately it wasn't clear it was, it was a winner then. It wasn't clear that brand was enduring. It wa... Looking back on it, it wasn't. What would... We don't know if, if it would have even survived as a standalone company.
- RORory O’Driscoll
I, I think that's true, but at the same time, what was clear is over the prior six months, it was that if anyone was going to be the perceived company worth acquiring, there was only two or three names in that space, and the other seven or eight names that had been around weren't, right? So I understand what you're saying. It's not clear at that... The reason they took the deal, it wasn't clear they could go from where they were to, you know, a billion in revenue and an IPO. But what my point is this, going back, we're dealing with probabilities here. At the seed, you know nothing but the people. At the early A, when there's five or six of these companies doing a million plus or minus in revenue, all you know is you got a one in 10 shot. Somewhere at the, at the B, I think you get down to being able to say it's a one in three shot. It's still a one in three shot with a huge amount of variability, right? But the odds have narrowed. Let's take... I mean, you guys keep talking about Lovable and Replit, right? You would say, implicit in what you're saying is those are the two names. You implicitly said, "I don't know the space as well." Bolt is not as... has shot its bolt, as it were, pun intended.So yeah, you now, that's a piece of information you have. When you're making a bet at this stage, you can probably say something like, "There's two clear winners here, probably less likely to be another raw startup. There is adjacent competition from, you know, the Wicks have bought someone." So you at least-
- HSHarry Stebbings
I'm so sorry to interrupt you again. I, I would just say you need to expand it significantly. It's not one in three, 'cause you've got Vercel and you've got Cloud Code who are eating their lunch coming down. You've got, uh, as we mentioned, Rapid and Bolt, but then you've got, you know, Salesforce who have their competitor, Atlassian have their competitor. Figma Make is doing very well. It's one in 10.
- RORory O’Driscoll
You're, you're right. So the adjacent competitors, let's talk about the... 'Cause I always think the horse, there's a two-step horse race in all these deals, right? And by the way, I'm gonna argue what you just said is proof of success. Let me tell you what I mean by that. In any startup, you start off on day one and you're like, "There's three other startups doing just... or maybe 10 other startups doing just what we're doing. I wonder which of us will win." And my experience is when you go to the first board meeting where you suddenly realize you're scared of the big company adjacent competition, it probably means you've graduated from the baby class, you're one of the two or three winners in the startup land, and now you gotta worry about the adjacent guy next door. You might say you're not sure if your lovable bet's gonna be the winner yet, but do you believe you've, within the venture, within the class of venture bets on this space, you've got one of the one-- you're in one of the one or two winners?
- HSHarry Stebbings
Yes, but that doesn't generate any price.
- RORory O’Driscoll
And that's right. You... It does, it does-
- HSHarry Stebbings
That doesn't... Yeah, that, that, but that means shit. It doesn't matter if it's one of the venture bets. If one of the venture bets doesn't win and Salesforce or Atlassian or Clamber does, I don't care.
- RORory O’Driscoll
Obviously you're correct, but y- you gotta think about it just like incremental information updating your priors. When someone did the seed there, they were like, "This is a good idea. It might not even work." Right? Then you do the, "Oh my God, vibe coding is a thing. There's five companies doing it. We're one of the five." And now you can say, "Vibe coding is a thing. We're one of the five doing it, and we're one of the two winners." Right? A huge amount of inf- of risk reduction. Now you still have the other risk, which is the, the big companies might do it, something might disrupt you. There's a lot of risk still left, 'cause it turns out that startups are risky. But you've got to admit that there's been, you know, there's been a massive amount of information gleaned, risk reduced from, going back to what Jason said, is the five on 50 bet where you don't even know if it's a space and you don't even know if you're gonna w- be a viable player in that, is that a better or worse risk than doing two billion pre when you know both those things, you are the winner? Yeah, there is a space, you are the winner, and there's still a whole ton of competition to come, which is the lovable bet you made. Which of those two bets are riskier? I don't know.
- HSHarry Stebbings
I think about this, which is, you know, at, at about, I'm, again, butchering, but four to five million in revenue. It was done at, uh, you know, 200 when we first did it, and then when it was about 80 to 100 in revenue, it was done at 2 billion. You can choose your entry price.
- RORory O’Driscoll
Totally. That says to me is consensus, rightly or wrongly, has said there has been a massive risk reduction. And now unfortunately what's happened and always happens in a bull market is valuation has expanded to fill the risk that was reduced operationally. In other words, at four to five mil there's still a ton of risk, right? Fast-forward when you're doing 50, 150 million, I'm just gonna say it, you can't deny there's been a huge amount of operational risk reduced. Now, the problem is at 2 billion pre, are you getting paid for the... You know, [chuckles] is there enough upside left in the deal? Separate question. But it's, I think it's... The point I'm making is it's gone from being a, is this a category? Are they the winner? It's gone to the third and last question, which is always, is the TAM big enough to support a $2 billion valuation? Which is a, you know, much more late-stage
- 40:09 – 50:02
Should All Funds Be Way More Diversified
- RORory O’Driscoll
question.
- HSHarry Stebbings
It absolutely is. I, I just wanna go back to the, like, w- we kind of know the winner at the B, and if we don't, and if that has reduced or got less, are we overpaying was an interesting addition.
- RORory O’Driscoll
Yeah.
- HSHarry Stebbings
My statement is we dramatically know less, and that one in three has moved to one in seven to 10 significantly across categories. In which case, surely the suggestion is we are dramatically overpaying.
- RORory O’Driscoll
There's some level of truth in what you're saying. I think the r- the variance in these companies is a lot more than the 15 boring years of SaaS is obvious and you know what to do for the next 10 or 15 years. The, the, the v- Jason and I would both say we both had a play, Jason as a leader and a founder, I just as a humble investor, in an e-signature company. When we did those deals in '08, '09, it was e-signature, and fast-forward 10 years, it's still a e-signature. That was a simple world. We would both agree, I think, that there's way more change in this market in a m- in a year than in some of those older markets in five years. So we'd agree that. So you are right, there's more risk, Harry. The, all these investments I think are riskier than they were in SaaS land, and they're astonishingly priced higher, right? I would agree on that. But I still think there is some significant risk reduction in going from a one in five, one in 10, will it even work, to a one in three, you know, I know, I know who the competitors are.
- HSHarry Stebbings
If that's the case, should our B portfolios be more diversified? Jason put it as a w- great question. Do seeds need to be diversified? If we agreed that we knew-
- JLJason Lemkin
Well, how big a fund do you w- you do, right? Or if you're gonna write... If seed checks are 5 million, how big a seed fund do you need just to make the minimum diversification work? How big does a seed fund work with $5 million seed check?
- HSHarry Stebbings
Well, it depends if you think outcome s- sizes are expanding with the movement from technology spending or human-
- JLJason Lemkin
Does it matter? You, like, h- it's just some basic math.
- HSHarry Stebbings
Well, it does, 'cause you can expect to lower ownership.
- JLJason Lemkin
How many first checks do you wanna make, do you need to make in that fund for it to work? So if you traditionally-
- HSHarry Stebbings
Yeah
- JLJason Lemkin
... needed 20 or 30 checks to work, but risk has gone up, to Harry's point, maybe you need 40. So, and what reserves you mean? You might need a $500 million seed fund to have sufficient reserves, because I need to do 40 deals at 5 million now. That's 200 million. 200 million for reserves, that's 400 million. 100 million for fees and times and backup. I need at least 500 millionUh, for my little seed fund to make the math work
- HSHarry Stebbings
What you're missing on the maths is if you think that the outcomes are gonna expand, you can have a smaller ownership on entry, and so you don't need to increase check size if you assume you're gonna have a-
- JLJason Lemkin
4 million out of 50. Does it really matter? These are not massive owners. 4 million, who cares? 1 million on 50 isn't gonna work, Harry, in my seed fund, is it? It's not gonna be enough ownership, is it?
- RORory O’Driscoll
I, I just try to disaggregate Harry's response 'cause it, there was something... It was inter- I, I, I g- first of all, I agree with Jason's framing, and then your response was interesting 'cause you could've said one of two things. You act- you could've said, you know, "You don't need to go from 20 deals to f- to 40 because the winners are so much bigger that even if you have less winners, you're fine." That would've been one... But you didn't say that, interestingly. You said implicitly, you said, "Go to 40, but just take less ownership." Right? That's what you said. So the mere fact that you made that answer, uh, y- the mere fact that you made that answer says you are embracing a more diversification story in the face of risk, which, you know, is Math 101. Which is a super interesting concept, 'cause we had it down in the agenda to talk about, and some folks are even pulling it off. These highly focused seed-stage bets, which I find awe-inspiring. Because all other things being equal with the amount of vari- w- variability you're seeing, I would've expected people's deal count to have to creep up slightly. But, you know, we had Roger on, who was very much a concentrated bettor. You have the Hummingbird story in Europe, which is astonishing and impressive. So everything in logic says to me, with the increase in time to exit and with the concomitant increase in risk, logically you should be increasing your diversification slightly, s- probably reasonably, which probably means either smaller checks and more deals or a bigger fund size to maintain the same ownership.
- HSHarry Stebbings
Well, I think, I think both work really w- in, in a lot of cases. I mean, I'm in, I'm in one fund as an LP, and it has 100 to 150 positions with 100 to 150K checks. [chuckles] It's a 7X fund. And it goes to my point of the outcome sizes being so much bigger, and so the ability to have lower ownership. Jason, to your point, 1 million on 50 does work if it's a $100 billion company, not the 3 to $5 billion enterprise outcomes that we've been playing with for the last 10 years.
- JLJason Lemkin
Yeah. Works even better if you own 10% of that company, though.
- HSHarry Stebbings
[laughs]
- RORory O’Driscoll
[laughs]
- JLJason Lemkin
You gotta have... Listen, I... Your, it's your call. The w- the thing, the 100 to 200 fund, here's... I mean, I'm not that human. I don't wanna meet 500 founders a year, right? What, h- to do 200 deals between your team, you gotta meet 500, 600, 700 founders a year, even with your AI agent helping you. You know, I, I, I, uh, I c- I c- I could barely tolerate doing a couple meetings a week. I can do stuff by email. But God, I gotta carve out an hour for a deal I might not do? I wanna blow my brains out after that meeting. That's the... I, I didn't s- I sold my companies to not do those meetings anymore.
- HSHarry Stebbings
I mean, obv- so I, I can tell you our, our partnership does 20 meetings per partner per week. And so now with my four investing partners, we have 80 n- net new companies that we meet in person per week.
- JLJason Lemkin
80 in person?
- HSHarry Stebbings
Yeah.
- RORory O’Driscoll
Yeah.
- JLJason Lemkin
I, I would resign. I would give you-
- HSHarry Stebbings
Who knows
- JLJason Lemkin
... all my carry back. Thank you for hiring me, Harry.
- RORory O’Driscoll
[laughs]
- JLJason Lemkin
I'm eternally part of the 20VC team. You make me do 20 in person... Like, the, I sold my companies 'cause I didn't wanna spend my life in meetings. I'll, I'll do one a week. I'll do two. I'll do two.
- 50:02 – 1:00:47
How to Run a Fundraising Process & What Not To Do
- RORory O’Driscoll
Yes.
- HSHarry Stebbings
Rory, how do you feel when you hear people say, "No, no, no, no. No, I'm not gonna meet. I'm waiting to run a process, and I'll run a process on the 19th of November, and I'll, I'll email you then"? 'Cause for me, I found this really abrasive. I'm just opening up here. I fou- I said to the founder, "Listen, if you're running a process, you're either optimizing for price or partner selection. I'm giving you a great price today, a price that you want- you said you wanted, which means that you're not optimizing for price with this process, 'cause I've given you what you said you want, which is you saying that you think you can get better than me. Which may be the case, in which case, just tell me straight you think you want Sequoia or Benchmark, in which case, no harm, no foul, but fine." And they're like, "No, no, no. I just want to run the process." How do you react to, "I want to run the process"?
- RORory O’Driscoll
I think from their side, they're correct. I don't have to like it, but I think from their side... I think I see more failed financings because they didn't run a process than they did. You're basically saying, "Mister Founder, you don't have to run a process 'cause I'm going to give you a term sheet right now that's a good price, and you like me. Let's do it." Right? That's not an unreasonable offer, but typically what happens when people, quote, don't run a process is someone comes in and says, "I'm really interested," and they share, and they give information serially to someone who's not yet ready to commit, uh, on, on a, on an investor side. So they've run, they've run an accidental process, right? That's a mistake. Do you understand me? So i- when I see f- 'cause I would quote-
- HSHarry Stebbings
What if I'm saying, "Here's your term sheet. There's nothing to be done"?
- RORory O’Driscoll
That's different. I mean, at that point, it's not crazy as... I- I- I- if that happened, if I was a comp- if I was on the board of a company that had that happen, I would take it seriously and I would think, should I allow... Should I, should I hit the bid? Conversely, if I was on the board of a company where the founder said, "Hey, I'm meeting with Joe at mega firm. They asked can we share some data. They're not... You know, they just wanna get a sense of it," I would shut that down and I would say, "You share with everyone or you share with no one," because l- giving your data to one or two people, whether or not in, is just starting a process without meaning to start a process. And then if they don't move forward, you've kind of had a failed process already without ever doing a process. That's... I'm 100% certain that that's a mistake, right?
- HSHarry Stebbings
Mm-hmm.
- RORory O’Driscoll
Even though on my side of the table, you know, again, I don't love that, right? But you're raising something, which is why a lot of times we... You know, you wrestle as invest- uh, this is my aha. You wrestle as investors with I wanna be able to do what Harry just said. I wanna be able to come in and commit, because it's the only way to get them off their process, right? And that means I have to, you know, they have to have a good enough relationship with them, they wanna do business with you, and on top of that, you have to bid with probably sparse information. And my big aha on that is the only way you can conceivably do that, no amount of pre-work can do it because you don't know the actual information. If you've seen the prior round, it's probably your best chance, because if you've seen the prior round, you have some sense of what's going on, you know what they underwrote, you had a mental model at the last round. You can probably in a dialogue get one or two pieces of information, calibrate how they're doing, and maybe do that process.
- JLJason Lemkin
I have a slightly nuanced view in the mi- middle for what it's worth, just for the, maybe for advice to folks that watch, not, not to Harry. But when that happens that Harry said, I think it's a slight founder fail, a slight own goal, okay? Not a total one, because obviously he's got a good company, right? Harry is in essence ready to do the deal now. The founder says, "I want to run the process." I think what many of the best founders do, not all, there's all different types of founders, extroverts, introverts, great fundraisers. But what many of the best do is they're able to cultivate enough interest with enough good VCs that if they hit the number, they just send an email. They just send an email, and they don't have to play games. "Harry, uh, I, I'm thinking about raising a round before the end of the year." And Harry can say, "I'll give you a term sheet today." And the right answer is, "I love you, Harry, especially love the one with Rory, but I'm not ready today. I honestly, I'm not ready today. I will be ready at the end of the year." That is the perfect way to handle this situation. You don't risk losing Harry's term sheet. You don't risk o- accidentally... Few- founders do overplay their hand, not as often as you might think, but they do overplay their hand. Um, VCs, some, they, they can say the wrong things. And so the best foundersOne way or another, build relationships over months. They, they copy them on their investor updates, they update it, and then three or four folks are just in when you're ready. They're just i- it's so casual with so many founders. They're just in. As long as the deal is reasonably fair, just tell me, tell me where to write the check and how much I can buy. And, and it, and it... You don't break any glass. You... And you... And, and I think the reason this happens, the Harry scenario, there's so many seed investors and so many accelerators hammer into founders, you have to run a process. That is the classic top three bits of advice, but I don't... I think it mi- misses some nuance on the optimal way to run it. The optimal way to run it is for everyone already to want to invest for real without games before you open your data room, and the super optimal way doesn't even require a data room because they already... You don't even need a data room 'cause they already wanna invest. They need diligence, but you don't... The best run process, I know this might be slightly controversial out of context, but the best run processes don't require a data room. Not a traditional one. Not a traditional one. Only one for diligence. They only require a file that says Box-diligence-investment-122125. They don't need any other data room. It's just for diligence.
- RORory O’Driscoll
I think what you're actually saying is the best run processes don't feel like a process, but they are. And I think you're exactly right, is that if, you know, i- yeah, if a founder i- is, i- is smartly nurturing relationships, keeping people broadly informed, but then tries to time the interest such that when he's ready to put his or her hand up, there's three people who are primed and ready to go, that is the best outcome, as they say. So it is a process, but it doesn't feel like one, and that, that is perfection itself. I, I, I agree with you. Now, you have to have a very attractive and p- high-performing company to be able to do that.
- JLJason Lemkin
Maybe, but I also think those are the only ones getting funded in this environment. We talk about all the, the Gammas and the Shamams, but everyone below that ain't getting funded anyway, so you might as well run this version of the process. [laughs]
- RORory O’Driscoll
Because...
- JLJason Lemkin
[laughs] Maybe Harry thinks a lot of BB folks are getting funded today, but I ain't seeing it. It's the most binary ex- fundraising environment in our lifetimes, isn't it?
- HSHarry Stebbings
Expand on that, Jason. Like-
- RORory O’Driscoll
Please do.
- JLJason Lemkin
You're either, you know, you're either YC, Neo, South Park Commons, got something, get funded, or who the hell's gonna find you in your pre-seed round, right? You either got... You're, you know, you either... You better have, you better be s- whatever the hell AI native is, I mean, we know what it means. You better be hot AI native with top quartile venture growth or you ain't getting funded. It's pretty simple, right? Um, it's just not, there's not a lot of gray zone anymore.
- HSHarry Stebbings
But, but I do think even with that, you know, you say YC, Neo, fine, but they have, you know, a huge amount of companies per batch in YC. If you wanna stick to the religious, we're gonna run a process. That does work only if you have fucking stellar numbers. 'Cause if you haven't relationship built-
- JLJason Lemkin
You run a process? Yeah, yeah, but don't do the Harry-
- HSHarry Stebbings
Yeah. But then of course-
- JLJason Lemkin
I'm assuming-
- HSHarry Stebbings
'Cause if you haven't, if you haven't built relationships before and you start on Monday the 19th, to expect that you're gonna come in, hit the ground running with first meetings on Monday the 19th and get term sheets super freaking fast with average to net no numbers, it's not gonna-
- JLJason Lemkin
No, of course. Of, of course.
- RORory O’Driscoll
Agreed.
- JLJason Lemkin
I was making an assumption in the story you told me, the anecdote of the term sheet, that it had top, top decile venture numbers. The very fact that, that they were flippant assumed it. Now, if they didn't, then they're, then they're reading too many tweets.
- HSHarry Stebbings
Zero to, zero to a million ARR in seven months? Like...
- JLJason Lemkin
Yeah, I would take that offer. [laughs] I would sign the term sheet and send it right back and, [laughs] and, and ask if you wanted to meet at Selfridges over the holidays to see the Disney exhibit or something like we're doing with our team trip. I would say, "Thank you, Harry." [laughs]
- RORory O’Driscoll
Guys, I... 'Cause I think you were saying the same thing, 'cause Jason's throwaway comment, but it's worth pausing on. He was basically saying you should run this kind of, let's call it the, this light process which is very kind of f- f- FOMO-driven, right? His comment, you should... And I had said, "Hey, you can only do that if you're a good company," and then his comment was, "Only the amazing ones are getting funded." So implicitly what he's saying is if there's 100 companies and only 20 of them have these kind of numbers, they should run that kind of process and the other 80 are screwed no matter what, so he doesn't even... He'd not even invest. So, so 100% of successful deals will be this kind of FOMO-driven non-process process. That was the implicit statement of what you're saying, Jason, right?
- JLJason Lemkin
I mean, Harry's right. There's, there's some non-truth to it, but I think there's a lot of truth to it, that it, that we're in, we're in the Captain Obvious era of investing.
- RORory O’Driscoll
Yes.
- JLJason Lemkin
And, uh, and it only takes one term sheet and spend your time going to Harry's point of don't, don't, don't... Be careful. But man, I'm not, I'm just... Harry sees the most of any of us, but I'm, I'm just not seeing the non-obvious ones get funded. I just don't see it. I'm just not seeing it. I, I'm not seeing it, uh, ev- anywhere, right? And, and the most brutal one is, again, the classic SaaS company, triple, triple, double, double, which has been discussed ad nauseam on every 20 VC channel, right? Including cr- 20VC Cricket and 20VC Sales.
- RORory O’Driscoll
Yeah.
- 1:00:47 – 1:17:00
Datadog Surges 20% and Duolingo Crashes: What Happened
- HSHarry Stebbings
We- we're, we're gonna switch tack slightly, but I wanna discuss two kind of crazy stories or results in the last few days. One good, one bad. Datadog absolutely freaking crushed. [chuckles] Uh, stock up twenty-three percent, fifteen million dollar plus AI native customers. Wow. How do we think about Datadog?
- RORory O’Driscoll
I think, uh, Jason has covered this so well last time. His basic comment was, even if you're not AI first, co-attach to the AI trend and you'll be fine. These guys co-attached to the AI trend, and they're fine. Sell shit to the people who are making AI, and if they grow, you'll sell more shit too. And yeah, and they did it.
- HSHarry Stebbings
Love that as a summary. On the-- Jason?
- JLJason Lemkin
No, no, it's true. The irony as we go into next year, the AI leaders, the hyperscalers and the hyper this and the hyper that, they're starting to buy like classic B2B companies. They, they-- It's the same. And in fact, they're recycling the same people in procurement and the same people in GDM, and they're buying the same stuff. So this is-- If you have attached to AI budget and you're a Datadog era, and you're in that, you're actually gonna have a great twenty twenty-six because we're-- they're-- these are normal B2B companies. Like, OpenAI is buying like a normal-- buying like an Adobe or a Microsoft now. But if you're not in that, man, you're ju- you're just dead, right? And the other one was Clio, which raised it five billion in legal tech. It attached to AI in a different way. This is a company founded in two thousand and eight that found its way in the AI era, right? It added fintech. Payments got up to three billion, now at five billion. So fi- find your, find your way, right? Datadog, it helps the Datadog, even though it got expensive, it was the darling, right? It was the darling product. But man, they, they, they captured that revenue.
- RORory O’Driscoll
Yeah.
- JLJason Lemkin
Go find it.
- RORory O’Driscoll
It did because, you know, I, I-- I'm gonna leave Clio out because I think it's so different. I think Datadog is a core piece of compute infrastructure, and these peop- and these hyperscalers are the most compute-intensive companies that have ever been known. So if you're selling compute stuff, you should be having, as Jason said, a great quarter. If you're selling routers, if you're selling switches, if you're selling little interconnects, you know, whatever it is that's associated with-- Whatever takes to stand up Stargate, if you... An observ-- Yeah, an observability is a key part of that, right? Um, you're gonna be golden because there's more compute than you've ever seen, which I think is a very different dynamic than some of the others.
- JLJason Lemkin
Fair, fair enough. If you're not attaching to that compute, something's off, right? If you're, if you're-
- RORory O’Driscoll
It's like, yeah, if you're in the, if you're-
- JLJason Lemkin
If you're compute adjacent, you better be growing quickly if you're a compute adjacent. [chuckles]
- RORory O’Driscoll
Yes.
- HSHarry Stebbings
I'm a Duolingo shareholder.
- JLJason Lemkin
I mean, Broadcom's crushing it. Why aren't you? [chuckles]
- HSHarry Stebbings
I'm a Duolingo shareholder. That was a shit week. Down twenty-five percent. Rory, you know, the age-old thing, which I just love that you describe me with is, "That's great, but what about me?"
- RORory O’Driscoll
Yes. Harry, Harry, that's you.
- HSHarry Stebbings
Du- Duolingo plunges twenty-five percent. I'm going, "Why? What the fuck happened to make it plunge twenty-five percent?"
- RORory O’Driscoll
I don't think there's a mega story here. I think that, you know, Duolingo has been... I think they've just been-- You know, they've had-- I mean, they're still eighty percent up on their IPO four or five years ago. They had a period when it was, "Oh my God, um, AI is gonna kill them." Then the CEO very wisely got ahead of that and said, "We're using AI." So then the stock got way ahead of itself, and now it's like, AI is not gonna kill you, nor is it gonna make you enormously rich. You just guide it down for next quarter slightly for fundament-- business fundamental reasons, and the stock was overvalued and went down. I, I, I don't think there's a big story here. It's like, it's still, you know, the graph is, it's still, as I say, up in the five years. It just, it's still significantly up on its lows. It just got ahead of itself. They had a good quarter. The revenue guidance was slightly less. Life goes on.
- JLJason Lemkin
Oh, I'd say it has the wrong kind of AI. And what I mean is Duolingo is using AI to make its product better, right?
- RORory O’Driscoll
Yeah.
- JLJason Lemkin
Hooray. But every single portfolio company at scale twenty VC or better be using AI by this point to make your product better. This is not twenty twenty-three. You don't get any kudos for sprinkling AI dust on your product. Going to Rory's point, what you get kudos is, is attaching to that compute budget. That's the only kudos you get, and Duolingo didn't earn any. They didn't earn any.
- RORory O’Driscoll
Well, I don't think they couldn't because, to be fair, I mean, I'm just gonna, as an apps investor, I'm gonna step up and defend the poor little apps companies, right? If you're an infrastructure company, you can co-attach to compute. If you're a new AI apps companies, you are using that compute and using that AI. If you are like Duolingo and a lot of our companies, companies that have been around since pre-AI, the question is, you know, I don't think you're gonna co-attach to the spend, but what you can do is co-adopt the technology. And I gonna give Duolingo credit. They've done a decent job of saying, "We're gonna be AI forward, we're gonna be AI leaning." But in the end, this is my zoom out point. In the end, you're still selling, you know, you're selling a, a subscription product to help people, you know, at a very modest level learn another language. Yeah, there's no AI compute to attach to there, Jason. There's, there's no-
- JLJason Lemkin
Well, there is. They have to find a way. I mean, listen, I'm not a total Duolingo expert, okay? But Duolingo took money from... I mean, it's a-- it does a lot of things, but in, in some sense, it took money from Berlitz and all these language schools and stuff online, right? Hooray, you did that. Now, where are you gonna disrupt humans? This is your job. Like, you already disrupted those humans, unfortunately. They're gone, right? Where is the next level of human disruption?
- RORory O’Driscoll
Zooming out, that is-- I will give you that. That is true. I do think the next generation of companies that are going to be, quote, "teaching a foreign language" will obviously be LLM-based, and there's a lot you can do. And, you know, we've seen some of those companies, like, um, do m- what I call more professional, more interactive teaching using LLMs. And I do believe there's a whole ton to be done in terms of one-on-one instruction in language and a whole bunch of other things. And Duolingo should be getting on its skates to do more of that versus just using, you know, AI to... The thing they got into a little bit of trouble for the CEO was u- using AI to ob- obviate the need for humans. The real question is, can you build a more compelling set of products using AI to do more immersive learning? And I think it's companies like Speak and companies we've talked toI think there's a whole bunch, there is a whole bunch to be done in AI-enabled learning, and it's actually a super interesting space, including language learning.
- HSHarry Stebbings
Really interesting question to ask for all investors, which is, like, if you are not removing humans from the equation, you are going to be heavily discounted.
- JLJason Lemkin
I think you should. That's the other s- I, I mean, to simpl- Rory's got a good point. You're either getting money from compute, right, this massive spend, or you're getting money because you're using AI to replace humans. You go- that- otherwise, you're not gonna grow. Otherwise, hooray, congratulations on your 14% growth. Where are you repla- replacing humans for real? Where you, whatever vertical, whatever industry, where are you gonna go in and reduce the head count that vendor needs by half?
- RORory O’Driscoll
Most of the time I'm in the, yeah, replacing humans is a story. Interestingly enough, in education, I actually think it's actually doing it better. I think the data, the stunning data shows that a bunch of these education... That, in fact, if the human today is someone in a class with 20 people, there's a whole bunch of examples that says LLM learning is equivalent to one-on-one human learning, tutoring one-on-one. What you should be doing with AI in education is allowing everyone to get something they haven't had, which is one-on-one learning instead of group-based learning, 'cause all the data says one-on-one based learning constructed specifically to your needs is far more efficient way of teaching anyone a foreign language, and frankly, most concepts. There's been a bunch where-
- JLJason Lemkin
But where does the bu- and I'm not, I, I admit I'm not-
- RORory O’Driscoll
Anyway
- JLJason Lemkin
... a total expert in education, but where does the budget come from for that software? If it's not, if it's not replacing humans, then you better steal it from a legacy inventor, inve- uh, pro- which is fine.
- RORory O’Driscoll
No, that's actually a fair point.
Episode duration: 1:17:10
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Transcript of episode Euj5TAon_Q0
