Stripe's $8B OpenRouter Bet | Anthropic's First Profit & The Math Behind Reaching $600B in Revenue?

1. 0:00 – 1:07

   Intro

   1. HSHarry Stebbings0:00

      SpaceX closes the $60 billion all-stock takeover of Cursor

   2. RORory O’Driscoll0:05

      Your gross margin problem is my revenue opportunity for my Colossus cluster. Pessimists sound smart, optimists die rich.

   3. HSHarry Stebbings0:12

      OpenRouter, $7 billion acquisition by the Irish Polson brothers

   4. JLJason Lemkin0:16

      It'll be like the Scale acquisition. It'll be the start of something that gets bigger. I don't even think this product will exist in five years.

   5. HSHarry Stebbings0:21

      Anthropic turns its first profit on $11.5 billion of Q2 revenue

   6. RORory O’Driscoll0:27

      You can't add expenses below the line fast enough to stop yourself making money. The only thing that matters will be the growth rate and the '27 and '28 projected revenue. Someone who was hired with a million-dollar package in '23 ended up making $51 million four years later.

   7. HSHarry Stebbings0:42

      On the consumer application side, Higgsfield raised at a $5.5 billion price, and then you have Lovable raising at a $13.3 billion price. Guys, we've talked about these companies a lot. How do we think about them?

   8. JLJason Lemkin0:55

      Ready to go? [upbeat music]

2. 1:07 – 8:04

   SpaceX's $60B Takeover of Cursor

   1. HSHarry Stebbings1:07

      Boys, we are back. We have some mega news this week. SpaceX closes the $60 billion all-stock takeover of Cursor, minting 1,000X returns for the likes of Annie Partovi and Neo. OpenAI's startup fund is a mega winner, uh, who invested $6 to $8 million very early, which Rory, I thought of you when you said before about Elon Musk, like, giving Sam billions of dollars through gritted teeth, um, and many others. Thrive and Andreessen, most importantly, netting huge returns. What do we have to say on this one? It's the closing of an already announced deal. Thoughts?

   2. JLJason Lemkin1:48

      I just had three things of it. One is it's just sup- you know, we've been doing this show about 70-something weeks, you know, or so on. So much has changed. In the middle of it, or maybe a third of the way in, it almost seemed like Cursor was dead. You know, no one's portfolio companies were using it. Um, I ca- I don't even remember if Claude Code existed when we started this show or not, right? It might not have ... It, it, it sounds so crazy. I'm not sure it had launched, right? So Cursor was super easy. Lo- rockets to half a million in revenue, half a billion in revenue. Claude Code comes out and all, uh, it seems like everybody's moved. Like Cur- Cursor's dead, right? Cursor goes multi-mo- model really early. It changes everything and rockets to a 60 billion outcome. I mean, forget about that it started as an email client, right? That fun little thing from Hacker News. I mean, God, what a ... I can't imagine what a rollercoaster it was on behind the scenes. This was not actually 100% linear progress to 60 billion. [laughs] Um, pretty, pretty crazy, I think, the rate of, the rate of change. And the one thing I just kept thinking is, um, and it's tough, it's how important it is to be beyond agile because I think so many teams would have given up on that journey, right? Oh my God, fucking Claude Code came out? [laughs] I gotta build my own LLM. I gotta do the ... Like, and it just, I mean, I, I ... And it's just, it's so hard to keep up with the rate of change, and there's probably been three different Cursors since we started, other than the email client. That was my main thought. The second one is how, how it ended up not even being that expensive by the time the deal closed. [laughs]

   3. HSHarry Stebbings3:17

      And you say that because it's gonna be at 6 billion end of year, and then you're paying 10X, or you mean it because you were-

   4. JLJason Lemkin3:22

      Yeah, paying 10X forward revenues if, you know, uh, and it went from something ... Earlier in the show, it looked like it would be gross margin negative, right? It, when we started the show, it'd be like, "Well, Cursor's a joke because they're selling a dollar's worth of tokens for, for 80 cents or 50 cents to, to the world. Of course, it works," right? This was the classic thing that VCs would mock when we started this show. Um, a- and it was true, right? Turn around everything from open weights and everything, um, it's a pretty darn good, uh, business model selling at 10 times forward revenue. I mean, that's a ... Elon got a-- Elon was a shrewd buyer.

   5. HSHarry Stebbings3:56

      I'm intrigued why Zuck didn't buy it. He's building the model capabilities with Alex and co. He's missing the enterprise capabilities. This would have solved that in a similar way that it solved it for Elon.

   6. RORory O’Driscoll4:07

      Interesting tangent. And yes, if, if the logic is, hey, you've got a whole bunch of compute but not an obvious business on top, the two people for whom that's true are Meta and SpaceX. And you're right, SpaceX did it and Meta did not, right? So that's, you know, at a high level, it's a fair point. But one of the things we, we pointed out in the agenda is S- SpaceX could move a little more expert. They didn't do one of these weird acqui-hire things. They just bought it like a regular old corporation. They didn't have any anti-trust... I mean, they actually filed for anti-trust. They got quick clearance. They didn't have any compelling issues with that. I don't know if the seller would've had the same confidence, um, that, um, the seller would've the same confidence that Meta would've gotten through, right? Just given their DOJ. They just, they just probably are gonna have the DOJ more kind of crawling through what they do. So that would be one argument. Uh, it may also be, to be very direct, no one else had the stomach for the bet in the way Elon does. And I mean, yes, Meta is relevant here in terms of fitting the characteristics of lots of compute, no compute business on top, but e- Elon has the biggest advantage, which is his stock is trading high. They're doing, what, 20... I mean, it's 8 billion last quarter in revenues. Call it 30 billion growing. Round up to 50. What the hell? You know, right? It's still 40 times revenues, right? Picking up a big asset, as Jason says, at, you know, 15 times current revenues, maybe less than 10 times year-end revenues, dirt cheap for him, right? A net accretive day one in a way that probably wouldn't be as true for Meta. I haven't thought about it all that much because, frankly, until you mentioned it, I hadn't thought of that. But it, this was ... I mean, one of the things for me is if you zoom out, uh, and just reflecting back on Jason's comment on the gross margin negativity, right? That's true. That story was true when it happened, and it's still true today. There's, there are challenging margin issues, right? And when you, when you, when you reflect on the journey, you kind of ... The things that The negatives that you can cite along the way tend to be true. They're correct. Tho- those were real, and it's a question of the positives. When you look at an investment, the positives in terms of market trajectory just outweigh the negatives. I mean, it, it's easy to sound very kind of financially smart and say, "Oh, in the end, everything has to generate free cash flow. This doesn't have gross margin, so quote, 'In the end, it's worthless.'" But it's wrong because along the way, when you have a market that's exploding like coding, that's a huge market. Remember, this is the biggest market for AI, like 70, 80% of Anthropic's trillion dollar market cap is predicated on this, right? If you have the, if you have the number two player in that space and you're growing hyper fast, then even though, yeah, you got gross margin challenges, the bu- especially in a kind of optimistic forward-looking market, the buyer's gonna look past that and say, "There's only one or two ways to play in this space at a meaningful level." And it was just a perfect fit, right? In a ve- frankly, in a very different capital markets, it could've been a very different story. You know, "Oh my God, there's no capital. Oh my God, the gross margins. Oh, no free cash flow. Maybe you have to slow down and do a very different trajectory as Cursor." But in this market, they were able to go balls out, for lack of a better word, have those tough gross margin stories, and then find a buyer who not only was willing to look through it, but actually had every incentive, every ability to solve it. Because he's like, "Your gross margin problem is my revenue opportunity for my Colossus cluster." So i- it just shows, yeah, the issues, the negative issues didn't go away. They just got swamped by the optimistic take, and that's why, you know, it's the old cliché we talk about, you know, pessimists sound smart, optimists die rich, right? Those guys had... Jason, Jason said it. There was probably some very tough days, but they had the guts to keep moving forward. And because the market's huge and because frankly the environment is risk-on, they've had an amazing result. Good luck to them, you know.

3. 8:04 – 14:10

   Why Zuck Didn't Buy Cursor

   1. JLJason Lemkin8:04

      And on, on the Meta thing, it's just a detail. I guess it's a par- it's a parallel universe question. But I mean, Zuck would've had to pay $80 billion, $70 billion in like a week to do the deal, right? That'd have to be very core because don't forget, Cursor w- what happened was Cursor was about to close around $2 billion at $50 billion, right, from Andreessen and friends. And Elon s- Elon did what you have to do in that situation. What does it take? So he bid $10 billion more, right? You've got a deal at 50. I mean, Zuck did Instagram and WhatsApp like in an hour on the back of a napkin and paid high, right? But, uh, I think Elon did even better. What's it gonna take? They were already working together with Cursor, right? They were already working together. Um, we're gonna do the round at 50. Would it- how about 51? No. How about 50- 60? How about 60? Okay. And well, the deal might not happen. Well, what if we pay you $10 billion if it doesn't happen? Well, okay. I've removed all the objections from the deal and, and I'll let you run the company the way you want, right? I, I think it was three points and they shook hands and did the deal. I mean, uh, Zuck can do the same thing. He's done it at least twice, but you gotta want it bad to do it, right, at $80 billion. And he would've had to go- move even faster. I mean, Rory's of course right. Uh, uh, Elon had the ultimate stock and currency to do this deal, right? And the ultimate match. Um, but to do any of these deals, I think you gotta be Elon or Zuck because you gotta just strike this deal in a week at $60 billion. I mean, it's o- only a handful of people can do this, right? I don't even know... Only a handful.

   2. RORory O’Driscoll9:33

      A- a- agreed. And you know, I was reading Noah Smith, who's kind of a dem left of center but mo- moderate centrist blogger who's not an Elon fan. Just wrote a great piece about a year ago that says, "Only a fool denies that Elon Musk is wildly effective." He, you know, regardless of your opinion on the merits of the part, he's one of possibly the most effective person on the planet at getting shit done when it comes to industrialization, physical AI, and AI, right? And you know, from a standing start a year ago, he built the cluster and then he bought the product to s- to stay on top of it. And he took SpaceX from literally a year ago being a really amazing rocket and satellite con- connectivity story to being, as their S1 says, at least in terms of the, quote, "future prospects, 89% an AI story." I mean, you saw his tweet. You mentioned it a year ago. You know, I've underestimated AI, some version, I've underestimated AI, time to go. He went from a standing start to owning more compute than anybo- pretty much anyone else and owning a product of, the most important product to fill that compute in less than a year, just over a year. That's just wildly effective management. Just, it, it's, it's a world-class in getting shit done.

   3. JLJason Lemkin10:46

      The other, the other small factor, just thinking about it, we can move on. But imagine you are Michael at Cursor, right? And things are going pretty well. You've got a, you've got a term sheet from, uh, you're what? 24. Um, you're a paper deca-billionaire, um, and Andreessen wants to- and Nvidia and Thrive want to put in money at 50, right? You're not that cash motivated. You could take out a billion, right? Or $500 million, right? Things are going okay. These are very rare deals, but, uh, even though working with Elon in a year might turn out to be terrible, right? I, I would much rather, uh, initially work for Elon than for Zuck, personally. I would do it. Like, I would be like, Elon is the guy I want. If I had to work for someone, it'd be Elon. I mean, he is better than me. This guy is fucking rockets, uh, electric, he does everything and, and Zuck's firing everybody and, and going crazy 'cause he doesn't have an LLM. Um, not that he isn't one of the greatest entrepreneurs, but I wouldn't wanna work for Zuck, but I would wanna work for Elon. And, and that actually matters. It may be a mistake in M&A as a target, as a CEO, 'cause we've all, when we've been founders on the other side, we've made mistakes here, right? I, I tell advi- founders to ignore it. Ignore the brand. Ignore what you think the job is today because you have no idea in 24 months what the hell you're gonna be doing. But it is very, it is incredibly emotionally important to founders to, to land in something they wanna land in, right? And I would not wanna land at Meta today If I was Alex at Scale and I got 24 billion and I, I had a tough business, maybe. But this one, man, I'll, I'll take Elon over that one

   4. HSHarry Stebbings12:15

      Do you think Amazon or Meta go, "Eh, we'll take Cognition instead"? Is there a knock-on effect for the second player in market, which I think arguably now would be Cognition?

   5. RORory O’Driscoll12:27

      There's actually a quality of absolute imperative to do something. You know, who has to? And I think SpaceX had to, because they had all this compute, and it looked like they had to fill it. Now, subsequently, they've also been able to rent that compute to Anthropic and Google. I don't think it's nearly as existential for different reasons to the two you named, and I'll name one for whom it is. Um, for Amazon, you know, th- they're in the AWS business mu- I mean, they got lots of contracts with Anthropic. They basically have the compute for Claude Code. So they're basically getting the inference side revenue for that. They don't own the model, but, uh, i- it's important, but not imperative. They've never done a $60 billion deal. Doubt they're starting now. Meta, that to me is more a, again, unlikely, and the reason they didn't do it earlier is their core business is an ads business. It's fricking amazing. This is literally, "I have a wonderful ads business. It kicks off north of 100 billion. I've chosen to do this new AI thing. We can pretend it's strategic, but it's really, I'm just fricking really interested in it." I don't know if you have to do another 60 billion deal on top of that one, so not as imperative. I think just to put it out there, I'm gonna name the one. The, the company for whom this market matters is Microsoft, because remember, he's now long since gone and owns a basketball team, but Steve Ballmer would jump around the stage sweat- sweating, screaming, "It's developers, developers, developers," right? And the fact that they've lost that connection with developers, that GitHub is now a trailing edge product is, to me, over the medium term, a pretty significant loss. I mean, the, operationally, the numbers are fine. It's a well-run company. But if you wanted to name people who should want to own a leading state-of-the-art coding product

4. 14:10 – 19:52

   Microsoft Is the Real Loser in the Cursor Deal

   1. RORory O’Driscoll14:10

      in this brave new world, clearly the number one person is Microsoft. Now, the antitrust issues would be a longer discussion, but I don't think... In other words, I don't think owning the developer is existential for AWS. I definitely don't think it's existential for Meta. It's 100% existential over the medium term for Microsoft.

   2. HSHarry Stebbings14:27

      I saw a fantastic tweet that said Satya should buy it and then make Scott Wu CEO of Microsoft. Um, I thought that would be a rather ridiculous thing to replace himself, but I actually thought Scott would be a rather brilliant CEO of Microsoft. [chuckles]

   3. JLJason Lemkin14:40

      My experience with big company M&A, um, is that the idea that, uh, Harry, what did you say? That, that you feel like you've got- someone else feels like they have to do a deal. What was the term you used? Sorry. You feel like they've gotta j- other folks have to jump in to respond to Cursor, that everyone else-

   4. RORory O’Driscoll14:55

      Yeah.

   5. HSHarry Stebbings14:56

      Yeah.

   6. RORory O’Driscoll14:57

      Yeah.

   7. JLJason Lemkin14:57

      Uh, my experience is that doesn't happen. It doesn't actually get everybody else to say, "Hey, I've gotta go buy Cognition." My experience is that usually the other thing happens. I wanted to buy Cursor, I lost Cursor, or I didn't even know I lost Cursor 'cause Elon swooped in. Now it pushes it up my existing priority list. That's how number two and number three get bought, not because there's a panic for a land grab, but because I didn't get what I wanted, right? That, that, that's when you gotta be really thoughtful as number two, um, uh, because, uh, that- that's when you get bought as number two and number three, really, when just number one just gets taken off the table. It's not so much a land rush. It's just, I thought... A lot of times the acquirers are like, "I thought I had more time." May- maybe Satya's like, "I thought I had more time with Cursor. Like, Andreessen was gonna do it at 50. I could do it at 100 billion next year. I wanted to wait and see." Um, and they thought they had more time, you know, and they, and they didn't, so then they go buy number two. A couple times I've sat on the other side. I don't know that it creates such a strategic arm race that everyone just gets picked off instantly. That, that might be a VC partial myth.

   8. HSHarry Stebbings15:55

      There's another mega acquisition that happened this week. It's not quite the $10 billion that was reported, but OpenRouter, $7 billion acquisition by the Irish Polson brothers, Rory or brethren. Um-

   9. RORory O’Driscoll16:08

      Yeah.

   10. HSHarry Stebbings16:09

       I mean, what an incredible journey. Alex Otala, CEO, who I just had on the show, he founded OpenSea before. It's obviously the leading LLM routing company. Uh, it raised a Series B. Uh, it was at $1.3 billion valuation just four months ago, so it's 5X that for CapitalG. It's a 12X for Menlo and Andreessen. How do we think about this? It's widely reported. Now it's confirmed.

   11. RORory O’Driscoll16:36

       You, you can see intuitively how Stripe get there from here, right? Is that, you know, when you look at their existing business, it's kind of a, they get paid a small percentage of the money flow to manage complexities in collecting cash via cards, uh, and also via ACH now, and here they're gonna get a small amount of the money flow to manage the complexities of picking models and running, you know, as an enterprise, using a single API to run, you know, tens and maybe hundreds of different models. So kind of, I can see at the conceptual level it, it totally makes sense, and a lot of their lift recently has come from, um, even on their payments business, has come from just their customer base being so AI forward that every time you spend money with OpenAI or Anthropic on a credit card, they get some of that money. So I, I, I, there, you know, I, I can totally see how they get there, and again, it's the cl- it's, it's, it's some version of the same thing as the Cursor comment. You can do the old intellectual, "Oh, what are the barriers to entry for this business? Oh, over the medium term there'll be lots of people." And there's a ton of weeny router companies out there, and everyone's building one. But it turns out, in an early land grab, when people are moving... You know, remember, the meta market here was growing 10X year on year if you take Anthropic's growth rate as the big picture comment here, right? If you move early and you build a useful part of the infrastructure, right, you will probably find an acquisition at a price that doesn't make any sense on a DCF-to-you basis but makes huge sense to the acquirer, 'cause Open- just like Elon will turn Cursor into money, cash flow far quicker than Cursor could have turned Cursor into cash flow, I'm willing to bet Stripe will turn O- OpenRouter into money probably quicker than OpenRouter could on, do on a standalone basis. So these kind of ac- this is what happens in a crazy market, is that if things slow down, a lot of these you c- uh, the acquirer would run the buy versus build and say, "There's no hurry, we've got five years." When things are moving as fast as they are now, you're going to see, in my view, until such time as you see the correction and the acquirer currency diminishes, you're gonna see a whole bunch of people like Anthropic say, "Screw it, I wanna be in world models. I'm just gonna buy the card. I don't have time. Screw it, I wanna be in, you know, uh, Stripe. Screw it. I'm huge in payments. I wanna be in the AI influence flow. Quickest thing I can do is spend $7 billion, some of it stock, get these guys, and be rolling in a week." This is what you see. You saw it at early internet stage. You saw it back in times even before that, that would make you cry, Harry, if I even mention them, right? When things are moving really quickly in a build-out, you just see these kind of amazing acquisitions where the value to the acquirer dictates a very healthy price. And it's one of the reasons why venture works. You go right out there on the risk continuum, but if you time it right, you know, you can get these kind of returns. And, you know, well done a16z, well done Menlo, well, well done CapitalG.

   12. JLJason Lemkin19:32

       It's a reminder, you know, one thing, I have a couple thoughts if you want to get in, but it's a reminder, you know, how weird revenue is in M&A. Because if you're bought by PE, like revenue and, and top and bottom line are incredibly important, down to the significant digit, down to cell G38, okay? Uh, if Workday goes private, exactly what its DCF will

5. 19:52 – 26:42

   Stripe's $7BN OpenRouter Deal Creates Huge VC Winners

   1. JLJason Lemkin19:52

      look like in 2032 is so important. The weirdest thing about M&A with big companies is revenue's so important to argue over multiples and, and the price. Like, it's so important to price, but it's irrelevant because it's all about what Stripe can make out of OpenRouter, right? So it's just, it's such a weird thing that your revenue going into big M&A actually doesn't matter at all, even though it's probably the biggest input to price. But then it's, it's irre- [laughs] Like Stripe liter- what, what's OpenRouter doing, 70 million, 80 million today? Stripe does not care l- for that money, right? And so you often see acquirers will abandon even the existing revenue, right, to, to, to do the revenue. It's just, it's such a weird paradigm. But, uh, I would just... Two things. R- Rory's right. Stripe actually appears to be very good at acquisitions. It's how it accelerated into crypto and otherwise. They're good at it. The flip side, you could say, is maybe they should be better at building these themselves, right? That's the grouchy version. Why didn't you build it? But they're, if you're good at M&A, and this is 5% of your market cap plus cash, right, and you want it tomorrow, it makes sense. If you're go- you have to be good at M&A, though, right? And th- and then you do it. Um, th- the counterpoint is I love OpenRouter. I talked about it on the show, like, six months ago. I'm a customer. I'm a user. It was brilliant. It was one of these pieces of software like ElevenLabs which is just instantly easier to deploy. It's just elegant. It was just a beautiful piece of software. But it's pretty niche.

   2. RORory O’Driscoll21:13

      In what sense, Jason? Just a genuine curiosity.

   3. JLJason Lemkin21:15

      Okay. So let's talk... Let, let's, let's break... So, so OpenRouter, as I understand it, and I'll, and I think it's right, is really strong in sort of developer-type tools where you want a simple way to pick a model.

   4. RORory O’Driscoll21:27

      Yeah.

   5. JLJason Lemkin21:27

      Okay? Because you can pick any model. You don't need to get on Fireworks.

   6. RORory O’Driscoll21:30

      Yeah, yeah, yeah.

   7. JLJason Lemkin21:30

      You don't need to set up anything. And it's really, really, really strong with chatbots, where, uh, c- where, like, they don't have to be perfect. When you're talking with my, my digital Harry or digital Rory, you don't need perfect outputs, right? A, a, highly... You can route between models based on availability, co- and those are their two niches. Now, let's talk about workflows with a lot of reasoning for B&B when it has to be accurate. Like, you're gonna, you're gonna down spec to one or two models because you can't have model drift. You can't be routing from Kimi to Qwen to 46 to Fable and all of a sudden your, your, your, like, B2B workflow that has to be perfect drifts from all of them. It drifts. Even just going from, like, one Opus model to another, you see drift. You have to QA it, re-qualify it, fix it, test it. So for c- for, for high-reasoning models, people do n- that, that frontier-esque outputs, right? People don't rotate through 11 models, and I don't think OpenRouter is the right product for that, and that's fine. They don't... They, they get that, too. But I think Stripe is, "Hey, listen, any transaction on planet Earth we can take two-point-something percent of," right?

   8. RORory O’Driscoll22:37

      I think that's fair.

   9. JLJason Lemkin22:39

      But it's not gonna be true for OpenRouter. It's a niche, it's a wonderful niche product, but in the w- in the world of routing, which everybody does, Databricks does, Replit does it, Lovable does it, Vercel does it, it's a niche product with two really good niches. But this is the risk to Stripe, is that they end up owning a niche, a successful niche product, and that's not their, their DNA is not niche, right? It's just not their DNA.

   10. RORory O’Driscoll23:00

       I, I, and first of all, I do think that's fair, 'cause, you know, we internally agonize about this space, and that was exactly what we're angsty about. And you're right, and it, it, it... 'Cause, and your framing is exactly correct. Like, the, the positive tr- let's spell out the po- the positive trend is as long as you have the frontier models trying to extract 100 billion in revenue from you this year and you're an enterprise, you're gonna want a plan B, right? At least to keep the thing honest. So you are gonna want some kind of routing. But it's, it's what you said that resonated with me, uh, Jason, a little bit, which is remember when cloud was starting? People were like, "Oh, I wanna be multi-cloud." It's really hard to be multi-cloud. Here, maybe I wanna be multi-model, but maybe I only want two or three models, and therefore I don't need this kind of routing functionality. That, that, that is the risk. If your enterprise customer decides, "I need to flip between three models but not 10," then you're right, your value here goes down, right? I would imagine the, the, the positive spin is your value here goes up to the enterprise if you can build on top of just picking a whole bunch of normalization of all those options and try and commodify the model. So it, that, that's the kind of tension point. If, the more you can do that and the more you can service the people who don't care all that much, the better your business. But you're right. If JPMorgan says, "I want more than just Anthropic But I'm not gonna qualify 10 models. I'm just gonna work with poolside as my plan B and then offload the rest to something else. Then, then you're right. Then you have niche and you don't get that revenue.

   11. JLJason Lemkin24:29

       Yeah, like for example, like th- like this week, Rippling posted a, a, a, their view as a B2B player of what models they use, right? And they, they had it all, and they said in, "In the world across Rippling, we looked at two things that were best for us. Opus 4-8, it's an N minus one model, but it's well-trained with their harness." And then there's like, there's price, performance, and speed, and then I think they picked whatever, GPT-5.5 medium or something, and they said, "The rest isn't worth it for Rippling today." Now, that could change in 60, 90 days. So they down-specced to two at a time, and then they have to manage the outputs from these, and you may tune one set of workflows here, right, that are long reason in another. And even if you're Rippling scale, you m- managing 12 models is too much. Um, if you're a dev tool and let people pick, so be it, right? That's great for OpenRouter, right? Um, or if you wanna build into your own product a fallback, OpenRouter is a 10 out of 10 for this. Like, let's say something's down, right? OpenRouter automatically falls back, but I think it's a niche product, but it could be a massive niche.

   12. RORory O’Driscoll25:26

       I, yeah, I'm, I'm remembering the conversations now, 'cause you are right. The great thing about the core Stripe product is all payments are equal, and all V- and Visa is the rails for everything. That might be the case. Duly noted. Keep going, Harry.

   13. JLJason Lemkin25:37

       Yeah, yeah. Rippling said GLM 5.2 and Opus 4-6 were the two.

   14. RORory O’Driscoll25:41

       And I want to explore that route, 'cause it, I mean, one of the big questions will be how much pricing pressure enterprises can put on the foundation, the, the, the closed foundation model companies, and how do they put that pressure on? 'Cause I think it impacts a lot. Sorry, Harry, go on.

   15. HSHarry Stebbings25:55

       In five years' time, will this be considered a successful acquisition or not? Bets on. Prediction.

   16. JLJason Lemkin26:03

       I think it'll be like the Scale acquisition. It will be the start of something that gets bigger.

   17. RORory O’Driscoll26:07

       I like that frame.

   18. JLJason Lemkin26:07

       Whether this brand exists or whether even this product exists five years, I don't even think this product will exist in five years.

   19. RORory O’Driscoll26:13

       I like that answer.

   20. JLJason Lemkin26:13

       But I think it will be, I think there's a high chance, more than 51% chance it builds into a, into a 20 or 30% revenue stream for Stripe, and that's enough. But does OpenRouter as part of Stripe exist in five years? I'll bet you dollars to donuts five years is so much time and it's such a niche product, this, this product itself, if it does exist, it'll be deep in a dropdown menu on the top of Stripe, like ele- eleven, 11 layers down, um, 'cause it'll be subsumed into their whole, the whole sort of, uh, uh,

6. 26:42 – 30:35

   Anthropic Turns Its First Profit on $11.5B Revenue

   1. JLJason Lemkin26:42

      token management, uh, uh, platform, right? Their TMP.

   2. RORory O’Driscoll26:46

      I don't know. I think that's, I think Jason's answer resonates with me is if it works, it'll be a, it'll be seen as a TAM expansion play. What's fun about Stripe right now is they're doing that acquisition, which is very much a, "Hey, we don't play in this space. Let's put a stake in the new ground." And at the same time they're talking about a PayPal acquisition, which is very much, "We own the, we own this space already. Let's buy these guys, fold them into what we already have, and just make a shit ton of money consolidating," right? And actually, I think that's a clever strategy. I mean, I think they're [laughs] actually playing a very clever hand. They're doing some things that, you know, there's probably a one in three chance that they have a massive AI routing business in five years, but if they do, that's a big second leg. While at the same time, if they get the PayPal deal done, that's the kind of deal you have a high, to Jason's point about if you're good at M&A and good at consolidation, you probably have a high degree of visibility that you keep those revenues, that [laughs] you remove the entire GNA. You get more of a two-sided network 'cause you have consumer wallets, which Stripe doesn't have, and, you know, you've done core consolidation acquisitions. Doing them both together, provided you can pull them off, is, you know, super interesting in terms of building enterprise value. And they're doing it all private. Again, back to the comment, doing what looked like public company s- size M&A and pulling it off while private. I know they got the, um, investors to take Stripe stock in the OpenRouter deal. I think some portion of it was stock, and, you know, the PayPal deal is more complex and probably requires more thought. But again, being able to do a s- what is it? I think a $40, $50 billion deal and a $7 billion deal issuing paper while private is pretty impressive.

   3. HSHarry Stebbings28:23

      Stripe's corp dev team need a bonus at Christmas time. They are busy this year.

   4. RORory O’Driscoll28:28

      They are busy this year, but isn't everybody?

   5. HSHarry Stebbings28:30

      We, we mentioned margin pressure on foundation models. Anthropic turns its first profit on $11.5 billion of Q2 revenue. The business is getting better for Dario. This was also in a week where Gavin Baker said about Dario saying he believes that they will be the final private company. Did you see this?

   6. RORory O’Driscoll28:54

      We did, and again, let's, let's separate the hyperbole and the future from the facts and the present, right? It's not surprising they're making money, right? If you just go back to last year, right, they did $4.5 billion last year, and I think their operating margins, um, sorry, not operating margins. Gross margins went from negative blah the year before to, like, positive 30 or something like that, right? On track, I think end of the year, roughly 40, right? When you have decent operating margins like 40% and you go from $4.5 billion in a year to $10 billion in a quarter, right, that, and you have 40% amount, that means you have $4 billion of gross margin, right? You can't add... And that's literally in two quarters. You can't add expenses below the line fast enough to stop yourself making money, right? So it's inevitable. I mean, yeah, they 12X'd growth, right? Which means they probably 14X'd gross margin if it continued to increase even slightly, and the trajectory's been increasing. You're not gonna 14X headcount or below the line training costs in six months. So yes, I'm totally not surprised that they are operating in composite. We had run numbers at the start of the year, and it kind of came to that conclusion. I mean, the interesting thing will be as they continue to grow, as they buy that expensive compute from Elon, if you remember, that has a big price increase two quarters, uh, uh, two months in, I, I will, I doubt they will forecast for their IPO a base case of continuing profitability. I could be wrong, right? But- This profit didn't surprise me. It, I mean, it's amazing performance. It's amazing revenue. I mean, revenue with any kind of decent gross margin cures almost all ills

7. 30:35 – 38:36

   The $100K Per Engineer Token Budget

   1. JLJason Lemkin30:35

      The other- I think the other question is, as we gear up for an IPO, which could be very imminent, right, is, um, how, how, what numbers does Anthropic get away with, right? So for example, you've got off, you've got off-balance sheet liabilities, right? You've got massive commits. You've got probably stock-based compensation like we've never seen in the history of mankind, right? So if you get asterisks and daggers on your numbers, they will be jaw-dropping, right? If they have to, if they have to fully account for that, and some of that's non-GAAP, right, these off-balance sheets. If they have to fully account, if, if they're gonna be hammered like, uh, like a poor Wix or someone for SBC or... And, and, and everyone's gonna write up the, the, the horrific downside, right? Um, but I, I think they'll, I think everyone's gonna look through all the, all, all, all the nerdy negative things you could see in the numbers. They're just gonna ignore it, right? But I do think it's important that it get ignored. I think it's important for Anthropic it get ignored

   2. RORory O’Driscoll31:27

      I think none of that shit will matter, to use a technical term, right? [laughs] The only thing that matters will be the growth rate and the '27 and '28 projected revenue. Because it's a little... I, I... Kind of weird analogy, but it's a little like... I mean, provided the... We'll step back. Provided the revenue comes, everything else will be fine, 'cause you play it. If the revenue comes, then you'll need the off-balance sheet stuff, and you'll have the revenue to buy it. In other words, they, all these off-balance sheet stuff are basically I promise to buy a whole shit ton of c- a whole load of compute from you in two years' time, 'cause if my revenue grows 10X for two more years, I'm gonna need all that compute. Well, if the revenue grows, you need the compute. You're happy to have it. In fact, you're insisting you get it, right? If the revenue slows down, then you don't need the compute. It all gets hard, right? So almost everything is gonna boil down to what number do you underwrite for the next two or three years, right? And then as you said, the stock-based comp, no one's gonna care because the reason you worry about stock-based comp, it's because in a steady state, like Workday, we can talk about that in a second, if you're giving someone 500 grand every year to show up and be a middle manager, right? They're probably mentally putting those RSUs into their comp, and they think to themselves, "I'm paid 400 in cash and 500 in RSUs." And if you stop giving them the RSUs, they're gonna want cash. So it really is a cash number. So in a mature business, I really... You know, it's totally correct to worry about SBC. But the SBC numbers are here are gonna be huge because all these people got grants and then it turned out to be worth way more than they ever thought, right? And yeah, the classic example, someone who was hired with a million-dollar package in '23 ended up making $51 million four years later, right? That doesn't mean you'd have to pay the next guy $51 million. [laughs] It means he just, he would've signed up... If that person had gotten the million they signed up for, that's all the real economic stock-based comp it take. The other 50 billion is, 50 million is just dumb luck. You got lucky it's not a run rate. So I, I, I actually think it is okay in a hyper-growth company to look ba- past a good slug of the SBC and normalize it out. And conversely, it's not okay in a mature company. That SBC stock-based comp in Workday or Salesforce, that's real money that people are spending, so. And it's a little bit unfair 'cause you're kind of giving the hyper-growth company a free pass. But they get a free pass. You get a free pass, and it's, like we, it's the same thing we said about Cursor. You get a free pass on margin. You get a free pass on off-balance sheet. You get a free pass on SBC, provided revenue go up. Once revenue stop go up, all bets off.

   3. HSHarry Stebbings33:59

      Once revenue goes up, all bets are off.

   4. RORory O’Driscoll34:01

      All stops going up, yeah.

   5. HSHarry Stebbings34:03

      Yeah. What would it take in usage for Anthropic to hit the $200 billion in ARR plan for 2028 and then 600 billion in, you know, the next year?

   6. JLJason Lemkin34:14

      The simple version is how many knowledge workers are in the world, all right? How many folks can c- take a subscription? Uh, being generous, is it a billion human beings, right? So, you know, if Anthropic has 100% market share at, at 200 bucks, that's, uh, 200 billion. Um, if Anthropic has, uh, 300%, uh, market share, that's 600 billion. Um, I don't know. Rory's thought more... The 600 billion seems complicated but, um, our, you know, our demand, our demand for in, our, for AI has only just begun, so.

   7. RORory O’Driscoll34:46

      You can see 200 billion, which is a number, right? Once you start getting s- the 600 billion number, it gets really hard, 'cause no one ever looks at the big number. And I've just been doing some work on this, right? No one ever steps back and looks at the big numbers. Total... I mean, you said a billion knowledge workers in the world. Absolute bollocks, right? There are 80... I mean, hard-nosed comment here, US is typically 50% of the world's software budget, 'cause we're 50% of the world's high-end knowledge workers. N- you know, we're 25% of the world's GDP. So at a minimum if spend tracks GDP, we're only g- we're t- it's only 4X to US. But every software company is typically 2X US. Why? Because the rest of the world can't afford the same software we do 'cause they're poorer and they have more people at lower wages and less software. That's why we have crappy internet when we go to Europe, right? So the truth is, the hard-nosed comment is this: You probably take the US knowledge worker spend and double it. There are 83 million knowledge workers in the US, right? And let's p- and then roughly 86 physical labor workers. So that's what you start with. And you start cutting it down, and I've, I literally was doing the math this weekend thinking about it. You start cutting it down real quickly, right? The truth is, you know, knowledge workers includes everyone in healthcare. I don't think we're gonna, you know, we're not gonna replace the nurses. It includes the teachers, right? The sweet spot, the ur-sweet spot of the whole damn thing is there are... Yeah, there's about 1.8 million people doing coding in the US, including then QA and all the other bit. There's around five million people that do software-related shit, systems admin stuff, all the rest of that, and they get paid in total grossing up about 600 billion a year, right? 200 billion means you're replacing a third of them. That's a lot. Right. And, and remember we said this before, the single most important ratio, and I asked you about what you thought it was, Jason, is what's the ratio of software s- in, in a steady state, what's the ratio of salary dollars to AI dollars, right? 'Cause that's what's, you know... I- if it's 50% of salary dollars, you can easily get to 200 billion. 600 billion is hard in coding. Well, you can't get there. If it's 10%, then it's hard to get 200 billion across the whole thing. So it, it really boils down to, in the steady state, how much revenue, how much of the, how much s- software... 'Cause if software is the tip of the spear in terms of max adoption, what do you think, for every $100,000 you spend on an engineer, or $200,000 you spend on an engineer, are you gonna be spending 100K on software, 50K... Sorry, on AI, 50K on AI or 200K on AI? That's the number.

   8. JLJason Lemkin37:25

      Yeah, we're testing it.

   9. RORory O’Driscoll37:27

      We are. No, you're right, 'cause the Ramp data shows-

   10. JLJason Lemkin37:28

       In the last 60 days, our every single scale-up is, is capping their AI budget for real. It's not just, it's not just Ubers of the world. Everyone's capping it because it's, it's grown truly exponentially, right?

   11. RORory O’Driscoll37:40

       Yeah.

   12. JLJason Lemkin37:40

       Everyone's capping it at-

   13. RORory O’Driscoll37:41

       Yeah, 10X

   14. JLJason Lemkin37:42

       ... 6 million a year, 8 million a year, right? Um, I, I think it'll land at 100 grand per engineer equivalent. I think that's what we'll s- I think we'll give each of our best engineers $100,000 of tokens, and in return, we'll cut the size of our dev teams 30, 40% effectively. It, it won't exactly work out that way, but close enough is how it's gonna work out. So there, there's 100 grand here for running inference 24/7 with 10 agents in parallel.

   15. RORory O’Driscoll38:08

       For what it's worth, I actually agree with... That's, that's what was my mental model too, and that points to a total... And let's assume it's not just dev engine. Let's give the cis admins, the QA guys, let's do the same thing for everybody. Same thing for everybody. You are, you get 200 grand of wages, fully loaded, including all the benefits, and 100 grand worth of AI, but we cut 30% of you. That turns out to be terrifyingly about a 200 billion plus or minus market in the US. And p- no. Ever.

8. 38:36 – 48:22

   Anthropic vs OpenAI IPO Race: Who Benefits From Going First?

   1. RORory O’Driscoll38:36

      Ever.

   2. JLJason Lemkin38:36

      Well, yeah, I mean, that's Anthr- Sorry, that's Anthropic's estimate for next year, right?

   3. RORory O’Driscoll38:39

      I know. Yeah, true. Yeah.

   4. JLJason Lemkin38:39

      Getting to 100 billion.

   5. RORory O’Driscoll38:40

      But my point is this: if you count all the heads and apply the Jason math, you get 200 billion in the US, which probably means you struggle to get 350 million wor- billion worldwide. That's the TAM. And then you've got to go beyond software. And there is obviously revenue beyond software, but it's nowhere near as fertile, and the percentage isn't gonna be anywhere near as high. But I, it's funny, it's exactly the number I come out with. 'Cause you see the Ramp data that says, you know, the top 1% of their sample, which in turn obviously is a biased sample of tech-forward people, are spending 7K, and then the median is spending, like, 100. It's amazing the dispersion. And 7K times 12 is only 84K. So the top 1% of the most curated group in, you can imagine in terms of tech spend, is spending... Now that's 1% for all employees. So you, you, you... That, that's the pointy edge of the most optimistic spend is 50 cents of salary dollar.

   6. JLJason Lemkin39:37

      I think we're gonna get to 100,000. In the investments I've made that are the best ones, the ones growing faster, but that are pre, like, especially the ones that are pre-2022, '23, so they have a frame of reference, right? They literally are shipping two to three times faster. Only recently. O- only recently. That was kind of bullshit last year, right? People would say that, but it was all performative, like token maxing, right? I had two board meetings in the last week where they finished the roadmap for the year. They're into 2027, okay? These are my fastest-growing, two fastest-growing, but not brand-new companies. They finished the roadmap. They're well into the 2027 roadmap. So you're gonna spend 100 grand on your team to do that, but it's adding up to so many millions, it's overwhelming. So I, I do really think there's some... This 100,000 makes a lot of sense. You could justify more or less. People will ratchet it. But I think it'll be, it'll be the new normal, and you'll cap your team, and it'll all be... That's just what the CFOs will do, right? 100 grand of inference and you get to hire this many engineers. Um, but the idea that they're pulling their 2027 roadmaps in, it's not just performative, it's not just, uh, PRs. Like, you want to invest in that up until the maximum where it works, right? But the absolute numbers are just getting, [laughs] getting really big. I, I gotta say, man, if you're not that way, you're, you're, you're losing today. If, no, if you're not into your 2027 roadmap, deep into it by August of 2026 in the agentic world, your team is not good enough to survive today. You gotta make... This is your last chance to make changes. You should be deep into your 27... I'm not saying... Listen, if you're, if you're OpenRouter, you didn't even have a '27 roadmap. It didn't even mean anything. You're, you're, you're just remaking it day by day. But if you're running the classic playbooks of these, "I can get this much done each quarter, this much done each month," and you're not into 2027, you're gonna lose to, to, to the competition. You gotta be, be honest. How deep into '27 are you? Not deep enough.

   7. RORory O’Driscoll41:30

      Yeah, Jason always gives me these terrifying soundbites that I go back and think about. 'Cause yeah, I'm... You know, we did this survey. You know, we tend to be fact-based people. We did this survey of all our companies, and we saw similar to the Ramp dispersion, which is some companies all in, some companies, yeah, adopting, but still, you know, dramatically less spend per head. I can't, I can't remember the average, but it was dramatically less. And you know what I didn't do, and actually now that I think about it I should do and I will do, is go back and see, you know, if you can touch a strong correlation, which you believe you should be able to, between output and sp- you know, can you justify the spend? Then you're right. Then you should be saying to the laggards, "You're just gonna fall behind."

   8. HSHarry Stebbings42:07

      If it goes out at two to two and a half trillion, would you be a buyer?

   9. RORory O’Driscoll42:12

      And first of all, I want to be clear, I don't think the software market is definitionally the end of the TAM. I think the average knowledge worker won't have 50% of salary and thing, but they'll have a meaningful percentage. So the TAM is, you know, significantly bigger than just, um, developers. 'Cause you have lawyers, but I think lawyers won't... Look The K&E guy who's pulling 2 million a year with a partner isn't gonna be doing 200K's worth of tokens, right? Uh, he's definitely not gonna be doing a million dollars worth of tokens. A lawyer would die before they gave a million dollars [laughs] of tokens instead of a million dollars of take-home pay, right? So, uh, the market is bigger than software, but there's nowhere else that's such a sweet spot as software. And so I, I don't wanna be limited to 200. But... And I, I'm gonna answer your question. I think the really challenging thing, I'm, I'm gonna jump around it a little, is I definitely wanna be first out rather than second out in terms of going public, especially if you have a, some kind of near profitability story or bouncing around profitability story. I think it's a far more attractive strategic position to be going out as Anthropic in the fall, um, with a, "We've been profitable. Okay, we're unprofitable again, but we're the winner in the enterprise," than going out next year where maybe the growth rates have started to slow, both for Anthropic in the public markets, and if you OpenAI trying to access the markets then. I definitely think they're in a strategically t- more challenging situation.

   10. JLJason Lemkin43:32

       Uh, I think they've just capitulated to it. I, my guess is. Like, l- you, of course you wanna be first, to your point, right? I think OpenAI has had to get their house together. More executive turmoil. App- apparently a great last 30 days, right? But, but first half of the year, slower than its, than its previously junior competitor, right? They've had to do so much to say, "Listen, we're gonna go public s- second, and then we're gonna have a comp out there, and the comp is what it is, and we may not trade with the hype that SpaceX and Anthropic did, and the world will not end. Like, we will trade at a, a very precise number. We will know what we're gonna go out at, and the world will not end if we trade at 1.3 trillion." I, I just think that they've, uh, they've given up on worrying about that, um, because ultimately Rory's right. It's much better to be first, but in the long run it doesn't matter, right? You're just g- I- if you don't need the capital, it just is what it is. It is what it is, right?

   11. RORory O’Driscoll44:19

       But, but, but, but Jason, that's the sent- This is my... I'm gonna push a little.

   12. JLJason Lemkin44:22

       Yeah.

   13. RORory O’Driscoll44:22

       That is the sentence. There are no two companies on the planet that need more capital than these guys. In a world where you do need the capital, being second sucks. 'Cause I agree, in general you are correct, right? It doesn't matter, you know. Two companies go public plus or minus a year, and a decade later no one cares, right? We've definitely seen that over the years. The thing that's challenging in this particular case is both companies still have, you know, enormous, many hundred million, billion dollar capital needs. In that situation I would much prefer to be fi- I do-

   14. JLJason Lemkin44:48

       I think you're right. But, but-

   15. RORory O’Driscoll44:49

       I'm not even asking to run fear there

   16. JLJason Lemkin44:51

       ... but the thing is, let's say in whatever, pick your number. Let's say Anthropic, uh, is public at 2 trillion. It really doesn't matter, right? OpenAI is gonna be able to sell stock at a discount to its-

   17. RORory O’Driscoll45:00

       Yeah

   18. JLJason Lemkin45:00

       ... implicit valuation before it goes public. There's, there's some, there's still enough capital. Let's say, uh, they're both worth 2 trillion, right, implicitly, and OpenAI is gonna be able to sell stock next year at 1.8.

   19. RORory O’Driscoll45:09

       Agree.

   20. JLJason Lemkin45:10

       People will do it, and I, and I, I, I, especially if you have no stock, a CEO in your own company, it's okay to sell at a small discount. It's not-

   21. RORory O’Driscoll45:17

       Yes, agreed. And look, I'm not catastrophizing here more than any, but I think the interesting thing is y- if you're the smaller market cap company and you have the bigger capital need, which right now OpenAI does, 'cause they have a more ambitious capital need target. Now, would you prefer to be the guy trading at 1.5 trillion who only needs to raise 100 billion or the guy trading at a trillion who needs to raise 300 trillion? At some point these things become troubling. And yeah, price clears all markets. This is the best new technology market we've seen in dec- ever perhaps. And if you are the founder in that market, and even now the number two, you're gonna be attract capital, but you just don't know the terms under which it happens. And I, uh, going back to my comment, I think you will re- regret not being able to access the capital markets this year. Who knows the next 12 months.

   22. JLJason Lemkin46:03

       No, no, I, I, it's not that I ... I, of course I agree, and I don't wanna spend too much... My only point is the media and social media will make a big deal out of this, right? Who goes public first and who does better. I just think Sam and the OpenAI team have said, "This is, this is our fate. Like, we've, we've, we've talked..." We- they could go public tomorrow, right? There's no... There is enough people to buy these shares to go pub- They've decided that w- while this isn't perfect, right, this is, this is the best, uh, uh, on the, on the board, and we're gonna live with the doubt. Like, it's not the end of the world. Like, you can't solve every problem tonight. They gotta solve bigger problems, right, than, than the, the, the cards are the way they are, right?

   23. HSHarry Stebbings46:38

       Jason, you said about management team churn, that the churn, for those that don't know, most recently was Denise Dresser, who was the CRO, who left, and Dali Rajic has replaced her. For those that don't know Dali, he's one of the most respected CROs. He was a fricking master at Wiz, and I think the best CRO or sales leader in the business, who's Chad Pete's, says he's the best of the best. So I'm feeling a little bit more confident for their Codex and enterprise division.

   24. RORory O’Driscoll47:06

       Yes.

   25. JLJason Lemkin47:09

       Yeah.

   26. RORory O’Driscoll47:09

       Agree.

   27. JLJason Lemkin47:09

       It's just a lot of change. Listen, I'll, I don't know an- anything inside. I just think Greg Brockman took over, right, and brought in, brought in, brought in the Wiz guy. Just had enough of the Salesforce crap, right or wrong, right? Um, actually if you look across all of AI, a ton of Salesforce executives have been recruited, right, to come in and help. Because... A- and you can make fun of it. Like, I used to make fun of how back in the day Salesforce hired Oracle executives, because they took shots at Oracle. But you need folks that know how to scale. There's not only Sal- What is Salesforce at, 45 billion run rate, 50 billion run rate? I mean, the, uh, Anthropic's past that now, right? OpenAI is past that. So y- you don't wanna hire kids. You wanna hire someone that has some idea how to play [laughs] . So Salesforce is about it, right, uh, that is... But, but, but, um, but if you step back from it, I'd rather have someone from Wiz that is close to technology, right, that is in a hypercompetitive space, rather than asking how many seats of Slack you want. It's just a very different, uh, go to market motion, right? It's very different.

   28. HSHarry Stebbings48:07

       Jason, you said if you have not already hit your end of term or end of year goal in terms of product and you're not well into 2027, you're behind. I'm making assumptions. I don't imagine Workday's quite at the cutting

9. 48:22 – 57:00

   Silver Lake's $43B Workday Take-Private

   1. HSHarry Stebbings48:22

      edge like two of your companies at 2027 already hitting those goals, and Silver Lake circles a $43 billion take private bid for Workday, one of the biggest SaaS buyouts ever. We've got two of the best SaaS minds in the business here. Guys, what should we take from this? I-I, SaaS isn't dead. One of the biggest firms, one of the biggest buyouts. The stock popped 18% afterwards. Wow.

   2. RORory O’Driscoll48:53

      I think what you can take from this is that it-- 'Cause the, the SaaS isn't dead thing is just too simplistic. I think what you can take it is a very financially oriented, wildly savvy buyer is willing to bet money that they can buy this at a c- at, at a constrained price, lever it, and generate a return because the revenues are sticky enough to allow them to pay down the debt over five years. And with, you know, reasonable multiple stability, sell it on, and make a 20% IRR plus or minus. I mean, I ran the numbers. That's the bet. In other words... So, so it's not, quote, dead, but what it is not is wildly exciting. What it says is Sa- this is the mature phase of an industry, right? When it's not about wild growth, it's not even about untempered growth, it's literally about someone saying, "This thing is growing at 13% year on year. We can pro-- You know, we can buy this thing for, what is it? Roughly five times revenues, 16 times trailing EBITDA. We'll probably leverage it, you know, two or three times in, four or five times in EBITDA, but it's gonna be a big equity check." And then you run the, the, the, the LBO model and you say, you know, you keep at a 35% operating margins for five years, you use all that cash. It's roughly 10-- I think it's 10 billion a year in revenue, so it's like 3 billion a year of cash. You pay down the debt and the interest and, you know, provided you buy right, you can make 20% and almost a two X over four or five years. It's-- What you recognize is I look at that deal and I go, I, I, I'm torn. 'Cause I-- First of all, I think Silver Lake are wildly smart. It's very interesting when you run the sensitivities. If you pay, like, 20% too much, it, you know, dips down into the mid-teens. And it's, it's almost the exact opposite of venture. In venture deals, if you're in the right thing, it almost doesn't matter what you paid. You see Cursor for details, see OpenRouter for details, right? This is the exact opposite. This is fine, precise financial engineering. If you're wrong by 20%, 30% on price, you know, your IRR dips from 20, which is totally acceptable at scale, to low teens, in which case you wish you hadn't done the deal.

   3. HSHarry Stebbings51:05

      Can I ask you a question? Precise financial engineering for a four to six-year hold period. Six years ago, ChatGPT didn't exist.

   4. RORory O’Driscoll51:14

      It didn't.

   5. HSHarry Stebbings51:16

      Are you able to do fine, precise financial engineering in a world where we move so fast?

   6. JLJason Lemkin51:23

      I don't think system of record is... I think it's a moat, but I don't think it's a ticket to growth. This is, I think, super important, and it's something that everyone on X gets wrong. It's great to have a system of record, which Workday has. It means churn, even with AI, a-a-and LLMs help, it's very hard to churn or you just don't wanna churn, but it sure as hell doesn't mean I wanna spend more money with that vendor. That's their challenge. But it sure as hell means the five years are far more predictable than 95% than poor Monday, which we love, or others. I-- We have no idea where Monday or even HubSpot will be in five years at the SMB level. We know pretty much where Workday's [chuckles] gonna be. 10 years, right? Um, and so I think this growth versus retention is misunderstood. There is a little bit of upside in this deal, which may... I don't know if it's part of Silver Lake's calculation. The CEO came back. The founder-- One of the co-founders came back and Neal came back. He came back. He hired his successor when times were easy. Just before AI, he brought in a great, a knobs and dials C- co-CEO and, uh, you know, like our friends at-- Daniel at UiPath and others, and realized if I ain't go to work today, came back. So I don't think Silver Lake is planning on, on a Neal, like, radically changing it, but I think if he does, like, there's real upside to th- maybe instead of their 20% IRR could be a game changer if he creates the agentic version of Workday. They at least have the founder back in the saddle doing it, and that would make me feel a lot better if I were Silver Lake that I have upside.

   7. RORory O’Driscoll52:49

      You'd-- But it wouldn't be in the damn base case.

   8. JLJason Lemkin52:51

      No.

   9. RORory O’Driscoll52:51

      Uh, Jason, you framed the base case exactly correctly. It's like, it's 5.3 times trailing. In other words, what this says is financial minds will pay five times revenues for system of record growing at 13%. Anything that's not a system of record, anything that's not growing as fast, price accordingly, right? Down from here. 'Cause you-- I-- There's no way you'd apply the same kind of leverage to, for example, a to-do or a task management or a project management software or a website building software, right? In other words, m- what this gives you is k- maybe I'm trying to... What this gives you is a sense of what the baseline is for best-in-class LBO takeouts, right? If, you know, if Airtable give, if the Airtable bending spoons give you an idea of what it is, if you just, you know, if you don't have that kind of system of record, you get 2.7. If you do ha- If you're not, if you're vaguely profitable and in a space where, as Jason says, you can predict five years, you get 2.7. And what Workday says is if you've got 30% operating margins, modest growth, but you're a system of record where you really can believe in the next five years, then if you're lucky, you get 5.3 times revenues. That's the bid-ask spread right now. That's the aha. And, you know, contra-contrast, just one last comment. Contrast that with the game for OpenRouter, where they're gonna get, let me see, a trai- I think a trailing revenue plus or minus 100. You know, they're gonna get 70 times trailing revenues. Which game would you prefer to play?

   10. JLJason Lemkin54:20

       Workday has something that makes it a better deal for PE, I think, than anybody else on the target list, which is that it is a somewhat closed system of record. Now, Salesforce is out there working their frigging tails off because they are a muchly open platform. You can build your own agents on top of Salesforce tomorrow, and a lot of the hot GTM startups are built on top of Salesforce. They're not necessarily only on Salesforce, but it's open Try building on Workday. It ain't so easy, right? It, it is like LinkedIn, right? It is intentionally, uh, b- barely open. So there are negatives to that, right? But it also means you're gonna ca- it is... You're gonna capture more budget, um, overall in your ecosystem than you would for others. So I- it has more of a buffer against agentic damage to your growth than an open ecosystem has, right? Open has negatives today, and so I would want system of record, um, churn impossible, and closed AF. [laughs]

   11. RORory O’Driscoll55:16

       Agreed.

   12. JLJason Lemkin55:16

       I want the most closed system that can't churn, because the reason system of records aren't that great is because if they're rem- g- you need your system of record, but if you're remotely open and, and you can produce a better agent yourself or a third party, a lot- the value will extract to the agent even if the system of record is retained, right? But Workday's so closed, um, they've got a leg up, right? Um, so-

   13. HSHarry Stebbings55:40

       Jason, how open is Salesforce?

   14. JLJason Lemkin55:43

       They are a toll keeper, right? Like a Shopify, but they're pretty open. Shopify and Salesforce are pretty open. You and I, the three of us can ship, we can, we can use OAuth to ship a Salesforce app tomorrow.

   15. RORory O’Driscoll55:53

       Just to-

   16. JLJason Lemkin55:53

       Yeah

   17. RORory O’Driscoll55:53

       ... prove that, Jason, really quickly, uh, sorry, um, Harry, really quickly is that, look, there's a bunch of companies even in pre-LLM world, like Gong, Outreach, Saleloft, that are all effectively built on top of the Salesforce platform, right? You can't name the equivalent with any ease in Workday. There's a few, but it's much harder. There's some of the planning tools, but pretty much most, and it makes sense. Within the financial accounting system, everything gets sucked into the gravitational pull [laughs] that is the GL and the accounting system, right? So I agree. That's a good point, Jason. Whatever dollars are in that ecosystem, if they're careful and shrewd, Workday will get most of them. And from the other hand, if they get too greedy and they don't invest enough, then the customers start thinking, "Oh my God, this is just not advancing. Over five years, maybe I do need more of this agentic workflow on top." Maybe the smaller customers start evaluating NetSuite, start evaluating the next generation. The, you know, even at the very small end, you know, you've got the Willis, you've got the Campfires, you've got the people like that. Y- you can't be such a greedy bastard in your ecosystem that you incent people to start trying to move out,

10. 57:00 – 1:17:36

    Higgsfield at $5.5B and Lovable at $13.3B

    1. RORory O’Driscoll57:00

       right? But Silver Lake are smart, Anil's smart. This, you could have this be a profitable self-contained universe, but remember, the most exciting version of that is you pay down all the debt in five years and you double your money. You're probably putting in plus or minus a $20 to $30 billion equity check, 'cause you're not gonna get infinite debt. You know, maybe 20 billion at, you might get 18, 15 billion of debt, which means you need a $25 to $30 billion equity check, so you're gonna turn 30 billion into 60 billion, which on a multiple basis is not amazing, but it means you've generated 30 billion in gains and 20% of that in carry. So someone's about to make $6 billion if they can pay down this debt and just work, knuckle down for the next six years. Go team.

    2. JLJason Lemkin57:46

       Yeah. And Anil gets to rebuild his company outside of the public company eye-

    3. RORory O’Driscoll57:49

       Yeah

    4. JLJason Lemkin57:49

       ... which is slightly overrated 'cause he has to hit the underlying numbers, but it's much better.

    5. RORory O’Driscoll57:54

       Yeah.

    6. JLJason Lemkin57:55

       It's still much better. It's still much better, right?

    7. RORory O’Driscoll57:56

       In- instead of large numbers of stupid comments, he will get one very focused comment from one of the world's smartest investors. It's probably a trade-up. [laughs] You know, right?

    8. HSHarry Stebbings58:06

       Lemkin, buyout-

    9. JLJason Lemkin58:06

       There's one last thing on this. I don't mean to go d- in the weeds, Harry, but since you asked. Versus Salesforce, I j- just, it's just interesting. So we run Salesforce entirely headless.

    10. RORory O’Driscoll58:15

        Yeah.

    11. JLJason Lemkin58:15

        Okay? So we have our own agent, 10K, our own AI VP of revenue. It runs Salesforce under the hood. Pro is it makes Salesforce much more powerful than it ever was. Like, I didn't log into Salesforce for seven years. Now I log in every day because I have an agent. Con, it can connect anything, the agent. It literally can connect to any other agent, including competitors, including other data sources, data lakes, data everything. The agent doesn't care. So it's really a weird world as a system of record or a core system. Do you want to be extensible and o- opened, right? It ha- Salesforce has said you can be headless. Risks and opportunities, right? Because-

    12. RORory O’Driscoll58:55

        Totally

    13. JLJason Lemkin58:55

        ... the risks and oppor- you make your s- you make it much easier to abstract you away or to compete with you, even while you may retain a few seats, right? You may reten- the, the logo retention may be high, but, but it makes you have to run faster. Workday doesn't have to run that fast. Um, everyone can't run it headless and, and integrate any single thing or pull out all your employee data and push it into my own ATS or my own system, our own financials. Um, I think it's a sh- the more I... It's a shrewd deal because it's the best, it's the best moat out there with the system of record.

    14. RORory O’Driscoll59:24

        And, and I go back to my comment. If it is a shrewd deal, it also by definition means it's the high water mark of what deals are gonna look like. Plan accordingly, people. You get 2.7 from the Ben Spoon and you get 5.7 from the Silver Lake guys, and you pays your money, you takes your choice.

    15. HSHarry Stebbings59:39

        Lemkin, you have a buyout firm. Which other asset would you buy next?

    16. RORory O’Driscoll59:45

        I'd want to know who gave Jason money for buyout. I would give Jason money for venture, but I don't see him as the spreadsheet guy.

    17. JLJason Lemkin59:52

        I just think more and more about the fact that systems of record, um, are gonna retain their customers, um, but I think we, we just underestimate that's just not enough to grow. You gotta... It's grow or die today, right? It's grow or die. This whole show, everything, grow or die. Who cares about the stock-based comp or anything at Anthropic? My God, it's OpenRouter at 192X revenue. And so just because your customers are prisoners does not mean in today's world they will spend one more dollar with you. In fact, the CIOs wanna cut what they spend with their, when, when they're hostage, right? They're like, "Okay, I want to spend 90%, 80% of last year. What can we cut from our bill from the vendors we're stuck with?" It's a... I, I, I, I gotta think, but yeah, Rory's right. I'm not the best at the spreadsheets.

    18. RORory O’Driscoll1:00:38

        You know, I'm actually gonna, I'm gonna cancel my comment and disagree with myself. Actually, I think you'd be great, 'cause I'll tell you what you would bring to the table that I think a lot of these- PE buyers missed. It's this idea of mission clarity around growth. If you don't have growth of some sort, you're in a desperate race against the debt, and the best you can get is a mid-teens IRR if you Workday and you buy cheap. And remember, that's when you buy, uh, you know, at 5.7 times revenues. Some of these PE deals were done four or five years ago at 10 or 12 times revenues for not as good a quality asset as Workday today, right? I think you would ac- I, I think y- the PE firm should hire you as their operating partner, where for every new pers- every new deal they do, you explain the facts of life. It's really clear here, people. The only thing that matters. You can't just stick it to your customers. If you don't give them value, you're gonna get shafted in the end.

    19. HSHarry Stebbings1:01:31

        Rory, for me, the death spiral here is the exec guy who's got no idea about AI and has a load of logos-

    20. RORory O’Driscoll1:01:37

        Yeah

    21. HSHarry Stebbings1:01:37

        ... and has a load of middle management, and I think Jason would be the fricking best-

    22. RORory O’Driscoll1:01:41

        Call it

    23. HSHarry Stebbings1:01:42

        ... at AI.

    24. RORory O’Driscoll1:01:42

        I, I agree. I changed my mind. Agree. Because you're, you're done if you don't.

    25. HSHarry Stebbings1:01:47

        By the way, you can click the link below to donate to Silver Lake Lamkin Ventures, uh, for The Buyout Firm. Uh-

    26. RORory O’Driscoll1:01:53

        Yeah.

    27. HSHarry Stebbings1:01:53

        As we said growth-

    28. JLJason Lemkin1:01:54

        Well, you know, I wanna spend money on the positive side. If you look at it like a more S&B version, I, I'm not saying how, um, how widespread it is, but if you look on social media, a lot of folks are like, "Okay, I'm, I'm, I'm, I'm lifting off Airtable now." And they're like, "Bending Spoons is gonna raise my prices 3x," right? "I'm- let me start doing it now," right? And so it's just an extreme version of what you have to be careful with everywhere. I mean, Bending Spoons may lose 20% of Airtable's customers who finally spend a week lifting off of Airtable, but when they triple prices, it's a good deal for Bending Spoons, right? But it's gonna happen a lot faster than Workday.

    29. RORory O’Driscoll1:02:28

        Agreed.

    30. HSHarry Stebbings1:02:29

        Growth at all costs on the consumer application side. Two big fundraisers from Higgsfield who raised, uh, at a $5.5 billion price from DST, and they hit 700 million in ARR. And then you have Lovable who raised a new round from Menlo. They're around the 600, 700 million ARR range too, raising it a $13.3 billion price. Big price divergence for very similar revenue numbers, which I find interesting. Guys, we've talked about these companies a lot. How do we think about them?

Episode duration: 1:17:47