Thinking Machines Co-Founder Joins Meta for $3.5BN, Industry Venture's $665M Acquisition

1. 0:00 – 0:51

   Intro

   1. RORory O’Driscoll0:00

      In the face of unprecedented wealth, I'm shocked to discover that most people behave badly. [laughs] You know, at some level it's not a surprise.

   2. JLJason Lemkin0:07

      Something's broken in the way that we're evolving as humans if everything ultimately reduces to what's in it for me.

   3. RORory O’Driscoll0:15

      Would you prefer $2BN in Thinking Machines unlisted stock with the chance to be amazing and a chance to go burst, or $3.5BN of liquid Facebook stock over the next five years?

   4. JLJason Lemkin0:26

      What I'm hearing Rory say is essentially reduce it all to [beep] the big VCs. They're playing the momentum game. If shit happens, shit happens. They can handle it. This is life.

   5. RORory O’Driscoll0:35

      Everything in life you can price as an option.

   6. JLJason Lemkin0:39

      Ready to go? [upbeat music]

2. 0:51 – 4:42

   Pre-Show Chat: Rory Is So Old He Worked with Arthur Rock!!!

   1. HSHarry Stebbings0:51

      R- Rory, what was it l- what was it like co-investing with Arthur Rock? [laughs]

   2. RORory O’Driscoll0:57

      I actually have invested with Arthur Rock, and I'm totally willing to talk about it. That shut you up, you little punk.

   3. HSHarry Stebbings1:04

      Oh, yeah. [laughs]

   4. RORory O’Driscoll1:04

      Right? And let me tell you what it was like investing with Arthur Rock. He was the scariest dude I ever saw, right? He was old at that time and just as grumpy as when he was young, and when he said things, you just trembled in fear. So it was pretty awesome investing with Arthur Rock, actually. And you just, like, heard a guy speak who was literally the first VC on the West Coast, who, like, you know, did Intel, and he was pretty direct. It was great, is the answer.

   5. HSHarry Stebbings1:31

      Well, there we go.

   6. RORory O’Driscoll1:33

      And you thought it was just a rhetorical bullshit question.

   7. HSHarry Stebbings1:36

      I did. I did. I mean, Arthur Rock was, like, 1960s, 1970s. I mean, like, I-

   8. RORory O’Driscoll1:39

      He was still doing deals in... The thing is, he was still doing-

   9. HSHarry Stebbings1:42

      I knew, I knew you were old, but [laughs] sorry.

   10. RORory O’Driscoll1:44

       No, I, I did... He, he was still doing deals in 2004. Absolutely. So I-

   11. HSHarry Stebbings1:49

       What?

   12. RORory O’Driscoll1:49

       Yes. Arthur Rock wrote checks in 2004, 2005. I was in a board meeting, only one or two. He was pretty damn impressive.

   13. HSHarry Stebbings1:56

       Yeah, Jason. [laughs]

   14. RORory O’Driscoll1:57

       And as I say, you just were scared because, you know, he was-

   15. HSHarry Stebbings2:01

       I mean, no one's gonna argue with him, are they? It's like, you know, are you real... Nah.

   16. RORory O’Driscoll2:05

       Yeah, no, the, the sentence, "Mr. Rock, I think you're wrong when you said that," just did not come out of my mouth, and I'm pretty punky, and I was even punkier then. But nope. I, I, I'm going with this is received wisdom down from the mountain. This is, you know, carved in tablets. I'm taking it as read. By the way, we lost money on the... No, we didn't, actually. We made money. We made money on that deal. Yeah, we did. Took a long time.

   17. JLJason Lemkin2:25

       R- Rory, when did you start in venture?

   18. RORory O’Driscoll2:27

       1993.

   19. HSHarry Stebbings2:28

       I was born in '96.

   20. RORory O’Driscoll2:31

       Oh, that k- that killed the conversation, just fucking died.

   21. JLJason Lemkin2:34

       You know, Harry, you think it's funny, but I say, you know, when you, when you come out here and you go to YC Demo Day, you're gonna feel old now.

   22. HSHarry Stebbings2:39

       Dude, I already feel old. I was in Stockholm for four days.

   23. JLJason Lemkin2:41

       Yeah, you're not young. You're not... I mean, when we met you, when the three of us met you, you were young. You're not young anymore.

   24. RORory O’Driscoll2:46

       I hope with just taping all this, it's great content, but my partner Andy has this great line. He says, "The real problem with this industry," he says, "there's a huge period of time where everyone says you're a little too young, and then there's this brief shining moment where you're good, and then there is the when is he gonna retire moment," right? And it seems to me it's, like, 10 years each and three years in the middle, and, you know, what the fuck?

   25. JLJason Lemkin3:05

       What about the moment when someone comes out of it and decides to do another institutional fund after being wildly successful? That's the craziest one of all, isn't it? Why would anyone do that?

   26. HSHarry Stebbings3:13

       [laughs]

   27. RORory O’Driscoll3:13

       Yeah.

   28. JLJason Lemkin3:13

       Why would anyone cash out at the top of the game, go out and manage their own capital, and then have to deal with LPs? What a headache, man. That, that's like a sucker bet, isn't it?

   29. HSHarry Stebbings3:22

       Dude, my favorite thing with that is LPs. You know, for the first three funds, you know, there's no DPI, there's no DPI, there's no DPI, and then you return a shitload of DPI, and then LPs go, "Mm, but are they really hungry anymore? 'Cause they've made a lot of money." [laughs]

   30. JLJason Lemkin3:36

       [laughs] That is, that is so-
3. 4:42 – 14:45

   Goldman Sachs Acquires Industry Ventures for $665M

   1. HSHarry Stebbings4:42

      Guys, I'm so excited for this. We have a very special guest in Roger, one of my favorite people from the industry, and we're gonna start with v- very fresh news that Industry Ventures has been acquired by Goldman Sachs. Uh, $665M as the starting price with, I think, a 300 million increase depending on performance over the next, you know, five years up to 2030. They have $7BN under management as a, you know, asset manager. I wanted to start with this. How did we analyze and how did we think about this on the breaking of the news last night?

   2. RORory O’Driscoll5:16

      Good for Hans. Good for the founder. He grafted for 25 years. It felt like... I, I think it was just after the crash in 2000. Um, you know, built that secondary business and, you know, great entrepreneurial act and well done. I mean, let's start with that. Just well done to the guy.

   3. JLJason Lemkin5:33

      Can I ask an ignorant question to, to Roger and Rory maybe? I should know that I don't know how fund-to-fund economics really work. So at first I read it and it's like, one, congratulations for not pushing to do a billion. It's like 970 with the earn-out. It's like, congratulations on letting the ego walk it back and not putting your fist on the table and saying, in, in, in 2025 founder language, "It has to be over the top." Like, that was one thing. But then I stepped back and I thought for a minute, "Hold on, they've got 7 billion under management," right? And here's where the math... Like, I wou- I should know this. I don't. I know it's a fund of funds, but imagine you're taking home a minimum of 20% of that, right? Uh, you could do more. That's 1.4 billion. What, what am I missing?

   4. RORory O’Driscoll6:13

      No, no.

   5. JLJason Lemkin6:14

      What am I missing in the math?

   6. RORory O’Driscoll6:15

      You're missing the math. Um-

   7. JLJason Lemkin6:17

      I know I'm missing the math.

   8. RORory O’Driscoll6:18

      Yeah. Um, because it's just-- I mean, you don't get quite that much. I mean, just, you're, you're implicitly asking two questions, maybe. One is, how are asset managers valued? And then separately, as-- if you're the owner of a business, when should you sell versus keep it and just keep the income stream, right? On the first, I mean, look, this thing traded at roughly ten percent of AUM, right? And I actually went and looked it up, because what's-- the mental model for assets under management to kind of enterprise value is very varied dep- which makes sense, because there's different models. I mean, Carlyle and KKR, where they own all the economics, they roughly trade market cap twenty percent of AUM. In other words, if you manage a hundred billion, the asset-- the, the entity is worth twenty bill, right? Here, which makes sense as a secondary, because the economics aren't typically quite as good as primary investors. It's at ten percent, right? And then you can go all the way down from there to kind of public asset managers trading at, you know, one or two percent of AUM, right? So at ten percent felt kind of about right for this kind of thing. It's, I think, a little bit in line with StepStone and Hamilton Lane that are publicly traded fund of funds as well. So it, it felt around the right price, right? And it kind of makes sense.

   9. RERoger Ehrenberg7:27

      Mu-much as I ha- yeah. Much as I hate to agree with Rory, because, I don't know, I have so much joy disagreeing with Rory. I actually used to be in this business. I was in financial institutions M&A at the very beginning of my career and sold asset managers. Uh, his a- his analysis is spot on. This as being kind of a hybrid, and if you look at it as a perce- as a multiple of revenue, you know, if you think of... So Jason, if your, your numbers, the, the twenty percent if you were to say the expected earnings of that pool is twenty percent, as an as- as a fund of funds, I get ten percent of that, right? So it's, like, two percent. So call it a hundred and forty million, and then you get some management fees on top. But of course, if you were to say twenty percent, it's probably not twenty percent, it's probably, like, thirteen or fourteen percent, and you adjust it, then you're saying it's probably, like, ten times revenue for a very, a very, very solid business with a great brand. And I honestly do think that, you know, they had started out early in the primary business. Actually, Industry was one of the first institutional LPs at IA. So they were in IA, they were in IA one and two. Um, but obviously, their secondary business now dwarfs their, um, their direct in- their initial investing business and funds. So as-- Kudos to Hans. It's been a grind, but they have really r-ridden the wave beautifully. But I think it, it is a straight on-market deal.

   10. JLJason Lemkin8:49

       And for GS, the rationale behind it is they can push a huge amount of their private clients into Industry moving forward?

   11. RORory O’Driscoll8:55

       Yes. It's a platform for them. I mean, look, the, all the public asset managers are desperately trying to get into private, um, assets because, I mean, at, at the most basic, the S&P, you can get your S&P exposure for less than ten basis points versus, you know, twen- you know, two thousand basis points running, you know, ru-running, uh, private capital. So if you were an asset manager in public stocks, your business is eroding away super fast. Active management's going away. If you wanna be an asset manager, and Goldman is a big, big asset manager, getting a platform like this that you can expand just makes a ton of sense. So you're right, Rog. They're probably paying ten times sales, which on a fifty percent margin business is twenty times earnings. It's a very healthy price, but they're sitting there going, "We can jam this through our channel, expand this ten X, and, you know, k-k-keep our asset business going with some high return," sorry, high, frankly, high expense, high fee assets at a po- when, you know, your public assets aren't nearly as profitable.

   12. RERoger Ehrenberg9:56

       There's also one, one other point I'd like to raise. You're a hundred percent right, but, uh, just a little insight on Goldman. So Goldman has this platform called Apex, and Apex is a platform that is for their high net worth individuals, where they bring these kinds of deals, primary and secondary deals, to their ultra-high net worth clients. This is something now where they can actually institutionalize it, make it m- create much more product, and they already-- It's just, it's something else to give to their ultra-high net worth clients. Plus, Industry itself has institutional clients that can now become GS clients. So it's kind of a win-win, both from a product perspective and from a distribution perspective.

   13. JLJason Lemkin10:40

       I'll tell you what I like about it. Maybe I'm in the wrong platform, but I get these calls from Morgan Stanley to invest in private equity. And first I'm like, "Do you-- Have you looked at my exposure? Like, don't you have access to my account?" And the ideas are so dumb. They're so dumb.

   14. RERoger Ehrenberg10:54

       [laughs]

   15. JLJason Lemkin10:55

       They're so dumb. And I'm like, if, if, as long as Hans and team stays, I think they said they had, like, eighteen percent IRR over history. Like, if that's every day in and out, that's a good baseline for folks to get into, right? If they can productize that, I would take that a hundred days out of hundred versus the crazy calls I get from Morgan Stanley, you know. "We'd like to get you a little more private equity exposure." Well, I, I'm ninety percent as it is, guys. [laughing] But maybe ninety-five is the right-

   16. RERoger Ehrenberg11:23

       Stop telling the truth, Jason

   17. JLJason Lemkin11:23

       ... is the right diversification.

   18. RORory O’Driscoll11:25

       And, and I think the, the other thing to note that's interesting is, you know, what kind of GP-led businesses can in fact be a hundred percent sold, right? And I think the interesting insight is probably not a pure venture firm, right? 'Cause, you know, I m- because if you-- You can't sell a hundred percent of Benchmark 'cause then you don't have Benchmark 'cause you don't have the five great guys who are doing Benchmark of... right? Whereas this, it's a more ins- it's a more productizable business. It's got a lot of secondaries, it's a lot of fund to funds. Just like, you know, Greenspring, which was a large LP in Scale, got sold to StepStone. Same kind of thing. These are the kind of businesses that can be sold a hundred percent into a larger institution, right? And it can work for both sides. Obviously, the seller gets a great capital gain, and the buyer gets kinda something that they can blend in. You couldn't do that with a venture firm, I would argue, right? Especially a small venture firm. 'Cause in the end, you know, all you have is the three people, and if you cash them out a hundred percent, then you don't have anything.Right? So, you know, I will admit at times over the last 25 years, you kind of look at the secondary business and you go, "That's not nearly as interesting as the business we're in. I love being a primary investor. I love doing my deals." But one thing you recognize is you can't sell this business and you can't... And Hans could sell his, and he did. So [laughs] well done, Hans. Who's laughing now?

   19. JLJason Lemkin12:45

       It's the fee stream. You're, you're 100% right. Like, you had mentioned, like, the, you know, the Blackstones and the Carlisles and folks like that. Asset gatherers. I mean, ultimately Hans is an asset gatherer, and most of the revenue from it comes from fees, and it's not depen- it's... He's built a machine. I mean, kudos. It is a very... He's, he built an asset management business. N- the, the rest of us here do not run asset management businesses.

   20. HSHarry Stebbings13:09

       Well, give Harry time, but point taken. Give Harry, give Harry a couple years.

   21. RORory O’Driscoll13:13

       The more your business is predicated on either a brand or some institutional thing, the more it's like a business, and the less it's like just three to five partners picking great investments, the more monetizable it is. I could totally believe that your media company with a venture fund attached could be monetizable in a way that Roger's fund or my fund will never be, right, Scale will never be, right? Um, you know, obviously Andreessen, who, who has clearly embarked on the AUM and great investing journey to bigness and maybe an IPO believes the same thing, right? There are some businesses that are-

   22. JLJason Lemkin13:48

       Geez, so General Catalyst, same thing.

   23. RORory O’Driscoll13:50

       Agree, General Catalyst stated the same thing, and yeah, I would argue even, I would argue Y Combinator, for example, not saying it's 'cause gets old, but it is the definition of a business. It's independent of the greatness or not of the, of the current operators. It, it kind of has heft over and above that, right? Those kind of things can be sold, but if your only asset is... I mean, we're gonna talk about Roger's new fund in a s- in a second, but let's be clear, the only asset in Roger's new fund is Roger's IQ as a stock picker, God help us, right? And, um, you know, so, you know, without Roger, there's nothing, right? I thought that was good, Roger. I thought it worked in nicely, right? And you know, that, that's just not a non- monetizable asset. And it's a continuum, but mayb- maybe you can sneak out as a media company. You know, Roger and I are just destined to stay here and be simple, humble stock pickers.

   24. HSHarry Stebbings14:36

       This is so nice. With Roger here, you give him shit, not me-

   25. RORory O’Driscoll14:38

       [laughs]

   26. HSHarry Stebbings14:38

       ... and you defend me. This is great. This is like deflection, Roger. Nice. Um, I think-

   27. JLJason Lemkin14:44

       Any, anything

4. 14:45 – 30:05

   Thinking Machines Co-Founder Raises $2BN and Then Leaves for Meta

   1. JLJason Lemkin14:45

      for you, Harry. [laughs]

   2. HSHarry Stebbings14:46

      Ah, dude, you're too kind. Now Jason, this next topic I, I felt that you might have a perspective on given our, our prior chats. Andrew Tulloch leaves Thinking Machines, the company he co-founded and raised $2 billion for, to join Meta for a reported $3.5 billion. Well done, Andrew Tulloch. [laughs]

   3. RORory O’Driscoll15:06

      [laughs] Yeah.

   4. HSHarry Stebbings15:08

      [laughs]

   5. JLJason Lemkin15:08

      I, listen, I hate this term.

   6. RORory O’Driscoll15:09

      See you, Hans.

   7. JLJason Lemkin15:09

      I hate this term.

   8. HSHarry Stebbings15:09

      Better luck next time.

   9. JLJason Lemkin15:11

      I'm triggered.

   10. RORory O’Driscoll15:11

       Should've done computer science. [laughs]

   11. HSHarry Stebbings15:13

       [laughs]

   12. JLJason Lemkin15:13

       I'm triggered.

   13. HSHarry Stebbings15:15

       Jason, what did you think, dude? I know you have some perspective.

   14. JLJason Lemkin15:17

       Well, not only that, literally I was, I was on LinkedIn, uh, just yesterday and, and, uh, [lips smack] a founder I've known from a distance for a while, I didn't realize he'd left his unicorn and just raised 20 million from Excel to do his next company. I'm like, "I, I guess it's totally cool today to do that. I guess it's totally cool to leave Thinking Machines, uh..." Or d- did it happen with Ilya's co-founder too, right? I mean, who went to, and who went, who went to, um... I get it all confused who went to Meta. I guess it's just cool to, like, forget about raising 2 million at Demo Day and quitting or keeping the money, now it's cool to, like, raise a couple billion and check out? I just don't, um... And if it is, I don't know how ventures should adapt, if at all, right? I- i- is it just a risk factor when you invest in Thinking M- what was the Thinking Machines pre-money? 10 billion or something like that?

   15. RORory O’Driscoll16:05

       It was, it was 10 billion post.

   16. JLJason Lemkin16:07

       Good God. And so people are checking out of $10 billion seed companies now. Uh, I, I honestly don't know what... I, I just, I, I feel like, I feel like a fuddy-duddy because when I was a founder, good God, I mean, I would, there was no way I would leave, no matter how horror- h- tough it was at my start. I would just never consider it. And now it seems like it's cool, man. It's cool. And, and y- w- even your accelerator will take you right back after you quit.

   17. RORory O’Driscoll16:31

       A- a- and, and this next sentence is genuinely not meant to be snarky, Jason, even though it's gonna come across as it. Um, yeah, you absolutely wouldn't never quit. You would hang in there. But you also probably never faced the existential dilemma of being offered $3 billion to quit, right? Because most of the time, most people independent of their startup aren't worth a multiple of their startup valuation. If they're lucky, they're worth, you know, a $500,000 a year salary, right? So I mean, i- in the face of unprecedented wealth, I'm shocked to discover that most people behave badly. The loyalty conversation erodes pretty quickly when you're, you know, when you enter the third comma.

   18. JLJason Lemkin17:10

       You know, I... That, that's all f- fair. Like, I understand the words, and again, y- you s- you said fuddy-duddy, I didn't. But the fact that the notion of these are people that backed you and believed in you and supported you, and you just peace out and do something else, I, I, I do have a bit of an issue with that. And I, I, I, and it's... Uh, but it's also, it's there's, there's levels to this shit, right? Where, yes, the, the person sitting at the helm of a $10 billion post-money company, and their share's 2 billion, and then they go for 3.5 billion, to m- like, I look at that and I'm like, "Are you fucking kidding me?" Like, if my kid did that, I would not be happy with my kid. I would be like, "You, you, you leave the people that brought you to the dance because you see a prettier girl over here?" It's like, I don't know, man. It, it... Something's broken in, I think, the way that we're evolving as humans if everything ultimately reduces to what's in it for me, and there's not another vector involved. And I'm a super competitive... But I'm a wildly competitive guy. I want to w- I, I want to win, but it's not at, you know, any cost. And let me say one more thing, and then I'll-

   19. RERoger Ehrenberg18:34

       Create some oxygen for others. But like, you know, some of these, some of these deals like Scale AI were basically, you know, I saw that and I... Like, it reminded me of the old style, you know, the asset purchase versus a stock purchase, right? Where I don't want, I don't want the liabilities, I don't want all that other stuff. I just want this asset, or in this case, I just want these people. And that has now become de rigueur. I mean, i- it's hard to call it an acqui-hire when you're talking about many billions of dollars, right? But essentially, it's an asset purchase, and I think that's something we'll continue to see more and more of. But I feel less badly about that than I do what we're talking about right now.

   20. RORory O’Driscoll19:14

       Leaving aside the morality question, which I reserve the right to come back to and take a different perspective, the interesting question Jason asked is, what do you do? W- w- what protections do you have as an... How should investors handle this information, and what should they do differently going forward? And what should other founders do, right? I mean, to state the obvious, um, you know, you see this interesting thread where founders are realizing extended founder vesting and cliff vesting and stuff like that, and protections for them versus a co-founder leaving are a legitimate part of the discussion here, right? Now, it may not even have mattered. He may not even have made his cliff, right? But it does point to being very sure that you and your founders have extended vesting. I mean, if they, for example, if these shares weren't subject to vesting, then you feel even stupider as both a co-founder and an investor. And I, I, I mention the co-founder to make sure that, to make it clear this is not just a VCs taking care of themselves perspective, though we'll come to that in a second, right? Purely from a, if you're a bunch of founders, if you're seven people leaving a safe job to go do this startup, you gotta run the game theory of what, how, how will I feel if one of my seven co-conspirators bails on me, and what should the economic penalty be to them? So if I'm a founder looking at this, I would be thinking about cli- is there cliff vesting? Is there six-year, not four-year vesting? Is there repurchase rights? Are, are there ways to make sure that this doesn't happen, and if you leave for a competitor, something really bad happens? So I think that's gotta be on the table 'cause, yeah, f- even as a founder.

   21. HSHarry Stebbings20:45

       Well, I'm, I'm just saying, Rory, is this not just symbolic of the conversation we had before recording, which is the increasingly transactional nature that we're seeing in rounds, which I, I moaned to you about. I'm a romantic. I like to fall, fall in love with a, a partner, whether it's, you know, a, a investment or a romantic partner. It's super important to have the relationship, and now it's like, hey, highest price, auction process, zero r- relationship, and this is just the embodiment of that in the post-

   22. JLJason Lemkin21:09

       Well, I think that's, that's just, that's been true for since we met here. I think it's just become institutionalized with AI, with deals being done on a Saturday for nine-figure, 10-figure. But what I do, um, what I worry about, this is just me, I've ne- you know, I'm an early... We're, you know, mo- we're, we're mostly early stage investors here. We're all, we're all relatively early stage. I, you know, I, I don't believe liquidation preferences matter. I don't believe they're a big deal, despite what they annex. But my liquidation preference has always been, and I put it in quotes, not true, knowing the founder would never quit. That's my protection as a seed investor. Forget the, the preference stack or $1 million raised or $1 trillion. If I know Roger's never gonna quit, when I, you know... That's the best protection I can get as a seed investor. The regular stuff is at the margin, right? But if I am investing and he might quit in a, no matter how good I think he is, he might quit in six months for something better, it may, it, it... I guess you can adjust it on a spreadsheet, but it's a risk I've never taken in my, in my history. Th- this has been my, my, my downside protection is he won't quit. She won't quit. [laughs]

   23. RORory O’Driscoll22:10

       The interesting thing here is the core asset in these investments is a group of seven engineers, which is pretty unusual compared to most deals you do. I mean, let's be honest, most of the time, and correct me if you're wrong at the seed stage, but the stage we're investing at, you know, you spend a lot of time with the CEO. You check, you meet the VP of eng once. You just assume it's a good team. You look at the product. You try and do your due diligence. But you're not, you know, at a... You're not leaning in and saying, "This seventh, the seventh of seven co-founders in a list is pivotal to my investment thesis," right? So it, b, uh, so it's different here 'cause we're talking not about the motivations of a founder person, but the motivations of an engineer person who was, like, an e- engineer, academic, then we might have spent 14 years or something like that at, at Meta, went to OpenAI for less than a year, and was at, um, Thinking Machines for less than a year, and then went back to Meta, right? The unusual... As a career trajectory for an engineer, that's not crazy. I was this longtime engineer at place A. I bounced out to this other place, left with them, and then decided I just wanna go back to the original place I was. It's, it's kind of not an unusual pattern of behavior. What is unusual in this case is because of the technical nature of these bets, how much reliance we're putting on the behavior of an engineering/academic talent pool, which probably responds fairly differently than the, "I'm a founder, I wanna be the CEO" talent pool.

   24. RERoger Ehrenberg23:38

       Well, y- so but Rory, that, that last thing to me is, is the bit, right? Which is if this isn't just job hopping and then, oh, eventually going back to the place where you kinda earned your stripes, it's founder responsibility, and I think that's what's lacking here, is that notion of if I am taking on this mission with a group of people, with a set of capital partners, that conveys a measure of responsibility that I'm discharging, and the minute that I say, "You know what? Screw that. Respon- my responsibility is to me and my not optimal out..." I wouldn't even say it's, um, the optimal outcome. The maximal outcome, the near-term max. Like, who knows whether or not this is, is, this is better? It, this may way, may well not be better. But the fact is, the people that they left behind are kinda screwed.

   25. RORory O’Driscoll24:34

       Agreed, but I'm, I'm gonna go back. And first of all, I'm gonna do the money because I've known you for years, and you're a financially astute person. Question, Roger, would you prefer $2 billion in Thinking Machines unlisted stock with a chance to be amazing and a chance to go burst, or $3.5 billion of liquid Facebook stock over the next five years? Just as a pure financial call. How-

   26. RERoger Ehrenberg24:54

       Obviously.

   27. RORory O’Driscoll24:55

       Yes. Thank you. So let's not pretend that they're equivalent. I mean, you know, it's such an obvious-

   28. RERoger Ehrenberg24:58

       They're... I, I'm, no, I'm, I'm not saying, I'm not saying they're equivalent at all.

   29. RORory O’Driscoll25:01

       Okay. 10 to one? 10 to one better?

   30. RERoger Ehrenberg25:02

       Maybe. You know, but there's o- there's obviously way more option value in Thinking Machines, right? If... That could, that could be a $500 billion company.
5. 30:05 – 33:41

   SoftBank Goes for $5BN Leverage Against ARM Stock To Buy More OpenAI

   1. HSHarry Stebbings30:05

      It's okay.

   2. RERoger Ehrenberg30:05

      [laughs]

   3. RORory O’Driscoll30:05

      Yeah, yeah.

   4. HSHarry Stebbings30:07

      Okay. Uh, we said he left OpenAI. Um, yeah, SoftBank reportedly securing a $5 billion margin loan secured by Arm shares to invest in OpenAI. How did we analyze this? And if they're getting loans to invest in OpenAI backed by Arm securities, how do you think about that, and what did you think of it?

   5. RERoger Ehrenberg30:32

      Masa rules. Noth- nothing new to see here. This is what he does. You know, uh, for better or for worse, when he has a feeling, he goes all in.All chips, max risk, personal, financial, everything. This is Masa being Masa

   6. RORory O’Driscoll30:49

      100%. I mean, this man is, you know, full risk on all the time and, um, just wants to get the bet on the table, you know, and has been spectacularly right at times and spectacularly wrong at times, but spectacularly willing to play, which [chuckles] on behalf of the audience, we should be eternally grateful, right? And he's not even that levered. I mean, I checked actually. He owns 90% of Arm still and SoftBank, and Arm is trading 90-odd billion. So he's got 80 billion of equitable equity there. He can lever up some more. I mean, and if he can, he will.

   7. HSHarry Stebbings31:25

      Jason, what did you think?

   8. JLJason Lemkin31:27

      Yeah, that's what I... I did think this was... At first it, it, it seemed to t- and I think it does tie into the story of where the hell are we gonna get all this money to, to fund the, the, the tokens that I burn every day as a vibecoder. Like, we still don't have the answer. Um, uh, but, but reflecting on it, when I thought more about it, I mean, f- you know, and it, it's actually a smart use of leverage. If you have a $90 billion, $100 billion position, I don't know, uh, you know, if, if you're an individual, you certainly don't wanna pay capital gains on it. [laughs] A $5 million margin loan at an acceptable interest rate, uh, is, is, is, is, is probably a smart position, right? That, that loan's not gonna get called, right, under any scenario probably, right?

   9. RORory O’Driscoll32:07

      Well, j-j-

   10. JLJason Lemkin32:08

       But it is, but it is kind of weird... It, it still, it still feels like part of this whole, you know, we're all, we're all believing in Sam, which I do believe now. We're all believing in Sam, [laughs] that trillion in revenue's coming. [laughs]

   11. RORory O’Driscoll32:19

       Just for the record, let us remind ourselves that in 2002, the NASDAQ, you did see individual stocks go down 90% from the peak. So it is possible the loan will get called. It would just... It's just unlikely.

   12. RERoger Ehrenberg32:32

       Yeah, the question is, does... A- again, let's, just for, for ease of analysis, let's say that Arm is 100 billion, right? That's leveragable pretty much to 50 billion. Now, so but it very easily could see him back in the news with an incremental 20 billion. He could lever this. He could take 25 billion against the Arm position easily. And then to Rory's point, and we saw this, like the thing about Masa, and again, I'm, I'm old enough to have seen, you know, w- the, the NASDAQ run-up, the NASDAQ crash, Masa, M- Masa being Masa, and I mean, he has had so many existential moments where he's waking up in the middle of the night, sweat pouring down his face, wondering if this is it. But he's h- but he's held tight, and he didn't go over the line. He went right to the line, and he's come out, and then his macro theses have been, have been proven out. So to me, this is, this is like a relatively low-octane Masa move.

   13. RORory O’Driscoll33:33

       Exactly. [laughs] Exactly my words, yes.

   14. HSHarry Stebbings33:37

       That's a great visual for the show. Masa surrounded by fires with low octane

6. 33:41 – 46:27

   More Data Centres Than Offices: Are We In a Bubble

   1. HSHarry Stebbings33:41

      just around it. Uh, and the, the thing that I find hard is like when we said about kind of where does the money come from and then the speed of just what we're seeing, we're now building more data centers than office buildings. A- and, you know, we're seeing demand for compute be the single biggest constraint. And I'm looking at this going, "Really?" The bubble that everyone's saying in comparison to we're building more data centers than office buildings and demand for consumer computers just off the charts. Is this, is this not fundamentally different?

   2. RORory O’Driscoll34:14

      I think there's a lot in that. I mean, the, the, the, the c- the, the, the counterpoint between building data centers and building offices, it, it sounds clever, but it's a c- it's, it's, it's to some extent trivial, 'cause who the hell is gonna be building offices? 'Cause there's no one in them, right? [laughs] The reason we're building computer, data centers is 'cause we wanna put computers in out of the rain, and the beli- the reason we're not building office buildings is people are staying at home. So it's pretty obvious what you'd build, right? But I think stepping back, I mean, the wider comment is, you know, w- we go around this is it a bubble, AI CapEx spend for a while, and over and over again. And funny, I was reading over the weekend that there's this new Stripe press have this, is it Dwarkesh Patel's Scaling AI: An Oral History of Scaling, and I kind of read it over the weekend. Really good, right? And the thing that impressed upon me was the matter-of-fact way that a number of the people just reiterated, it was just interesting to hear, like reiterated, one, that the scaling law has been proven to hold for six, seven years now at a high degree of accuracy. And a couple of them blithely said, you know, it wasn't a question of when. It was like they were literally saying, "How long did it take?" W- of course w- it was kind of, "Of course we'll need 1% of GDP to invest in computers, but then we'll be fine 'cause we'll have AGI." My point is, what I find fantastical, 'cause that's a shit ton of investment, they were like, "Well, that's what, just what it's gonna take, and of course we're gonna get to that." It was, it was the matter-of-fact way in which, you know, the smartest people of our generation thinking about scaling AI accepted that this was kind of the to-do list, right? So i- that's a long-winded way of saying it's not just frankly Sam spiffing out of his butt. It's like a whole bunch of these folks are like, "Yep, this is the task we've embarked on ourselves for the next five years, and it's gonna take around 1% of GDP to build a compute cluster big enough to get the flops to get the outcome we want," right? So they're going for it, right? It's back to what I said. So, so the, so it's just happening, right? And then the only question is, you know, how does the capital get found, and can it earn a return? Right? But if the capital is provided, this is going down. These c- these, these data centers are gonna be built. You could see these guys going, "This has just held for six or seven years. It's totally predictable. The loss function is predictable." It was kind of like, "Why? Well, of course we're gonna buy, you know, 10,000 computers worked, so we're gonna buy 100,000. Then then we're gonna buy a million, and somewhere along the line we'll get AGI, and what's your point, and why are you even questioning it?"

   3. JLJason Lemkin36:40

      I can tell you just one thing f- f- for what it's worth, um, for me, just, just-Forget the macro stuff. So I've, I've vi- Mr- as Mr. Vibe Coder on, on the group, I vibe coded eight apps. I have-- I haven't built a piece of software, I've been part of building a s- s- piece of software since 2012. I vibe coded eight apps in 100 days, and we have 12 AI agents working at Saastr now. Replaced al- almost all of our sales team and our whole content team. What I can tell you from that, and, and folks have been saying this, I didn't-- I wouldn't have believed this 90 days ago, but folks like Amjad or Replit are saying, "You've got it backwards. Everyone will consume every available token." And what I know is today, just what we're doing today with 12 agents and eight apps, I could use 100X the tokens. I could use 100X the tokens. Um, even now, like I gotta wait like 20 minutes to build one feature. I mean, vibe coding's cool, but it, it don't work at Google speed [laughs] . Our agents could all do more. So if everyone today could use 100X the tokens, and think how early we are on the journey, right? I mean, you know, as we record this, uh, it's Dreamforce week, right? Harry's gonna be there, I think, this week. And as Mark points out, like point... only 0.1% of Salesforce customers are really using AI yet. So it's like 100 times 100 times a something. Um, I really do think we are not, uh, I can see it myself, we're not remotely servicing the demand that exists today, right? So how it gets paid for is a different question, but I think this is so different than the prior waves, where we just can't even service this demand.

   4. RORory O’Driscoll38:05

      The only thing I would actually question you on, 'cause I'd love to hear your thoughts on it, is my mental model of this is from a technical and demand perspective, it's all gonna happen because the people who are building it wanna build it and Jason at the margin wants to use it. So if anything's gonna constrain this, it's gonna be economics. And my big picture model here is, you know, y- you've got the technical trends and then you've got, you know, the economic trends and the wheel... the question is, will, will it get the return? I mean, you know, w- w- will the, will the capital be found to offer... I think if it's slowed down, if it's wrong, it won't be 'cause the technology direction is incorrect. It won't be 'cause the demand isn't insatiable. It will be purely and simply at the margin. The marginal capital provider says, "Oh my God, people, even though the scaling law is holding, the economic return from that investment isn't holding." And, you know, the scaling law might be l- log linear, but every economic phenomenon tends to be diminishing marginal utility and at some point capitalism is gonna say, "I don't know how to tell you this, guys, but you can't have your $1 trillion dream because we just can't afford it and we're gonna have to slow down a little here." And that's what I'm trying to figure out is, yeah, uh, are we gonna get the economic return quickly enough to warrant the investment? And, you know, back in the day you were a financially astute investor and, uh, what do you think? And put on your trading and thinking hat here.

   5. RERoger Ehrenberg39:33

      No, I think it's, uh, I think, I- I- I think you're, you've nailed the dynamics and yes, economics will dictate that not everything that people wanna b- wanna build will be built because the capacity won't exist f- once diminishing marginal returns reaches a point where the value of the capital is not met. And I, I guess, you know, one vector that I'm not clear on, and clearly the people that you're citing, Rory, are a million times smarter than me, is if there are step change advances in processing efficiency or simplification of code such that the amount of, you know, processing required per unit is, it declines in a way that people don't expect, is that going to relieve some of the pressure on the magnitude of infrastructure that's being built?

   6. JLJason Lemkin40:28

      I don't think so. I think we burn more tokens. You know, all the, every company's like 30%, 50% of my company's built with AI, our engineers, right? Hooray, our engineers came back 50% built with Cursor. Does that mean they take the rest of the day off? No. What it should mean is they're shipping more features, right? Because, because instead of spending an hour on Stack Overflow trying to find a, a, a library that was stolen or pseudo open source, I can do it in 60 seconds, so I just go build another feature. Um, it's just, and you'll just, so you'll just, the better that gets, the more tokens you'll consume. I don't think there's this great efficiency coming. I think it's, I think we'll get fa- we'll just build more and more stuff faster and faster. That's why it's actually so stressful at seed today because so many of these companies are born almost instantly. They're born almost instantly today. So, you know, it's, it's tough doing the A and the B and the C and the D and the E, but seed is really hard today 'cause that company probably didn't exist seven days ago or m- being less facetious, 30. And when we, when we all started, even when Harry started, startups were never good 30 days in. They were terrible [laughs] . I mean, once in a while, like an off-the-chart CTO would build demoware 30 days that your jaw would drop, but if you picked at it, it didn't work, right? But it's, it's just crazy what you can build so quickly today. It, it, it, it, it makes it so competitive. It's complicated.

   7. HSHarry Stebbings41:43

      Lovable had their first year anniversary today, oh, the other day, and I thought that was insane. First year anniversary, over 170 million in ARR. Wow.

   8. JLJason Lemkin41:54

      It's great, but it also makes that pre-seed inception phase harder, I think, because how, how... you can't, you can't intuit differentiation in the way you used to be able to with a little bit of software. Oh my God, these, Aaron, Aaron and Dylan built a folder you could put a file in. I, I'm in [laughs] . Those days are long gone [laughs] . I mean, how did they do that? You mean it stores on the internet? Get me Rory [laughs] .

   9. RORory O’Driscoll42:22

      Yeah, no, it, it's moving a lot quicker, you're right. And you make a comment here, it makes it hard to be seed. You're right, because you don't know. It makes it also harder to be A and B 'cause you have to pay up. I mean, the period, I mean, let's be frank, we're all looking for this really... I mean, it's pathetic when you say it from the entrepreneur's perspective. What we're really looking for is that wonderful period where it's, where you know but it's not obvious and you can invest, right? And it turns out that period may have declined to like a half an hour, right? You have the pre-seeded Lovable, then you have like day three it's exploding in revenue and suddenly you're at 2 billion pre, right? So I mean, and it's an exaggeration, but not by a lot.I mean, six months ago they were raising it a couple of billion, so the y- the, the time period from we haven't launched yet to oh my God, it's so obvious, has, as Jason said, compressed to the point where it's just, you know, i- i- i- that sweet spot is vanishingly small, and therefore you're left with the choice of do you invest into acute uncertainty or do you invest into 2 billion pre?

   10. RERoger Ehrenberg43:21

       Acute uncertainty or businesses that aren't specifically disrupted by this phenomenon, which generally have, like, legal and regulatory challenges that make it not simply do I have better or faster or cleaner code, it's there's a bunch of these other issues to address.

   11. RORory O’Driscoll43:39

       And is that your thinking? 'Cause, you know, w- what we didn't say it at the start, but Roger's getting back on the field, proving his timing is as always brilliant, and is that your thinking when you're back on the field or as a seed investor?

   12. RERoger Ehrenberg43:50

       I mean, it's par- part of it. Um, the stuff, the stuff that we're doing definitely is less resistant to the phenomena that we're talking about on this call. Um, I, as, as you well know, R- Rory in particular, but you g- the rest of you, too, acute uncertainty does not trouble me in the least when that acute uncertainty is expressing a, a deeply held, well-researched thesis that, that I have, and that's just the nature of very early stage venture. But I do think that the issues of legal and regulatory complexity, um, and again, it's whether, whether it's financial infrastructure or it's media rights, copyright, patent, IP, it makes it more nuanced than am I able to develop the, the next, the next base model or a, a great platform for, for developing applications at warp speed.

   13. RORory O’Driscoll44:58

       I think that's fair. I think, you know, actually, um, we had Aaron talking to some of our LPs. I'll maybe come back to that later. But one of the concept he introduced was something I've been thinking about at the apps layer, and, and Aaron for Box is always so crisp, and he talked about the diffusion rate of this technology across, you know, enterprise as a whole. And, you know, there's going to be different diffusion rates. The diffusion rate for a lovable will be very different than the diffusion rate of AI for, you know, complex medical prognostication, right? And having a handle on that and having you ex- and setting your expectations accordingly and your investing thesis accordingly and varying it by virtue of the diffusion rate, I think will be one of the key skills here, right? And a- and assessing, you know. Um, recognizing that some markets it's gonna be done and dusted in six months, and you're right, Roger, other markets where there's regulatory constraints, you know, you might be two years in before you get your first big lighthouse, you know, vertically focused enterprise customers, but then it's bowling pin and you get the other five in six months, right? And there's gonna be very different adoption patterns by industry.

   14. RERoger Ehrenberg46:05

       Harry, I, I, I'm not gonna say it, but, um, somebody m- might have said some relatively smart things right there.

   15. RORory O’Driscoll46:13

       I was paraphrasing someone else.

   16. RERoger Ehrenberg46:14

       [laughs]

   17. RORory O’Driscoll46:16

       I don't know if I-

   18. RERoger Ehrenberg46:16

       That Aaron Levie, he's a smart guy.

   19. RORory O’Driscoll46:18

       Yeah. He's a smart guy, yeah.

   20. HSHarry Stebbings46:19

       Roger, what you, what you don't know is that I prep Rory before the show, and I sit down, I share my thoughts, and really he comes to-

   21. RERoger Ehrenberg46:25

       Yeah, we just, I'm just prep, I'm just, I'm just-

   22. RORory O’Driscoll46:26

       I

7. 46:27 – 57:19

   Where is the Alpha in Venture in 2025

   1. RORory O’Driscoll46:27

      know he's parroting you. Yeah.

   2. RERoger Ehrenberg46:28

      Yes, yes.

   3. RORory O’Driscoll46:29

      [laughs]

   4. HSHarry Stebbings46:29

      Y- you said about va- you said about value in regulated markets maybe where it's more difficult to be disrupted. Rory, we, and Jason, we had this great chat last week on the ability to king make and how capital can be used as a moat. We discussed, Jason, you very well and eloquently discussed Polymarket raising 2 billion at 9 billion, and then this week, Calshi, the direct comp, raises from Andreessen and Accel at $5 billion, again, right after Polymarket's raising it $9 billion. How did you think about this? King making not possible? What was the thoughts?

   5. RERoger Ehrenberg47:05

      I mean, this is... Let's, let's be honest what's going on here. This is the purest regulatory arbitrage play of all time, okay? If you can look, you can look at the cumulative market cap of regulated sports betting and look at how it has dropped in response to the rise of Polymarket and Calshi, who are not subject to the same rules and regulations that they are. Literally, it's we're gonna take value here, and we're gonna place it over here, and the, the combination of, in at least in the United States, the current administration being extremely predisposed towards the prediction markets companies, and now Calshi's announced that they're, like, they're going to India as part of their 140 country coverage. [laughs] If they were to, if there was a level regulatory playing field, this would not be happening. But for now, this is one of those circuit... So you talk about king making. I think to an extent they are trying to run as quickly as they can to get so big and so powerful that they will not face parallel regulatory scrutiny that the legacy companies have suffered through since PASPA.

   6. RORory O’Driscoll48:20

      Jason?

   7. JLJason Lemkin48:21

      That was, that was in my FDX investment memo was to just get to that scale where we could push through some of these issues. I feel like we just came up just a little short.

   8. RORory O’Driscoll48:29

      [laughs]

   9. JLJason Lemkin48:29

      If we coulda just, if we coulda just waited for our buddy David Sacks to get in, then I think we woulda really had a fun returner on that one, but, um, uh, [laughs] uh, uh, it's a, it's a good point. Uh, it, it, I, I, listen, you're obsessed with king makers, and I think it's a, it's a good topic, Harry. Um, I, uh, I think it's right. The only thing that fascinates me on this king making topic was that literally Polymarket was founded by a solo founder in his toilet during lockdown.A solo founder in his, in his picture on Twitter, in his bathroom. That was his of- the only place he had to work during the worst lockdown of March 2020, he founded this. It gives me, uh, inspiration that, that new i- new f- founders will come out of everywhere, right? And so king-making works. It is a real, it is a real issue to talk about. But if you c- if you can solo found, uh, Polymarket out of your toilet in March 2020, who knows where the next one's [laughs] gonna come from?

   10. RORory O’Driscoll49:25

       I, I'm, I'm gonna push and just bring it f- couple things. One is I actually think this is an example of king-making not mattering, right? I think Roger nailed it correctly on what's going on here. This is two non-sports betting companies who are doing court prediction markets, where all we talk about is the 10% of the revenue that's political, and 90% of their business is sports betting, but we're not calling it that. And they're just killing it because we all love to sports bet, right? And the number of people who give a shit about, you know, who's gonna win the Nobel Prize or whatever else they're betting on that's not sport betting is low, but everyone in America wants to bet on the NFL, and they're cleaning up, right? And good luck to them, and Godspeed, right? Um, that's, that's just what's happening. Uh, Roger is totally correct. Separate comment on the king-making, the implied, just tracking back to last week, 'cause my short-term retention for memory is actually longer than a week, Harry. Um, we were basically saying that money can pick a king, right? And I think this is an example, and I've been thinking about it since we talked last week, and I think this is an example of where it can't. There's two good companies. They're both getting a ton of money. They're gonna slug it out. Uh, they're gonna get relative market share. But I don't think... I mean, they, they both need capital, but I don't think there's king-making going on here 'cause for a couple reasons. 'Cause there's two reasons king-making work. One is if you give one f- company so much money, i- i- uh, that they can overwhelm the other, then maybe that's king-making. And then the other is where getting money from brand name perceived VC makes the customers default to you, right? And that actually happens at enterprise software. If you're, let's give a ex... You know, if you're awesome CEO and then you get three awesome VCs and you're selling mainly to tech companies in the Valley, you probably have a herding effect. I mean, I think Brett Taylor's an example of someone at the high end. There's a perceived, "Oh, Sierra's amazing. Would you wanna take them on?" kind of vibe. I don't think that's true for a second. I don't think anyone betting on Poly or Kalshi gives a damn how much money they have, provided they can pay their bet, and gives a damn who that money came from, right? So I think this is an example of non-king-making, to be very clear. I think it's just making the bet, right?

   11. RERoger Ehrenberg51:32

       I, I think it's, but it's definitional. Like, what does king-making really mean? I think to me, king, king-making means something different. Here it's do... And to me, king-making doesn't need to be one company. Call it an oligopoly, right? A small group of companies that receive an exceptional amount of funding relative to everybody else. Here, I think the, what I would refer to as the king-making is more money to spend on marketing, distribution, and team. And that, 'cause at the end of the day, bonusing, like, that's what makes these companies go around is the ability to-

   12. RORory O’Driscoll52:06

       Yes

   13. RERoger Ehrenberg52:06

       ... um-

   14. RORory O’Driscoll52:07

       Spend money in marketing

   15. RERoger Ehrenberg52:08

       ... you know, to... Yeah, exactly. As long as LTV to CAC makes sense, and that's exactly what they're doing. So to me, the, that's the money. But, but you're right. Customers don't give a shit. They don't care how much money Kalshi-

   16. RORory O’Driscoll52:18

       Agreed

   17. RERoger Ehrenberg52:18

       ... has raised or Polymarket's raised.

   18. RORory O’Driscoll52:20

       A- a- agreed. And look, y- t- to, to that extent, you're right, Roger, in the sense of every time someone gets money, um, to some extent it's called a king-making, 'cause you n- you need money to pursue your business, and you're right. These, these are oddly enough capital... They will become capital-intensive businesses, 'cause you're right, it's the spiffs that'll drive it, right? To get new customers. It's just like Uber, right? But I, I... And you're right. So at, at that level you can define anything as king-making 'cause whenever you pick two or three c- when, when 10 companies could enter a market and only two or three do and then they suck up all the capital, that's king-making. But I would argue we were defining the term more tightly to say you can pick the winner. I don't think these are picking the winner as much as, you know, you're backing the winner, and there's a distinction in terms of am I, as the... The point is this: Am I, as the venture person, making the difference? The hell I'm not, right? You know, that money could come from anyone. As long as Polymarket has enough to pay out those spiffs and meet their CAC, the money's good, right? There's no anointing here. Um, if you think back to king-making, there was the anointment process with oil. There's none of that here. It's just you've got money to play the game. But you're right, right. There's no doubt that any of these games that become high velocity, it's impossible to play, I mean, t- to take the other extreme, it's impossible to contemplate a bootstrapping world [laughs] in this game right now any more than it was possible for Uber, any more than it would be possible for, you know, the kind of LLM game, right? Many of these high growth businesses, thank God, lose money and rely on us in venture capital to fund that money, 'cause otherwise we wouldn't have a damn job, right? You know, if they could all bootstrap, we'd be forced to work for a living.

   19. JLJason Lemkin54:00

       Um, and I also, I, I'm probably allowed to say this 'cause I'm outside the borders and we're not gonna go into a political, but am I the only one to also realize that Eric Trump is on the board of one, another person's, a- another Trump is investing in the other. Howard Lutnick's son happens to run the fastest growing investment bank. My word, that seems like an awful lot of coincidences in one go. I wish I was as good at picking as-

   20. RORory O’Driscoll54:23

       It's a great deal

   21. JLJason Lemkin54:24

       ... Lutnick's and the Trumps. What a, what a great deal, huh? For a regulatory arbitrage play, Roger.

   22. RORory O’Driscoll54:29

       It was like the old days when you could be-

   23. JLJason Lemkin54:31

       Things like this could be that

   24. RORory O’Driscoll54:31

       ... work at YC and have your own fund at the si- at the side. You didn't have to invest through YC. It's a great deal.

   25. JLJason Lemkin54:36

       100%.

   26. RERoger Ehrenberg54:37

       If you're in crypto-

   27. JLJason Lemkin54:38

       [laughs]

   28. RERoger Ehrenberg54:39

       ... energy-

   29. RORory O’Driscoll54:40

       Smoke and deal [laughs]

   30. RERoger Ehrenberg54:41

       ... gaming, prediction markets, right? There's those handful of things which this administration-
8. 57:19 – 1:25:02

   What 90% of Managers Get Wrong About Portfolio Management

   1. RERoger Ehrenberg57:19

      where it's heading is the unregulated part of the market. [chuckles]

   2. HSHarry Stebbings57:22

      Something that you said, "Don't piss off," I always think don't piss off Peter Thiel, and Peter Thiel's made a very concerted, uh, concentration play in terms of AI bets, very much all in on OpenAI. And it just struck me w- 'cause it kind of was a piece announced this week where they shift from caution to concentrated AI bets, meaning they were out of the market, and now they're obviously very in the market but with few players. But what struck me though was, you know, I've interviewed, uh, Hemant at DST, I've interview... Uh, sorry, Hemant at GC. I've interviewed the team at Lightspeed. I know the team at DST, and they've taken the completely opposite approach of we don't really know the winners, so let's be in Mistral, let's be in Anthropic, let's be in OpenAI, and let's just index this wave of the best companies. Given the venture brains and Rory, phenomenal wisdom, may I add, that we have, thanks to e- experience, if you didn't know, with Arthur Rock, guys, Rory does.

   3. RORory O’Driscoll58:21

      Oh, for God's sake. [laughs]

   4. RERoger Ehrenberg58:23

      Poe, Poe, Poe, Poe, Poe, Poe, Poe.

   5. HSHarry Stebbings58:25

      I, I wanted to hear your thoughts. How do you think about these two opposing plays in this new world and where you would sit?

   6. JLJason Lemkin58:33

      I'll tell you my guess. I wanna hear what Rory has to say. My guess is being too, too diversified from investing in AI today is biding time. It's not knowing, not having the conviction, not knowing, and I think it's better to bide time than to completely stay out. There's plenty of reasons to, to do a check into to leaders, even if it's not gonna 10X the fund, rather than to be grouchy or sit it out or criticize these rounds. Um, but I think if you're Peter Thiel sitting on what he has, you wanna go concentrate. I mean, he's 40 perc- he's, like, 40% of the capital in Founders Fund, plus his own capital. You know, making little teeny bets, uh, little s- little play checks doesn't get you there, does it? But if you don't know, I would do 100 if you don't know. You might as well do if you don't know, if you're still... The world is, like, let, this world is so different than nine months ago, right? I think plan B is to make a lot of bets.

   7. RORory O’Driscoll59:23

      I think that's actually right. There's a lot in, there's a lot to unpack in this, so we'll take a little while, right? One is, look, we've discussed this. You know, diversification reduces your upside. That's the nature of it. It also reduces your downside, right? I mean, it just is. It's the central limit theorem. It's not a great insight here, people, right? You will have a wi- uh, you will have a wider variance of returns positively and negatively if you have 10 deals in your fund than 30, right? Literally, the math is clear, right? So there's nothing there, right? So logically, the more certain you are that you can call the shots, the more focused you should be, right? And I think Founders Fund both has the evidence that they can call the shots, 'cause they've done so, and frankly, the confidence to call the [chuckles] shots 'cause they got it, right? That I totally understand why they're gonna try and be more focused, right? I actually looked at the article, and I was honestly surprised at how diversified they actually, the information shared. Founders 1, the growth fund had 31 investments. Founders 2 had mid-high teens, and Founders 3 is aiming to have 10, right? To me, I was actually surprised at how undiver- how, how diversified Founders 1 was. It just didn't feel in sync with what we've seen from these guys in general. I mean, if you look at their SpaceX non-diversification, these guys strike me as the most likely to be most concentrated, right? So to, there was nothing surprising to me in that announcement. The only surprising thing was they weren't there already.

   8. JLJason Lemkin1:00:54

      Roger, how are you thinking about concentration with your new fund? You, you, you're back in the game. You wanna do 100 investments out of your new fund, or you wanna just do five big ones and go big and go home?

   9. RERoger Ehrenberg1:01:03

      To me, over a, you know, three to four-year initial investment period, obviously fund ones tend to go a little bit faster, more like two, two and a half years. I tend to be 20 to 25 portfolio constituentsAnd just to create the farm team, but with, you know, significant ownership from each of those checks. But then where, where I've tended to get very concentrated is on the second and third checks, and where we've gotten deep, deep conviction in, in a team, their execution in the market, and the fact that if they continue to execute with that skill and at that speed, that the market opportunity is, is massive. So we end up, um, historically, and I'm following a similar playbook, of three to five companies out of the 20 to 25 companies constituting 75% of the capital de- deployed.

   10. RORory O’Driscoll1:01:54

       75?

   11. HSHarry Stebbings1:01:55

       Roger, is your fund big enough then? If, if we run through that 20 average, three million checks today in full-

   12. RERoger Ehrenberg1:02:01

       They're not average three million. They're not average three. Our initial check is way less.

   13. HSHarry Stebbings1:02:05

       Are you gonna get ownership if it's gonna be a smaller check size to that given seed round?

   14. RERoger Ehrenberg1:02:09

       It is in the spaces I'm investing in.

   15. HSHarry Stebbings1:02:12

       And they still exist? [laughs]

   16. RERoger Ehrenberg1:02:14

       I mean, we just, we just wr- we just wrote a 1.5 check at a 10 post, so 15% ownership in a real- really cool analytics company that, yeah, is disrupting a seriously stodgy and screwed up sector that I think is generalizability outside of that space. So, yes, I do think it's possible to write those kinds of checks, and then assuming they do a great job, then we'd love to write a $3 to $5 million second check into that company. Maybe more.

   17. JLJason Lemkin1:02:47

       I'm switching to Roger's fund. I wanna find these deals. Like I-- it's been a few years for me since I've gotten enough of those. I'm, I'm switching over.

   18. RORory O’Driscoll1:02:53

       Yeah, if you're listening to this podcast and you can see, and you can see people's eyes, what you're seeing in Harry's eyes is the wide-eyed look as if, "Can such things even exist?"

   19. JLJason Lemkin1:03:05

       [laughs]

   20. RORory O’Driscoll1:03:06

       A 10 million post for a company with a product? Can such things exist? And yes, they can.

   21. RERoger Ehrenberg1:03:12

       And multi- multiple six-figure ACV clients.

   22. JLJason Lemkin1:03:16

       Yeah, I believe it. No-

   23. HSHarry Stebbings1:03:16

       Five on 50. I'll do it.

   24. JLJason Lemkin1:03:18

       [laughs]

   25. HSHarry Stebbings1:03:18

       Five on 50. I'm, I'll do it.

   26. RORory O’Driscoll1:03:21

       And Roger, Roger, and therein lies the danger to your model for that follow-on check, which is the existence of people like Harry who'll just snatch it away from you at a high price. Um, but I, I genuine-- but coming, coming back to the concentration, I actually think, Roger, again, at, at the risk of being nice, that, that's exactly the right strategy, which is... 'Cause it's not just a, "Oh, we're gonna diver- um, focus." Yeah, it would be easy to say, "Oh, we're gonna be concentrated," but I think what you're saying is correct, which is you have to start off with a significant element of diversification and then concentrate down. And in fact, this is top of mind for me. We just had our LP meeting, and that's-- and we would typically be at least a turn later than you, Roger. But my big picture comment was, we've moved from a world where an exit is 200 million in ARR to a world where an exit is 400 million in ARR at an IPO, right? So you're just doing your thing here, but way over there at the finish line, the finish line has receded another two or three years, which means logically you've got more risk and more upside. You just gotta hold these things longer, right? So when you think about that, at the margin, that should have some impact on your portfolio strategy, right? And for us, you know, we'd typically been, at our stage, under 20 deals per fund, and we kinda said you probably need to aim to closer to 25, just given this dynamic. Just nothing's changing at the stage we're at, but success is further away, right? Now, so and then at, like you say, trying to concentrate back down, 'cause in the end, I mean, it's no insight, but just to say it again, concentration, diversification is the enemy of upside. Concentration gives you more potential, more variance, but you have to do that ac- you have to do that via aggressively on your follow-ons, right? And that's a very different strategy, just to call it out, Harry, back to you think, than what Founders Fund articulated, but it's worth pointing out they're articulating that strategy for a growth fund, right? And the big aha here is how bifurcated and different different stages of this business are. When you're still at the will this thing even work stage, which is Roger, or will it scale, which is where we are, or maybe Jason somewhere in the middle, right? You probably need some significant diversification and then concentrate. When you're effectively investing in what should be public companies but are just private, then the growth fund strategy should be 10 or 11 or 12 deal concentration, right? So it doesn't lend itself to a one-dimensional answer, right, o- on that, and I think that this question of how to handle portfolio concentration and, you know, what should you be aiming for is just gonna be a key part of making the math work.

   27. HSHarry Stebbings1:06:03

       My challenge here is that I've done the portfolio reviews, and when I look back on like fund one where there's like a meaningful timeline to actually look back on the six years now, the best performers, your Linea's of the world, were not obvious early, and the early outperformers did not signify enterprise value in the long term. Clubhouse, Hop In, Be Real. And so if you think you can pick your winners early, I think you are wrong. Am I wrong?

   28. RERoger Ehrenberg1:06:30

       Harry, but, um, here's-- So ye- yes and no. Um, uh, yeah. [laughs]

   29. RORory O’Driscoll1:06:36

       But more yes than no.

   30. RERoger Ehrenberg1:06:39

       [laughs] Uh, I think one of the, the aspects of the strategy articulated is this temporal many turns in order to be able to see progress. And yes, it may affect your ownership if, in fact, you don't have that high degree of confidence at the earliest days and you're leading or writing massive checks into every round. But with, for, you know, as a for instance, there was, uh, and I've got like these very, very different ways of getting to multiple fund returners. It was not, they did not all look the same, right? TTDMultiple near-death experiences, multiple exit opportunities, bridging multiple times. Didn't have a product and market for more than a year and a half. S-so that, so that's one, one all the way over here, and then once it hit, then it hit. Then you had something like Wise, which was chugging along, chugging along, chugging along, chugging along. Not that they didn't have hiccups along the way, but fundamentally, that was as close to an up-and-to-the-right company that I've ever been involved with. So there it was, you know, at the f- my first check into Wise was 750, right, at a five-and-a-half post, okay? Yeah. Oh, yeah. Yeah, yeah. And then, but then, you know, Valar came in, and then we piled in with Valar to 20, and then we piled in with Valar to 160, and we just kept going, and we were 17% at TTD at IPO, and we were 13% at Wise at IPO out of a little shitty seed fund. But then, um, Datadog's a, a great example of one that ended up being a fund returner, but we had 2.2% at IPO because we were in there at pre-seed, and then RTP led the seed, and then Index led the A. So we were not comfortable in that, just being honest, to back up the truck at either the seed. The A we wanted to, but it... Sharp elbows. We couldn't get what we wanted in there. We were able to write a check, but not as much as we wanted, but we ended up having 2.2% at IPO. But that still was incredibly valuable because that was a $40 billion company. I'm just saying there's multiple paths, but the thing is, you want-- You're playing a multi to-- Going all the way back to the beginning of this 'cause this is a multi-turn game.

Episode duration: 1:25:12