OpenAI Restructuring: Who Wins and Who Loses & Mercor Raises $350M at a $10BN Valuation

1. 0:00 – 1:16

   Intro

   1. JLJason Lemkin0:00

      I just can't think of a retail IPO that would be more popular than OpenAI. To me, going from 23 billion to 30 billion, I don't even consider it an up round. It's not enough

   2. RORory O’Driscoll0:09

      If they really have gone from 100 to 150 in less than six months, then I can make this conversation really quick. There's no way they should sell. Andreessen Horowitz is the Red Army of the venture industry. What you're basically saying is, "Rory, you can win a deal, not 'cause I've grafted for 30 years and returned, you know, frankly, billions of dollars to my investors, but because I'm on a [censored] pod." If that sentence is true-

   3. JLJason Lemkin0:29

      No

   4. RORory O’Driscoll0:30

      ... if that sentence isn't true, then 100% Marc Andreessen was right all along.

   5. JLJason Lemkin0:35

      I think Bezos would lay off half his company in a fortnight if it was the right thing. I don't think he'd even care. Ready to go? [upbeat rock music]

   6. HSHarry Stebbings0:51

      We have so much to discuss this week. It's my favorite show of the week. Um, and we were talking, Rory, about-

   7. JLJason Lemkin0:57

      It's at least in the top two each week, isn't it? At a minimum, it's gotta be in the top two, right?

   8. HSHarry Stebbings1:00

      Do you know, I, I would say it's a top two show, for sure.

   9. JLJason Lemkin1:02

      Always, right? [laughs]

   10. HSHarry Stebbings1:03

       Yeah, always a top two. Does that, does that make you feel special now? Yeah.

   11. JLJason Lemkin1:07

       They say the silver medal is the toughest one in the Olympics, but I don't know about Rory. I'm good with it here. I'm good with just a silver.

   12. HSHarry Stebbings1:11

       I'll take a silver. Okay, so we were talking about where we were gonna start, Rory,

2. 1:16 – 16:12

   OpenAI's Restructuring: Winners and Losers

   1. HSHarry Stebbings1:16

      before this, and you were like, "I think we should start with OpenAI given the news today." And so learning from the feedback that we get, I would love to start with you just explaining a little bit about the news that's just come out about OpenAI and their structure, and we can start there.

   2. RORory O’Driscoll1:30

      Sure. I mean, the big news today is OpenAI cut their deal. They cut their deal with Microsoft, and they cut their deal with the attorneys general, the plural of attorney general, um, of Delaware and California, which means they have been able to implement their restructuring, which means they can raise their capital, which means they're tr- they are out of the messy, complex trap they had put themselves in all those years ago in terms of their structure, and they've gotten it done. That's the big picture news. There's lots of information one level down about who won, who lost, who got what economics, but that's where we're at. And you know, it's still got some opposition. Elon can still litigate and say, "I don't think you should do that because I gave this money to a charity," but possession is nine-tenths of the law, and once the attorneys general have allowed it and they've actually converted, uh, you know, it's a lot harder to unwind. So as of now, as of this morning, as I understand it, OpenAI, there is the charity, the charitable foundation, which is now one of the well- most well-capitalized charitable foundations on the planet. Underneath that, there is the company itself, OpenAI, which is a, it's a PBC, I can never remember the initials. Basically a, a for-profit company, but also has to take into account, um, more than just ma- shareholder maximization. I'm, I'm sorry, I'm having my dyslexia there, right? So that's the entity that's created, and that's the entity into which you can invest. There are other companies like that. I think Patagonia, for example, has the same status. This is not a crazy thing now. This is not some weird... Like the old OpenAI used to have this disclosure, "You should regard this as a donation. It can all go to zero." This is a real honest, honest to goodness American corporation, a different kind of American corporation, but they can go public with this. They've gotten out of the straitjacket. So that's the bi- and it's big news. It means, you know, what... For example, it means an OpenAI IPO is one enormous step closer. Not saying they have to, not saying they will, but big news today.

   3. JLJason Lemkin3:26

      I'll just throw one thing that jumped out at me on the deal. Um, the overall structure, Microsoft owning 27%, the employees owning 20-something percent, uh, the, uh, the nonprofit owning 20-something percent, those are all roughly what we all expected, right? There's, there's some nuances on, uh, how AGI worked that are a little interesting. But the craziest thing in this deal, 'cause it's unprecedented, I think, in our lifetimes, is OpenAI said that Sam Altman will still have no shares, no shares in the combined entity. And we've ne- we, at the same time, we've got Elon Musk arguing he deserves a trillion dollar pay package so the robots don't kill us, which I, I think he deserves, okay? His, I think his VCs will say he deserves it, okay? There is something, uh, unimaginable to 99, to almost anyone in the world to say he should have a trillion dollar pay package, but the scale has to be relevant to the, to the outputs, right? I don't believe it will ensure the robots don't kill us. It's a little crazy. But on the other hand, Elon wants a trillion, and everyone was saying, "Show Sam the money," when he was fired as CEO over a very long weekend, right? The Night of Knives or whatever. Was fired. Fired by this crazy nonprofit. Um, everyone had to revolt to bring him back. Fast-forward to today, that, th- that same nonprofit's in charge still. The same... Now listen, there's been turnover, but it's still sort of charge... And he has no shares. Um, I, I, we could hypothesize why. He's pretty transparent. I actually think it gives him, in some ways, more power as well as less power. Um, you can't assail the man for, for capitalism [laughs] when his other billion-dollar entities are the ones that let him finish off the McLaren collection. But we've never seen someone own nothing, have we, like this? Have we ever seen anybody own nothing? It's crazy.

   4. HSHarry Stebbings5:04

      If we just drill down on, on winners and losers from this structuring change, who, who are the winners and losers here?

   5. RORory O’Driscoll5:10

      I think the lesson here is a lesson that every attorney knows, which is you often hear this expression when litigators, what's the case worth? In other words, they look at the filings on both sides, and experienced litigators look and go, "Okay, we got these three points. They got those five points. In the end, we're gonna win on the three. They're gonna win on the five. This is the way it's gonna come out." And then there's a whole load of human drama, 'cause humans are like that, and we yell and we scream and we have juries and the... And then typically things settle out for what they're worth, right? This settled out for the, where the cases worked. Let me tell you what I mean by that, right? Is when you look at the thing, as Jason said, not only no surprise, but you know, no surprise for a long time. Microsoft had a fair amount of leverage. They used it. They got a great deal, right? They put in 13 million do- $13 billion. They got a 10X on their money as of today. They got a lot of AI leverage.They got some going forward AI property rights, they got some, a significant going forward contract for Azure business if they want it, which we can come back to. Overall, they didn't push it to the point of breaking, but they got pretty much what they were going... And they still have some rev share, which surprised me. So they got a great deal. Again, I go back to my comment, Microsoft corporate development and lawyers deserve a gold star for, from their shareholders in a way that frankly Microsoft R&D does not, and the proof of this is this morning Microsoft stock is up nicely. They're like, "Thank you for the $100 billion, we're up." There's three big winners. The second big winner is, just to step back, the charitable foundation, right? You know, there are some people again, even today, griping and saying, "We did this all for charity. It feels wrong that there's any capitalists involved." And I, I get that, especially if I'd given the seed money. But stepping back, somehow in the midst of this, we've ended up funding a wonderful $135 billion charitable foundation. If, you know, that's a significant contribution to whatever good they hopefully will do with that money, and they already made some announcements about AI for medicine. So there's $135 billion out there that's not going into someone's pockets to, you know, buy yachts, uh, boats, and football teams. It's actually going to try and solve world's problems. Now, whether they can or not, TBD. But yay, 'cause I would have laughed in 2016, but the people who started OpenAI saying, "We want to do good for the world," have at a big picture level succeeded. They built something, worth $130 billion, which is a foundation that they can be proud of. So th- th- it's a win for them. Obviously, the employees own a third and now it can get liquid. Yay them. And then, um, you know, the remaining, the investors can kind of exhale, get a sigh of relief. SoftBank can put in their $22 billion, and the, the investors as a group, I mean, think SoftBank will own about 10% and everyone else will own low single digits. And everyone won and everyone got roughly what the leverage would make them get. And then the final winner, I just got to say, and I know this is a lot, but Brett Taylor just wins the best board chairman of the year award again for the second time in the last five years. He totally won it as board chairman of Twitter, where he jammed that down Elon's throat for $44 billion despite his opposition, and he won here today 'cause he unraveled the mess and set it all up for a win. So I, it, it's a really good settlement for everyone.

   6. JLJason Lemkin8:23

      So there's no losers?

   7. RORory O’Driscoll8:26

      Well, if, I mean, the, the losers would be the, Elon feels he didn't want any of this to happen, so he's miffed. And the people who think, um, "Oh my God, it should all have stayed not-for-profit," they m- they, they feel they're losing. There's a lot of that Twitterverse comments today. But pragmatically speaking, I mean, if you think about it, Microsoft put $13, $14 billion in here, right? And they've made a 10X, which is a good return, but we'll talk about returns. It's not like it's pr- it's not like it's rapacious relative the risk they took. No one else was writing OpenAI a billion dollar check in 2019. Microsoft did, and they got their return. So-

   8. JLJason Lemkin9:06

      And the IP for a, for an extended period.

   9. RORory O’Driscoll9:07

      And the IP, absolutely.

   10. JLJason Lemkin9:08

       And the IP.

   11. RORory O’Driscoll9:08

       No. So-

   12. JLJason Lemkin9:09

       Yeah.

   13. RORory O’Driscoll9:09

       Yeah, so I, I don't think there's any losers at all. I don't think anyone got much more than they deserved for the risks they took and the work they did.

   14. JLJason Lemkin9:20

       So I can tell my LPs that the little 6% stake deal I'm doing today is okay, because here's, look at OpenAI, I don't need to get double digits. Point, point to this one.

   15. RORory O’Driscoll9:29

       Totally.

   16. JLJason Lemkin9:30

       Don't, don't beat me up on the double digits. [laughs]

   17. RORory O’Driscoll9:32

       Totally. No, exactly, and y- you're right, Jason, it just shows rules of thumb are made to be broken. 90% of the time your ownership target is a really meaningful metric, and it should run your business on it, and, you know, 10%, 1% of the time, who the hell cares? 1% of the biggest company on the planet is $5 billion. There you go.

   18. JLJason Lemkin9:51

       The one micro thought I just thought was it's very con- you know, there's so, all the circular financing, who, who, Nvidia giving them money, AMD giving them 10% of the company, Oracle raising a, a, a, a, a, an unprecedented amount of debt.

   19. RORory O’Driscoll10:06

       Yeah.

   20. JLJason Lemkin10:06

       So what I mean is, I don't know how much equity OpenAI needs, but it seems to me if they're coming up on being the first trillion dollar startup and more, if they could IPO at two trillion, which is crazy by any historic, so is a CEO with no stock, maybe they could raise another two hundred billion, right? I mean, at least in theory. That's a lot of capital to access, but my point is this unlocks maybe f- four times more equity for them potentially if the public markets are different than the private because of the potential valuation they could IPO. They may need that, they may need an extra two hundred billion to go the distance.

   21. RORory O’Driscoll10:40

       I, I think that's an excellent point, Jason, and you're exact- it means that there's one more set of winners here. All those people who stock popped because they have a bullshit promise from OpenAI to buy a whole bunch of their stuff in the future with money OpenAI didn't, didn't have, now at least can say they can go get that money. You know, the probab- I mean, I, as you know, I'm skeptical that Oracle will collect the last dollar of that cloud contract, but at least you can now say hand on heart the customer, OpenAI, now has a sensible corporate structure. They obviously have an amazing business, and if they need to raise another hundred billion, it's not like crazy anymore, it's just, it's just banking and math. So you're exactly right. This thing may fail for, you know, there, there may be business issues around, you know, return on thing, but we're out of the stupid corporate structure getting in the way of everything stage of business.

   22. JLJason Lemkin11:28

       I just can't think of a, of a retail IPO that would be more popular than OpenAI, right? Just bringing everyone out of the woodwork to put a little bit of their life savings to do it, to ignore the v- well, even if the valuation makes no sense, I just s- this would have to be the most popular retail IPO of all time, right?

   23. RORory O’Driscoll11:46

       I think you're exactly, I think y- yes, you're exactly, and it's now it's doable.Yeah. I mean, people aren't gonna be reading the prospectus and saying, "Maybe we won't make profits." They're not gonna be reading the thing about $250 billion of cloud commits to third parties. They're just gonna be, "Let me get some of that OpenAI," right? I, I think it would be interesting actually, to your point, it'd be interesting to check on the secondary pr- valuation pop today for OpenAI trades. I mean, 'cause right now... The weird thing right now is SoftBank is closing two separate deals right now. They're closing their roughly 300 billion pre-direct investment, and they're also doing a share buyback from exist- from some existing employees of 500 billion. So well, I mean, literally you, you have the same security trading at two different prices, and I think that's true for other investors too. They've locked in the earlier price. When the other investors, I think Thrive is in this too, when they committed to OpenAI a while back, they said, "Hey, we'll give you money at 300 billion, but you gotta get, get your conversion done first." So now that the conversion's done, they're gonna put the money in, but already they've already had a markup before the mon- oh my God, they've had a markup before the money's gone in, right? Because SoftBank is marking itself up by doing business at 500 billion in a secondary, right? So literally you're gonna wire money at 200 billion or 300 billion, whatever the number is, and then sec- next day you can say, "Hand on heart, current valuation of this is 5 billion, 500 billion, so there you go. You have 40% IRR in an hour"

   24. HSHarry Stebbings13:11

       Do you think they'll be a trillion-dollar company in 2026?

   25. RORory O’Driscoll13:14

       On the current trajectory, maybe all I can answer is on the current trajectory and without the euphoria Jason mentioned, it's probably two y- 'cause, you know, you do get some attenuation of growth at scale and, and, you know, at the current thing they're tra- I mean, at 500 billion and, you know, 12 billion, let's call them boring GAAP revenues rather than ARR, it's kind of, you know, 40 times GAAP and if it's 20 bill- and 25 times ARR run rate. So my guess is it would take two years in the normal course, but you, you know, you might see that euphoria moment. But it's not crazy. It's not like it's never gonna happen. It's, it's, it's within the trajectory, it's within the strike zone if anything like the current growth rate continues. If it slows, I mean, as a reminder, when you're trading, and we saw this in '21, if you're trading at 40 times revenues and your growth rate slows, it's, it's nasty and you fall sheer. But right now they're growing, so they can get it.

   26. HSHarry Stebbings14:05

       I would love a $2 trillion IPO. [laughs] That sounds great.

   27. RORory O’Driscoll14:09

       [laughs]

   28. HSHarry Stebbings14:09

       [laughs]

   29. RORory O’Driscoll14:10

       ... from here. Actually, the interesting question will be, are the dynamics of the negotiat- again, when you have master corporate financier like Taylor and Sam Altman on your s- it'll be fun to watch the bankers beg for that. They might pretty much do it for half nothing just to be on the biggest IPO of all times. I mean, I think technically Saudi Aramco had a kind of a couple of trillion dollar market cap, but nobody really cares, let's get real. It's an oil company in Saudi Arabia. Um, yeah, th- th- this would be one for the ages, and I think every banker on the planet will be making decks as we speak and calling on Mr. Altman and Mr. Taylor.

   30. HSHarry Stebbings14:45

       Dude, you'd do it for free for the credit.
3. 16:12 – 26:22

   Andreessen Horowitz's Raise $10BN in New Funds

   1. HSHarry Stebbings16:12

      Okay, we're gonna talk about Andreessen's new funds. Andreessen dominates so much of the venture microphone today. $10 billion split across $6 billion in growth, $1.5 billion in AI apps, $1.5 billion in AI infra, $1 billion in defense. My word, what a big raise. Um, I would love to understand, is this just a new normal of General Catalyst and Lightspeed and the mega platforms raising like this? Is this different? How did you analyze this news?

   2. JLJason Lemkin16:45

      Honestly, I thought they were small, and what, what I mean is, it, I didn't think it was small until I saw the breakdown of the funds, right? Um, at first I... When we talked about this before, I was like, "10 billion, that's unprecedented," right? But when I look at that and the new Sequoia Fund, $200 million Sequoia seed fund, that's not that big compared to 20VC. What's the 20- 20VC's 150 out of 400 or something, right?

   3. HSHarry Stebbings17:07

      125, yeah.

   4. JLJason Lemkin17:08

      Yeah. And Ro- and Rory's more A and B, but it's not tw- 200 million doesn't really get, get, get you out of bed at scale. And then 1.5 billion for AI apps when you're investing in ElevenLabs and Friends and, and Replit doesn't seem to get you, doesn't really seem to get you very far. The seed funds and the AI fund for Sequoia and Andreessen were smaller than I would have expected in today's insane world, where even 50 million at a YC Demo Day could be a low valuation, right?

   5. RORory O’Driscoll17:36

      Wasn't expecting that. Uh, no, I, I thought it... Look, step back. Is it the new normal? Yes. It is the business model that Andreessen and a couple of other firms have brilliantly pursued. This is the world we live in today, and as investors, we'll live in for the next four to five years, right? I mean-Somewhere down the line, you'll either have the it works over across a cycle, and then this will be the norm forever, and you could envision a world where this is a little like where venture becomes more like investment banking, where there's Goldman Sachs, JP Morgan, and the rest of us are boutique players, right? Or the other thing that could happen is the returns from the bigger funds are l- slightly disappointing and kinda there's a little bit of a tilt back to more mid and small cap ventures. But this is the dominant modality today. These are, this, this is what top dog venture investing looks like. This kind of scale, this kind of dollars at work, and there's four or five other firms doing this.

   6. JLJason Lemkin18:38

      Is there any excuse to, that I can't compete with Sequoia? I mean, I mean, Scale can outbid them. I think you can compete with a $200 million seed fund or a 1.5 billion AB fund. I think you can compete.

   7. RORory O’Driscoll18:49

      Yeah, I, I, I agree. The, the, the sentence, "I can't compete at a seed with Andreessen 'cause of check size," doesn't make sense except in one very derivative way, right? 'Cause I agree. At the end of the day, if someone's raising 10 million and you have 10 million and the other guy has 10 million, end of, right? There could be one... There's one of two arguments against what you're saying, though, right? The two ways, the, 'cause there's two ways in which the, the fact that one checkbook comes 10 out of... Let's just pick on Harry. One checkbook comes 10 out of a $400 million fund, and one checkbook comes 10 out of a $10 billion colossus, right? Let's just say. There's two ways in which the colossus has an advantage. The first is they can literally decide they're not pricing this round, they're buying an option on the next round. If Harry's trying to make his money on seed and they're simply trying to set themself to make the m- money on the B, they can by definition pay a higher price, 'cause any option [laughs] always trades higher than the intrinsic value of the asset in question by virtue of the time value. So they can, they can pay a s- quote unquote, "a stupid price," right? 'Cause they have a different model. And then the second way they can out, they can win, and I'm really internalizing this now, is the wall of news, right? At the end of the day, when you have a $10 billion fund, you always have shit going on. You don't talk about your bad stuff, but, and provided you're modestly competent, and these guys are far beyond modestly competent, they're extraordinarily competent, you always have some good news in the portfolio, right? You always have exciting things. You're probably gonna be in some winners. So the wall-

   8. JLJason Lemkin20:16

      I don't buy the wall of news anymore.

   9. RORory O’Driscoll20:18

      What? Okay.

   10. JLJason Lemkin20:19

       I'll tell you why I don't buy a wall. I've learned this first from Dr. Harry Stebbings, and now I've learned it others, okay? Look, Harry's in some great, great, uh, investments that he, he quietly but, but, but relentlessly reminds m- us of, the, the, the-

   11. RORory O’Driscoll20:32

       Yes

   12. JLJason Lemkin20:33

       ... complexities and the Mercors.

   13. RORory O’Driscoll20:35

       No, no, and, and Harry-

   14. JLJason Lemkin20:35

       Harry says it with his British accent. How do you say Mercor in British? Mercor. He like, he elongates the vowel or something like that, right? And he tells us all, all the great stories. What I'm saying is you can get coverage. You don't have to write t- $10 million checks to be the with participation fund guy. You really don't. You don't. You could write the... Scale could do 50 deals if you wanted with participation from Rory from Scale, who we love from the pod. So just, I, I he- the, the, the option thing's a bigger deal. I just wonder if a $200 million seed fund at Sequoia, how many options can you afford before your whole fund is options, right? That's the question.

   15. HSHarry Stebbings21:13

       The one thing I will say is the with participation thing does not work-

   16. JLJason Lemkin21:15

       Yeah

   17. HSHarry Stebbings21:15

       ... for publications, and this is very w- in the weeds and granular. W- with the with participation, you playing in rounds with smaller checks-

   18. JLJason Lemkin21:23

       Yeah

   19. HSHarry Stebbings21:23

       ... does not work unless you have an existing brand. For random tier two-

   20. JLJason Lemkin21:28

       Yes

   21. HSHarry Stebbings21:28

       ... tier three firm, if you were to do with participation, no, the TechCrunches, the big brands-

   22. JLJason Lemkin21:33

       You mean you won't even be at the end of the fifth paragraph? You, they'll cut you off?

   23. HSHarry Stebbings21:35

       No, they don't. Honestly, they don't.

   24. JLJason Lemkin21:37

       Okay.

   25. HSHarry Stebbings21:37

       They really don't listen. And so, and so yes, we do have that.

   26. JLJason Lemkin21:39

       But Rory has a following now after this pod. He's got a pretty big following.

   27. HSHarry Stebbings21:42

       R- Rory now would be.

   28. JLJason Lemkin21:44

       Yeah.

   29. RORory O’Driscoll21:44

       Even if I did, which I would get-

   30. JLJason Lemkin21:46

       I'm not kidding. [laughs]
4. 26:22 – 44:51

   Mercor Raises $350M at a $10BN Valuation

   1. HSHarry Stebbings26:22

      Jason, you said about this company, uh, M-M-Mercor, I think it was. I think it might be a twenty VC company, to be fair. Um, but they announced yesterday they've raised, uh, three hundred and fifty million dollars at a ten billion dollar valuation led by the person who led their last t-round at two billion dollars only eight months ago, which is Felicis. Now, this company has gone to five hundred million in revenue faster than anyone else, I believe, in history. I think it was seventeen months. Um, also, again, this is not bias. I hate freaking bias shows. I sometimes listen to them. A lot of people say it's not real revenue, it's GMV. I wanted to hear, how did you guys feel about this round, the speed of revenue acceleration, if it's real revenue? I want your thoughts.

   2. RORory O’Driscoll27:09

      It is quote-unquote "real revenue," right? Uh, in the sense of it's, you know, they, they ship things, they get paid, right? GAAP requires you to book it as revenue. Maybe step back and give people some context. Merc, what they do is they provide humans with specialist knowledge to, and their customers are the large foundation model companies, and what they do is they bring this human talent to bear to help the foundation model companies train the models by providing human feedm-feedback. You-- people would have heard RLHF, reinforcement learning through human feedback. These are the humans that do that, right? So if I'm OpenAI, and I want to quote, "Teach my nate-- teach my latest model how to do advanced math," what I need is a whole bunch of doctorates and PhDs who understand math that are available to pose questions to the model, judge model questions, give feedback on which answer is correct, which answer is not. So by doing that, you effectively, by giving this human feedback, I think of it as you pound the model into submission, where it eventually says, "Okay, I've learned this shit," by adjusting the weights. That's what's going on here, right? It's an astonishing amount of... We think of this all as happening in NVIDIA GPU chips. There's an astonishing amount of human training that is required to make these models work, right? So that's kind of the market these guys are playing into, right? Scale AI, which was acquired by, partially acquired by Meta, is in the same broad market. These guys have done-- Mercor has done an amazing job because five years ago, as Jason said, I love the expression, five years ago, we were labeling cats, right? And, you know, you had people often overseas charged with labeling cats and not getting a lot of money. I think Mercor realized that the market today is not labeling cats, it's in fact answering complex physics questions, math questions, bio questions, because the models know how to label cats now, and what they need to do is the outer edges of human knowledge. So it's a very different set of humans that you need, and Mercor did an amazing job of assembling all these kind of high-end folks and making that product available to the model companies to do it. So that's kind of what they do. And the-- and in that context, the growth quote isn't surprising because if you think about it, these model companies have grown faster than any company in human history. They're spending three, four hundred billion dollars on compute. They're probably spending three, four billion dollars on RLHF, and they were spending zero five years ago. It's an explosive growth market. So, you know, it didn't happen in a vacuum. This happened because our customers want our stuff.

   3. HSHarry Stebbings29:43

      I actually obviously spent quite a lot of time in the market, which will surprise you, Rory, to hear that I've been thinking, uh, about markets more deeply. But it, it all started with, like, talent acquisition. If you got the talent and could provide it, fantastic, we'll pay you. That's pillar one. Pillar two is get the talent, number one. Now we want data acquisition, which is you provide it to us, not we extract it. You provide it to us, and then you measure the quality of it too. That's the second pillar. And now we're adding the third pillar, which is the implementation layer, which is we now expect you to not only do those first two, but we expect you to implement it efficiently and make sure our models get off the ground more effectively. And with that, you also see increased pricing and the willingness to spend much, much more from the model providers. The other thing I will say is you have concentration of buyer unlike any other industry.

   4. RORory O’Driscoll30:30

      Right.

   5. HSHarry Stebbings30:31

      Two buyers are fifty percent plus of every one of these-

   6. RORory O’Driscoll30:35

      Totally

   7. HSHarry Stebbings30:36

      ... labeling providers' revenue. So there is real revenue concentration there. It's, it's high-quality customers, but you do have that dynamic as well.

   8. RORory O’Driscoll30:44

      Agreed. And that was well put because it, it, it actually sp- it, it kind of-- it makes it an interesting question from an investing perspective, because on the one hand, there's nothing better than a customerWho's got an urgent and compe- who's well-funded, we just agreed they're well-funded, who's got an urgent and compelling need to get a bunch of stuff done that you can help them with and wants you to grow with them. And what you're saying is you're exactly right. OpenAI and all these people, five years ago, they had simple requests. The more the complexity goes up, the more you meet that complexity as a vendor, and Mercor has done that in spades, the more revenue they're gonna give you. So they're gonna be shoveling money at you, 'cause you're solving their problems. They got a, they got other shit to be solving. They don't need to be thinking about this. Mr. Mercor, if you can make this go away and get me, you know, five thou- five hundred doctors and this data and this answer and integrated to our system, I will pay you money 'cause money I have in spades, time I don't got.

   9. JLJason Lemkin31:34

      For sure, but I've got to imagine y- you, you guys, and especially Harry would know better than me, I, I don't think it's stressf- it may not be stress-free. I have a portfolio company that was doing a, a, a vaguely similar attach to a, to a lar- to a large AI business model where the contract was growing to, uh, eight figures, okay? That renewal was stressful AF.

   10. RORory O’Driscoll31:55

       Yes.

   11. JLJason Lemkin31:55

       [laughs] Nobody-- Once you get to, once you get to eight figures, okay, I know, know, I know these guys i- i- i- have more money and time than engineers, but there's a point where you turn around and you say, "Maybe we should do a little," you know, OpenAI is building its own chips. I'm not saying this happened at Mercor or Scale. I'm just saying it's, um, H- Harry's point of having to, to radically go up the value chain is both more revenue but more stress because I don't, I don't, I don't think anyone's just shoveling money at, uh, at Datadog and, and Mercor without even thinking about the, the margins.

   12. RORory O’Driscoll32:26

       I totally agree, and that's what makes the adventure fun and challenging is that you've got one, and I mean, like, you look at the checklist and you have one enormous positive, great big honking market growing like a weed, you're exploding, and then you got two negatives. The first is your margin profile is not amazing because the gross revenue is five hundred million, but you give seventy percent of it to the doctors and the mathematicians who are doing all... Or whatever it is, some percentage, I'm not gonna speculate. And then the second fact you have against you is massive customer concentration, and at some point they're gonna say, "Hmm, giving you two hundred billion, which means you're making thirty percent on that sixty million. Hell, maybe do it for forty," right? So from a long-term value extraction pers- I prefer to be O- you know, you prefer to be OpenAI and have eight hundred million customers than to be Mercor and have two. The-- When you look at those positives and negative, what you say to yourself is, "This is fundamentally a bet that the AI CapEx train will keep running for two or three or four more years." If the AI CapEx train slows down and, like, OpenAI is only gonna-

   13. JLJason Lemkin33:26

       Is that, is that enough? Is two to three years enough to justify ten billion?

   14. RORory O’Driscoll33:27

       Well, whatever, at least. You're right, Jason. At least three to, three to five years. In other words, that it's a permanent new thing at growth. Because OpenAI is not gonna focus on getting efficient until it's dealt with hypergrowth. So as long as it's not getting efficient, you probably can lean in. If it slows down, then the positives, which is the growth rate, goes away, and then all the negatives come back to bite you. So it's a, it-- If you were to say to a public or a hedge fund guy, "Find me a bet that had the maximum exposure to hyper AI CapEx growth," this would be, you know, right up there with Nvidia. I'd say, "Yeah, I like this risk, man," you know?

   15. HSHarry Stebbings34:03

       If you're, if you're doing this at ten billion, what are you underwriting it to? What does that maths look like?

   16. RORory O’Driscoll34:09

       Um, I mean, y- as we're gonna discuss later, you should be writing anything to a three X, so you gotta be thirty billion to make it worth your while, and thirty billion and, you know... [sighs] So, you know, I, I, I'm just doing the math in my head. At, even at five X revenues, my God, that's six billion. You know, you're, you're underwriting a lot of training data, [laughs] you know? That's the, that's the sobering thing.

   17. JLJason Lemkin34:34

       In the short term, though, in the short term-

   18. RORory O’Driscoll34:36

       Yeah

   19. JLJason Lemkin34:36

       ... if they're at five hundred million, at ten billion, growing at an unprecedented rate-

   20. RORory O’Driscoll34:40

       You're so likely at some-

   21. JLJason Lemkin34:41

       We're all ignoring gross margins in twenty twenty-five, twenty... It's only twenty times revenue. So, like, it doesn't seem... This is where actually we're seeing revenue compression, right? Which we talked about [laughs] with Cliff and others. He doesn't like the revenue compression at Canva, right? Where this twenty X ARR, h- was, was your last deal lower than that, Harry and Rory? Higher or lower than twenty X ARR, the last deal you did?

   22. RORory O’Driscoll35:03

       It was higher, and I-

   23. JLJason Lemkin35:04

       Higher. [laughs]

   24. RORory O’Driscoll35:05

       And, and, and, and, and Jason, you're exactly right. Actually, you said something else that was really insightful, your comment is, there's two modes of thinking about an investment. And I think it's really insightful, Jason. There's one mode that says, "Pencil me out the next five years. How do I think end state? What market do I have?" Right? And then there's the other mo- and therefore, what return are you underwriting? And I think if you assume five times revenue and you wanna be at three X, you're underwriting thirty billion, which means six billion in training revenue, which makes a man pause. On the other hand, you can say, "It's growing five X, and if the multiple just stays contact and it grows five X for another year, I'll be five X up." Right? And in fact, that's just what happened on the last round. It was at two billion, I don't know, at a hundred million, and now it's at eight billion, uh, sorry, ten billion at five hundred billion. So it's kind of the, the near-in revenue traction is saying to everyone, "As long as, as long as this keeps happening, you can go and validate quite quickly," 'cause watch. You look back now and, I mean, 'cause, you know, we're talking about is, is it worth ten billion, but go back, give them credit. You now look at the two billion that somebody paid six, seven months ago, and you're like, "Oh my God, that seems cheap," because you're like five hundred million already. So this is wh- when h- when high growth happens, it, it's tempting and it often pays to lean into that growth, and yeah, you very quickly, just like I think, you know, the Anthropic round at sixty-seven billion earlier this year now looks dirt cheap. If the hypergrowth comes, the, at the s- at the size of growth we're dealing with now, which is not, to your point, Jason, trouble, trouble, double, double. It's, I can't, I don't know what the word is, but fipple, fipple, deco, deco. [laughs] You know, I don't know, right? If you grow five or seven X, you can grow into almost anything. So this whole thing, top to bottom, is one big ass bet on AI CapEx hypergrowth. And as long as it keeps happening, you know, I don't wanna Chuck, quote Chuck Prince, but we all know the quote.

   25. HSHarry Stebbings36:56

       No, we don't

   26. RORory O’Driscoll36:57

       Oh, you're young then, Harry. Chuck Prince famously said in 2007 at Citigroup as, as some, some version of, "As long as the band keeps playing, I'm just gonna... You gotta stay on the floor and keep dancing." And it turns out he should've stepped down and not danced anymore, obviously-

   27. HSHarry Stebbings37:13

       [laughs]

   28. RORory O’Driscoll37:13

       ... given the way 2008 happened. But in other words, it's the quote of when things are working, everyone just tends to lean in.

   29. HSHarry Stebbings37:18

       Well, when things are working, everyone just tends to lean in, baby. Ramp is a fundraising machine. Guys, they, they raise every few months.

   30. RORory O’Driscoll37:27

       Yeah.
5. 44:51 – 49:52

   Spray and Pray: Does it Work: Data Breakdown

   1. HSHarry Stebbings44:51

      him. Uh, I wanna move to spray and pray. There's different models of venture. Um, you can be concentrated or you can be spray and pray. Spray and pray, for those that don't know, is obviously having a broadly diversified portfolio, investing in lots of different companies rather than few with more money. Um, there's always a question of does spray and pray work? There was some data released by Carter. What did the data say, and how do we think about spray and pray today?

   2. RORory O’Driscoll45:17

      I disagree. I, I, I read the data. I also read, Jason, your blog, the blog post on SaaStr, and I think your, your characterization of the... Your, your characterization of spray and pray is wrong, to be very direct. I think the data was awesome. Let's start back with the comment. The, the Carter data was awesome and very pleasing. Stepping off it, what it w- what it told people, for listeners, is they looked at all 547 2018 Series B investments, and then they did a histogram of where they come out in less than a 1X, you know, one to a 2X-

   3. JLJason Lemkin45:48

      Oh, that was Series B?

   4. RORory O’Driscoll45:49

      So 547, and then, you know, 20... 18% of them greater than a 5X, about 10% of them greater than a 10X, and one deal, Figma, returned 100X, right? And what's... Well, I... That's a pretty sizable chunk of information. What's it telling you, right? And, you know, and w- yeah, I find it really interesting 'cause in fact, you know, we typically do As and Bs, and I'm very pl- I was very happy actually, by the way. It was exactly what the distribution for our fund model we think has to be, which is 30%. They were actually 35. We would've said 30 less than a 1X. We do wider buckets, 1 to 5X, 50%. They broke that into two buckets, and greater than a 5X, 20%. So the distributions on 547 deals match pretty much what we're saying, right? That's a long answer. So if you hit those three buckets correctly, the blended return, I know it from our fund model, is 3.7X gross, 3X net to the LP, right? So if you look at that business, if you look at all those things and you get your... and you put... you get enough slots in the buckets, right, in each of the buckets, the good buckets, the 5X bucket and the 10X bucket, you end up with a 3X net to the LP. So the first piece of good news is if you do it right, the return was available to you. The interesting thing is, to your point, is the right strategy spray and pay? And I, I don't think that's what it... And that's why I was jumping back on it. I don't think that's what it said. I mean, I think it says, you know, you gotta pick very carefully, 'cause obviously if you do a lot of deals, but... I mean, Jason picked on the s- looking at the same data, Jason picked on the negative, which is two-thirds of all deals are less than a 2X, which means they just don't help. Correct, Jason? That was, that was the point you made in the blog, right?

   5. JLJason Lemkin47:31

      Yes.

   6. RORory O’Driscoll47:32

      And, and, and what it says is picking is so important because if, if, it, you know, if, if, if-

   7. JLJason Lemkin47:38

      But did it, did, did it say that?

   8. RORory O’Driscoll47:41

      I... No, your blog didn't say that, but I'm saying... I think the data says that.

   9. JLJason Lemkin47:44

      But, uh, first of all, you're right. I mean, at... To me, the data was shocking as someone that is a concentrated investor because this is scary risk for me, but it did blend out to 3X net. Plenty good, right? So, so you're right, and, um, but at, at Series B, everyone thinks they're a great picker, don't they? This isn't pre-seed. Everyone's a great picker at Series B, right? So does everyone have the same logarithmic distribution across the, across these deals or, um... I, I don't know.

   10. RORory O’Driscoll48:13

       No, they probably don't. I mean, I, I wouldn't say ev-everyone... I, I'd say three things. Everyone thinks they're a great picker. Not everyone is a great picker. But the third sentence is you have to be a great picker to win, right? Because if you look... I was thinking at it. You, you kinda articulated those two strategies. You can, at this... You know, a-again, faced with this s- opportunity set of 547 Series Bs in one year, right? That's the... It's a very clear data point, right? Um, I think if you don't pick, if you, if, if you're not a good picker, you will end up with more... Remember, to Jason's... Jason said a different set of buckets, but his buckets are more scary. He said two-thirds of all these deals are less than a 2X. If you skew... And that's on average. If you skew instead of 66%, if you skew 75, 80% in that less than 2X bucket, your math doesn't work.And it's not that hard to be that bad because on average, it's sixty-six percent is my point, right? It requires a fair amount of discipline and picking to pull this off. I don't think the spray-and-pay strategy would work here. It might work at seed. I'm not as familiar with seed. But here, the cost of spraying just gets too high. The picking doesn't work. The only way it does, and I can see Harry doing his I don't agree face, is I think there's actually three stra- there's actually three approaches. There's picking, there's spraying, and then the third one, which is someone big like Andreessen can do, which is optioning, right? You can s- you can spray if you have opti- if you're just doing options. But if you spray and that's the only way you make your money, the probability of being wrong is just too high.

6. 49:52 – 1:08:03

   The Role of Option Checks Venture Capital

   1. HSHarry Stebbings49:52

      So that's exactly what I was gonna say, which is actually in reference to an amazing graph that was released a month or so ago about seed bets by multi-stage firms. And Andreessen did seventy-two seed bets compared to Score in number two at twenty-seven. And exactly to your point there, Rory, you said you can't win without being a great picker. I'm not saying Andreessen are not great pickers. I'm not saying anything against them. But you can if you have seventy-two option bets.

   2. RORory O’Driscoll50:16

      Agreed. Agreed.

   3. HSHarry Stebbings50:16

      And you pay that.

   4. RORory O’Driscoll50:16

      There are three strategies. There's spraying, picking, and optioning, right? And to, to do the optioning strategy... And 'cause, 'cause the beauty about when you can option, you can afford to spray more. Optioning allows you to spray more, right? The... You're exactly right. No, I, I think it's super clear at every stage. And again, it goes back to structurally... I mean, once upon a time, you thought seed was all about option value, and anything beyond that wasn't. Because we're dealing with gargantuan sums of money, it is now plausible that for some people, As and Bs are partially options. And really it's if you're gonna deploy two hundred million in the growth round, you know, you don't wanna be totally slipshod at the A and the B, but you can think of it as more option value, right? And that, and that's absolutely a, a superpower that a wall of money gives you, right? I can't afford to do that because most of my money goes in on my initial round. At most, fifty, sixty percent comes in follow-ons. So I can't afford to be wrong on two-thirds of my money [chuckles] to be right on one-third. That's not gonna make me a dollar, right? So poor me, I'm stuck having to pick.

   5. HSHarry Stebbings51:21

      Does the ever-expanding outcome scenarios that we're seeing today, you know, before thirty billion dollars was insane, insane valuation for a company. Now we're kind of like, "Meh" with Ramp, "Meh," ten billion with Mercor, and w- we're not blown away by it. The outcome sizes are getting so much bigger. Does that not favor a spray strategy? 'Cause all that you need to do if you're early is just get into the winners. Who cares? Uh, not who cares, but five hundred K or two million, it doesn't matter. Spray the five hundred Ks 'cause the only thing that matters is Mercor and Ramp and everyone are in yours.

   6. RORory O’Driscoll51:57

      No, because what you're doing is you're taking a plausible theory and extrap... and, and, you know, and extrapolating to the point where it no longer holds true. You can spray as much as your bankroll will allow you. The more bankroll you have to build up option value... I mean, well, step back. You could be talking about two things, Harry, and you gotta break them apart. Are you saying simply spray because I'm not gonna make my money on follow-ons, but it's the seed argument. I have to be in the very best deal, and I have to cover wide versus concentrated to do that.

   7. HSHarry Stebbings52:28

      Mm-hmm.

   8. RORory O’Driscoll52:29

      Right? And that's one thread, and then the separate thread would be, how much easier is the, is the spray constraint if I also have option value at the back end, right? And that's easier. There's no doubt the more option val... Let's agree the following. The more option value you have at the back end, 'cause you have a ten trillion dollar fund, the easier it is to spray because you can amortize the cost of the losses over the one winner. Provided you get to stick five hundred billion in the winner, the rest is noise.

   9. HSHarry Stebbings52:54

      But if you're a seed fund and you're David Tisch today, who, and, uh, uh, he won't mind me ca- calling him out, he, he explicitly does respectfully spray and pray. He does fifty-plus companies plus plus in a portfolio with low ownership. But my word, he is in some of the biggest companies, including Ramp, consistently.

   10. RORory O’Driscoll53:13

       Again, going back to the Carder data, what I like about Carder is it's actual data, not words. There were five hundred and forty-seven series Bs in two thousand and eighteen. I'm gonna guess graduation rate probably about... that implies eight hundred As, that probably implies one thousand six hundred seeds. So even what you are pejoratively calling, quote-unquote, "spray and pray" is doing fifty deals out of one thousand six hundred. There's still a huge element of picking involved in that. The only people on the planet who have a structural business where they can de-emphasize picking 'cause they can write checks, option checks at scale is Y Combinator, 'cause they have a structured advantage in terms of their economics. They are the only people who've built a mass production seed business. But for everyone else, if you're trying to pick even fifty and there's one thousand six hundred places, right? I mean, and we know that at the B, only five hundred of them get to the B. There are one thousand one hundred places to put that money that doesn't work out. It'll always be true that if you pick the single largest outlier in any vintage, like if one of those deals was Figma, where the B made a hundred, so probably the A made, I, I can tell, about, about two hundred, and the C probably four or five hundred. I don't... Right? Of that order of mag- the numbers are available. Three hundred, right? Even if it's three hundred, if you did an index and did every deal, you know, you made a three hundred X and you did all one thousand six hundred deals equally, it's only a point two, it's only a point two return. Do you understand me? In other words, if you put a dollar into everything, your Figma check doesn't re- quote-unquote, "return the fund," right? If you did the whole industry, right? Now, maybe an OpenAI would. Maybe there is one deal so big that it would literally return the vintage such that if you just bought the entire vintage, you're good. That probably happens maybe once every decade or two, right? Most of the time, even at the seed stage, if there's not an element of picking to it-Yeah. You, you can't just say it's praying, is my point. There's an element of picking up and down the stack. I mean, it's funny, I was more- the Jason headline, only one in three deals double investors' money per carta data. That's a... It's so sobering. It's like it makes you remember how much of this business is disappointment. You know, you, you remember your deals, you remember your 10Xs and your 15Xs and your 20Xs, and you just forget, you just... And I think actually the best investors and just learn to-

   11. HSHarry Stebbings55:37

       You, you become numb to it, Rory

   12. RORory O’Driscoll55:40

       ... I don't. I get all sad. I'm a bit lame. Um-

   13. HSHarry Stebbings55:44

       I had a shit out- I had a shit outcome this morning, and now I'm really, like, upset by it. [laughs]

   14. RORory O’Driscoll55:50

       Yeah. You get vested. Well, we can talk about that-

   15. HSHarry Stebbings55:52

       I know, you know, I, I had the w- I had the worst, which is a company gets bought by another company, and you get stock at some insanely high price. I mean, it's just the worst.

   16. RORory O’Driscoll56:04

       That's not the worst. No. The worst, it's... Let me... Dude, the worst is you're on the board, you try and sell the company, it doesn't close, you're on the hook for shutdown costs, and you have to wire 300 or, or 400 grand just to pay severance costs, which you should do as a board member, and you're probably legally obliged to do, and then write that money off straight away 'cause you waited too long. That's the worst.

   17. HSHarry Stebbings56:23

       Wow, I thought my day was bad. That's, that's perspective for you, kids. [laughs]

   18. JLJason Lemkin56:26

       That's why I just do everything on a SAFE.

   19. HSHarry Stebbings56:31

       [laughs]

   20. JLJason Lemkin56:32

       I have no rights-

   21. HSHarry Stebbings56:34

       Yeah

   22. JLJason Lemkin56:34

       ... no visibility, no financial statements-

   23. HSHarry Stebbings56:36

       No meat

   24. JLJason Lemkin56:36

       ... no understanding of anything. But if it goes south, [laughs] I can just ghost them. [laughs]

   25. HSHarry Stebbings56:44

       Are you serious though, Jason?

   26. JLJason Lemkin56:46

       What?

   27. RORory O’Driscoll56:46

       No.

   28. HSHarry Stebbings56:47

       About just doing everything on a SAFE?

   29. JLJason Lemkin56:49

       No. But, um, but the SAFE does have some comforts. I, I do like the post-money cap as a seed investor. I don't have to worry about the pool or other things. Um, and I like the fact that, um, it's a, it's a, it's a medium commitment. It's a me- like, I'm not the only guy. Like, I don't always love being the only guy in the cap table, the only director. The SAFE is like, "Listen, I'm only sorta committing, guys. [laughs] Good luck to you. If it goes great, I'll invest some more. If it doesn't, I'll, I'll write cheery responses to your monthly updates. But you didn't ask me to, to... You didn't ask me to get married and commit, so I'm not committed." You think I'm joking, but I... That stuff Rory talks about is awful, right? This, this end of life stuff or a decade of a struggling company where you're on the board. I, I, I... I'll take the SAFE over that. [laughs] The unsafe SAFE. The... Because the commitment is low back. Founders should be... Founders are... If you're gonna raise on S- in Saturday on a SAFE, she can't expect too much.

   30. HSHarry Stebbings57:47

       S- speaking of commitment and marriage, I'm really intrigued to hear your thoughts on this one, Jason, 'cause you've said like, "Oh, I encourage founders to sell. I encourage-"
7. 1:08:03 – 1:11:54

   Amazon's Struggles: How Do They Return to Greatness in AI

   1. RORory O’Driscoll1:08:03

      Don't do that.

   2. HSHarry Stebbings1:08:04

      Okay. We can do Anduril capital efficiency, we can do Amazon layoffs, we can do Amazon cloud wars or Oracle debt. You choose.

   3. JLJason Lemkin1:08:14

      I feel bad for Roomba, but you choose.

   4. HSHarry Stebbings1:08:16

      Ooh, y- you wanna do Roomba?

   5. JLJason Lemkin1:08:18

      Kind of. Kind of, uh, 'cause this whole talk is about how everything's up and to the right. Poor Roomba gets an offer from Amazon to buy them for one point seven billion-

   6. RORory O’Driscoll1:08:27

      Yeah, and then go down the list if we've time

   7. JLJason Lemkin1:08:29

      ... blocked by antitrust. They raised two hundred billion, million of debt to finance the gap, and now it's all spent and they're probably gonna go bankrupt. This is why maybe, maybe, maybe take the Synthesia offer. Owning maybe a half dozen Roombas over the years, it's a tough, it's a tough end to a founder journey, isn't it? [sniffs] Sorry, maybe that's not the story you wanted to pick. You go ahead.

   8. HSHarry Stebbings1:08:49

      Do you sue the government in that case?

   9. RORory O’Driscoll1:08:51

      No, cro- uh, I think in the UK it's called crown immune. It's, it's hard. It's very hard. I mean, I can't remember because you can sue the g- I mean, in the UK you have crown immunity where literally governments are protected from incredibly dumb acts 'cause they're the government. I think over here we have more rights, but still, and I'm winging it here now, now. Like I, I can't remember, did they actually... If the DOJ blocks something on antitrust count, you can, uh, you can take them to court and pe- and those DOJ decisions have been overturned. I can't remember in this case did they take it to court or did they just decide to fold? And if you decided to fold, then you probably can't sue because you had a statutory remedy and you chose not to take it. I mean, so again, zooming out for people, the story here is iRoomba had a, had a deal to be sold to Amazon and the FTC, led by Lina Khan, chose to block that deal be- uh, 'cause that's, I think Benedict, uh, Evans said in his plea, because of an insipid monopoly in the house vacuum cleaner marketplace.

   10. JLJason Lemkin1:09:50

       [laughs]

   11. RORory O’Driscoll1:09:50

       Very tongue in cheek, right? It was an absurd decision at the time, and it only got more absurd since because unfortunately the poor company, which is a consumer, consumer hardware business with all the gross margin profile that requires, struggle on a standalone basis and you right now faces the risk of going bust. It's a horrible and unfair outcome for which the government and Lina Khan and the FTC is entirely responsible based on an outdated, stupid and foolish paper. There's just nothing, and beli- and, and a foolish belief about how things work. Beyond done.

   12. JLJason Lemkin1:10:21

       It's, it's also another... I mean, there's, there's the, there's the whole how the antitrust killed the company. The, the, it's the edge of no politics rule, right? But not past it. It's also a reminder that like when you go into the, the M&A offer, the Synthesia, sometimes you'll get, like the acquirer will pay a multiple that only sort of kind of makes sense, a revenue multiple that makes sense-

   13. RORory O’Driscoll1:10:41

       Yeah

   14. JLJason Lemkin1:10:41

       ... for them but you couldn't get. And so, you know, when you get one of these deals it's a, it's, it's tragic it died, but you gotta take it, right? You gotta take it. Um.

   15. HSHarry Stebbings1:10:51

       I don't know. If you're Synthesia, you're looking at Dylan and Figma going, "God, do I wanna put myself in that potential-

   16. JLJason Lemkin1:10:56

       No

   17. HSHarry Stebbings1:10:56

       ... eighteen-month waiting period?"

   18. JLJason Lemkin1:10:58

       I, I, exactly.

   19. HSHarry Stebbings1:10:59

       By which time I'll be four hundred million in revenue being acquired for three billion. Pfft, no.

   20. RORory O’Driscoll1:11:05

       You think you're getting this great multiple of, oh, they're paying me thirty times revenue, but the damn thing's gonna close in eighteen months, by which time you might be down to ten times and it's just not gonna feel that much. Like I don't think Wiz has closed yet. I could be wrong. I think it was early twenty-

   21. JLJason Lemkin1:11:19

       But that's the crazy one that hasn't closed. It's crazy, right?

   22. RORory O’Driscoll1:11:21

       And you know, if you think about it, everyone's like, "Yeah, you got a two and a half X in six months." No you didn't, you got a two and a half X in two years, right? And this antitrust, this prolonged antitrust process really is kind of sand in the gears for a lot of these M&A decisions and at the margin probably pushes people to push o- either, A, push on, or B, in the case of the crazy deals, when the acquirer only wants the people then they do the, you know, the, the, the, the Silicon Valley acqui-hire routine. But you know, when you're buying the vacuum cleaner company, you want the freaking vacuums. [laughs] You know?

8. 1:11:54 – 1:26:38

   Why IRR is a BS Metric and What Matters More

   1. RORory O’Driscoll1:11:54

      Right.

   2. HSHarry Stebbings1:11:54

      That duration period though is also why I think it's our responsibility as early stage managers to be much more proactive in secondary markets 'cause we get cash back way sooner and the age old thing of a four X fund over seventeen years is the same as a two point five X fund over ten, and duration matters and time matters and IRR is king.

   3. RORory O’Driscoll1:12:12

      It's not the only king, 'cause obviously a, you know, a... I mean, back to Jason's comment, the f- I mean, he was just sneering at a f- 'cause look, in this very show Jason was going, "Oh, it's only a thirty percent IRR ramp from the two, twenty-two billion to thirty billion." From an IRR perspective that looks amazing. So I don't think, I don't think IRR matters. I actually think, for the record, formulation of the optimization function is the maximization of multiple subject to a constraint on a minimum IRR. Just to be a total geek here. Basically, you should know what your target IRR is, and let's just say it's twenty-five percent. Let's just say, right? You wanna maximize the multiple provided you don't dip below twenty-five, right? That's actually what you're trying to do, right? So a f- so for example, a thirty percent IRR in one year isn't as good as a twenty-five percent IRR for four years. But if you hold on too long and that twenty-five starts dipping to nineteen, eighteen, seventeen, then you've gone to a different place. That is the rule, right? 'Cause in the end you want the maximum amount of capital to investAnd you, and you get that because you are held accountable at the investor level, at the IRR basis, because at some point they're looking at you, they're looking at the public markets and they're saying, "Risk-adjusted, I need me my twenty percent." So it is the constraint because it's what prevents money from coming down the spigot to you, but you're actually trying to maximize your multiple.

   4. HSHarry Stebbings1:13:34

      So the shit is hitting the fan at Amazon before we do, uh, agree or disagree. Ten percent largest layoffs in history, ten percent of white collar that is, that very sizable. Falling behind in cloud wars from thirty-- fifty percent of cloud revenues in twenty eighteen to thirty-eight percent today. Uh, Raymond James sees Amazon's AI cloud share falling to seven percent. Then we had the outage, billions of damage. I mean, f- this was a bad fortnight.

   5. JLJason Lemkin1:14:05

      You know what? Maybe it's not fair, but what I was thinking is contrast this with Sergey Brin coming back to Google, everything else happening. Maybe, maybe this was a tough time for your founder to leave and go to Miami. Maybe this was not-- Maybe it seemed like a very stable time to do a transition, right? I mean, long, long wa-- Jeff Bezos' longtime as CEO, but maybe this wasn't the perfect age of it. Maybe stepping down just before AI hit was suboptimal for Amazon.

   6. RORory O’Driscoll1:14:33

      Or that's, that... Yes. Or maybe it was brilliant for Jeff because maybe, you know-

   7. JLJason Lemkin1:14:39

      He's off the hook [laughs] .

   8. RORory O’Driscoll1:14:40

      'Cause, 'cause, 'cause you're implying in that, that had he stayed, all these bad things wouldn't have happened. And it's plausible just given his, you know, world top two or three entrepreneurial achievement of the last t- three decades. But it's just worth pointing out what the two big problems they have are. The first problem is in their retail business, they over-invested for COVID, and now they're trying to replace people with robotics because the technology is there, and that's just something that had to be done, right? That's just, that's just more of the same. And in cloud, it's less that their core AWS business has folded up. It's like all the new compute, which is ten X and twenty X larger in terms of demand for these customers, is AI-related compute, and you, you know, you've neither built something compelling standalone nor have you partnered, except to be fair, a little bit with Anthropic. You didn't made it-- make a meaningful partnership, and you haven't found a way to get some of that compute, right? You know, not clear-

   9. JLJason Lemkin1:15:41

      But he had four years. Andrew Jassy took over in July fifth-

   10. RORory O’Driscoll1:15:44

       Agreed. No

   11. JLJason Lemkin1:15:44

       ... twenty twenty-one. Bezos checked out right at the peak-

   12. RORory O’Driscoll1:15:48

       He won. No

   13. JLJason Lemkin1:15:48

       ... of the last era when, when products were frozen in time for a decade, when AWS was the same product for a year. So were most of the companies we invested in, all three of us. In twenty twenty-one, they were the same products as twenty fifteen.

   14. RORory O’Driscoll1:16:00

       Totally.

   15. JLJason Lemkin1:16:00

       It was the great time to go to Miami because nothing ch- was w- changing in the world. It was just go-- just stock prices were going up and revenue, but the products were the same. So why wouldn't you retire? There's, there's not gonna be any change.

   16. RORory O’Driscoll1:16:10

       Punched out at the top. No, gets, gets an A++ from Mark Tatami.

   17. JLJason Lemkin1:16:14

       No. He-- I think he gets an F.

   18. RORory O’Driscoll1:16:17

       Oh, God. Um-

   19. JLJason Lemkin1:16:18

       If he sold, if he sold his company-

   20. RORory O’Driscoll1:16:20

       True

   21. JLJason Lemkin1:16:20

       ... you get an A+.

   22. RORory O’Driscoll1:16:21

       That, that's true. But even-

   23. JLJason Lemkin1:16:23

       Yeah. Like my last deal, SalesLoft December twenty twenty-one, th- you know, two and a half billion.

   24. RORory O’Driscoll1:16:27

       Yeah.

   25. JLJason Lemkin1:16:27

       That was the last deal of the era.

   26. RORory O’Driscoll1:16:29

       Kyle, Kyle won.

   27. JLJason Lemkin1:16:29

       You know, Kyle and team get an A+ for timing. This is not the same.

   28. RORory O’Driscoll1:16:33

       I wanna congratulate Kyle. Exactly. This is not-

   29. JLJason Lemkin1:16:35

       This is not the same. This is punching out at twenty twenty-one and not punching back in like Sergey.

   30. RORory O’Driscoll1:16:40

       S- cynical comment here. You're right. But when you've got a couple of hundred billion dollars, my guess is you're not maximizing money, you're maxing psychic pain and joy. My guess is his psychic joy in the last three or four years doing what he's been doing has been significantly higher than the psychic pain that would have been involved in realizing you've never done a big acquisition in your life. You've got to do a huge corporate deal in AI to matter. And B, all those people you hired in twenty-one trying to do the right thing for COVID and expand, you all gotta lay them off. So i- I don't think it would-- My point is-

Episode duration: 1:26:49