The Twenty Minute VCThe New VC Game | CoreWeave Sell-Off Creates Panic | Revenue Multiples Out of Control
EVERY SPOKEN WORD
65 min read · 12,975 words- 0:00 – 1:01
Intro
- JLJason Lemkin
You gotta have billion-dollar positions in everything in big boy venture today, I think. 'Cause billion-dollar positions are nothing. There's no point in investing otherwise with large funds. 50 million, 100 million seeds, you can't make money.
- HSHarry Stebbings
So what are we talking about today? Are the AI cracks starting to show? CoreWeave is hit pretty hard. Next up we have Anthropic, the talk of IPO Town. Could be priced at 1.5 trillion, not the 2 trillion originally suggested. This and so much more in the episode today.
- RORory O’Driscoll
If the end user demand is there, then everything is gonna work out.
- JLJason Lemkin
CoreWeave is B tier compared to NVIDIA and friends. Oracle is B tier.
- RORory O’Driscoll
We're all fucking B-tier assets. How about that?
- JLJason Lemkin
I actually think code review is the single most important category today in software.
- RORory O’Driscoll
Coding is the model load of LLM value.
- JLJason Lemkin
We are just taking revenue multiples too far today. Bending Spoons is like the Berkshire version of software. Ready to go?
- HSHarry Stebbings
[rock music]
- 1:01 – 3:41
Is Venture Broken for Great Companies Outside the AI Hype Cycle?
- HSHarry Stebbings
Boys, um, I just tweeted something that has got a rather large response from a founder community. I think venture is broken today in the way that I'm meeting more and more companies that fit this profile. I just met a company today, and I have a company that's 20 million in ARR, growing incredibly fast, 600, 700% profitable. Brilliant business with a great team. Crickets. VCs do not want it. Is venture broken today?
- JLJason Lemkin
Well, look, I'm sure Rory has a lot of thoughts. Let, I'll just add one one ahead of it, which is we were talking about this company which will be nameless, right? I invested in a, in a vaguely similar company, like, uh, doing similar things for similar-sized companies. They raised about a three hund- $3 million seed round, and they're planning that's it, even with this type of growth, even with it all being agentic, even with it all being, uh, all the things we're supposed to be excited about, right? AI and voice and resolution agents. It does some- It does actually something that's pretty somewhat unique, but they're literally planning to never raise again because, uh, you know, you get the, you get the 15%, 18 a month venture update, but no one wants to meet. It's like, "Well, I'll put in a little more money." But y- it, it may mean in some ways in the old days where your in- early investors may need to carry you if you're not, if you're anything that's not hypergrowth and the right boxes to check, right? The three boxes to check. Your, your, your investors may have to carry you. It's like the old days [laughs] . We need Rory to carry us through the IPO [laughs] .
- HSHarry Stebbings
But Jason, you're right. You said-
- JLJason Lemkin
You really need those reserves [laughs] .
- HSHarry Stebbings
Jason, you're right. You said earlier the kind of specificity box has really narrowed in terms of what is interesting to investors.
- JLJason Lemkin
Yeah.
- HSHarry Stebbings
And I'm seeing that more and more with this concentration of capital going to fewer and fewer names, and everything else being wholly unfundable, which more so than I've seen ever in venture before, which is, is surprising for a sheep-like market like venture.
- RORory O’Driscoll
So what you're saying is if you think about, if you think of the role of venture financing innovation, what you're saying, there are lots of companies that look on the surface to have very good numbers that can't raise money. That's what you mean, correct?
- HSHarry Stebbings
Correct.
- RORory O’Driscoll
And, uh, and I think that's probably true. And let me give you the contrast, though. At the same time, I don't think it's just going to 10 or 20 companies in total, 'cause at the same time there are a whole bunch of projects that probably in another era would not get funded at all that are getting venture money, right? I mean, you know, data centers in space, quantum computing, you know. So we're very risk on for stuff that has ultra-high upside, and I think the stuff that's struggling to get funded is, as you say, it's software for specific markets where there's some inarticulate fear that AI will make it all go away. Is that kind of a fair next level summary?
- 3:41 – 5:45
Why VCs Only Want Trillion-Dollar Outcomes
- HSHarry Stebbings
Yeah, I think so. I think you're obviously right. I think it's this, like, power law on steroids requirement where it's like, "Unless you can paint me the trillion-dollar market cap, I'm not interested."
- JLJason Lemkin
To answer your question a little more, to be more tactical, Harry, I think you're right that... I mean, you, you, you, you, you roll with a high-powered crowd. I think if you want Sequoia and Benchmark and o- one of the better partners at Andreessen to fund you, the box is very specific, right? It's cursor better, right? OpenRouter's okay, um, but let's see what we can do better next time. I will say for, for companies like you described, still growing at numbers that approach the iconic outlier metrics, right? Here's where I think actually the world is today. You gotta meet 100 V- You gotta meet every VC. You gotta meet 100. It is like the old days. And you will find someone that takes that bet. It will not be Se- the Se- It will not be the seven benchmark partners and, and all the rest, but someone will take that bet at a, at, at a reasonable but still elevated valuation because it's the best deal they've seen this quarter. Someone will take it. You just got... It's the old days where you gotta meet 100, and there are growth investors whose names are not Index, Andreessen, and Bessemer, and they will take that bet because it's a good bet. To Rory's point, it will lead to a Listen Labs or better in some cases. It's just-
- RORory O’Driscoll
I agree
- JLJason Lemkin
... you better meet everyone on planet Earth now if you just have top decile gr- numbers [laughs] . But top decile for a while is like an automatic of term sheet, right? For years it was an automatic term sheet, right? You'd, you'd walk into Rory's office. Rory knew every, every deal since the dawn of time. He would know exactly if you're in the top decile. If he believed in you and trusted you, you'd walk out with a term sheet from Scale, right? The world just doesn't work that way today.
- RORory O’Driscoll
You might still walk out with a term sheet from Scale, but-
- JLJason Lemkin
[laughs]
- RORory O’Driscoll
... what you're saying is there's a small number of extraordinary potential startups that the very best VCs are focused on, almost to the detriment of anything else. That's your point, Harry, correct?
- HSHarry Stebbings
No, I'm saying the whole venture landscape has realized that a certain few categories are the most interesting and exciting, and everything else is uninteresting in a way that has not
- 5:45 – 8:07
Why Mega-Funds Need Billion-Dollar Positions
- HSHarry Stebbings
been before.
- JLJason Lemkin
Rory, back me up here. If you're raising a $5 billion plus fund, you, you have to have billion-dollar positions in everything. You even need a $5 billion position here or there, right?
- HSHarry Stebbings
Yes. Which is why we need energy and infrastructure
- JLJason Lemkin
So what, a $2 billion, listen, Labs just does- doesn't, is not good enough. 'Cause the odds, unless you have 51% ownership, which most founders are not cool with, it's pretty hard to build a billion-dollar position. I mean, if I were working at one of those mega-funds and we were playing our game, that would be my final question to, to the, to the team. How do we g- how are we gonna get at least a billion-dollar position out of this? And I'll take 1% of Anthropic. I think that still gets me to a billion-dollar position even with dilution, right? The Eric Schmidt story. But you gotta have billion-dollar positions in everything in, in big boy venture today, I think. And, and I don't mean boy with a gender attribution. Big, big, big folk. You gotta have billion... It's billion-dollar positions or nothing. There's no point in investing otherwise with large funds.
- HSHarry Stebbings
I agree.
- RORory O’Driscoll
Well, I still go back to the statistics we cited last week, which is, you know, 10 to 20 decacorns per decade in the entire US tech industry, and we clearly believe that there's gonna be 90 of them this year, right? And one of those two facts is gonna be at variance with the other, and I'm willing to bet on the 50 years of data, albeit lifted up for growth. You know, this is not gonna be just predicting on the past because, you know, you, you allow some kind of growth over the years for bigger exits. But I don't think, I don't think you can confine yourself to saying, "I'll only do deals where I can get a billion dollars to work," or a billion do- or, or it's a d- or a tw- what's, what's the main outcome? A $25 billion outcome. I mean, and you want some of those, but it's, it's gonna be in, not the, the whole industry's not gonna be able to say we're all going to do those and have more than five funds, 'cause it's just not enough.
- JLJason Lemkin
Maybe five is enough.
- HSHarry Stebbings
Jason, I think Rory is, Rory is not going along with our thread here.
- JLJason Lemkin
Listen, I haven't sat in an Andreessen or Index, uh, partner meeting, but I'm pretty sure the math is something like, "How can we make at le- make at least a billion dollars off this deal?" It's not even enough. Like, that's... I don't k- e- you know, everyone has, like, the, the four different scenarios when they write up the investment memo. A billion-dollar, uh, position, not an exit, billion-dollar position, is just the B outcome, right? This is 10% probability analysis, $25 billion or higher, 25 [laughs] you know, this percent, uh, we, we only make a billion on the deal. We're raising these funds every 18 months, these 5 to $10 billion funds. We, we have to have so many billion-dollar positions, positions, gains, to even be playing at this game. It's just math. It's
- 8:07 – 10:46
Is Seed Investing Now Harder Than Growth Investing?
- JLJason Lemkin
just the maths.
- RORory O’Driscoll
To take the other side of the argument and actually to talk about seed, which is your world, Jason, you probably, I'm assuming you would agree that from a multiple perspective, it's going to be far easier for the best seed investor to generate a 5X net fund than it's going to be for someone who's writing billion-dollar checks into things.
- JLJason Lemkin
No, it's harder.
- HSHarry Stebbings
Mm.
- JLJason Lemkin
It's much harder.
- RORory O’Driscoll
Okay.
- JLJason Lemkin
Because the, because unless you really do the Roger Ehrenberg, find something in Antarctica, right? The entry prices are so high, and the ownership typically is lower unless the seed fund is very large, that actually... A- and all these Valars are cutting my pro ratas, Rory. How am I gonna make it up on the back end with my SBVs and my triple... I can't make any... 5X is so much easier. I'll do w- I'll do it at one billion in, in town, and I'll raise it 5 billion next week-
- RORory O’Driscoll
But you're really saying-
- JLJason Lemkin
... and I'll take the rest of the year off.
- RORory O’Driscoll
Okay, I got it. I got it.
- JLJason Lemkin
The entry pri- 50 million, 100 million seeds-
- RORory O’Driscoll
Doesn't work
- JLJason Lemkin
... you, you can't make money.
- HSHarry Stebbings
A- and not, and not only, just to add to that, not only can you not make money, you can't make money even worse because they're a multi-stage product for those big players in terms of they're the ones who lead them, and they crush your allocation. So not only does the price go way higher, but your allocation goes way lower. Well, just pause. And so you have 3 to 500K at best, and I've, I've got this, and I've got this in a company that is going now to 18 billion. It still doesn't move the fucking needle, Rory.
- RORory O’Driscoll
Because what? You only got 300K in the deal?
- HSHarry Stebbings
Because we got 300K in, and it's at-
- RORory O’Driscoll
Agreed
- HSHarry Stebbings
... 100 million price. It's still-
- RORory O’Driscoll
Yeah, no, that doesn't move the needle. No, you, that, that I would agree. Right? That, that's-
- HSHarry Stebbings
And, uh, a- and so not only do you have a way higher price, but you have a way lower check going in.
- RORory O’Driscoll
Look, over time, in a rational capital world, the return multiple from early-stage investing should be higher than growth, right? Um, just logically over an extended period of time, 'cause otherwise why would you do it?
- HSHarry Stebbings
I, I agree, but would you not say for the first time ever that we're actually gonna see that inverted for-
- RORory O’Driscoll
I totally agree. I think the last five years are gonna be clearly inverted.
- HSHarry Stebbings
Yeah.
- RORory O’Driscoll
It's clearly gonna be... I mean, look, someone said it. It was a very good line. He said, "The aggregate market cap of SpaceX, Anthropic, and OpenAI went from around $400 billion three years ago to something like 5 billion, $4 or $5 billion today."
- HSHarry Stebbings
Right.
- RORory O’Driscoll
Right? That means... Sorry, trillion. Adam, change billion into trillion. 4- 400 billion to 5 trillion, right? So you've got 4 trillion-plus of value created in, in the late-stage business. Nothing else matters, right? And if, you know, if your theory is there's gonna be 10 more of them next year, then you're right, that's all you do. And if your theory is, that was amazing, but it's probably not gonna be a runway business, then you make different bets.
- 10:46 – 16:55
Is CoreWeave the First Crack in the AI Trade?
- HSHarry Stebbings
We will go back to schedule, which is are we starting to see a crack in the AI trade? CoreWeave have had a tough week. I admit I'm a holder. It, it has not been great. Rory, can you please provide some context as to what is going on? Um, what do we need to know as background?
- RORory O’Driscoll
Yeah, look, I mean, I think CoreWeave... Yes, CoreWeave had a tough week last week, I think down 15, 20%. Kind of bond prices went up, implying, you know, lower to default. But zooming out, but the way I think about it is, you know, all... When you think of the whole AI trade, these kind of neo clouds, they're always gonna be more risky than anything else in, in the system because they have, you know, they're underwriting high growth with large CapEx and lots of debt, right? So you try to thread the needle. If you grow too slowly, you don't make your c- customers happy. If you grow too quickly and demand slows even slightly, then you're screwed because I, I'm doing it from memory here. I think, you know... Oh, I should... I, I checked it this morning. I'm sorry, but CoreWeave's, I think it's like $7 billion runway or whatever, 10 or 20 billion of CapEx, you know, 35, 40 billion of debt, right? I mean, that's the way you have to do it, 'cause you gotta build these data centers and fill them full of compute. So it's just very tight. Right. You have-- Like, it's not like a software company where you can hunker down and cover your nut, right? There's just no way out here. So they're always gonna be risky. So any time someone wakes up and says, "Oh, AI is growing a little less quickly," all these things are gonna go down. And any time anyone says, "AI is growing amazing," they're all gonna go up. And last week was an AI go down week 'cause, probably 'cause a little bit 'cause of the Anthropic numbers, which in retrospect a bit silly. But there's no doubt last week was a things are slowing down week, and when that happens, CoreWeave jumps down.
- HSHarry Stebbings
Rory, was this a, was this a gross overreaction then?
- RORory O’Driscoll
If the end user demand is there, then everything is gonna work out, and including CoreWeave. 'Cause look, the, the-- I think their biggest customers are people like Microsoft, OpenAI. Like, provided the demand is there, they want the, they want the data, the data centers. So it, it, it will all true up under those circumstances.
- HSHarry Stebbings
Is that not like a generational buying [chuckles] opportunity though? It's, like, down twenty-five percent. Of course demand is not cracking. We all see that every single day.
- RORory O’Driscoll
More precisely. But the problem-- Yeah, well, if it was that easy, we'd all be doing it, Harry. But, I mean, the real question is the g- is the growth-- n-not is the demand going, is the, how does the demand compare relative to what these guys are spending, right? You know, it's like, can they fill everything they have? Now, of course they can fairly quickly. But if you're continually investing for next, like I said, if your CapEx budget is twenty billion, it's not enough that demand go up, it's that demand go up by a lot every year. The beating heart of the whole thing, and we're seeing people share it, is you, you add up OpenAI and Anthropic's numbers together, so that kind of gets rid of the, you know, the, the, the, the shift in market share, and the growth rate of that overall is what's going on in the AI economy, right? And that's the growth rate you have to look at. You know, the question is: How does CoreWeave's CapEx plans look at relative to that?
- JLJason Lemkin
The simple learning is that markets are gonna be very sensitive, right?
- RORory O’Driscoll
Yes.
- JLJason Lemkin
As, as, as Rory said. Uh, any bump with Anthropic, any bump with OpenAI, any bump anywhere, uh, of course CoreWeave et al and Oracle should be hypersensitive because they have massive debt loads and massive risk. Um, but, but, uh, listen, uh, but they're also the B-tier players. CoreWeave is B-tier compared to NVIDIA and friends. Oracle is B-tier, right? So I, I don't know. You can make money in the B-tier, but why would you wanna hold the B-tier? C- CoreWeave, CoreWeave exists because NVIDIA and friends w- need it to exist for now. It has no inherent reason to exist. It is not producing a singular set of-
- RORory O’Driscoll
No, no, no, no, no
- JLJason Lemkin
... silicon and GPU and software today that no one else can do. Oracle just can't sell enough enterprise software. People don't wanna install enough of this crap on their servers, so they're stuck renting out their excess capacity and buying GPUs and doing Stargate. These are B-tier assets, and B-tier assets should trade at a premium. And I think more importantly, they should be more sensitive to shocks in the system, the B-tier assets. The A-tier assets should be-
- RORory O’Driscoll
I mean, you know, I under-
- JLJason Lemkin
... in theory, less sensitive
- RORory O’Driscoll
... Yeah, fine. The only comment I'd make is I think, you know, B-tier, A-tier, CoreWeave versus NVIDIA, I understand what you're saying, but it's almost like you're comparing apples and oranges. I mean, you know, NVIDIA's core IP, yeah, it's the dominant provider of the whole eco... Look, compared to NVIDIA, we're all fucking B-tier assets. How about that? Right?
- JLJason Lemkin
Yeah, but why buy the... Harry just asked, "Listen, why buy the B-tier?" If you just look-
- RORory O’Driscoll
Because the stock could-
- JLJason Lemkin
It's like IPOs. Why buy-- Like, Braze is getting acquired for s- for whatever, five point eight billion. It's down forty percent from its IPO. Like, why buy any IPOs that aren't A-tier? Why buy... And you just, there's just nothing in the public... You can make money as a, as a, if you g- if get your nice seed entry at eight million, uh, post, you can make money on the B-tier, right? But, uh, you know, it's the start of this conversation. It's A-tier or bust. There's just... The discount's too high. What the hell am I gonna do with my CoreWeaves?
- HSHarry Stebbings
Yeah, Rory.
- JLJason Lemkin
It's five or six... I'm not going long on C- I want to hold, I want-- I'm not passing CoreWeave to my great-grandchildren. I'm not putting it into their five twenty-nines that I'm giving to, to, to, [chuckles] to my great-grandchildren. You know, there's no way.
- RORory O’Driscoll
I mean, th- th- this is the Jason stock picking is dead. Um, this is the public equivalent of the private comment, only the biggest companies matter. And again, the great thing about this is I, I can prove you wrong more easily in the public markets. 'Cause what, you know, when you go back over a year, I mean, you know, NVIDIA is up eighteen percent. N- Nevas is up fifty percent. Um, you know, SOAX, I mean, that's, that's, uh, Micron's up three hundred and fifty percent. I mean, the truth is, you buy the second-tier assets 'cause you think they're gonna pop, right? So, you know, I hear you, but no. You know, the, the, the bigger you are, the more likely you are to have no-
- JLJason Lemkin
Well, let's see if you put twenty percent of your, of your personal portfolio into those, into the Microns-
- RORory O’Driscoll
Well, that's why they call it-
- JLJason Lemkin
... 'cause Micron-
- RORory O’Driscoll
... downsizing
- JLJason Lemkin
... there's a lot of risk there, right?
- RORory O’Driscoll
No. Agreed. I wouldn't, I wouldn't dare. [laughs]
- HSHarry Stebbings
So Rory-
- RORory O’Driscoll
Yes
- HSHarry Stebbings
... you know we have Jason's IC. We, we're gonna have Rory Recommends, okay?
- RORory O’Driscoll
No, we're not.
- 16:55 – 18:39
Anthropic’s Growth Slows: Is a $1.5TN IPO Still Cheap?
- HSHarry Stebbings
Okay, okay. I- I'll leave it there. I'll leave it there. It's okay. Um, and we can talk about what maybe caused a slight crack in that-
- RORory O’Driscoll
Yes
- HSHarry Stebbings
... which is Anthropic's numbers. Anthropic announced that they'd turned profitable on an adjusted basis. Growth slows. IPO price potentially rumored to be going down from two trillion to one point five trillion. Q3 revenue was sixteen point eight billion, up forty-five percent on Q2. Eighty-five percent gross margin, which we'll talk separately about. What should we take from these numbers?
- RORory O’Driscoll
I think it was good. I mean, I think that, like, it depends. Look, again, it's-
- JLJason Lemkin
You should tell your voice that, Rory. [laughs]
- RORory O’Driscoll
Sorry, long day.
- JLJason Lemkin
[laughs]
- RORory O’Driscoll
Um, I mean, look, growth is clearly sl- slowing fairly quickly, but from an unsustainably high number. I mean, it ta- it had 10X for the last three years. It's highly unlikely to 10X, you know, what was it one week coming into the year, ten billion. If it, you know, if two more 10Xes, then what, let's say a hundred billion, you'd be at a trillion. So y- growth was going at a cl- this is all about how fast is this gonna grow- How quickly is the growth gonna slow, right? And honestly, I thought, I'm sure people are sitting there going, if you add linearly, if you did five in Q1, 11 in Q2, 16 in Q3, you kind of lean in and you're at 20, 21 in Q4, if you keep adding five billion bucks a quarter. I'm not saying they will, but, right? And you do that. So you start next year, which is y- which would be when you go public, the n- the future year. If you're at a $20 billion runway at adding five a quarter, then you do 100 and, you know, 5, 110. And now you're saying it's 12, 13 times forward revenues for the most exciting company in the world. It doesn't feel crazy. So, you know, it doesn't take a lot of squinting to make that work.
- 18:39 – 21:49
Why Anthropic’s Revenue Could Be Less Predictable Than SaaS
- JLJason Lemkin
You know, I'd say, I'd add just one thing for, for, for what it's worth, just tactfully, I, I thought, I, I, I think, Rory, you'd agree. I mean, Chamath's tweet was just raise whatever you need at $1.5 trillion and move on, right?
- RORory O’Driscoll
Get it done.
- JLJason Lemkin
Win the day. Like, if you're, if you could raise it $2 trillion, but it's gonna stress your capital needs, d- like, it's just evaluation. So in a- in absolute terms, it's, everything's great, right? This is unprecedented on all levels, great team, great application. I think, though, what I think, what I suspect will a reminder is, it's gonna be very choppy after the IPO because going to Dev's point when he was on the show, developers are not loyal, and the amount of market share, the, the, since this show started, right, the amount of change in Anthropic versus OpenAI versus OpenWeights versus Jev, right, which didn't even exist, what, 45 days ago, right? This is a winner. This, but, but the amount of variability in, in the, in, in the incremental growth and in the market share, there's only so much predictability in this revenue. There's only so much ARR in the, in, in the ARR here, and I think it, it, it, it, depending on how, how, how effusive the markets are, it may create stress. It w- it wouldn't surprise me if at the end of next year, Anthropic's market share is down, you know, 10% from where it is today, and it still could be great on an absolute basis. But down percent wouldn't, wouldn't be a shocker at all, not just in tokens, but in revenue. Easily could happen. Look at, despite whether OpenAI's at 70 or 50, it's a lot. [laughs]
- RORory O’Driscoll
When you say the sh- you mean the share is down?
- JLJason Lemkin
Yeah, market share could be down, right?
- RORory O’Driscoll
Yeah.
- JLJason Lemkin
And so when you're, when you're building your models, right, not just DCF models, but your top-line models, you could be materially off from your, from your good case, right, your best case, and it, and it, and it should be expected. It should be expected.
- RORory O’Driscoll
Which, uh, to state the banal, is a little scarier than the average recurring revenue business, right? And that's what people are wrestling with. How do I think about... I mean, if you c- have continued market share shifts between the key players, then the next shoe to drop is typically, well, I wanna keep my market share, so I'll look at price. And I think, you know, everyone's trying to work out from a game theory perspect- you know, what, you're right, what does that look like as a P&L going forward, right? Which is why going back to the boring thing I keep saying is that provided the end user demand at the top is there, you can, you know, everybody can win, and we all love businesses where everybody can win, right? If it ever, if that starts to slow down and then price competition becomes not a m- you know, literally the thing you gotta do to take it from the other guy to keep a l- growth rate going, then it could get pretty tougher. So that's-
- HSHarry Stebbings
Do you think Sam was super strategic raising his supposed round at 1.4 just in terms of some form of anchoring and message to market?
- RORory O’Driscoll
I think when you need money, you take money, and I don't know if there's a big sophisticated, oh, 1.4 as a messaging versus 1.5. I think it's as simple as, you know, we spent a lot of money in compute. We didn't get our IPO done. Been good. We spent all of Masa Son's money. Better get another 40 at a price. I mean, you know, what are the constraints? It's gotta be up on the last round, otherwise the messaging is shit, and it's gotta be down below reality to leave room for the upside. You know, there's only a finite number of digits between... Well, there's infinite number of digits, but there's only a finite number of one decimal plus digits between one and two.
- 21:49 – 25:29
Why Replit Switched Its Default Model From Claude to OpenAI
- HSHarry Stebbings
There, there are a couple of elements beneath this story, uh, one of which, or beneath Anthropic as a week, uh, was Replit made OpenAI its default. Jason, I, I am intrigued here. Anything from you on that, especially given your Replit power user status. [laughs]
- JLJason Lemkin
I think it was a stupid media story. Um-
- RORory O’Driscoll
Yes
- JLJason Lemkin
... I, I mean, we do use Replit about 14 to 15 hours a day. Basically, uh, R- Replit has its own router in it, right, its own model selector. It's, it can be invisible or visible to you depending on what category you're in. And, uh, and, uh, OpenAI models are just, are just cheaper for the same rough quality output in Replit, so they just made it the default. And TechCrunch miswrote an article saying they were no longer working with OpenAI, which wasn't true. They just flipped the default from Opus and Fable to, to, to Astra. That's just the default, and it's what we're, we're all, we're all routing, right? We're all open routing one way or the other. Um, it's just if you're Replit or Lovable or, or, or Base44 or V0, you have these extra incentives because your average user just wants to have a high-quality output, and, and they're very incented to get this quality price thing just right for you, right? Unlike, you know, the average idiot pre-configuring open router themselves, hoping they get it right, these guys are ac- it's more interesting to watch what Replit, Lovable, Base44, V0 do because they have an incentive to nail the routing, right? They have a very strong incentive. They can't, they can only partially pass it on to the end user, right? So we can actually squint and see the future based on what these, these guys are doing. And what they're saying is, listen, what Amjad's saying is the quality is sufficiently peer level here, and the price is 30 to 40% better for us. What, today, why would we use Fable and, uh, Opus? And you know what? Next week, he may be at a, at a different event and get on stage and the, j- just go into this market share thing with Anthropic. It may change, right? Uh, it may change. They may not have fully thought through how to use Sonnet 5.5 and Haiku 5.5 and, and they have Kimmy and others. But if Kimmy actually was so great, you know what? All those guys, Replit would be using it entirely, which is maybe the more interesting learning that was under discuss, 'cause it will route through them too, and it doesn't. Amjad didn't get up on stage and say, "We'll route everyone through Kimmy," did he? He said, "We're going from Claude to OpenAI because it's just as good and che- materially cheaper."
- HSHarry Stebbings
What's to take away from that?
- JLJason Lemkin
That's all he cares about.
- HSHarry Stebbings
What, what's to take away from that? That Kimi is not as good as people think? That-
- JLJason Lemkin
In practice, not seeing the benefits for his billion dollar of revenue, for his customers. He's not seeing the benefits. Or he would just auto route it. They're very-- The customers are very cost sensitive at the, at Replit and Level. Not just... The SMBs are very cost sensitive 'cause they wanna get everything for, like, 25 bucks a month, so they even have free LLMs. But the enterprise customers are very cost sensitive because they don't want these massive variable bills for the product teams going off and building prototypes. Everyone's-- It's a super cost-sensitive model, right? Hosting, database, um, LLMs. You c- if you slow down and see what they're doing, and they're each at, like, a billion in revenue, right? That's-- It's like a little lab that we should be paying more attention to. It's a more interesting lab than the idiots [laughs] spending all the money and, and mis- and misallocating it and hoping it works. Like, we... That's a great business model, but we learn much more from the massive investment these guys are making in optimizing high-quality output for low cost. I, maybe others are doing this, each at a billion in revenue, but I don't think that many people are doing it for end users.
- RORory O’Driscoll
I think it's a great point 'cause it, it is a, yes, it is a very objective calculating test of what value, you know, how do you think about the value you're leaving on the table by paying top-tier prices for, you know, less than top-tier intelligence, and what do you actually need? 'Cause with a billion dollars, you've got enough time to really think about it. It's a good point.
- 25:29 – 28:47
Does Claude Code Review Threaten Coding Startups?
- HSHarry Stebbings
Yeah. Jason, you are the best user and analyzer of these tools. Under the Anthropic What Happened This Week, Claude Code Review is out. We saw Boris Chorney tweet about it. I'd love your thoughts. Which startups are destroyed by this? What did you think of it?
- JLJason Lemkin
You know, I don't wanna t-talk out of my rear because it's so much change, right? I mean, you know, Greptile is super hot. They just raised whatever this week, right, 75 billion. I think Rory's in CodeRabbit, or I, I could be wrong. They're, they're an epic player, right? There's all these great folks, and, um, they all have benefits. They all have the benefit of be- uh, uh, I think in many cases, of being able to run on LLMs, which is very valuable, right? Having one LLM check another LLM's work, having OpenAI check Claude or vice versa. So there's a lot of it. Just like there have been since the dawn of time in software, there's a lot of benefits to having pure plays, right? Um, but it's also always scary because this is cl- this is the core of Anthropic, right? Claude, Claude Code is the core of Anthropic's engine we've talked about. And making code review, making all of this process, it's actually arguably mu-much more important than building code today. You know how much time we spend now reviewing the code because the LLMs are so good at getting you 95% of the way there. You talk to any engineer, they're like, "Oh, I'm out at dinner and I bui- I built the feature for Harry. I'm, I'm, I'm having, I'm having a, you know, barbecue and my phone is building the feature for Harry." And you did build the feature that Harry asked, but you're gonna have to spend the whole next fucking three days testing it [laughs] and fixing it. So it's a big deal. H-How big a deal is it? I, I have to imagine it's a bigger deal than the Nothing Burger, which was, uh, you know, Claude Design or whatever the heck it's called, right? Um, which didn't kill Figma. But how much, it's, it's so hard to predict. It's scary if you're working at a competitor. It's always sc- it's always scary, right? It just has to. No matter what you say on Twitter, it's always scary. But, um, even if it memes you 30 or 40%, you just gotta be better.
- RORory O’Driscoll
One of the things we said last week, and I stand by it, the best markets for standalone AI apps, and I put coding as effectively an app, the ones with the highest growth rates have also been closest to the sun. They've been closest to the foundational model. In fact, I just did a tweet on that today about, you know, it's, it's the Icarus moment. You know, Icarus had no choice. He wanted to get warm, he gotta fly close to the sun, right? I think these big use cases are interesting. I mean, you know, it's like code generation, code review, um, legal. They're all very close to the foundation models, and every six months you have the terror moment of, "Oh my God, they're gonna do it," right? And that's the downside of being in that real estate. But the upside in being in that real estate is they are marquee, presti- they are superb use cases for the technology, and as a result of that, you know, CodeRabbit, all these companies are growing faster than we've ever seen. If you wanna avoid that risk, Harry, then you go back to your, like, dull little three X year-on-year software companies that you were bullshitting on about earlier, right? That no one wants to invest in, right? You can't have it both ways. Y-Y-You know, you can't sit there and go, "Oh, I want infinitely fast growth rate, utterly undifferentiated from fou-foundation models," even though the only reason we're getting the fucking growth rate is because the foundation models have unlocked new capabilities, right? It just doesn't make sense. That's not a thing. I mean, I'd like to be, you know, a lot of things in my life, but it ain't gonna happen.
- 28:47 – 31:34
Why Code Review Could Be Bigger Than Code Generation
- JLJason Lemkin
I, I don't know if this is true from a venture outcome or revenue, but I actually think code review is the single most important category today in software.
- RORory O’Driscoll
Yes.
- JLJason Lemkin
By far the most important category. It does not mean it will make the largest fortunes. It does not mean there'll be a 600 billion code review cursor. But what I mean is buil- uh, you cannot vibe code your own SAP in Salesforce.
- RORory O’Driscoll
Agreed.
- JLJason Lemkin
But the rate at which we're building code is unprecedented, and the code now is pretty darn good, but it's never production intent. This is the, this is what everyone misses. It's never production ready or production intent. And so if we step back a minute and define code review more broadly, it is the most important category in building. It is so important. Everyone is building 10, 12, 14 hours a day in Claude Code or, or, or Cursor, whatever. But the amount of time it takes to review and process it and make it production intent is still an order of magnitude more than building. And we have not figured out... We're pretending that this, this work is, is, is, is, is complete. It's not. If I could find the best next generation true code review broadly, the, and the best team, I, I, I'd make 10 bets because we need it. And they, they may all get killed by Anthropic. We'll see, but, but it's much more important than code generation. This is back to Amjad's point. I can rotate between, uh, um, you know, Astra and Fable and whatever. They're all great, right? And maybe Kimi if it catches up. But what-- how am I gonna get it into production?
- RORory O’Driscoll
Agreed. Big picture It's pretty clear that we're making way more software than we've ever made, right? Probably orders of magnitude. I mean, just l-looking at the Anthropic thing they did on employment and recent, that paper they did on unemployment. So given that, the whole software development life cycle's gonna change, right? Because how that gets deployed successfully is probably gonna be very different in an agentic world. So I, I agree. I think it's a... There's a whole bunch of compelling related opportunities, um, you know, not just around code review, but the end-to-end memory management, testing, Sandbox is how we, where you and I have an investment. So yeah, I just think the... You know, I said it last week, I'll say it again, coding is the mother lode of LLM value, right? It's where it all happens, and the entire... And therefore, there's gonna be a whole bunch of ancillary opportunities around that. And you know, they mightn't be $25 billion, so you guys might pass, but if they're a $10 million outcome, I will take my humble check and be very glad.
- JLJason Lemkin
Yeah, maybe I shouldn't call it code review, because Rory's point, it might be construed too narrow, but-
- RORory O’Driscoll
Yeah
- JLJason Lemkin
... build to pr- build to prod is the biggest category.
- RORory O’Driscoll
Yep, absolutely.
- JLJason Lemkin
Build to prod. How do you go from built... It's built, it works, it works in dev, it looks great. How the hell do I get that thing into prod? That's where the big money's gonna be made now. We... The money's already been made in frameworks for build, and they're great, and let them duke it out. Let, let, let, let Sam and Dario and friends duke it out every m- every, every day. We all benefit. Um, but h- get this... How do I get this crap
- 31:34 – 35:31
Modal Hits a $15.75BN Valuation as Inference Explodes
- JLJason Lemkin
into production?
- HSHarry Stebbings
I want to move actually to one of the most interesting rounds I thought was Modal closes at a $15.75 billion valuation, run rate surpasses a billion dollars. It's $750 million Series D led by Accel. I just actually interviewed Eric the other day. He was amazing, actually, in the studio. How do we think about this round, um, and what it means in terms of the wider inference market?
- JLJason Lemkin
I like it better than CoreWeave. I like adding value to the universe rather than [laughs] just being some, some outsourced racks of, uh, of GPUs. I like this one better, even though the co- to Rory's point, the competition appears to be infinite and limitless, right? So you better, you better have some, uh, some cojones in venture growth to do it. Um, but, uh, yeah, I, I like a- I like at least adding value to the, to the universe.
- RORory O’Driscoll
The interesting thing about Modal is they appear... You know, they were, like, six... I mean, they were always s-s-perceived strong by developers, but I think they were, like, 60 or under 100 million, like, mid, late last year, right? And that level of acceleration is just amazing, right? I mean, it's just, it's stunning when you see it, right? And, um, yeah, so, I mean, that's... The first big picture is, oh, my God, inference is exploding here, right? And yes, they are very developer-friendly. They have a whole bunch of products. So yes, that's the takeaway. The other thing I was just thinking about it is, you know, how big could this market be? I mean, I think you, you look at the four or five key inference providers, and you add them all up, and maybe they're plus or minus $5 or $6 billion in run rate revenue, which is a lot, right? But if you think about it, they're all serving all the open weight models in a world where right now, and it's not like with like, the sum of the OpenAI and Anthropic revenues is probably north of 100, 110 billion right now. So, and by dollars, it's less than 5%. So it just points to the opportunity here, to the ex- I mean, going back to Jason's Replit guy. Think about Amjad at Replit sitting there going, "Do I want to give money to Claude Code and give them a 70% gross margin for this token, or do I want to buy it on Modal and give them a 30% gross margin for this token?" Right? Well, if the tokens are roughly the same, you know what you wanna do, right? So yeah, it does point to the upside there.
- HSHarry Stebbings
I completely agree it does. I'm constantly shocked by, like, the infinite expanding size of the inference market.
- RORory O’Driscoll
Absolutely. No, it's, it's stunning.
- HSHarry Stebbings
It's the, it's the one thing that I know today that I wish I'd known 12 months ago, 'cause I would have done things slightly differently 12 months ago had I been more expansive around my mindset here.
- JLJason Lemkin
Well, also, you had to be smarter than me to understand how much this revenue could be captured outside of OpenAI and Anthropic. A year ago, I wasn't smart enough to, to really think through this. I didn't think enough of it would be captured outside of it, so I didn't think it was that interesting. Um, but I, I brought-
- HSHarry Stebbings
But are these inference providers-
- JLJason Lemkin
I was wrong
- HSHarry Stebbings
... gonna be worth $300, $400, $500 billion?
- RORory O’Driscoll
I always think it's a race between two things. You can put your MBA hat on and say, you know, open weight. Going back to Jason's comments on CoreWeave, all the Neo clouds are saying, "Oh, my God, let me get this straight. We do all the building work, we buy all the compute, we borrow all the capital, and then these bozos come in, buy from us, sell it to developers, and make a shit ton. Why don't we do that?" Right? So, you know, y- you put your MBA hat and you can imagine a lot more competition here, right? And then you say to yourself, "I doubt, you know, you get those kind of valuation." On the hang on, let me finish. On the other hand, when you have this kind of growth rate, nothing else matters. It covers a multitude of sins. You know, my bet is their margins have crept up this year, right? So-
- HSHarry Stebbings
They have Fire- Fireworks in mid-30s now, and they'll be, you know, g- hitting 50 pretty soon.
- JLJason Lemkin
Even mid-30s, if it stays there, I mean, the public markets can, can tolerate that. It's just the multiple you'll ultimately get o-on all of it, right?
- RORory O’Driscoll
Agreed.
- JLJason Lemkin
There's plenty, plenty of folks like that. So it's okay wherever it ends up, right? I mean, it's important for, for Accel probably nailing it at 16 billion, but, um, I think it works either way.
- HSHarry Stebbings
Do you think the three kind of hyperscalers of inference are Base10, Fireworks, and Modal?
- RORory O’Driscoll
Probably in some simplistic who's the winner, you're probably right, those are the three biggest. But, you know... I don't... Maybe, maybe the statement is this. I don't think it's like the hyperscalers where no
- 35:31 – 38:45
Investment Committee: Town at a $1BN Valuation
- RORory O’Driscoll
one else mattered.
- HSHarry Stebbings
Jason, this is a big funding round, but I think, um, it's too easy for you in the investment committee to decide that you're probably gonna do Modal at $15.7 billion.
- JLJason Lemkin
Yeah.
- HSHarry Stebbings
And so if we call an investment committee, there was another round that was announced, which was Town at a billion dollars. I think it was $108 million Series B. Are we going to do this from our growth fund, Jason?
- JLJason Lemkin
Well, look, Harry, as you know, I regret passing on Modal and letting the Excel guys sneak in there. Um, they're aggressive, and they're behind in many ways on the AI investment so that they... I mean, they did the deal over the weekend. You know, I asked for one business day, and I didn't get it at, at Modal. Uh, Modal was, you know, by all intents, it was cheap. Yeah, I mean, three billion to one billion in five months. At the end of the year, we end up at $1.4 billion. Next year, five billion. Even if the margins never hit the forties, um, we'll- we make money on this deal. Like, there's just no question. Let the markets crash. Town I'm gonna pass on, Harry, and if you and Rory and the rest of the team wanna do it, I'm fine with it. Um, you know, a billion today is the new hundred million, right? Um, a billion is just the, the entry point for a, a, like, a classic B round. In the old days, when, when the three of us met, they used... Series B investors used to say, "As long as it's 100 million or less," it didn't matter because the classic Series B wanted a billion-dollar plus IPO. They wanted their 10X, so 100 million, 80 million. They didn't care, right? Uh, so a billion's the new 100 million. Do I, do I... Town has no data. It ha- it, it's sort of interesting revenue. The... It has a smart team. This is just a bet. Th- this is just an old classic Series A, Series B with a bow tie at a billion. And, and if you want to... If this is one of the 10 you want to make in the next 12 months, just do it. I, I, I just consider it a chip, and I don't, I don't need to be at the rest of the meeting. But there's just not enough here for me to get excited either way. Bunch of guys from Plaid. I mean, it's a great one, but, you know, we wouldn't even do Plaid today. I don't even see a $25 billion exit for Plaid, so I wouldn't even bring it to the IC. It's too early to predict, right, where it's gonna go. It's too early. It's just a, it's just, it's just a classic bet.
- HSHarry Stebbings
So we're not doing it, Jason?
- JLJason Lemkin
Uh, well, I mean, the good news is the team only predicts it needs about 500 million of inference over the next 12 months, so that's much better than the Instinct team, which needs five billion. So in a sense, I like it for the fund because we were a little more conservative than our peers, so all we need to do is round up some of our SBVs and put in another 500 million to fund the inference. So, so in, in a sense, there's a positive here, right? Because I'm, I'm, I'm, I'm, I'm glad we passed on Instinct even though we look like fools because I don't know who's gonna fund this bad boy. At least Town, again, they only need 500 million over the next 12 months. So, so if we're about protecting our downside, let's do it, guys. I just, I just don't know. It's just, I just don't know.
- HSHarry Stebbings
Would you rather do Instinct at 30 billion or Town at a billion?
- JLJason Lemkin
All I wanna know is maybe we can get back into Modal at 20. I... We just blew that one over the weekend. The Excel guys, they're just aggressive. They're just aggressive. [laughs]
- RORory O’Driscoll
I, I, I think that we should put this clip in the vaults, and two years from now when you realize that a billion dollars still really is something, and we can just revisit this discussion. I mean, I just... Whenever we're throwing blithely around numbers like a billion dollars, I mean, there's only two, you know... Yeah, I mean, w- it doesn't sound like a lot. There's only 4,000 or 5,000 billionaires in the country. It's real money, right? And that's for 30 billion. It's pretty downscale.
- 38:45 – 42:41
Are Private AI Valuations Completely Disconnected From Public Markets?
- RORory O’Driscoll
But okay.
- JLJason Lemkin
Well, you know what? You know what? You know what I was thinking as I was writing my LP report last night, I, for all s- It goes to the next point on, on Harry's list, Anduril at 90 billion, right? And, and what I was thinking about with, with, with Town and all these is, listen, Anduril is clearly a generational company, right? Uh, got, got in early on next-generation defense, clearly deep, has the contracts, has everything, right? But is this thing worth 40 times revenue with the margins and everything it has? And it's like the, the... I think the meta question is, a- are, are s- are a bunch of the rounds we're doing, and maybe Modal isn't one of them, are they so disconnected from public comps that we either need, um, um, these massive public comps to, to recorrect, right, in a way and have the Anthropic do, or, or some of these deals just make no sense even though the companies are great. Does Anduril make any sense at 90 billion? Does, does Town at a billion make any sense? I mean, uh, when, when, you know, when, when Braze was just the best, the, the best exit in the whole public GTM category at six times revenue. Monday's at two. HubSpot's at two.
- RORory O’Driscoll
I mean, you, you can't-
- JLJason Lemkin
Clavius at two.
- RORory O’Driscoll
Yeah, I mean, you know, you, you-
- JLJason Lemkin
[laughs] Two times revenue.
- RORory O’Driscoll
Yeah.
- JLJason Lemkin
Growing 20 s- 20-something percent, right? I'm, I'm not saying they're the same. The growth is here. But, um, I do wonder if some... If, if the multi... Here's my point: if the multiples are disconnected from where they will land, the, the multiples, and I... That's just venture, right?
- RORory O’Driscoll
My comment would be this: I think that's almost certainly true, right? The multiples are disconnected 'cause, you know... A- And the only thing that kind of makes that plausible is the growth rate. Look, if you're a mature defense contractor doing two billion in revenue, you're worth $8 billion best case, right? If you're a $2 billion revenue defense contractor and you've doubled for the last couple of years and you think you've got a line to the administration for the next five- or the Pentagon for the next five years, then maybe you go two, four, eight, 20 and you justify the valuation. So it's not impossible, but to your point, Jason, it's leaning in a lot into the future, right? A lot. And all these valuations, you know, you could wake up one day and decide amazing company's just priced wrong. 'Cause it's, you know, of all the things that are likely to bail you out, just 'cause you mentioned one other in passing, it's highly unlikely that the US market, you know, which is trading at an amazing alt... I mean, you're not gonna get huge multiple expansion from here that saves you, I would guess.
- HSHarry Stebbings
I, I'm asking does it all go back to the point that Jason made earlier about the need to move large amounts of money? And actually-
- RORory O’Driscoll
Yeah
- HSHarry Stebbings
... if you need to move a billion or two billion, I agree with you totally on the multiple com- com- compression you're gonna get from here. But, you know, is there a chance it's a $200 billion company? Yeah, not im- not impossible. So it's a 2.2, 2.5x.
- JLJason Lemkin
And you're happy.
- HSHarry Stebbings
And-
- RORory O’Driscoll
Yeah
- HSHarry Stebbings
... and you moved a billion-
- JLJason Lemkin
No, yeah
- HSHarry Stebbings
... to three billion.
- JLJason Lemkin
I just wonder... And listen, whoever's doing this tender op- these are very sophisticated investors, of course, right? Let's not be, let's not make fun of it. But I, I do wonder if some, we are just taking revenue multiples too far today. I'll give you a different example. I was like- like Profound or Harry's and Peak, right? These are interesting companies, right? But when you... My God, when you look at the ca- the public comps are trading at two times revenue, okay? And you can say, "No, no, these are agentic guys." Okay, these are agentic pl- these are agentic players, uh, high growth. But when the growth even just be- slows to 70 or 60 Okay? Will it, will it trade at a Cloudflare revenue or will it trade at, uh, a better-than-Braze revenue, right? Which until today was trading at three times revenue. It's not... I'm not... I, I get the growth side. It's the job we're in. But I do wonder if the AI versions of low multiple companies will just, will settle too early into the multiples of their, of their peers. I j- I just don't know, right? 'Cause I think they're being punished. I think the, the whole marketing category is the worst public category, uh, without question, right? They're not dying. HubSpot and, uh, and friends are not dying. Klaviyo is not dying. They're, they're trading at, you know, below three times revenue. Uh, I would have a hard time getting the IC excited about it.
- 42:41 – 46:03
Is Bending Spoons Becoming the Berkshire Hathaway of Software?
- HSHarry Stebbings
Jason, speaking about multiples-
- JLJason Lemkin
Yeah
- HSHarry Stebbings
... and how public markets think about multiples, where they're appreciated, where they're not, a fascinating one for me was actually Berkshire doubling down on Bending Spoons. Um, obviously, it bought $330 million of new shares, um, caused a massive bump in the stock price, and the assets that these, that Bending Spoons is buying are traditionally slightly challenged assets, uh, slowing growth rates, not the darlings. And then the price premium that's being placed on Bending Spoons the holding company right now in public markets is enormous. I'm just intrigued, boys. How did we think about this?
- RORory O’Driscoll
Did not expect it. [laughs] I mean, what do you see?
- JLJason Lemkin
I think it makes sense. I think, I think B- Bending Spoons is like the Berkshire version of, uh, Berkshire ver- version of software, right? It's like See's Candy or Coke. Like, they're trusting that the boys have b- this is not... They're not flipping them. These are holding companies. You know, uh, uh, Warren Buffett wanted to hold See's forever, right? And Bending Spoons is saying, "Listen, we're gonna be diligent. We look at th- a thousand deals a year," or whatever you ha- What is it, Harry, 5,000 deals a year? We're gonna do five or six, right? And we're gonna find enduring software assets that we're gonna hold for as long as we can hold them. And the quality, you can, you can... If you actually step back from it, the quality of the assets is improving. Vimeo, kind of a dog that they kept. I mean, Evernote, kind of a dog. Now, they made them work with price increases, right? They're, they're gonna make money off both those deals, right? Eventbrite, kind of a dog. Like Miro and Air- Airtable, I'm gonna argue better, right? Better. And so I think Berkshire's saying, "Listen, you're gonna make these into a bunch of See's Candies and Coca-Colas, and folks think you can't make them enduring, but you're gonna make these endure for a decade or longer." Maybe, maybe I'm wrong, but I think they ul- ultimately probably see some similar attributes that they can make these long-lasting assets. It's just like See's Candy.
- RORory O’Driscoll
Get a See's Candy from the 1960s and get a See's Candy from today, and you look at them side by side, they pretty much look like the same thing. I don't think that'll be the case for the Evernote product of 2080.
- JLJason Lemkin
No, but my point is it may be as close as you get in software, the Bending Spoons model, because they're gonna keep these and keep these assets, right, and invest them. I'm not saying it's the same as a See's Candy.
- RORory O’Driscoll
I describe it as it's conceptually the same idea as Berkshire Hathaway, but perhaps in an industry where the idea doesn't apply.
- JLJason Lemkin
[laughs] Maybe.
- RORory O’Driscoll
We'll see.
- JLJason Lemkin
Or maybe you let, maybe you let... Maybe it, it's like Jane Street putting all the money into whatever his, his name, Leo Alepojal. Like, r- Berkshire's like, "This is close to what we're doing. It's not our core. We're gonna let the, the Italian guys do it, and we'll take a meaningful position, um, and we, we think they have something. That we, we, we think they, they're gonna be able to maintain this incredible growth level because they will have, uh, a thousand assets to look at in a year, and we'll be able to maintain them in a way Vista can't."
- HSHarry Stebbings
Guys, y- I, you can also guide. We, we can do General Atlantic set to IPO. Wow, didn't see that one coming. We can do Tesla, the new Roadster. Unbelievable videos of cars that literally elevate themselves with thrusters. We can do Benchmark on stage conceding that competition, eh, it's a bit of a flimsy term in venture these days. Any predilection as to where you wanna go?
- JLJason Lemkin
You know, I wanted to do the 37 Signals one, but, um-
- 46:03 – 50:23
37signals and the Case for Never Raising Venture Capital
- HSHarry Stebbings
We can do 37 Signals. David Hanema Hanson, who-
- RORory O’Driscoll
Wow
- HSHarry Stebbings
... is an incredible race car driver, has the most extensive library of race cars. Um, 37 Signals made 370 million in profit since 2020. Bootstrapping ain't all that bad, hey?
- RORory O’Driscoll
I was, yeah, I was gonna say all... I mean, you know, going back to the conversation at the start, all these software companies, none of the VCs cares. Well, if you hold on to it yourself and pull out $370 million, I think you'll be fine. That was a great result. I did not... I knew it was good, but-
- JLJason Lemkin
I don't think-- I think that was wro- for what it's worth, I think it's directionally correct. I think the point that was made, which was interesting, is they say they do 10% profit sharing, right?
- RORory O’Driscoll
Yeah.
- JLJason Lemkin
So if you do 37 million of profit sharing, it's 10%, Rory can help me with the math, I think that would suggest overall-
- RORory O’Driscoll
Yeah
- JLJason Lemkin
... profits were 370. I, I don't think it could make that much money. I'm guessing it does 60 to 70, 60-ish million a year, right? And even if it's, even if 40 million can go to the b- bottom line-
- RORory O’Driscoll
Yeah, yeah, 40 times six. You're right, 240
- JLJason Lemkin
Yeah. I- it may be in the zone, right? It may be a little high. But I, but, but when you look at the fleets of cars and all that, obviously, you know, they've been m- you know, they, they, they've been making this kind of money. I'll tell you a couple thoughts I had. One is it, it's, it's, uh, it's something to reflect on in the era. I don't think we're gonna have a lot of one person billion dollar startups, but we, we could have much smaller teams, right? The one I kind of [laughs] ... The one I thought about for the AI era is, man, Zapier should've been this. You know, people throw out Zapier, Zapier as the one and done example in venture. Like, and for VCs, it's great, right? You raise one round of whatever out of YC. I think there was a, a quiet secondary round from Bessemer. But r- really, one venture round, and you get up to th- they're at 300 million in revenue today. Growth has probably slowed. Probably not gonna IPO as its current company, but a great company that did something generational. What if they raised nothing, and the three of us just split 200 of the 300? Like, you could do worse.
- RORory O’Driscoll
Yeah, I think you could do a lot worse
- JLJason Lemkin
I mean, the GA guys may make more, but you could do worse, right? Then, uh, so I almost wondered if this one and done, which I used to be a fan of, is gonna be a trap in the new age. None and done j- is much better because o- it's tough to do dividends right in one and done. You can do them right in one and done, but it's, it's tougher. It's tougher to do d- dividends with the Benchmark team, right? To split them with the five... They're, they're not really that interested in the dividends, are they? [laughs]
- HSHarry Stebbings
Can you not just buy out investors? If you're a Zapier, you just go, "Listen, guys, it's a 5X multiple. We'll, we'll buy you out at a 1.5 billion price. You want the liquidity."
- JLJason Lemkin
You can. It gets ex- I mean, it doesn't happen that... Maybe Rory can come up with some examples. It does happen, but it gets expensive to do it from free cash flow. Even if you have a lot of it, it's not that, not that simple, right? It's not... It can be done, right? Buffer did it. Expensify did it, but they all did it at pretty mediocre outcomes to the investors. I think Redpoint made, like, nothing on Expensify, but probably more than if they'd held IPO, right? Um, it's, it's tough, right? [sniffs] I like none and done better than one and done now. [laughs]
- RORory O’Driscoll
Yeah. Well, the reason it's tough is because the only way you can pay... You know, if they own a small percentage of the company, then, you know, one or two years cash flow can take care of it. But if you're trying to buy out an investor that owns 30% of the ca- of the c- of the company, and you wanna buy it out for six times cash flow, by definition you're tying up two whole years' cash. So it gets risky if you're doing it with debt. So you're right, these are, they're hard deals to negotiate. But, look, if you needed a million or $2 million to get going, you take- you do the deal to start. But yeah, what... The big picture we're saying is there are a number of software companies that mightn't set anyone's little heart aflutter, but are kicking off cash and are extraordinarily valuable to their entrepreneurs, and I think that's great. And it just show... Not everything has to be through the lens of venture. I wanna make 25 billion or die trying, right? And it's really good that these guys are making money here.
- JLJason Lemkin
My learning when I compare it to... I just picked, um, Zapier as, 'cause they were at 300 million and a generational company in their own way, but probably won't IPO. Um, it's like, I used to think this one and done was a nirvana, right? The three of us get together, we wanna start a company. We're first-time founders. We don't have the money. We raise a couple million, right? From 20VC seed or whatever, and, and, and we just keep growing our company, right? And it's not a lot of pressure. No one... We don't have to have board members and... But we don't, we didn't... The three of us didn't have the resources to do it, and I used to think that was a great outcome. Now, in, in the AI era, I think it's a trap because you can't dividend out the profits as easily. You can't become a 37signals that easily. Now, they, they took money from Bezos or others. I'm sure they figured it out, right? Um, but I almost wonder if no venture rounds is, is the way to go rather than one
- 50:23 – 53:39
Will More Venture Firms Go Public?
- JLJason Lemkin
in some ways.
- HSHarry Stebbings
Rory, how do you feel about GA IPO-ing? We gonna see-
- RORory O’Driscoll
I mean-
- HSHarry Stebbings
... many more firms IPO?
- RORory O’Driscoll
I think you have to be a critical mass. You know, I was looking at it there. You have to be 800 million plus or minus a billion of fee income, right? That's the real question is... Look, these companies, step back. The, um, there's a bunch of, obviously everyone knows, publicly held, PE-backed companies like, you know, KKR, Carlyle, Apollo, TPG. And then the question is, can you do a bunch of these for the kind of growth and venture perspective? And, you know, the, the, the binding constraint is the fee income, and it typically, the c- public investors give you a lot of credit for the fee, management fee income and very little credit for the carry, which is really odd in a venture conte- in a venture perspective, but be that as it may, to get to a market cap that matters, 'cause they trade at four or five times revenues best case. So you're probably looking at having to have 800 million in fee income. Now you say to yourself at 2%, uh, what's that, 50 times 800 mil- 50 times eight... Yeah, you got a couple hundred million dollars, w- w- well more of actual AUM. So it's doable. You know, Andreessen probably will g- could get there easily from here, but it, that's, that's kinda what you're looking at here. Now, maybe you'll get to be able to go on a lower amount of AUM because venture, A, get paid slightly more, and B, has carry that's more meaningful. So the very largest companies will do it, but not many is the answer. Right? And that's just purely... And that was a very financial metrics answer. Let me make a s- totally separate comment. It's really hard to do that and not change the culture dramatically and become a more risk-averse institution, right? You know, it may well be Andr- someone like Andreessen could pull it off, but it's just very, it makes it a very different company. So a second separate and probably more important criteria is, you know, is that what you wanna do, you know, as a venture firm? I mean, I think it's great for the founder who get to take a ton of money off the table, but then you become a corporate venture firm, and that's just a different thing.
- HSHarry Stebbings
I don't know if there's a difference. I'm not being a dick, but I don't know if there's a difference between at the scale GA is at now. Like, if GC became a public company, I know compliance-wise sure there's a bit more-
- RORory O’Driscoll
Yeah, maybe
- HSHarry Stebbings
... but just, like, they're just, they're such behemoths anyway. My laugh is you get in the lift and you're like, "Oh, where do you work?" And the answer is, "Here." [laughs]
- RORory O’Driscoll
Yeah.
- HSHarry Stebbings
A- and you both go, "Oh, wow." [laughs] Um, it's the same for both. Um-
- RORory O’Driscoll
Yeah
- HSHarry Stebbings
... so interesting. Um-
- JLJason Lemkin
Is there... You know, I should know this, Rory, from, from the public comms. When you do IPO, is there more fee pressure though? I, I assume when you're not public, you can play a few more games, right? Because it, it's... The LPs all know, but when you're, when you're, when you're public, everyone's scrutinizing all of this, right? Where every single dollar goes.
- RORory O’Driscoll
I don't think it's scrutiny. I think the comment is you always have to grow assets. You know, you're always launching products. You just-
- JLJason Lemkin
Well, you always have to grow. You al-
- RORory O’Driscoll
Yeah, you always have to grow
- JLJason Lemkin
... you can't, you can't just, you can't just pay yourself 80 or 100 as the, as the-
- RORory O’Driscoll
Exactly
- JLJason Lemkin
... folks running it and kinda check out, right? You've gotta grow.
- RORory O’Driscoll
Yeah. I'll even state it. Like, put it this way, if... And it's a silly example 'cause they're not big enough, but if old Benchmark had gone public at 450 million every three years, you know, Wall Street would've had a shit fit 'cause they're like, "Come on, dude." And now finally they're giving them what they want. "Oh, good, you got the growth fund. Maybe you should do a crossover fund next." That's the way it would roll.
- 53:39 – 55:59
Harvard’s 27% Return and the Coming Venture Capital Boom
- HSHarry Stebbings
Boys, what about Harvard's endowment? Harvard's endowment returned 27.1% to a $68 billion, helped by venture SpaceX stake worth about 2.2 billion. They're an awesome team. Nav CIO's amazing. Love them dearly. Worked with them. They're great. Anything here?
- RORory O’Driscoll
Yeah, I mean, if you invest in venture when you're in the big outcomes, it's good. And, you know, they've had a few lean years, but, um, yeah, I th- you're gonna see that. I think one of the other universities who went in direct into SpaceX have made out even more like a bandit. I think it's Washington University. I c- I wouldn't swear on which university, but someone did really well. So yeah, I think it's gonna be a thing. And it's interesting when it's concentrated in only a few assets. The good news if you're, if you're a manager, you prob- not a manager, but if you're an LP, you probably have some exposure to that. So yeah, you're gonna see a lot of this madness.
- HSHarry Stebbings
If, if you are an LP and you do not have exposure to Anthropic, OpenAI, or SpaceX, you are, you are feeling a lot of FOMO right now.
- RORory O’Driscoll
Of course you are. Yeah.
- HSHarry Stebbings
Um, and, and I think the venture market's about to get a lot hotter, by the way, because a lot of people are starting to get cash back now from SpaceX. They're seeing Anthropic on the horizon, and they're hoping for OpenAI on the horizon-
- RORory O’Driscoll
Yeah
- HSHarry Stebbings
... in Q1, Q2. And I think we'll start to see that cash recycle back into the ecosystem that provided it, and I think LPs will come in with more money into venture.
- JLJason Lemkin
In 2021, the average, uh, college and university did 36.6% from venture and PE, 41% was top quartile. Um, and, uh, Cambridge had 62%. So the, the, the Ha- the Harvard's great, but I'm waiting for a banger 27. I wanna get back to the nutty IRRs that we saw in the last boom, right? The, the outcomes here are, are an order of magnitude larger, right? Maybe even more than an magnitude larger. But show me the... I want, I want to see 60% IRRs. Like, good, good job Harvard guys, but this is no 2021 yet. Y- yet, right? Yet.
- HSHarry Stebbings
I feel that 68 billion is pretty impressive, to be fair. Yeah.
- JLJason Lemkin
It is.
- HSHarry Stebbings
Scale, scale matters.
- RORory O’Driscoll
The 68 billion, you do remember they are the oldest university in America, so they've been piling the money up for quite some time.
- HSHarry Stebbings
And the one thing I'll say, Rory, is-
- JLJason Lemkin
Wesleyan, 95.3% returns in 2022 from the 2021 in venture and PE from v- 95.3% returns, Wesleyan.
- HSHarry Stebbings
Wow. Any others
- 55:59 – 56:54
Is Tesla’s New Roadster the Swan Song Before an Elon Mega-Merger?
- HSHarry Stebbings
that I've missed, boys?
- JLJason Lemkin
It's early in the super cycle. Um, I think the T- you know, the Tesla one, I think it's the last thing we're gonna see before the merger with SpaceX. I think it's the swan song, if you wanna know my view.
- HSHarry Stebbings
[laughs]
- JLJason Lemkin
I think it's the-
- RORory O’Driscoll
It's a good song, mate
- JLJason Lemkin
... no, I think it's the swan song. I think it's the swan song. And I think Elon kind of said it. He said, "This is the last..." He said, "China's gonna take over the cars. This is the last car a human will ever drive." Both of which are clearly true, right? Uh, China is gonna dominate, uh, global EV and autonomy. Uh, no one can compete with their cost proposition in electric and otherwise. And, and no one will drive their own cars in a few years. Like, l- literally no one. And I think this is a... I mean, some of the... I don't know why he did all of it. Some of it's clearly for fun, right? Um, but I think it's, I think it's the last standalone big hurrah before it becomes one big company over the next X months, which was always Elon's goal. Having these companies split up makes, makes no sense for him, right? They'll all be, they'll all be merged. And so this is the last, the last Tesla party as an independent company.
- 56:54 – 59:30
How Elon Musk Creates the “Elon Premium”
- HSHarry Stebbings
Is it not the most masterful marketing from Elon? And the, the brilliance of Elon is the Elon premium and his ability to have extremely high valuations because of his presence. Doing these stunts-
- JLJason Lemkin
Yes
- HSHarry Stebbings
... justifies it like no one else can do, and gives it life, like-
- JLJason Lemkin
Yes
- HSHarry Stebbings
... for another 12 months without any recompense. I think it was brilliant.
- JLJason Lemkin
Well, that and giving a SpaceX share to every American is pretty brilliant, kid, is pretty brilliant.
- RORory O’Driscoll
Yes.
- JLJason Lemkin
I thought of it just from a sales perspective. It removes objections. There's so many Elon haters, of which I've never... I think he's the greatest founder of our lifetimes. Politics aside, greatest founder of our lifetimes. I really don't see I can argue with it. But there's a lot of haters out there, right? Not just on, not just on the left. There's a lot of haters on the right, like all across the spectrum. Pretty hard to hate him when you grow up with SpaceX shares in your account and you watch rockets blasting every day to the moon and to Mars. Pretty hard to hate the man when you're a shareholder. It just, it's just that much harder to hate someone when you're a shareholder. It's really that much harder, man. It's that much harder.
- HSHarry Stebbings
I don't know. I hate CoreWeave today. [laughs]
- JLJason Lemkin
I know, but, like, he d-
- RORory O’Driscoll
But, but, but, but you didn't get it for free. I mean, the thing is Elon's gonna park one share in every kid's account. These, you know, these so-called Trump accounts for children is a very interesting way for super rich folks to make meaningful donation... well, make significant donations to everyone if they want. I mean, I think the idea here is literally every kid gets one share in their account, which is in aggregate, so I saw the numbers, something like $10 billion. It's real money. So-
- JLJason Lemkin
Yeah
- RORory O’Driscoll
... it's a super interesting way. Now, I mean, you could argue, you know, 200 bucks, you know, come compounding, what does that mean? But it's better than a poke in the eye, and it didn't cost you anything. And because it's associated, as Jason said, with the share, there is an interesting element of marketing to it. So it's good.
- JLJason Lemkin
Yeah. T- hard, hard to hate the man that just put the, put, put, gave a, gave my kid a SpaceX share. You can hate him, but it's hard to hate him as much. It's really hard to hate him as much, right? I mean, Michael Dell is gonna get some kudos too, but this is, this is the big lift. I think this will just gain momentum too, right? This is the next version of the 111 thing, which was nice, but, um, and it's gonna remove a lot of the toxicity around the massive wealth creation that's only just begun, and on a scale we've never seen before. And giving it directly back to the people rather than through weird charitable Gates whatever foundation, this is a much, much, much better way to deflect drama, to give it directly to people. The, the ultra-rich should do this. It's, it's, it's brilliant.
- HSHarry Stebbings
Boys-
- RORory O’Driscoll
Okay
- HSHarry Stebbings
... I think the brilliance of Elon is a great one to end on, in, in charitable giving.
- RORory O’Driscoll
Yes. Always end on a win
Episode duration: 59:40
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Transcript of episode OJX2L21e4fA
