The Twenty Minute VCToken Budgeting Panic Hits Corporate America | Cognition Raises $1BN at $26BN Valuation
EVERY SPOKEN WORD
110 min read · 21,652 words- 0:00 – 1:24
Intro
- RORory O’Driscoll
I think there's a tangible feeling of grab it now.
- HSHarry Stebbings
Yeah. I'm not interested if it can't be a billion-dollar position anymore.
- RORory O’Driscoll
Losing money is like sex. You can talk about it all you like, but until you feel it, you don't know what it's like.
- HSHarry Stebbings
Starting off, we have Anthropic raising $65 billion and then filing to go public in the same week. We have Cognition raising a billion dollars at a $26 billion valuation. We have public markets coming back to life. Is the SaaS apocalypse over? Best earnings week in two years. And then finally, Uber and Microsoft now pessimistic on the productivity gains from AI. Is there a question mark coming, and what does that do to token maxing and token spending?
- RORory O’Driscoll
We are done with the, "Ooh, I don't want to do the public markets. Staying private is cool." All these businesses have gone from CapEx light cash flow machines to CapEx heavy cash consumptive machines.
- HSHarry Stebbings
I would quit as a developer if you told me I could not use the model of my choice. I would quit. I really do think by the end of the year, we're going to choose tokens over humans. Ready to go? [upbeat music] Boys, it is so good to be back, and this is my favorite time of the week. Um, I want to start with... We were just talking beforehand about how in the fifty-eighth week of this week in Anthropic, we say anything different and provide different commentary.
- 1:24 – 7:27
Anthropic Files to Go Public
- HSHarry Stebbings
The question that I'm going to start on, Jason, is one that you just highlighted brilliantly, I think, which is Anthropic files to go public. Is Anthropic filing to go public and going public good for the ecosystem or not? Listen, we, we, we, we don't need to talk about w- how the ARR increased 28% since the last show. I mean, it's pretty good, okay? It's, it's the fastest-growing enterprise software startup of all time, of all universe, thr- throughout, past Alpha Centauri. But now it's also gonna be the, probably the fast- certainly the fastest to IPO to anything near its scale, right? This door of SpaceX, it's gonna IPO in five years. Five years to a trillion, okay? Cursor acquired for $60 billion in four years, assuming the deal closes, okay? Why would you bother with most of the companies in our portfolio? Why would you bother to even meet the founders? Why would you do anything as a VC? No, other than spend the next 24 months hunting these. And as an employee, here's the really tough question: Why would you work for any of these companies? Like, we have the CEO of Ironclad is now the head of legal at Anthropic, right? Or OpenAI. Sorry, I got it backwards. J- Jason Boeing or is, uh, he, he, he, he leaves Ch- Maybe he's still chairman of Ironclad, but, um, why would you do anything when you can build a trilli- when there is, there i- is not impossible to build a trillion-dollar startup in five years. Why would you do, rationally do anything else? Why would you even try to have a $400 million exit, $2 billion exit? Isn't just a waste of our time? I mean, I know, I know Rory will pick at this, don't get me wrong, but I think it will seep into our society. I think we will all start to feel this way when the bar, not just for valuations, but for time is reset. Why-- I'm gonna quit and spend a year at whatever. The... It's always made sense to join the hottest startups, but I think this is gonna just make it an order of magnitude, uh, at least emotionally feel to people like they should just quit tomorrow and work for the hottest startups because it's orders of mag- two to three orders of magnitude larger outcomes.
- RORory O’Driscoll
Yeah, you are, I am gonna pick on it because i- in one sense, what you're saying is true. Look, we're in the business of investing in the best startups. The best startup is now worth a trillion dollars, and you didn't invest on it, right? What do you do with that information? It is the best startup in the last decade. You can fool yourself into thinking there's gonna be another one just like it next year. That's one option, right? I think it's stupid because it is by definition a one in 10. Don't make your business plan on finding another trillion-dollar in five-year outcomes in the next five years. I think that's just foolish for reasons we can talk about if anyone wants to argue it, right? The second thing you can do is say, "I'm psychologically so damaged by missing this that I need to go home and I can't play," which is credible. There's gonna be a lot of people who do that. Or the third is you can grow up and be a fucking adult and say, "I wish I'd done that deal. I'd give my left arm to have done that deal, but I didn't. Now I got to go on and do perfectly good deals that will have great outcomes," because that's what normal, balanced people with kind of psychosis that aren't damaged do, right? As I say, in almost every human endeavor like this, there's one person who gets the big prize, and you just h- And as humans, you have to adapt and say, even if you didn't get the big prize, it kind of sucks, and I mourn it, but you then go on and live your life. Only one person gets to be president. Not everyone gets out of politics. Only one person gets to be the richest person in the world. Not everyone else can still kind of play in business. So I-- and in fact, I would argue one of the reasons business is more psychologically healthy than, for example, politics. I remember a dear friend of mine many years ago explaining, well, he's interested in both careers. Problem is this: in business, in, in politics, you know, the h- the 700 most successful politician in Britain isn't even a backbench MP. 700 most successful politician in the US isn't even a congressman or woman, right? The 700 most successful business person is probably worth plus or minus a billion dollars. It's an okay consolation prize. So the point is... But I genuinely, because I do actually, what you're saying resonates. Look, I'll admit, there are nights when I lie awake and say, "What was I doing in early February, March of 2023 when the Series C at Anthropic went down?" You know, I'd been to some of the early stuff. I'd seen the thing. I can tell you what I'm doing every day on the calendar because sadly I've looked, right? And I'll tell you what I wasn't doing, meeting with Anthropic. So, you know, you can mourn that information, but you can only mourn for so long, and then you get on with the rest of your life, right? So I do think I hear you, and I also think, say something else. It would be fucking great when it goes public because then we can just move on. It's just, you know, it goes from being the singularity to a magnificent outcome forever. Money flows back to the system. Sucks if you want to buy a house in San Francisco, but it's great. The mystery goes out of it. It's just a, it's the tenth or twelfth or maybe seventh or eighth, depending on how it prices, largest public market cap company, and we can all just get on with our lives. So yeah, I, I, I'm good with that.
- HSHarry Stebbings
I think you're right. You can't necessarily kill yourself for not being
- JLJason Lemkin
In the series B of Anthropic. I think to simplify it-
- HSHarry Stebbings
Series C, actually. I, I did say... I said I should point out. The B was the, um, the Sam Bankman-Fried round. Actually, you get to k- you know, that's, that's a, that's a poison chalice on every dimension. The series C, where Spark brilliantly led the round and Menlo did it. Yeah, that's the round where you kind of go as a VC, that was the round you missed.
- JLJason Lemkin
My version of it, thinking as a seed investor is... And, and I don't mean this facetiously-
- HSHarry Stebbings
No, I know
- JLJason Lemkin
... I'm not exaggerating, is here's my... And this is different than the employ- the employee issues and the ecosystem issues. I'm not interested if it can't be a billion-dollar position anymore. That's how it's changed my mind. I'm just not interested.
- HSHarry Stebbings
Position or company?
- JLJason Lemkin
No, position.
- HSHarry Stebbings
Oh, I see.
- JLJason Lemkin
I literally had this review with my fund management company. They talk- they're asking me why I was doing things. I'm like, "Listen, I will make small investments with friends for sure. I will do things to be parts of journeys that, that, that... But I'm gonna pass on anything that I, where I can't have a... At this point in my career. I'm not saying I would've done this in my first check to Pipedrive, which had a billion-dollar exit. I mean, I just don't want... It's not worth the, the 20 years, the t- hopefully it'll be five years, but I need a billion-dollar position to get excited today. I need a billion-dollar position. So if it's gonna be worth a trillion, I can do a pretty low ownership,
- 7:27 – 18:15
The "Billion-Dollar Position" Era: VCs Reset Their Expectations
- JLJason Lemkin
right? Um, but you gotta be worth north of $10 billion for it to even make sense to me, given dilution.
- HSHarry Stebbings
Rory, before you chime in, I actually totally agree with you, Jason, but I've also interviewed a thousand of the best GPs over the last decade-
- JLJason Lemkin
Yeah
- HSHarry Stebbings
... who've all said that their biggest winners, they underestimated the market size and the outcome and the opportunity. And so you're assuming that you're able to know Twilio is a $25 billion company, which you probably wouldn't have said it was at the time. That is a billion-dollar position to you as a seed or a Series A investor. How do you think about accurately identifying, given we continuously accept we can't anticipate outcome size?
- JLJason Lemkin
Uh, listen, I, I think it's a good question and, and, and I've made many, many, many, many mistakes, I will... But I do think the inverse is if you, if you see tangible reasons it can't create a billion-dollar position. For example, the founders are very, very good, but not great, okay? For example, the CTO, he's pretty good, but not like jaw-dropping CTO, okay? Not gonna dr- not gonna launch 17 simultaneous products. If you see that, fine, the TAM is small, but there just isn't a sense of how to grow it, okay? There isn't that drive. If we're 7/7/1, if there's complaints, if there's complaints. I, I just haven't seen a lot of great outcomes from complainers, from, uh, A- CTOs, from small... It's okay to start with the smallest TAM, but I wanna see that at least you're thinking, uh, e- even if it's insane, about the large TAM. So it's more just, to me, it's more just drawing a black marker through things where I might have taken a little bit of risk before. Just, just know I'm out. I'm just out because it's not that I can say for sure how big it will be, but I... these are blockers to a, a billion-dollar position. Not a billion-dollar outcome, a billion-dollar position. I think you can have a billion-dollar outcome if things are lucky, and you can have some... You can have the pretty good CTO, the mid-sized TAM, as long as you get some, some tailwinds and, and a few things break your way. I still think you can be lucky enough to have a billion-dollar outcome, but not a position.
- HSHarry Stebbings
Rory, is that not the same for you? Your fund is a billion. I mean, that's just asking for a fund returner. My fund is actually ni- our fund is $900 million, not a billion, just to be precise.
- JLJason Lemkin
Yeah. Harry.
- HSHarry Stebbings
And look, you, you want... Look, obviously you'd love to make a billion dollars, but you also... Look, I, I, I think that, I think you have to ask yourself how many of those, as a base case, how many of those realistically exist? You see, a- as is often the case with Jason, I actually agree with him on kind of what I'd call the gestalt. The kind of things he's talking about in a founder. You know, you, you do want the drive things, but I will, you know... So yes, I think ambitious, driven founders, upside, no complaining. So i- in practical terms, I agree with him. I don't think if I looked at the same deals he was looking at with excitement, I'd say I think that these are going to be a billion-dollar fund individual position, implicitly a $10 billion total fund outcome, 'cause I'm just too aware of the base rates. I mean, when we looked at it, you know, five, six years ago, it was like my mental model, which isn't the case anymore in enterprise software. It was roughly, you know, um, you know, you probably had 10 to 20 billion-plus outcomes a year best case. You probably had two to three $10 billion-plus outcomes a year best case, and then every decade, you know, you had one to 300 to, now I'll have to say a trillion dollar outcomes. Now, you scale that up probably by 10, 20%, but really there's not going to be more... In a normal year, there's not going to be more than four or five, $10 billion-plus outcomes a year. So I just don't know if that's credible or reasonable. I think in that $1 to $5 billion range, if you own 10%, you're very happy you did it. You made $500 million. You're very happy. It's half of a fund and you're very glad, right? Especially if you put 20 or 30 million bucks in and it's a strong capital returner, right? I think as you go later and you, as we've discussed, as you go later, it's much more about concentrated positions. But I don't think you can make 20 to 30 investments in a Series A fund or a seed fund and credibly really believe that each of them will be a billion-dollar outcome, uh, to you personally, or a $10 billion outcome totally. You can th- I mean, so therefore... Hang on, let me finish. Therefore, I think I tend to mentally have the following model. I wanna underwrite to a realistic base case return. But I do agree, never do a deal with just capped return. If you can't artic... The way we say it is you wanna have your base case, but you wanna articulate a credible upside story that can have that, you know, magic outcome. And that's how, as I say, I end up in the same place with Jason, even though we don't agree on the math. You do wanna have uncapped upside, but I don't think you go in saying, "I'll only do it if." I, I think the big statement you said there is will be rather than can be.
- JLJason Lemkin
Yeah.
- HSHarry Stebbings
I'm so much more willing now to go up the risk curve on doing things that I would never normally have done, because if they do work, they're gonna be so mega versus the will be. That is like, is like V1 SaaS companies, whereas I can see it much more realistically, but it's not that needle moving to have it succeed. Do you know what I mean?
- RORory O’Driscoll
E- everyone's always grave at the tail end of a 14-year equity boom, right? Again, uh, my biggest disadvantage as an investor, right, was I was investing in 2001, and I watched the Nasdaq go down by 90% and most of our investments go bankrupt and half... You know, less than 40% of them survived. So yes, everyone's always, "I want more risk 'cause the upside is there," when the risk hasn't come home and the upside is still there. So yes, I, I probab- I, I, I do think you at least have to be cognizant of the fact... You know, it's the old cliché, I've said it before on the show, so I'll apologize for ex- repeating myself, but, you know, losing money is like sex. You can talk about it all you like, but until you feel it, you don't know what it's like.
- JLJason Lemkin
It's not that... I'm not challenging your math. It's more that I think for founders-
- RORory O’Driscoll
Yeah
- JLJason Lemkin
... um, it's, for a lot of founders it may... After this IPO, after this Anthropic IPO, it may get even harder to get meetings. That's my point. I won't... There are meetings... Listen, I'm not so great. I'm, I'm, I'm not, know Marc Andreessen with all the E's and S's, but there's meetings I won't take now that I would have taken in 2024 or 2023. I just won't take them, and it's not because they're not great human beings or building real companies. I'm just not seeing that... The, the bar has gone up so much, I just won't take the meeting, and I, I'm not sure all founders get this.
- RORory O’Driscoll
I do think that is real. Uh, you know, and I do get this question from founders, you know. And they're implicitly saying, "Where should I be in the grandiosity versus boring stakes? If I'm too grandiose, I might lose them, but if I'm too boring, I might also lose them 'cause I'm not aspirational enough." And I do agree. What you are saying is correct, is the base rate for aspirational has gone up. In other words, there's a level below which... The level below which you're perceived as, quote-unquote, boring probably has increased significantly because people have seen what quantifiably amazing looks like. 10X growth for three years. You're right. There's no doubt it has an anchoring effect, and will do for some time. So again, I think you're probably right on the, you know, on the how you think about deals. And you just go, "Hmm, that can never-
- JLJason Lemkin
That's why I'm not sure the Anthropic IPO is all net positive. I think it will make things harder. Now, it's not just housing. That's already happening, right? I think it will make everything harder when there is a general sense of not being good enough, right, that is reinforced across the ecosystem.
- RORory O’Driscoll
I understand what you're saying, but I think we all have plenty of insecurity already based on the private. I actually think, to some extent... Again, I'm not gonna continue the prior analogy, though it is tempting, but we are a p- PG program. Um, uh, not R-rated, so... Not X-rated. So I do think that the mystery... When the financials are revealed, are, are stripped naked, some of the mystery tends to go out of the deal. So I'm actually just looking for... I mean, same as at SpaceX. It was... We can talk about what's going on in the wider market. It was just great to see the numbers deal with the facts and go, "Got it. That's what I thought it was." I can differ on how they're valuing it, but that all makes sense now. There wasn't any magic pixie dust. It was, got it, it was a m- amazing technical launch business, a wildly exciting starlet business, and oh, wow. It'll be the same thing with Anthropic. Oh, those are the numbers. Good to see. That makes sense. And it'll just, you know, just get the mystery out.
- HSHarry Stebbings
Anthropic goes out before OpenAI now?
- RORory O’Driscoll
Well, it's not clear. But I mean, gonna talk... But presuming, uh, I mean, Anthropic said they filed in... They, they, they made an announcement in the last day or two, so June 1st. I think OpenAI had made a statement that they were filing, uh, in May t- about May 22nd. And I meant to go back and look at the statement, and Jason is better at me at looking things in real time. Did they say they were filing or had filed, right? I think it might have been filed. In which case, they're roughly on the same track, right? And I think I was saying to you, Harry, before the meeting started, the most noticeable thing here is, is that... And I've, I've quoted the, you know, the famous, the, the quote from, I think in the show, in Reminiscences of a Stock Operator, that book from the '20s I often cite. What you're seeing now is everyone gradually jumping forward their cash waves in the public markets instead of... We are done with the, "Ooh, I don't wanna do the public markets. Staying private is cool." We are fucking done with that, right? You know, Elon had 20 years of private. Now it's go, go, go. 1.7 trillion. Now OpenAI and Anthropic. And if you look at their statements over the last 12 months, it was, "We may go public next year or two. We may go public in '27. Oh, we're going public now." Right? Everyone's coming in, right, to grab the capital. And the other thing, just to chart right today, as there was a ton of announcements today, is Google announced an $80 billion capital equity raise, right? So the most profitable company on the planet, with the exception of NVIDIA, said, "Hmm, I'm gonna need more capital. Better go get it." Right? So I think what you're seeing here is even though Anthropic just pulled off a wildly oversubscribed private raise, I think smart people on those boards are all recognizing the scale of the capital required means we should all jostle to the front of the queue. It's a little like w- you know, one of those airline flights in countries where they just don't queue, [laughs] you know, when, when they open the door and it's just a mad rush to get on the plane, right? It feels like that here. It's like, you know, Google... SpaceX was going first. Google just got ahead of it. Google just grabbed the first $80 billion. That's a d- you know, some of it's done now. Not all of it. $40 billion of it's over time. SpaceX has just then formalized its price at $1.75 trillion for early June. And, you know, Anthropic and OpenAI both said we're probably gonna do roughly the same in October. So you're probably looking at, across those three na- four names, including Google, $300 to $400 billion of equity issuance, all of which is really AI related given the SpaceX S1. So grabbing big piles of cash while they
- 18:15 – 21:37
The Trillion-Dollar Cash Grab: Google, SpaceX, and OpenAI Rush the Queue
- RORory O’Driscoll
can.
- HSHarry Stebbings
Google haven't done a raise like this in, in a significant amount of time. I'm forgetting the exact year number. Is this merely them being forced to in the CapEx race that we are in amongst the competitive set that they are in now in the AI race?
- RORory O’Driscoll
Forced to a, a... I mean, you know, in theory they could have borrowed more. They... There are lots of things. I think they're smart. I think stock's high, think equity's cheap.I think it's, it's... There's no, there's not a ton of downside to taking a wee bit of dilution at an all-time premium. Getting the world's best investor, well, you could argue Berkshire without Warren is really, but you're getting a reputable investor on your cap table, and you're getting another $80 billion, which maybe you can lever up with debt. I mean, so, you know, they... So I, I, I think it's, it's stepping up. What it's really indicative of is all these businesses have gone from CapEx-light cash flow machines to CapEx-heavy cash-consumptive machines, right? Generally, that's never good for stock prices over the medium term. Just, oh, across history, things that have high cash flow spinning out are really good investments, and things that eat money tend to be bad investments. And Google is right at, riding a tail... Yeah, on a trailing edge basis, it looks amazing. I think it's damn smart to issue money, to issue, to raise equity.
- JLJason Lemkin
Uh, listen, I'm, I don't claim to be... I've, I've only been in the conversations a few times. I don't claim to be an expert. Of course, it's smart. The dilution is as, uh, viewed from, like, a venture perspective or start perspective is un- un- un- unknowable. I mean, it's, it's, it's hideable.
- RORory O’Driscoll
No, it's, it's unseeable. Yeah.
- JLJason Lemkin
It's hi- it's unseeable.
- RORory O’Driscoll
Yeah.
- JLJason Lemkin
But, but if they really thought the payback was so quickly, wouldn't you issue debt and have no dilution? Because 80 billion is still 80 billion of dilution, right? To, to be, to be neutral, they're gonna ultimately have to repurchase 80 billion of cash to get those shares back, right? So wouldn't you do debt if you thought you could get, pay it back in any reasonable amount of time?
- RORory O’Driscoll
Well, first of all, it may be that they don't want to spend 80 billion. They might want to spend 200 billion, and they might lever the same. They might say 80 billion of debt, another 80 billion of equity, which will say, "And you'll take on 120 billion of debt without en- engendering our credit rating."
- JLJason Lemkin
Yeah.
- RORory O’Driscoll
So first of all, they could do both, right? It's one comment, right? Yeah, and then, you know, it's not clear the payback. I mean, again, to give... It, it is not clear. I mean, we can talk at some point about, yeah, i- is the payback there in the end the toll? But even when it is, the payback on these AI data centers is normally two to three years. Now, Elon has massively outperformed that with his storage deal [chuckles] with Anthropic, where he's getting all his money back if the deal lasts a year and a bit. But normally, the payback is not, it's not nothing, and three or four years is a fair amount of time. So I hear they co- Look, this is... I mean, Google is the second most profitable cap, company on the planet. Um, they could borrow all they wanted to within reason. I mean, they have some debt, I think about 70 billion of debt, so they could have borrowed all they want. I just think it's smart to have a strong balance sheet w- if you, if you find that you might wanna spend, you know, 300 billion a year for the next four years before it comes back.
- JLJason Lemkin
Well, certainly it insulates you from any, any colds or, or flus you get in the debt market on any given week or month. At least you don't have to worry about the vagaries of the debt markets, which do have micro panics. They do have micro panics.
- HSHarry Stebbings
I think we de- I think we deserve a, a milestone/award for the shortest time given to an anthropic section in a trio show, which i- which is impressive for us. [chuckles] I, I wanna m- I wanna move
- 21:37 – 30:02
Is the SaaS Apocalypse Over?
- HSHarry Stebbings
to... I, I'm jumping around, so forgive me for it. But we've talked a lot about public companies, and often it's been a tough conversation with, you know, SaaS, um, not being appreciated by public companies. We saw Snowflake, we saw MongoDB, we saw Salesforce. Best earnings, uh, in, in a significant amount of time. All of them did very well, and we saw stock surges across the board. Is this the end of the SaaSpocalypse? How, how did you guys analyze this?
- RORory O’Driscoll
There's the company-specific stuff, where I think the kind of Jason rules apply, which is either you re-accelerate or you attach to AI spend, and the guys who exploded did both, and the guys like Zscaler, who had a messy story, went down, right? So individual deals. If you look overall at, you know, the, the SaaS one, yes. The... What's happened here is you've had, it's interesting, it's been a massive round trip, right? I look at just, you know, World Cloud, which is the ETF that is the SaaS industry, the cloud industry, versus, you know, the QQQ or SPY. What you basically have is 30% down kind of a month ago, and then we talked about this. And remember, we talked about, you were giving me shit, we have to buy some stock. So I bought World Cloud, right? I couldn't figure out which ones. I hadn't have time to think, so I bought World Cloud, and it's up 25, 30%, right? But we're just back flat on the year. That's the fun fact, right? Um, I mean, the, the Sabbath is... And by the way, I would also caveat, literally, that was true as of y- as of yesterday night. For the last, I think, just over a month, SaaS had outperformed semis, fun fact. But for the year, semis have murdered SaaS to the upside because SaaS has just gotten back to flat, right? And now, interestingly, even today, you've seen a significant bounce down, right? To me, what I, I, as I say, I'll defer to Jason on the individual ones. But overall, what it says is the narrative got way overdone, and then people looked up and said, "These things aren't going to zero. And if they're not going to zero, they have cash flow value, so they probably are worth more than that." It doesn't mean that they have kind of long-term momentum. I'm not looking at World Cloud and saying, "I made 30% this ye- this month. I'm gonna make another 30% next year." I'm probably, "Thank you very much. That was great," right? And then on the individual, I'd kind of, Jason, over to you, get your thoughts on some of the individual companies.
- JLJason Lemkin
Well, look, yeah, for sure. I mean, you know, the, the media, I mean, if you just read in the last 30 days, it's great, right? Um, depe- depending on what basket you use, I, I have a, I have a slightly, uh, um, more optimistic basket. But my basket of cloud stocks, software stocks, is up 5% this year after today when we record this, another great day, right, in this run. But Nasdaq's up 21%, and I think semis are in the triple digits or close. So great that the, the, that the overcorrection is over, but the fundamental concerns are all there, right? I think our only learning is that there was a... I never understood the total panic of the Spaa- SaaSpocalypse. It couldn't all be vibe coding, right? Notwithstanding Harry's show, where they all want to vibe code, they're all serum. It, it didn't make sense. But the meta issues of seat contractions, of, of pr- of, of the fact that AI software spend, according to Gartner, will be up 60% this year, so that means it's got to be cut somewhere else, right? Those issues haven't changed, and I would say we're no longer... What's great is we're not in free fall because free fall leads to panic everything. Panic, panic buying, panic everything. But even with the re-accelerationYou know, Atlassian still at 4X, uh, ARR. You know, HubSpot 3.8X, um, Salesforce 4X. So I know Rory really disagrees with me here, but I just don't think investing really works without 10X or higher outcomes. And I know they're public, and I know they're mature, but I think the SaaS poc- the panic part of the SaaSpocalypse is over. Like, we overcorrected, as we always do, and we may be over-indexing on semiconductor stocks today that, that, that are, will be seasonal as well. But, um, but the issues haven't gone away. It's just we, we sh- we, we, we over-panicked on the timing of them.
- RORory O’Driscoll
Right. A- actually, w- we are in agreement, you know, I, I, I, on the... Yeah, 'cause I'm, I think we're saying the same thing, is that this was a rare occasion where literally an entire sector was discounted to the point where it made no sense. A month ago, I was able to identify a bunch of stocks where I could say, "Hey, um, they're so cheap that it's silly," right, in SaaS land. Now you actually have to say which of these stocks ha- given it's we've repriced enough, which of these stocks has a genuine re-acceleration or AI attach story. That's a harder message. I mean, I think some of the ones who killed it do, but overall it's still pretty tough. You... It's, so I think we're in sync, Jason.
- JLJason Lemkin
Uh, yeah, I think the interesting thing is there was, look, there was a modest re-acceleration of multiples for almost everybody, right? Even the hardest hit, Mondays and Atlassians, they all, they all, their multiples all bounced off the hard deck and, and just went back to crappy from, uh, from, from worthless. But the real, the only real learning of this, of the year to date, is that it's been long enough now that the public companies, let's just call them mature com- the mature public companies that, um, that are, that are benefiting from AI are seeing the boost. So yes, semiconductors are up, but you know, when Jeff Lawson was on this show, he said, "I haven't run Twilio in a while, but I'm pretty sure we're gonna benefit from AI because agents and AI just need to use more of our voice than other agents." And he, it took a quarter or two, but he's right. Stock's up 57% this year. It's gone from, I think 4% or 5% growth to 20. Okta, you know, which was, which was your dad's, uh, uh, enterprise, uh, auth system, up, up 57% this year. 56%, right? Datadog, which everyone uses, right, every AI leader uses, up 100% this year. So it, it's just the, the, our, our mistake and the captain obvious learning is, "Hey, look, we gave it six months, and every le- software leader that, that were, were agentic products and agents need more of it is up. And no matter what they say at X, the ones that only humans use is kind of down. [laughs] Even if they bounced off the hard deck, right? There's just not an appetite for more human per seat licenses. And even Salesforce, which re-accelerated growth, it was all through hard work. It was through Agentforce, it was through p- organic, inorganic purchases, it was through everything. And, and, and Ma- and Mark and the team came on the call and they said, and they split the business up into two verticals for the first time. I think agent- I forget what they're called. Agentic or Agentforce and the others. And they said the software business will be perpetually in single-digit growth. Like, that's as good as it's gonna get here, but we're double digits in the rest, and that's growing 12% or 13%. So let's not... We, we, we bifurcated. Um, we saw what made sense, which is AI-fueled a- agentic-focused products. But I, I want, you know, ch- the classic human per seat, uh, software really is dying. It's not dead, but no one wants to buy this crap. In fact, they're cutting it because they gotta come up with money for all these goddamn tokens. Uh, everyone wants these damn tokens, Rory and Harry. [laughs] You know, we're just, we just don't need another human seat for folks that, uh, that don't do any work on our project management software. It just, that has to be the math, right? Gar- you can't grow 60% AI software without cutting some material amount of the rest. So we, we are seeing it. But we should have known this. We should have all... Forget about the, the way I made my bets, just who fell the least. That was at the nadir, right? I bet on who fell the least. [laughs] We should have all made the bet, the Jeff Lawson bet, which is, okay, who's gonna honestly benefit from agents and agentic? And, and it's not that complicated, right? Of course it's gonna be Twilio, Datadog. I never would've thought Okta, but I, I, if I, if I'd been a little smarter with Claude, we would've figured it out because it's, it is an obvious one. If, if, if everyone doing auth that's a private company's blowing up, they should blow up too, right?
- RORory O’Driscoll
I think the real challenge is more a question of what does critical mass look like to go public, to Jason's point. What does liquidity look like, all that. I mean, you know, you guys often talk about Replit. There's an example of a company that was pre-AI that brilliantly attached to the trend and just got a ton of lift, right? Is that there's stuff you can do to get lift, and if you get the g- it's Jason's, there's only one test. Are you growing quicker? And if you're growing quicker, you've gotten lift. If you've gotten lift, you're fine. And you can imagine lots of parts of the new, you know, LLM first AI harness software stack, um, like isn't it Supabase is the Postgres database that's just brilliantly co-attached to everything. It's grown quickly too. So there will be incidents of that, but it requires deft product management and making sure you're attached to the future. If not, then, uh, as if you're not going away quickly, but you just have a question of how do you create value and how do you realize value, which we'll segue to a few other discussions.
- 30:02 – 32:46
Cognition Raises $1 Billion at a $26 Billion Valuation
- HSHarry Stebbings
Totally, yeah. Can I ask, we, we said about kind of explosive growth and then software creation. Cognition raised a billion dollars at a $26 billion valuation. Devin, their core product hit $492 million in ARR. Incredible growth with some mega customers, some of the largest enterprises in the world. A- Jason, I thought your statement here was, was a good one. Was Cursor at a $3 billion ARR cheap then if that was priced at 60? And how do you reflect on the growth, this Cognition round? I'd love your thoughts.
- JLJason Lemkin
I wish I was more of an expert on Cognition today. When we started this pod, I did say that, uh, probably the two s- absolute highest IQ CTOs in my portfolio were using Devin in the early days. That, when, when, when things were still pretty crappy, before, before anything. Um, and the, uh, the idea I think is still super compelling, uh, super compelling, um, and now we have some metrics. The idea at least is, "Hey, it's great that your, your, your engineers are 10 or100 or 1.001 pro- X more productive. What's far more interesting is if you can have an autonomous AI engineer, that's much more interesting. And I remember the, probably the smartest CTO in my portfolio, just in the early days, ran Devin and Slack, and he would just tell, tell Devin to go do these things and come back and make the commit on their own. And I'm sure it was pretty mediocre in like, you know, a year ago or something like that, just because of the nature of the underlying models. But the vision to me is actually more compelling than w- than all this Claude code crap. It's much more compelling to just tell the agent what to build, or not tell the agent, have these autonomous engineers that do it, right? So, uh, on the other hand, you know, there's just m- maybe it's not that impressive 'cause there's just so much money in the space. Maybe if it works reasonably well, right, and it's just a way to repackage the models for one workflow that's more interesting, maybe it's not as impressive as it looks. But the vision, I think, is the most interesting vision in the space. W- why, why do we wanna empower mediocre sales reps? No, we wanna, we wanna automate them with AI. Same with mediocre engineers. Let's get rid of them, man. Let's, let's have the best ones, but all the rest, let's have Devin. Dev- Devin's not... Devin doesn't argue. Devin doesn't only wanna work on interesting problems like most of your best engineers. It's not interesting. I'm not gonna do it. I was talking to someone that, that turned down an, an, uh, uh, an offer at Anthropic, just said it wasn't interesting enough what they wanted to work them on. He just didn't wanna work on, like, little edges of basic application. It was boring, right? So let's have Devin do it, man. So, uh, I hope it's the biggest winner of all.
- RORory O’Driscoll
This is very much a market where leads change hands at a furious pace. So every one of the companies that's worth a trillion bucks, and Google probably has them, every one of the companies worth a trillion bucks is gonna wanna eat your lunch. So it's a high-risk, huge market return, and good luck to them. I love it. It's
- 32:46 – 1:00:36
Token Budgeting Panic Hits Corporate America
- RORory O’Driscoll
what it should be.
- HSHarry Stebbings
I was speaking to one of the best CTOs this morning, and he said, "We've just... The analogy is we've just given a company credit card to every employee and said there's no limits. Spend away." And that's the token spend budgeting today. And, and my question to you is, if there is rigor and budget instilled, are we dramatically overestimating market size?
- RORory O’Driscoll
I don't think we're overestimating market size. So but, but let's pre... It's funny, we talked about this last week, and I was gonna tweet this because literally on Tuesday when we record, I was like, it may seem her- her- heretical to say that maybe this stuff isn't got an ROI. By the time the thing came out on Thursday, there'd been an explosion of these, oh my God, ROI articles. So it was right on the cusp of the zeitgeist where people finally woke up, and I was thinking about it last night. It all makes sense. Sometime in November, December, Claude produced the magical version of the model of Claude Code that just works. In early 2026, they kinda changed the pricing model, so you have to pay as you go. And it's like literally everyone cranked in Q1, and I can almost imagine in every CFO's office in the land, someone was doing accrual accounting, and like about by mid-May, they suddenly realized, oh my God, you know, we used to estimate our bill based on this, and suddenly we're 10X wrong in our accrual. And the f- and literally the penny dropped simultaneously across the entire [chuckles] corporate US, right? Um, we told these guys to crank in Q1, and fuck me, they cranked, right? [chuckles] And it looks like we spent our entire budget, right? And literally it, it was, it was, it was universal, right? And it's happened. So, so, so it all makes sense. This is about the time everyone discovers it. Now to your point, I was raising the issue when people weren't, but now I'm gonna take the positive side, provided the code that's generated is good, right, and useful, right? I can imagine a scenario where people put a pause on it. And I just saw, I think Uber announced today they're just gonna give everyone 1,500 bucks a month, which is about the right amount, um, on what we're seeing in terms of averages. I won't say the right amount. That's a normative statement. It's about a little above what we saw the average spend was. So they're basically gonna cap everyone, right? And try and get control of the spend that way, right? And y- the thing you have in your favor over the medium term is the frontier models aren't getting cheaper. I wanna be clear on that. They're getting actually slightly more expensive. But the model that is frontier today will in a year be five to 10X cheaper 'cause it won't be the frontier model anymore. So if you're getting value from this egregious spend today, you might slow down for the next 12 months, but as, as long as you stay on that pricing curve, the... what will then be not a frontier model, but an older model, will be available at a cheaper price, and you will be able to continue to get value from it. That's a long-winded way of saying it. I don't think you wake up and go, "Oh my God, we're not gonna spend any money on this." I think the pace of adoption might slow markedly as people realize quite how much they've spent.
- JLJason Lemkin
You know, I had two of my fastest growing portfolio companies say, saying they, they already blew through their budget this year. So it's not just the big guys, right? Two, two of my fastest growing companies. None of my slowest growing companies have said that. N- not, not a single of my slowest growing portfolio companies have said, [chuckles] "Guys, we've burnt, we've burnt through all the tokens." May- I don't know if it's causation or correlation, but it was interesting that two of them said that. I, I think that at a practical level, of course, there has to be cost containment, right? We're not all startups that just raised 50 million with six people where it doesn't matter, right? There has to be cost containment and, and folks are massively wasting tokens. They're, they're massively, they're massively wasting them. So it ha- it, it has to come that people have to be more, more thoughtful with what they build. Um, the vast majority of tokens that are used in coding are in QA anyway. It's not in production. We may have to be more thoughtful about how we do that or not. Um, but I think it's okay if we have... we don't shoot from the hip as often. I think it's okay if we slow down the number of features that we build. I don't think it's the end of the world, right? Having said all that, like more and more folks are using multiple models at the same time, right? For example, e- uh, not to talk about Replit too much, Replit, it does it automatically now. Replit, if you have a complex feature, Replit builds it in Claude Sonnet, not Open, it builds it in Sonnet to save money, and then it has Codex come in and check the work.It has both of them, and you don't even know this if you don't even check it, because it's mostly for non-technical users. One interesting learning, if you want to learn about cost sensitivity, actually study Replit and Lovable because they're under huge pressures right now from their customers, massive pressures. So if you want to see the future, we can, we can look at what, what the Uber dude said in one of my portfolios, but it's much more interesting to watch how, to me, how Replit and Lovable are evolving their platforms radically, because a couple extra dollars there leads to churn at the bottom of their customer base. So they're radically focused on cost containment, and yet they still run... S- I don't know about Lovable, Replit still runs two models. Not, not for everything you do, but for anything complicated, the architect, uh, agent now is Codex that it brings in to check Sonnet, and it works really well. Like, it's incredibly powerful to check your work in, in Sonnet and probably Opus with Codex. It's incredibly useful. It's co- every single time it finds issues. Every single time it finds issues. It's so powerful. So that's going the other way, right? Is that as we go more and more multi-agent and we ask them to do more, of course, we're gonna wanna... So, so we have to have budgets, but the tension is only going to grow. Um, and I don't think we've yet, to Rory's point, you just asked my opinion, right? I, I think in the course of this show, what we've learned, and it has changed since the beginning of the show, is it really doesn't matter, and this could change in 90 days, but so far it really doesn't matter if older platforms are cheaper and older models are cheaper 'cause we don't want them. There are use cases where we want them. There are... But overall, as, as an ecosystem, we are all in on the best, we are all in on Opus. That's, that's what we want. So we're not benefiting as much from the deflationary, uh, benefits of AI, uh, and we're paying into the inflationary side.
- RORory O’Driscoll
But we're pro- And again, I don't wanna sound the negative 'cause I'm actually a net positive, so I wanna come back to that. But first of all, I think the zoom out comment is this. At some enormously high level point is this is validately good news for the model providers. What's happened is somewhere around 3, 5% of tech spend, everyone noticed, "Oh my God, we're spending this," and no one said, "We're gonna cut back to zero." Right? What this means is you've just established a category that probably has a market size of half a trillion to a trillion dollars, and everyone is now going through the corporate process of saying, "How do I find that money? Where do I find it elsewhere? How do I manage it? How do I cap it?" But what they're not saying is, "Stop it." Right? So you've built a category that's huge. So if I'm Anthropic, if I'm... I mean, it's, it's obvious to us 'cause we're in the Valley, but, you know, the, the doomers who say it's all just gonna go away 'cause it's silly, no. Corporate America has said, "We're spending this kind of money. Shit, we don't like it. We're spending too much, but we're gonna have to have a plan to spend it." It's enormously validating, right? I think that... I don't know if... It would be interesting to see, Jason, as part of managing that spend, will it still be true that we all want the most expensive model for everything? I know I see some of my app companies find a way to use multiple models, use open source for the cheaper stuff. I'm more-
- JLJason Lemkin
For their application, but for their development-
- RORory O’Driscoll
I was gonna say, I was gonna say, is it a question that there are things where you want one but not two foundation models, but are other things that you offload, right? Because I don't think... Look, the, again, going back to what I said, the, the cost of off-frontier models keep going down, but the cost of frontier models keep going up. And while I, uh, I just made a positive statement, I don't think corporate America is saying, "Yay, the cost of the frontier model is gonna keep going up, and we're good with that." So I think we've now been found by finance. They're looking to the CEO and saying, "Dude, on January 1st you said, 'Use all you like. It's gonna be amazing,' and now it's May 15th and we got a problem. Let's figure it out." I don't think they're gonna say, "Keep using the frontier model for everything," you know, where not on a price per token basis, but on a price per pass, on a price per run basis, it's been going up. I, I think we've now gonna have to discover costing and marginal costing.
- HSHarry Stebbings
Jason, do you not think that open source will have a meaningful impact specifically on development budgets? You, you clearly identified differences-
- JLJason Lemkin
Maybe. I just think, I just think we're confusing the n- these narratives of two things, and I wish I had the exact number, but we're, we're confusing the models used for app, by applications, right, versus models used for software development. And for applications, anyone, uh, every, every... I mean, this is OpenRouter blowing up. This is everything. Everyone's optimizing. Uh, even if you're not optimizing, you're optimizing, right? Um, because if I had to... Some... You know, everything high-end you do in Opus is like a buck, okay? And it could be more. It could be dollars. And at the low end it's 50 cents. You can't do 50 cents for a chat, for every single chat, or a dollar. So this could change, and there are certainly workflows where you need massive amounts of, of, of inference and thought, but I think we're confused into developers are under pressure. These poor guys, as Harry has on the show, they gotta work 996, these poor guys. They're not gonna use a crappy model on Saturday. Like, I quit. I can't... No, literally, I would quit as a developer if you told me I could not use the model of my choice. I would quit. It's not worth my time. Like, you're literally telling me I've got to use... So I just ma- I'm not saying it won't happen in some use cases, but, um, I would quit. So I think what... The more interesting thing to me from all this, here's the thing that's interesting to me, to tie it all together, then maybe we can move on. I think now that we're hitting budget discussions, just discussions, right? And now it's CIOs are more involved, and now it's, it's, I think it's not just Uber, even though I think the Uber story was a little blown up and a little apocryphal, but it's gonna happen everywhere over the course of this year, right? The budget has to come from somewhere. I really do think by the end of the year we're gonna choose tokens over humans for engineering and product. We're g- at the margin. You're gonna go in and you're gonna say, 'cause this is certainly the way it worked for me in the old days when I was at a big tech company, "Your budget this year is 50 mil. Instead of your budget being 400, 100 heads, guys, or 200 heads, your budget this year is 100 million or 200 million or 400 million for pro- for EPD, engineering product development." And it's... And when I was, worked at Adobe, it was, that was all humans. Like, we ignored all the other costs 'cause they didn't matter. EPD, your budget was just head count, right? Everyone costs the same, $300,000 a year. It didn't matter if they were a, an office manager or your top... 'Cause just to keep it simple, okay? Now we're gonna have much more sophisticated budget discussions going into 2027, which is your budget is this much. You decide where you want to spend it, leaders. And I'm gonna be sitting around and I'm gonna say, "Do I wanna have another 20mediocre engineers on my team, or do I wanna give my best guys unlimited tokens?" And that may fuel a-a-a-a-a, uh, that may fuel the real, whether they're AI layoffs or just AI backfills, it may fuel another wave of this, which is very distinct from the ClickUp whatever, excuse for getting fit, right? This may be a rational choice at the end of the year. There is only so much money, and I'll take tokens. I'll take tokens over a B. I would take to- we've already made that choice at SaaStr. We got rid of all our Bs. We'd much rather have tokens.
- RORory O’Driscoll
So therefore, the next question is, you have to come to some kind of opinion what the percentage mix is. People are going to be pushed into some kind of hard choices, and then it will, it will force a belief. Do you really believe that these lift, they give you a 20% lift, in which case, you know, assuming no net change in, you know, demand, you need, you know, you have 25% lift. You have 80... You spend $80 on people and 20, and 20 bucks on, um, tokens. Do you feel it gives you a 50% lift- I mean, sorry, 100% lift is 50/50. I mean, it will force quantification, right, once you have a dollar budget and a set of deliverables, which I think is the next shoe to drop.
- JLJason Lemkin
It will, but even more than that, at, at more competitive companies, the best people won't tolerate the, th- not getting what they want. So you're gonna, so you're gonna look, and so what, what's gonna... I think what will happen going into 2027 is in engineering, QA departments will get destroyed, 'cause you'll be like, "I got six QA engineers, I got 10, and, and they're great, but, uh, do I h- uh, do I really... Like, I'd rather, I'd rather go to two with tokens. And, and whatever's left in my, my customer success department that I didn't put into FDs, I'm just gonna get rid of them for tokens for, to manage, uh, customer onboarding, customer support. I'm gonna get rid of all the marginal roles, the, the ones at the bottom of that, of that list, I'm gonna sacrifice for tokens." It's so easy. You don't... It's, it's really simple. The ones on the bubble that weren't already cut in the first wave will be cut for tokens.
- RORory O’Driscoll
It would be interesting to see if you're right or whether you'd have to have... I mean, uh, you know, you st- are you gonna waive testing? Are you gonna waive code revie- you know, like you have to think about all these things.
- JLJason Lemkin
You will shrink it to whatever the, the, the minimum you can do, and have, and have the models do the rest. You will just inherently make that choice rather than, uh, someone that's just okay, right? You're just gonna make the ch- and I will tell you, we had this FD C- C- CCO CS summit at Sa- at our SaaStr annual event. It was a couple hundred leaders. Almost everyone was talking about how they're getting rid of Gainsight and all the rest and all their teams. That was the topic this year. We're getting rid of all the people and all the software because it's more efficient to just handle this at the agentic level. This was, this was everyone, o- old and new.
- RORory O’Driscoll
I- I'm sorry, that's in customer support.
- JLJason Lemkin
Cus- customer success.
- RORory O’Driscoll
Customer success.
- JLJason Lemkin
Yeah. I'm just saying these are all roles on different lines that will get, just get cut at the end of the year. Whatever's left in these departments, I'm not gonna cut my best engineers. I'm not gonna cut, cut m- my actually smaller sales team than it used to be, right? I'm not gonna cut my best folks, but just I, I'd rather have tokens. I'd rather have tokens do the inbound call. I'd rather have tokens handle the 3K deals. I'd rather have tokens do QA or CS, right?
- RORory O’Driscoll
Jason, with all due respect, right, I think I liked what you said earlier, which is a nice way of saying I don't, I disagree with this, right? Um, at the app level, like for like customer support, I think, I think, right, the cost of tokens is so low relative to the total cost, it, it's in the noise. I mean, I think, I don't think token intensity for something like customer support will be a significant factor. Uh, you won't look back and say, "That's a huge amount of tokens." I'm just trying to understand the end-to-end product and development life cycle across initial engineering, code review, test, all that, right? What do you think the split will be between dollars paid to engi- engineers in total and dollars paid to tokens, just in that area, leaving out things like infrastructure?
- JLJason Lemkin
I, I don't know for sure. I'm just saying, listen, I don't... We'll s- let m- uh, let me go back in time. Let's imagine I was back at Adobe. I had 400 people in my B- my little BU, okay?
- RORory O’Driscoll
Yeah.
- JLJason Lemkin
And at the end of the year, I had, I, it was a fixed budget, and, and I, we got around the room and we decided we wanted to go into next year with 300 people and the equivalent of 100 humans of tokens, okay, another 100 of tokens. I wanted it, right? This is very, this is what I would do today if, if I was fixed. Okay, so now I'd go, "Now I'm gonna get rid of 100 people," so I'm immediately... Whoever's left in support that isn't great, gone. Okay? Whoever's l- I would get rid of my entire CS team except my head of CS. I would get rid of this whole, most of the, all of my functional QA team, and I would just leave the smartest guys. Like, I would just get rid of all of those people because I need the tokens, man.
- RORory O’Driscoll
Again, I'm just gonna be fact-based, right?
- JLJason Lemkin
I think it will happen at the end of the year-
- RORory O’Driscoll
Yeah, no
- JLJason Lemkin
... because people will make that choice.
- RORory O’Driscoll
What you're saying, uh, but the, the, listen to the math to that, 400 to... What you're basically saying is e- every, the remaining 300 people, um, you, you took 100 heads and replaced them with tokens, which implies roughly a 33%. Every engineer has, who's getting 200 grand or 300 grand has roughly 100 grand in tokens. That's what the math would be, right?
- JLJason Lemkin
Sure, but salespeople will have sales applications that aren't cheap.
- RORory O’Driscoll
Yeah, yeah, yeah, and that's why-
- JLJason Lemkin
So everyone will have agents. Everyone will have agents, right?
- RORory O’Driscoll
... and that's why I don't want... I mean, I would, but you keep refusing to... I'd like to just keep, keep it to engineering, 'cause I think that that, the, the math will be different in, um, sales and customer support, 'cause I think there'll be more app with less token intensity, but maybe third-party apps. I think engineering is where it's more interesting. I, I can't remember whether it was Uber or someone announced today they're gonna keep it to, as I say, 1,500 per engineer per month, which is 12, which is 18,000 a year. Call it roughly 10%, right? And that's probably a s- first pass swipe. That says on a $200,000 engineer, they're getting 10% token budget, right? You're implying on a $200,000 engineer, you're getting 33% token budget, which would be, what's that, 66,000, right?
- 1:00:36 – 1:12:41
Big Law Flex: Kirkland & Ellis Pledges $500 Million to Build In-House AI
- RORory O’Driscoll
If we're okay to move on, I, I do wanna move on to the, the next kind of segment or function to be heavily impacted, one would say, which is legal. We've spoken at length about Harvey and Nagora. There are two elements specifically that I wanna touch on here. Number one is Kirkland spending $500 million on building their own Harvey and Nagora, feeling they have proprietary data, proprietary workflows, and they should build their own, $100 million over five years. This is, uh, a big commitment from one of the world's largest law firms and a big slight on two of the biggest players that have told, "We don't need you." The other point I'm gonna make is Jason from Iron Cloud last night announcing that he is joining OpenAI and the impending or, you know, coming threat from OpenAI and Anthropic into legal, which we will see in the next two to eight weeks.
- JLJason Lemkin
I, for what it's worth, I don't think this... Like a lot of these things on X, I don't think the Kirkland story is as, as interesting as it looks for what it's worth, okay? So you've got a... Yeah, it's a law firm, but it's a law firm that does 11 billion in revenue growing 20%. It is committing $100 million a year of IT that's probably coming out of their Windows NT box or some other crappy budget that they don't need, and this doesn't mean that they won't put 20 million into third-party software as well. It doesn't mean they won't dump it if it doesn't work. But they basically... And it doesn't even mean... I don't know. They couldBe a Harvey or Legora or whatever customer too. I just think it's... This is a, a reallocation of less than one percent of revenue into AI to maybe build some proprietary stuff. They should do this. These, these are... Working in a law firm, I think, is one of the most soul-crushing businesses there is, but it's very profitable if you do it right. Segments of it are high margin, and $100 million is nothing to win the deal, right? How much would it, that be like to Andreessen to win a deal? It'd be like noth- it'd be like setting up a media company to win a deal, a twenty-four-seven media company. It's like nothing. It's like nothing. So it sounds like if Kirkland & Ellis was doing $200 million in revenue or something, it would be a, a big deal. But they won't even notice it, right? They won't even no- notice it. It'll come out of the, the bleeding edge of their, their Lexis Thompson budget for some, for some old terminals that get, uh, dust in the corner or something. Um, it, it, it... I don't think it's a threat. Um, and if it is, it'll make them better. If, if, if Kirkland can build a competitive product, then the single source vendors should, should... Then that will force them to be even better and say, "Listen, this is like anything in AI. You can do a lot on your own." So the vendors have to do more. That's just, that's a good thing. It's not 2023. It's, it's great for everybody that we're under AI pressure. It's great for everybody. Everyone should spool up, uh, and try and build their own CRM and see if it's worth it. More power to you if you wanna get rid of Salesforce or HubSpot. Go for it. Like, they should do this. It'll keep everybody on their toes. [chuckles]
- RORory O’Driscoll
I think one is Kirkland & Ellis have already won because they said it first, so they got all the publicity and their clients are aware of it. They look great. They look AI forward. They, they didn't even do something. They said they might in the future spend one percent of revenue a year for five years, right? So good, good move. If that's all they do, they win, right? And generally, if folks in the... If you're in a transaction business, you know, Kirkland & Ellis definitely come on the hardheaded, mean as shit side of things, and this is just, you know, continuing on a lifelong trend, right? So tough canny call to announce it. Is it realistic? And j- and that second company is maybe Jason's right. Have a go. Knock yourself out. You can do a lot in AI. I think it is hard, you know, in a part- any partnership structure to, to build that kind of technology. It's traditionally not been possible, so we'll see. But I, I, I think the other thing is, you know... A- and again, I don't know, was it Harvey Legora themselves or people talking about them, the whole... Forget even the models just for a second. As you think about companies trying to become, quote-unquote, full stack law firms, right? And I'm not saying Harvey Legora wants to do that, although you, you saw some third party Twitter comments to that end. Um, it would be crazy to think about that 'cause nothing could piss your clients off more. I mean, I mean, if I was Harvey Legora, I'd be like, "No, we will never do this," because you simply... What you cannot be is an AI provider to a vertical industry, a vertical knowledge industry, with even the slightest in- hint or intent that you intend to compete against them directly by going for their... by, by being a full stack provider yourself, right? So to some extent, this might be K&E being a little defensive and thinking, "If I am giving..." And, and it boils down to the question is, this is a stepping back. This is always the rule on when does a big company buy from a third party provider versus build something themselves? You buy from a third party provider where it's a horizontal product where there's no unique differentiation. You're not giving up your secret sauce. You're not gonna be able to monetize it differently by virtue of having th- that product. So law firms buy their case management software, their document storage software, their deposition software. Even Reuters and Westlaw, everyone has the same shit. It doesn't matter. That's not how they compete, right? And fast-forward five years, if AI is just like that, where it's, yeah, it's a great lookup tool, it's kind of modern Westlaw, modern case management, modern drafting, and it's all virtually the same, then they should continue to buy it from an outsource provider and then compete as they do on the basis of the ruthlessness, relentlessness of their senior counsel and the willingness to flog their associates almost to an inch of their lives to work, right, which is how law firms compete. If, on the other hand, this AI can become some level of encapsulation of your secret sauce, which is a little bit of the magic that people are saying, then I can see why people pause before they give that away. 'Cause no matter how much... You know, i- if you really think it's giving away your secret K&E sauce or your Coody sauce or your Gunderson sauce, do you really wanna let Harvey train on that? Even if they say they're not training on that, this is the, "Are you giving away the crown jewels?" argument. My gut is I don't think you are, but I can totally see why the managing committee at $11 billion firm said, "Hold on here, guys. If we pay Harvey $10 million for their software, but in return for that they know the K&E way, hmm, maybe not." So I'd sure there's some dynamic there, especially if they're also saying, "And maybe there'll be a law firm soon." So I think it's really fun and interesting to watch this. And then we didn't even talk about... Then on top of that, you know, if you thought Harvey and Legora were fast and loose with your IP, Mr. K&E, wait 'til you see what Claude does with your IP, Mr.... Which is why I don't think, I don't think big ass law firms are gonna have, are gonna be willing... If you're not willing to outsource it to Harvey or Legora, who at least are focused solely on your thing, I, you know, uh, I don't see, no matter... I don't see for large law saying, "I'm totally fine with doing this on Claude." So long-winded answer. There's such a lot of dynamics here, but everyone else looking at everyone else's lunch and saying, "I want that too." Right? And this is what typically happens when a new technology comes out. I do remember... I'm doing it now. I'm doing my old I remember thing. I remember in the mid-'90s the story was Microsoft would be a bank. Microsoft would take over Intuit, and then they'd take over your money. They would be... Yes, they were gonna be a fintech provider. This is what happens when lines blur, and then over time it becomes obvious what goes where, and I think the same thing will happen hereFast-forward five years, to be clear, I think there will be AI-focused service providers to law firms. They'll buy the product, and the drama will be out of the deal. Could be wrong.
- HSHarry Stebbings
How meaningful an entrant do you think the AI services legal entrants will be?
- RORory O’Driscoll
My gut again, and I'm... This, by the way, none of this was on the agenda, folks. None of us had time to prepare, but thanks, Harry. I think the answer is this: I think it can be market expansionary in the sense of if I couldn't access a lawyer today, you know, for, I'm... You know, in, in the individual level, I think this is really great. I'm getting sued. Or I, I got screwed by some big company. I can't afford to get a lawyer. Now I can get an AI lawyer. I love it. You know, cheap divorce, cheap wills. Explain the facts, explain the circumstances. I think there's a ton of additional demand for legal services that can't be met by ordinary people that will be met by AI, and that's freaking great, right? Same thing for small business, right? I think, you know, I'm a 10-person contractor. I, I get a document. I, I can get le- decent legal advice for 100 bucks. I can't go to a lawyer for less than two grand. I don't think the full stack law firms will replace K&E, right? An AI law firm, 'cause what you're getting from K&E, or, you know, even the nicer ones, the Wilsons, the Cooley's, the Gunderson's, the guys out in the West Coast, you, you're not just getting the knowledge. You're getting the whole experience, which I don't think you can encapsulate. I don't think full stack goes all the way. I think it, it, it takes... I think you still need the hum- Let me tell you this. When you're doing a $20 billion transaction, at some level, you want a human to think, as a CEO and the CFO, to hold your hand and tell you, "These are the last 10 of these I did, and they're gonna work, and this is why this is legal." So yeah, I don't... I think K&E will be just fine.
- HSHarry Stebbings
Thank God K- K- K&E can still sponsor the podcast. Be a bit awkward if you said they were fucked. [laughs]
- RORory O’Driscoll
[laughs] No, no, no. Yeah.
- HSHarry Stebbings
So you did just say they were like the mean guys.
- RORory O’Driscoll
Let me say something.
- JLJason Lemkin
You'll always pay the premium for that, for that high level judgment on mission critical things, which is why these jobs are terrible, right? This is why they're critical, because you just want... If you're a young associate, you just want a 40-hour-a-week job, but everything you work on is goddamn mission critical to the client. The, the $60 billion cursor acquisition, the, the SpaceX IPO, the, the whatever, the bankruptcy, the stress. And so the, well, you know, the, these... That's why these lawyers can charge up to $10,000 an hour now because, uh, the, the commodity services we do in Claude, but, um, but $10,000 is nothing on a, on a massive, you know, 10, 20, $100 billion transaction. It's nothing. You need the guy... You... I want Rory on this deal. I mean, that's who you want, right? You want Rory.
- RORory O’Driscoll
I totally agree with your comment, and it reminded me, way before Gen AI, when we looked at some of the AI startups in the mid 2010s, 10... '18, 2019, you know, natural language startups, and we were evaluating a really interesting one, and we had this young graduate from Stanford who was an associate at Big Law who just said, "Hey, I'll pay you a bunch of money over the weekend to crank and use this for five different things." And she came back, she's really smart, and she came back and said, "Look," I said, "This is 98% accurate. This is really impressive." She said, "I wouldn't touch it with a 10-foot pole. My boss will sack me if I'm not 100% accurate. I have no interest." [laughs] Like, it was exactly what you said, Jason. "I'm getting paid to get something right that's 100, $500 million transaction. I have no interest in this." So at the high end, I, I, I totally agree. I think you're gonna have that human in the loop. And besides, I was gonna say something else. Given K&E's reputation, I doubt the Anthropic Safety Committee will allow them build a model quite as mean as your average K&E bankruptcy attorney. I literally think it will fail the safety test, right, the ethics and the [laughs] safety, right? Just too mean. We can't be that mean.
- HSHarry Stebbings
And there we go. That's the partnership gone. And K&E now no longer partnering with 20VC. [laughs]
- RORory O’Driscoll
[laughs] They, they, they'll forgive you. That was a... As far as they were concerned, they're gonna put that into advertising material. That's the product they're selling.
- HSHarry Stebbings
Dude, they, they announced earlier this year they paid every partner an $11 million bonus.
- RORory O’Driscoll
Yeah.
- HSHarry Stebbings
I mean-
- RORory O’Driscoll
And they didn't do that by being patsies when it came... I mean, they, they, they were, I mean, famously aggressive in bankruptcy to the point where they actually had to step back on some stuff.
- HSHarry Stebbings
Also, we all like to talk about 996 and work ethic. Oh my God, these guys work like, like we, we don't see.
- RORory O’Driscoll
No.
- HSHarry Stebbings
I mean, m- maybe you do at Corgi. Maybe.
- JLJason Lemkin
It's a terrible... It's the worst job there is relative to the, uh, to the ec- balance to get... I don't know whether it's a two by two or three by three. The worst job it is for the most money.
- RORory O’Driscoll
Which is at least better than the worst job it is for the least money.
- JLJason Lemkin
Yeah, there's plenty of those. This is the worst job there is for the most money.
- RORory O’Driscoll
It's basically, it's bottom left. It's, sorry, it's top left. High money, low happiness.
- JLJason Lemkin
You're right.
- HSHarry Stebbings
Exactly.
- JLJason Lemkin
It's the top left of the two by two.
- RORory O’Driscoll
Yeah. It's top left. It's okay. It's okay. Winning ugly.
- 1:12:41 – 1:21:05
Robinhood's AI Move: Automating Financial Planning vs Beating the Market
- HSHarry Stebbings
Guys, I w- I want to open up. Are there any that you think are really important that we hit on? I, personally, I think Apollo and PE software returns being disastrous, uh, is quite a statement, but I, I don't want to guide all... If there's ones that you think-
- RORory O’Driscoll
We can do whatever you want, Harry.
- HSHarry Stebbings
Jason?
- JLJason Lemkin
I do think... Listen, it may be out of all of our collective skillsets if... but, but it is in my interest area. I, I do think Robinhood letting AI agents invest for you, if it really goes to the nth level, I, I do think it's pretty interesting. I think everybody should be... I mean, ev- it, it's good that they are exploring the limits of what agents can do, 'cause everybody should be doing this. What can your agents do, right?
- HSHarry Stebbings
And just so I understand, do we not just see the commoditization then of trading? Because if everyone wants to make 10% and all the agents are gonna trade in the same way, how, how do we think about-
- JLJason Lemkin
No, I think, I think there's a version of this, and I'm being optimistic. I think Rory will be with me on this. He might. There's a version of this where it's like, well, Wealthfront, but what we really want, which is you talk with your agent, you say, "This is exactly what I want. I want this risk profile of this amount of time. I'm this old. I have this, these, these expenses coming up. I want to buy a house in three years, okay? Uh, how mu- I'm willing to lose up to 18% of what I have, but more than that is stressful."I might make this much for my job. There may be ways that an agent, like, I, I think wealth management is, it's like, it's, it, it's the worst, the lowest quality of any professional I've ever worked with are humans in wealth management. They're, they're terrible. They all put you in the same crappy models and come up with the same 11 proprietary products they want you to sell. And I think Rob- this agent has the potential to leverage the best of AI to, to really do this dream of giving you the ri- 'cause no one, no one understands finance well enough to answer these questions. I don't. I need a product. I have a certain amount of cash, it's, it's in my bank. I have a certain amount of public stocks, done pretty well this year. I have carry coming. I have homes. What the h- I, I'm g- no matter who I talk to, I'm fucking guessing what to do with this crap, right? I want an answer from AI, and I ask Claude, but I would love Robin- and I'm, it's pro- I'm probably not the right fit for Robin. I would love the right answer for every single individual. So many folks will not get ripped off if we can get, nail this for everybody. Fidelity doesn't do it, Vanguard doesn't do it, none of them do this.
- RORory O’Driscoll
You know, I, look, I, I think w- we actually made an investment in a company, Range, that does this for kind of the low end of the high net worth kind of thing.
- JLJason Lemkin
Yeah, we talked about that. Yeah, yeah, I liked it.
- RORory O’Driscoll
We talked about that. So, and y- I mean, you're giving me shit for it, but I, I think the inter-
- JLJason Lemkin
No, Harry did. I said I liked it
- RORory O’Driscoll
... So the interesting challenge about this business, I would argue, is there's, you know, 'cause that's why the Robinhood thing's interesting, 'cause I do disagree with one part of the thing you said, right? You made a comment, no one knows how to give that financial advice. The truth is this, i- it's pretty widely understood what the correct financial advice is and what the correct portfolio allocation is. A lot of this is actually just getting the information from the client, understanding their specific circumstances, and actually dealing with, as wealth mans will tell you, a good portion of it is getting information from the client and then helping the client to stay on the straight and narrow and literally not let them do, you know, crazy stuff. I actually think knowing what to do in financial management at a macro level is pretty well understood. You know, risk allocation, wealth as a network, wealth to goals, right? Which is different than actually managing money on picking individual stocks, and I would utterly separate those two. The big-picture asset allocation, financial planning decisions can be automated, should be automated, and are knowable, right? And I think LLMs have a really meaningful role there, right? And I think for sensible people who think in terms of asset allocation, it will be great. That's why we made that investment. I'm sure Robinhood could do a similar version of the same thing. The thing the LLMs have been somewhat unproven as of yet is the ability to actually trade stocks, yet basically be a m- a pod manager in a hedge fund world and outperform humans. The record on that isn't there yet. So, and that to me, that's a less interesting problem, even though it's where all the drama is associated, right? I don't think Citadel, I think Citadel are gonna use LLMs, but I don't think they're gonna replace people with LLMs just yet, right? The fun thing is, I just didn't think of the Robinhood demographic as the people focused on, you know, kind of long-term planning for retirement. So it'd be interesting to see how that meshes with the, you know, the trading as entertainment part of the Robinhood product. And maybe that, as those folks grow up, they kinda grow up with them. I watch my son trade his Robinhood account. I don't think he's focused on where he'll be at 65.
- JLJason Lemkin
For sure. Uh, let me just say one thing that I really like about that.
- RORory O’Driscoll
The only thing he should be focused on where he'll be when close of market, for fuck's sake.
- JLJason Lemkin
This is what I like about it, though, and this is where... And Andrew Bilecki, CEO of Klaviyo, he came to SaaStr AI Annual this year, and he talked about what they're doing in AI. And the first one is how they're building software and their harnesses. But the second thing he said in a, a quick, it went over my head 'cause I didn't know it was on the agenda. But he's like, basically all, like we're bu- we have these AI agents, we have them for, for, for marketing and support and all the things they do at $1.4 billion in revenue. But the most important agents we have is so that every single person using Klaviyo now is a true expert, is a true expert in marketing, okay? Which wasn't possible for AI. So the idea that I can go into any account, whether it's Robinhood or Morgan Stan, and be an expert, and w- whatever, I can't tell you, and, and I actually think that the, we, we, the Google, uh, the YouTube agent is really good. It tells you everything about how your YouTube video performs better than any human could be, right? Try it if you haven't used it. It's amazing, right? It, it has access to data you can't see and isn't expressed, right? And so all applications should make you an expert in their domain and their product, an expert. And literally, I mean, I have so much, I have money in different places. Every quarter, Morgan Stanley s- tells me I need more private equity exposure. That's their insight.
- HSHarry Stebbings
Does that align, though, to what Robinhood is doing, which is basically allowing you to not be an expert? It's allowing you to say what you want, and it does the expert work for you.
- JLJason Lemkin
I think they're related, right? Whether, whether, whether it educates me or whether it, because I'm e- not educatable, it executes for me. I just think it's a line of autonomy in agents, which is a big discussion. How much is it education versus autonomy? But I d- but I think the aspiration, so that your product makes all of your 10,000 customers, million users, 100 million users, truly experts in your domain, I think this is something, as executives and founders, we should, we should aspire to. That you log in, and the first day, I'm a fucking expert in sales, marketing, CS, engineering, product, whatever. On that day, I should be an expert.
- RORory O’Driscoll
To be clear, though, an expert advising Jason would be someone who looks at the totality of his holdings and says, "Jason, you do not need more private equity. You got a ton of risk here. You need, you know, you need whatever." And to me, that is expertise that's available and should be available to everyone, and that's the kind of idea that these things should be doing. And again, I'm saying it again for completeness. If you then tell the agent, "I want you to outperform the S&P by 200 basis points by trading stocks aggressively figured out," that agent cannot do that, 'cause that task cannot be accomplished by that agent. I just want to be clear. So what it can do, again, financial planning is this, as this, financial planning can be done much better with AI and with agents. I think actual trading, the record on being able to perform, it, it, it, it is not there yet. And now, look, to state the obvious, given it's pretty... I mean, I've talked to some folks who've been trying to do it, is that given the power of LLMs, given the power, you know, um, given its potential, given the way people like Jane Street use this stuff, if there was an edge, they'd be doing it. So some on the millisecond trading stuff, yes.But is AI gonna give you a meaningful opinion on should you hold Microsoft or Apple for the next five years? It might make you more informed than if you didn't ask it, which is why, to your point, Jason, you'd love to have everyone as they're gonna trade. If that information is served up to you, that's great. It's not clear yet based on actual trading performance whether or not that answer will be better than, you know, the random number generator that is the rest of us. But move on. 'Cause if it was, someone would fund one of those companies and wouldn't tell anyone and would do what Renaissance-
- JLJason Lemkin
Yeah, I don't think you can create Alpha that didn't magically exist for every Robinhood customer for sure, right?
- RORory O’Driscoll
Yeah, it should.
- JLJason Lemkin
I-- Maybe I'm, maybe I'm indexing on something that's less important than it is to Robinhood, but this idea that you could imp- Like, listen, maybe we're all just gonna trade GameStop and SpaceX up to five trillion, but at least the agent can make me crystal clear understand what I'm doing, okay? Here's the risk. Here's why it doesn't work. Here's, here's the historical dispersion of similar things over the last one year, five years, 10 years. If you wanna do it, that's great. But let me tell you about a few things you haven't thought about, Jason, right? That, that would be epic, right?
- RORory O’Driscoll
That would be epic. I agree, and it would help things. What else?
- JLJason Lemkin
We can do it today. I might have to get rid of 100 employees on my team to get the tokens there, but
- 1:21:05 – 1:30:27
Apollo Warns PE Software Returns Are About to Be Disastrous
- JLJason Lemkin
we can do it.
- HSHarry Stebbings
Final one before a rage bait but real. There's, there's two for me, and so we can choose which one you think is more. I do think Apollo says PE software returns will be disastrous is very impactful given the percentages of the portfolios of some of the largest allocators in the world. And then tied to that, Harvard saying that now forty-one percent of their book is now privates. It's a, it's a very high number.
- RORory O’Driscoll
And taking them each in turn, I mean, w- yeah, Apollo, as always, talking, yeah, talking their non-book, but they're probably correct. I mean, if private credit, which is the senior lender to a whole bunch of PE-based, um, uh, deals, is struggling 'cause they're, you know, they're, 'cause they were the first... they're half the consideration and they were, you know, at 5X EBITDA leverage, they're worried, then the PE guys who are from five to ten and l- i- in other words, the equity is below the debt in the stack. If the debt's in trouble, the equity is dead. 'Cause these are all the s- the SaaS companies that we've been talking about for a lot and, you know, we all agree that they're not dying, that they bounced thirty percent in the last month. But as Jason points out, they're still trading three, four, five, six X. And if you bought the thing at 10X, you know, three years ago and now it's grown a little bit but you've had to pay some debt and now you're at 6X, it's just very hard to get out from under that. I would shape out, maybe it won't be a total train wreck, but maybe they'll have to own them for 10 years, do a whole bunch of bolt-on acquisitions to grind out a miserable 1.2, 1.3 X. Yeah, it's, it's, it's hard because you can overpay. In companies growing at 100%, you can overpay and get saved. In companies that are growing at twenty percent and then suddenly slow down to eight or nine percent growth rate, if you've overpaid, it's kind of like overpaying for a real estate transaction. There's nothing you can do. There's no accelerant. There's no magic that's gonna happen. You just own a mature SaaS company. I mean, if you-- Let's step back. If you bought Salesforce at 14 times revenue in 2021, congratulations, you own Salesforce. You paid for it half with equity, half with debt. So now you have seven times on, on the debt and seven times on the equity. You now own Salesforce. The public market thinks it's worth roughly five or six times revenue. You know, you've got some growth, to be fair, but your equity is challenged. That's all he's saying. The math is pretty, pretty harsh.
- JLJason Lemkin
I mean, the LPs are gonna be so excited to get their Anthropic distributions that they have to give you a pass on all these. To Rory's point, the point of Apollo is, look, if the debt's struggling, the equity's gotta be worse. You're just not seeing it. That has to be true. But we gotta move on and not care anymore. We just gotta move on and, and fight the next battle. And, um, you know, I do think these, these distributions will... I think the distributions will facilitate us somewhat ignoring maybe some bad funds. Just, just move on. It's life, right?
- RORory O’Driscoll
I think if you're the LP and you have a diversified portfolio, you have to move on. But if you're, you're one of these PE shops, y- y- the whole way it should work, and it should work, is you don't get to just quote "move on." You have to, as part of your management fee, spend the next five or seven years. 'Cause there's a big difference between giving up and getting a 0.5X now and grinding it out and getting a 1.21-
- JLJason Lemkin
Yeah, you gotta find an exit somehow that gets you to this, to this number.
- RORory O’Driscoll
You gotta make it happen, and that's why-
- JLJason Lemkin
You gotta somehow do it, right?
- RORory O’Driscoll
That's, and that's why I th- I always say to LPs, I think capital commitment really matters. 'Cause if, if, if, if your guys don't have skin in the game, and especially if they don't wanna raise again, they're like, "Oh, not me," right? Whereas if they've put in, you know, as Peter Thiel put in, in a very different fund, very positive fund, but hundreds of millions of dollars, then they're gonna sit and make it happen. So it will be interesting to see how the PE firms deal with that. 'Cause, you know, even the venture firms, if we all have one difficult fund, how do you respond to that will be a function of are you playing a multi-period game? You know, does the next thing look good? And what are your economic incentives in that fund? Do you have capital at risk?
- HSHarry Stebbings
You mentioned distributions from Anthropic. I think one thing that will be interesting is just how several firms deal with just massive distributions in terms of team retention. You, you know, Menlo will make $10 billion in carry. Uh, Spot will too, plus, um, Founders Fund will make more than that from SpaceX. When you have such huge amounts of cash coming to a team, p- humans are humans. Uh, they go off and do their own things. It does change structures of firms.
- JLJason Lemkin
It's okay. But, but so what? I mean, I gue- I guess it's interesting, right? I mean, you ha- And of our, of the last generation, you've got OpenView that after their Datadog and other money called it quits, right? They just didn't wanna do the AI thing. They're all centimillionaires, right? Especially the guy that founded it, right? You even have our friends at Emergence, most of them called it a day after becoming almost billionaires, right? Not all of them, but everyone but Gordon retired or did their own thing. So it's so... I, I don't think every VC firm has to last into the 23rd century. I think it's okay if some of them, the, these, these, these glorified institutions. Uh, I think it's, uh... And if, if, uh, some folks at Menlo wanna quit, more power to them. Who c- What does it matter? I think, uh, some of these folks really are in it for the love of the game, right? You p- I mean, what's P- Peter Thiel's point otherwise, right? I mean, he's too rich, right?And if you're not, then retire. If you, if you don't love the game, retire when you have, when you make eight figures. Just leave when you have eight figures. That- that's the simple math, isn't it?
- RORory O’Driscoll
When people make money, the thing it does, it, it, it allows them to be what they wanna be. And some people are like, "I wanna go back to work next day and do another deal," and some people are like, "I wanna teach high school," right? And go team, and that's, it's w- it's wonderful. Everyone has that chance to do that, right? And look, and I think that... So it just reveals preference. And I think, yes, a few firms are gonna make an awful lot of money, and more power to them. That's the way the system's meant to work. Some people will make a lot of money and say, "I'm done," but yeah, there's a lot of people who keep going, right? And enjoy it. So I, I don't think it will be as, quote unquote, um, impactful i- in the way you said it. I, I also like what Jason said is that you're right. If everyone decides they don't wanna do it, then don't do it.
- HSHarry Stebbings
Rory, if I gave you a $10 billion carry pool, would you come in tomorrow?
- RORory O’Driscoll
Absolutely. I like the job. 'Cause the real truth is, the terrifying fact, less so at my age, but especially at a younger age, there's nothing more terrifying than getting that kind of sum and then not having anything to do with your life. I, I always tell people to be very careful of, you know, large amounts of money and large amounts of free time tends to be pretty destructive, especially, you know, 30s, 40s and 50s. You know, it, it, it's hard to fill your day with, and there's so many things to do wrong. So yeah, I'd, I'd like to keep working. But again, someone else might decide, no, they really wanna save the whales, or save the planet, or run for governor of California, you know. I mean, all these things are possible, right? I mean, even run for governor of California and fail and just spend a lot of money trying. I mean, you know, political consultants thank you. It's the trickle-down theory in action.
- JLJason Lemkin
I just think, like, going back, it doesn't even matter, but the, when OpenView... I think just like the Kirkland & Ellis thing, people got the OpenView story wrong, too. This was a rational look that the guys, we have made more money than we will ever spend in our lives, and going forward in venture, we're not, we're not excited about what this takes. And so they, they liv- living their best life, right? I mean, I, it, that is a rational decision for most human beings. They, they returned a lot of their fund, right? This was not, uh, this was not struggling for 10 years to raise $100 million fund three. This is, "Guys, we all made nine figures, maybe one made 10, and it's time to, it's enough already of this venture stuff. Like, I'm, enough of these u- unappreciative kids."
- RORory O’Driscoll
Wow. Tough crowd.
- JLJason Lemkin
Or wherever it came from. It was clearly an intentional choice. Not for the, not for the next generation, right? Who kinda got kicked to the curb, but for the, for the founding managing partners, it was a very intentional choice. The real problem if you have very large distribution at a venture fund, um, is that for most people, even if you wanna keep going, you might be worried that the next distribution just can't be as large. Is it worth it? Like, when I went into venture, it kinda pissed the folks off I worked with, and I said, "I'm only willing to do this if I can make 10 times as much as I made as a founder." And I said, "I don't care about mo- I really don't care about money," right? I already made enough. I have my houses and cars and whatever. But I don't see why I wanna do this for the next 20 years if I can't make, if I'm gonna make .4 of what I made as a founder. It's got... Uh, this is just my simple math. It's gotta be 10X to be worth it intellectually, and I don't even care about money. And so if I made t- a b- a couple billion in carry, which I haven't done yet, and I'm looking at my next fund and I'm like, "God, for 20 years, I might make a, a 20 million from that," I, I would quit. I, I don't... Uh, the more power to the young kids. I would give them the keys, the code to the office, and I would tell them to, to keep all the fees and have fun, but I ain't gonna do it for a fraction of what I made on the big win, right?
- RORory O’Driscoll
True to seven. But just as a reminder, I can give you the quickest way to make five times more than you made, right? Which is be the LP as well.
- HSHarry Stebbings
I thought it was non-tropic SPV, but okay. [laughs]
- RORory O’Driscoll
That... Well, no, but my point is, yeah, you can just invest more of your capital. So there is a solution to your problem, Jason.
- JLJason Lemkin
Well, that's what Peter Thiel did, right? He's a third of the Founders Fund, right?
- RORory O’Driscoll
Yeah. And I think it was, uh, as always, when Peter Thiel does something, you should assume it's the entirely rational, cold-blooded correct solution, right?
- JLJason Lemkin
Yeah.
- RORory O’Driscoll
Is if I have so much money that the margin utility of the next deal is so low if I'm only getting one quarter of, maybe one half of the carry, then the only way to solve that is I get one half of the carry and 50% of the LP. Oh, now it's suddenly much more interesting. Yeah. So if you like the business, you can put more money into it, and if you don't like the business, you can, you know, go buy a football team or whatever it is you do, or plane or whatever the other
- 1:30:27 – 1:38:49
The 996 Work Ethic: Performative Theatre or Startup Reality?
- RORory O’Driscoll
things people do.
- HSHarry Stebbings
Okay, final one. Rage bait but real. You can kill me for this one, guys. But we, we went, um, [lip smack] and did a show with Nico from Corgi. They work seven days a week. Uh, they have a 24-hour cafe. Um, and it is a very intense work culture, unlike any I have seen before, to be fair. The company scales to $2.5 billion valuation and very quickly has been very successful. I'm not gonna pick on Corgi. I don't wanna-
- RORory O’Driscoll
Yeah
- HSHarry Stebbings
... but I'm just asking, in your best performing companies, are you seeing a different level of intensity and work ethic than you've seen in prior cycles? Or is this just kinda rage bait?
- JLJason Lemkin
Can I simplify it, my, my learnings? I wrote this on Twitter.
- HSHarry Stebbings
Yeah.
- JLJason Lemkin
But, so my very first startup job, I told this story, my very first startup job, I'd never bit worked at a startup before, and I roll in on Saturday to the office at 9:00 AM and it's me and the co-founder. And I'm like, "Well, I've never worked in tech before, but in all of my services jobs, I worked six and a half days a week. I worked nine... I didn't, we just didn't call it 996. I just had to work six and a half days a week before I worked at a startup." And he's like, "It's so great to have you here. I haven't seen anybody in the office on a Saturday morning in a long time." So he was there, right? Founder was there. As a founder, I worked seven days a week, right? Um, I think the only thing with 996, I think we're getting confused. F- there was a while in late 2020, 2021 when no one really worked. But in generally, it's just how deep does it go in the organization? How deep does working Saturday and Sunday go? And, um, I just think while many folks think it's toxic, if you're trying to build... I remember what the Cognition guy said. What's the CEO's name, the Cognition guy?
- HSHarry Stebbings
Scott, Scott Wang.
- JLJason Lemkin
Yeah, when they acquired Windsurf, he said, "We're, we're letting a lot of the folks go, and it's because we work seven days a week." And that, he didn't say it douchey. He didn't say anything. I thought that was very thoughtful, but if they're worth $26 billion where we started the show, and so they're all gonna make $40, $50 million, I think for the first 50, the first 100It may be okay today to have certain expectations of you... But you got- you better deliver them back at Corgi in Cognition. Like, you better, you better not... The $150 million exit don't justify that, right? So there has to be a quid pro quo. But I do think it's just a question of how deep in the organization and, and, and for how long. Um, so I don't think it's as toxic as... Or, or frankly, as new as the world makes it out to be. I don't think it's as new. I think, I think there's a performative element, even with the Corgi guy making it sound so new. I mean, just do it, man. Just, just hire those people, right? Pay up, give them four times the equity, make them all... Have 20 co-founders. You know, they're not really co-founders, but give them the equity and tell them, "This is what we want, and if you don't like it, g- go, go work somewhere else. It's cool. There's a lot of companies."
- RORory O’Driscoll
Totally agree that it's not new. I mean, look, the truth is this, there are different jobs pay differently, have different levels of responsibility, risk, and intensity, right? And you can pick where in that thing you wanna be. I'm not making a judgment on you, right? Um, different folks, you know, m- are moved by different things, say, for our compensation, right? Anyway, startups consistently have an intensity significantly higher than most companies. I was reading the Apple in China book and then the 50-year history of Apple. You know, this is not new. It was brutal there. I mean-
- JLJason Lemkin
Brutal. [laughs]
- RORory O’Driscoll
... they talk about heart attacks, they talk about the pressure, right? Unfortunately, sometimes to do really hard things, you need small numbers of people to concentrate 24/7 and pool their resources, pool their minds, and just will it true. It's not sustainable for 50 years of your life, right? It's just not a way to live, right? But, so I, I do agree with Jason. I think it's always been... I mean, we're joking about big law. I mean, everyone at K&E and all these places, they bill 2,100, 2,200 hours a year. That's exactly that math. So, you know, some people choose to make that trade in return for the success they're getting. So I agree. Don't be so performative about it. Don't be toxic about it. Just... And be realistic about your expectations. Most founders will do that, and most founders don't even regard it as a punishment. Most founders regard it as the thing they most wanna do. And I love work, right? They're like, "No, I don't wanna go to the ball game. I just wanna work," right? And that's why you know it's their passion, right? And the first 50 people that are doing it all in will do it that way. When you get to 2,000 people and you have a large organization and you gotta hire folks with lives and additional interests, you're probably not gonna have that same level of intensity across the board. But I, I, I'm with you. You know, like, it's nothing new. It's not... It's, it's normal in its unnormalness. In other words, in every generation, there are places like that. It's a small percentage of the total workforce, you know, 'cause most folks are doing different jobs at different intensities. But yeah, go do it. But you are... I like what you said, Jason. You better deliver. There's nothing more sucky. I mean, I had my own startup. It didn't work out. I look back and I worked, you know, seven by 24 for three years and made no money. That sucked, right? And that's, as a reminder, that's the mode of experience in the correct sense of statistics. That's the most, single most likely outcome.
- JLJason Lemkin
If you're implicitly promising eight figures to these early employees, then sorry, you, you have to think... It's not even the 996, it's you have to think about this every minute. No one that's wildly successful, no matter what they say, they're thinking about their company every minute. They have distractions. Maybe they own a sports team or two, but you gotta be thinking about this every spare... It's all your energy has to go into it. And, and, and, and so you can expect that of more people, but you better give them eight figure... You better give them a shot at eight figures, right? You better give them a shot at eight figures.
- RORory O’Driscoll
I do think the things you have to watch is that, you know, you don't over-devolve into weirdness and, you know, bad thinking and, you know, just, you know, l- losing a judgment. I find when you're working really intensely and you're stressed and you're kinda caught up in something, the good news is you put an extra 10 hours of effort. The bad news is you lost your judgment in doing it, and especially if part of your job is a judgment job, you need to step back and, you know, go out, touch grass, take a walk, and just make sure that you're not, you know, you know, instead of rage baiting, rage working. You're just performatively working and not achieving. I think that is something. Uh, you know, it sounds weird. I'm not hippy dippy, but making sure your psychological health and judgment is good.
- JLJason Lemkin
No, for sure. Listen, it's a marathon, not a sprint. Unfortunately, we've replaced you with tokens, but it is a marathon and not a sprint. The, the, uh, both, both are true, unfortunately. There's good news, there's bad news. We agree culturally it's a marathon, not a sprint. But we need the to- we need the token budget for the folks on the office 996. We just need your tokens.
- RORory O’Driscoll
By the way, to your point here, it is bizarre, and we've grown to accept that, that, you know, we're all here in the Valley with a plan to automate white-collar work such that there's gonna be mass unemployment, according to these folks, who are totally wrong in my opinion, in three years, and all the work will be done for us by agents. As yet, you talk to every single person in this valley, and they're like, "I've never worked as hard. I'm working 24/7." The contradiction at the heart of it is all... It, it's hilarious and-
- JLJason Lemkin
And also my number one problem is hiring and recruiting the best talent.
- RORory O’Driscoll
Yeah, you can't get people, and I have to work 24/7, but by the way, we're gonna automate all work and it's all gonna be fine. Maybe-
- JLJason Lemkin
It's hard to predict. It's just hard to predict, I think, is really the thing. It's hard to predict.
- RORory O’Driscoll
I actually put it easy to predict that it won't happen.
- JLJason Lemkin
You do?
- RORory O’Driscoll
But not... Yeah, it won't happen. I, I think, yeah, it's, it... Yeah. Things will be great, but it's all delusional. Things will be the same as the last 200 years. I repeat myself. 2% real GDP growth-
- JLJason Lemkin
We'll see. Listen-
- RORory O’Driscoll
... but everyone keeps giving up
- JLJason Lemkin
... we could go on forever. I, I, I think you can't predict because I just don't know, being objective, what happens with the Bs. The As, everyone can't hire enough, and they're worth more. I just... We, we absorb so many Bs in tech, and then we, the... And then we got s- we got full of them, and I just... I know you think there's gonna be plentiful jobs for them. I, I'm not convinced. I'm not convinced.
- RORory O’Driscoll
I don't know. I remember many years ago, I had a CFO of one of my companies, and she was fun. She was hard-nosed, and she had her quirks, right? But then she'd point to another ex-member of the staff who'd gone on to something else, and she'd say, "I look at him," she said, "and he's got a job, and as long as there's people willing to hire idiots like him, I'll be okay." [laughs] It always stuck with me, and I look at the world... I hear you. They might... I mean, the truth is this, people will get jobs. They mightn't get the high-sta- I mean, it sucks, but the people we purpose from f- maybe you won't get another job that pays 400 grand and allows you to work from home three days a week. I think you will get a job, right? So I am not in the, you know, the Bs will be doomed. The Bs might just have to recognize that there was a moment in time when they got wildly overpaid. Life will go on. And maybe they'll, you know, be happy doing other things. I'm benignly happy
Episode duration: 1:38:59
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