Why You Need a $1B Fund To Do Series A | SpaceX at $2TRN & Data Centers in Space | Groq's $20BN Deal

1. 0:00 – 1:08

   Intro

   1. JLJason Lemkin0:00

      On the Stitch Figma thing, on the one hand, massive market overreaction to a proof of concept. Give me an effing break. On the other hand

   2. HSHarry Stebbings0:07

      On the agenda this week, Anthropic, are they eating OpenAI's lunch when it comes to enterprise? Jeff Bezos seeks $100 billion for his latest project. SpaceX at 2 trillion after TerraFab. The debrief on Groq's $20 billion deal to NVIDIA, and much, much more.

   3. RORory O’Driscoll0:23

      If you're a software product and you don't think AI is going to disrupt not just how you build, but what you build, then you actually probably want to actively short it. I think every VC is stressed right now.

   4. JLJason Lemkin0:32

      Let's be honest, who the hell is going to buy them if they don't IPO? I just worry there's some ratio of potential acquirers divided by unicorns, and I think we're at the lowest ratio of our careers. I just don't believe the hyperscalers are going to buy these companies.

   5. RORory O’Driscoll0:45

      Basically, it's win or die.

   6. JLJason Lemkin0:47

      Ready to go?

   7. HSHarry Stebbings0:47

      [rock music] Guys, it is so good to be back. We had, we had a lot of shit go down this week. Um, I think, I think there's a couple of places we could start.

2. 1:08 – 15:30

   Anthropic vs. OpenAI: Who Is Actually Winning the Enterprise War?

   1. HSHarry Stebbings1:08

      To the arbiter of economic justice and revelations, which is Ramp, who revealed recently with, I think they're about 0.5% to 1% of US, like, GDP transactions or whatever it is that Eric used as a statement to validate themselves. Uh, Ramp data suggested that Anthropic now captures 73% of all spending among companies buying AI tools. Ten weeks ago, it was 50/50 with OpenAI. Early December, it was 60/40 in OpenAI's favor. Are we seeing Anthropic run away with the enterprise lunch, so to speak?

   2. RORory O’Driscoll1:43

      Just to start with the facts, they actually said 73% of new spending, right? And what it is, and the same graph shows OpenAI is still actually ahead of Anthropic in terms of total spend, but the marginal buyer in the last six week, eight, 10 weeks has massively shifted, which is obviously the most leading indicator. You know, people in the market today for a new AI went 70% Anthropic. So just in the interest of being precise, yes, the claim from Ramp. I thought the OpenAI response of it's not, you know, the, the, the snarky comment about extrapolating from a lemonade stand was just a bad look, right? First of all, it kind of doesn't really understand statistics. I would argue Ramp is probably a pretty accurate statistical reflection of, um, especially digital company spend in the US. I think they have got a pretty diversified customer base, and they probably have decent data, and they've got good data scientists. So it was a-- So, OpenAI trying to be snark, I think, was a mistake. I think the real, I think it does represent the facts, which is in the last s- three months, there's been a shift in the zeitgeist, and I do believe that the marginal user, the marginal person opting for AI today, or even people switching today, the switchers are moving towards Claude, and they're moving away from OpenAI. Doesn't mean it's the end of the world, but sometimes the first thing you got to do when dealing with a problem is to face the hard facts in the face. And I think the data was good, and the, the conclusion as well.

   3. JLJason Lemkin3:11

      If Anthropic now is maybe a $22 billion run rate, the, the revenue does tie to these, to conclusions, too. Certainly isn't inconsistent with it, right? The only thing I might say, I don't want to spend all our time on it. I think it's possible they're both right, like OpenAI and Ramp are both right. And what I mean is, in some ways, this felt to me like the Cursor debate. Because if we walk into our portfolio companies, barely anyone's using Cursor today. In, in my own portfolio, and people said it on Twitter too, like, "Cursor's dead. No one's using it. They've all moved to Claude Code." And I would say in that ecosystem, it's true, and maybe if, if r- a lot of Ramp's data is still biased toward tech, they might see this same trend. I mean, C- Claude has... If you just look at why everything's accelerated since December, it is Opus 4.5 and after. It is crystal clear. As soon as Opus came out, it was another step function that was under-discussed. Everyone's PR has exploded. Everything got better. But for the normal world, um, th- they live in ChatGPT. So I, I don't want to say for sure that, that the Cursor experience [chuckles] isn't happening here. Uh, so they, and my point is they both could be right. They, they, they both could be right. But it certainly, everything-- What I don't like is how OpenAI is acting wounded, to Ha- to Rory's point. I don't like it. I, uh, when we started this pod, OpenAI seemed invincible no matter what Anthropic did. It seemed utterly... And everything, you can just smell this era, this air of desperation. "Oh, we're going to keep head count flat to manage costs," to, "We're doubling head count," to, "We're going really deep on, uh, agentic commerce," to, "We're basically canceling, and Walmart says it doesn't work." It, it feels very inconsistent. And when I thought about this, the one thing that is, that I love about Anthropic is it's very consistent about its ICP and goals. It has been very consistent. We know what it stands for. We know what it's trying to do. Yeah, it la- it launches new features. I mean, it's got its new, like, open cl- its next version of OpenClaude launched yesterday as we record this, but you know what's coming with, with, with Claude and Anthropic. OpenAI, I'm getting whiplash from everything. And the Debbie Downer-ism, uh, [chuckles] is, it's not, it's not-- Going to last week, we talked about the air of invinci-vincibility at GTC at NVIDIA. It doesn't smell like that at OpenAI today, does it? It's just like a, a downer to be around, and it-- I don't want to try their products. Because of it, honestly, to Rory's point, I actually don't want to try their new products, and I, and I literally, last night, I'm, I'm DM-ing with our chief AF, so we're, we're trying the new Claude d- uh, app that just launched, but it ain't gonna happen. We d- I, I don't want to hang out with Debbie Downers.

   4. HSHarry Stebbings5:38

      If we, if we just kind of put that into, uh, strategic takeaways, in terms of their pivot, now Sora is getting folded into ChatGPT rather than being a standalone app. Hardware ambitions are being deprioritized, and they're really kind of trying to consolidate efforts, stop having such a diverse product set. And then they're also, to your point on head count, they now plan to nearly double head count to eight thousand by the end of the year, having said before that they were actually going to keep it flat.

   5. RORory O’Driscoll6:07

      Is there a question?No, I just want people to understand the context rather than-

   6. JLJason Lemkin6:13

      You know what it feels like to me in all seriousness? It feels like the, uh, it felt like when we started this podcast, uh, quite a while ago, but, but not a year ago I don't think, that OpenAI was an exception to the rule. You could have massive founder turnover. You could have massive management team turnover. You could have unusual, a high-- Like, the amount of drama with kicking Sam Altman out and then bringing him back and a dysfunctional board and like, it seemed to be the exception that made the rule that if you had so much momentum in a cons- like you could overcome it. Now I, I feel like the downside is rearing its mind of inconsistency. This inconsistency is, is damaging the company today in spades. We can see the downstream impacts of that massive turmoil.

   7. RORory O’Driscoll6:53

      Yeah. And, and, and I'm gonna come in here and try and say something positive, but start by pointing out if we do go back to those first 10 podcasts, they announced the hardware deal with Johnny Ive. If you recollect, I was like, "This will never ship." I'd said at the time, and I actually said right when he was on a high, that I don't envy Sam because the press only has two stories: we love you, we hate you. And once they've written we love you, there's only one story left. So they're just moving through the to-do list. We've done the we love you, Sam, now we hate you, Sam, right? And he has brought it on and, you know, you spend a year talking to the Prince of fill-in-the-blank, the President of France, instead of staying at home and shipping product. Eventually things get defo-defocused, right? So but things are never as good as or bad as they seem. That's just one of my rules. It was never as good as people thought a year ago. They still have, to, to your point, Jason, they still own the consumer business, right? And you know, there's ... And so job one is figuring out how to monetize that and make that a big-ass business. You know, it's hard to believe it, that there isn't something. The, the advertising efforts seem to be struggling now, but that's job one to figure out. And then you're right, job two is to figure out enterprise and particular coding. I mean, they're doing finally the right stuff, you know, perhaps a year, a year and a half later. But it's still clear to me that if you just take a big, deep breath and you are running that organization, focus on the two or three things, get a little more sensible on your financial trajectory, you still have a comfortable chance to be the winner. In other words, to exit two, three years from now as the largest market cap standalone foundation model player, right? You blow it for another year and you won't.

   8. JLJason Lemkin8:30

      You know what's interesting is, um, there's sort of two things going on here that I see in the data, right? If you look at OpenRouter's data, it has exploded since the start of the year. So what that is saying is folks are aggressively switching between models for cost and output, especially cost. Like that's saying there is a large set of customers who are optimizing when to use Kimi and when to use Haiku and when to use Mini and, and that, and that that, that model has exploded, right? The ... And we can see it in a lot of our more mature customers, I mean, companies that are trying to optimize their spend. On the other hand, so much of us have said, listen, I mean, Claude Sonnet and Opus since 4.5 and 4.6 are so good, I want to stick there. It's so ... Like, if you're not deep into coding or vibe coding, you don't see how much better it is in the last 90 days, and I have no desire to screw around when something gets their hooks in. It's so good. And so I want to build all my scaffolding. I want to build my apps. I want to build my AI agents about something that isn't just good, but now is epically good. And so you'd really ... I ... There is, there are a lot of ... Even with the OpenRouter data, like I think what I mean is there's this, there's these two things happen. On the one hand, the soft costs are very low to pick a different model. But on the other hand, there are high soft costs for managing the outputs and QA-ing it and qualifying it and making it great, and I don't want to do anything except Sonnet and Opus now. I don't want to spend any time on it. It's not worth, it's not worth the soft costs. And I think that's where the panic is. They can smell that they're losing that, uh, even as cost-sensitive customers will rotate through the cheapest possible thing.

   9. RORory O’Driscoll10:02

      I think true, and I think it speaks to the, you know, you have these discussions, you know, do you want to be first to market or do you want to be second and you know more and you don't, you know, pioneers get arrows in the back and all those cliches. But I think the real truth is if you are first to a market with the right product, you do, you, you, you grab that early mind share and market share, and then it's theirs to lose. And just contrast the two markets. 'Cause it's pretty clear the two potential mega markets here are the consumer market, where OpenAI grabbed mind share with ChatGPT, and despite they haven't monetized it yet, no one's really taken that away from them at scale. And then the other mega market is not just enterprise, but with enterprise coding. And you're right, Jason. The scary thing is today it's, maybe six, 12 months ago was up for grab. Today kind of y-your description's right, it's half up for grabs. People are starting to lock in. And you know, if OpenAI allows Claude to become the default for another year and the perceived best for another year, I don't think you get to show up after a whole bunch of people have made enterprise decisions and say, "Oh, now we finally got our shit together. We're good too now, I promise. Please pick me." Right? There is a moment. There is a tide in the affairs of men, as Shakespeare says, right? This has been the last six months of coding lock-in, right? Just the recognition that coding is the motherlode app within the enterprise spend. And you're right. I-if you let Claude run away with that for another six or 12 months, you've probably sacrificed value that you'll never get back.

   10. JLJason Lemkin11:30

       Yeah, let me just give you one small example like, 'cause these, 'cause they're, 'cause the models are so much better since December. So since then, we've built w-we have built an AI VP of marketing and an AI VP of customer success for real, and they're really, really good. But here is the meta point. Um, our AI VP of marketing defines every day, every single marketing activity. It wakes up in the morning and gives us Slack updates. It runs our weekly st-team meetings. Our AP-VP of success, we have like 200 sponsors for SaaStr, and all the humans would quit 'cause it was too much work. It does it 24/7, and the sponsors love it, okay? Now here, so these are greatIt runs on Sonnet three-- I mean, f- uh, sorry, four/seven and, and maybe a little bit of Opus. There is no way we're gonna switch the model. This is dialed in. It works. Now, we're gonna have to deal with QA when it goes to four/eight and five/one. There's a little bit of QA, and it, it does change. But my God, there's no... tho-these apps which we rely on every day, there's no way we're gonna switch them to Codex. 'Cause it took us weeks to dial it in, and you have to train it, and you have to do it. And that now that they're great, when there's a certain level, I'm not saying that other folks won't, but that is a lock-in since the latest models that I think deserve a code red. We will not invest the time after we've done it, 'cause they're so good, the models today. So that's a risk. I would have a code red on this [laughs] .

   11. RORory O’Driscoll12:49

       I agree. And becau- and again, just donning my economics of industry hat, you're exactly... You're an individual enterprise, right? Maybe if you were a SaaS vendor of these products to a thousand enterprises, you might have a big enough engineering team where it be- might be worth your while six to twelve months from now to evaluate new models. But you're right. You've built a business that worked for you, right? And it's... You're right. Unless they're extorting you on token costs, it ain't broke, so you ain't gonna wanna fix it six months from now. I, I agree. And that's why, just like on the consumer side, every time you lock in muscle memory... I mean, I'm using Claude all the time now in co-work, but I will admit, when I'm doing my random research for this thing, I, I, I go- still go to ChatGPT. I'm used to it. I got a lot of stuff in there. Every time you lock in behaviors like that and let them settle in for six to twelve months, you're just, yeah, you're losing lifetime value that's non-trivial.

   12. JLJason Lemkin13:42

       There are applications, if we just stick to B2B and AI for a while, there are applications that are very sensitive to token costs, okay? Um, we've all, you know... Even things like support are super sensitive, right? Because they're using so many tokens. But I gotta tell you, there are so many applications like the ones I described about that were not that sensitive to token costs. If you use two hundred, four hundred, two thousand dollars, ten thousand dollars of tokens per month for these, it just doesn't matter. And so there's the open router world where costs are super sensitive, but there are plenty of applications that will deliver epic value on these LLMs where it's not worth it. Fif- you wanna reduce my token costs from two thousand dollars a month to fifteen hundred? I'm not... Go... Leave me alone. Leave your Kimys and all these le- I don't care. Like, I got ninety-nine problems. This isn't on one of them, right? And there are gonna be more of those apps than we think.

   13. RORory O’Driscoll14:32

       You're exactly right. One of the things I've been thinking about for us, for our software a-apps investments is just having this mental model of, you know, what's the, what's the token spend as a percentage of revenue? And you're exactly right, you also... Jason, there's a ton of really interesting apps that, you know, for five, seven, eight percent of revenue on tokens are building huge value, which my sense at least is very different than the coding apps, where you might be at forty or fifty percent. And if you're at five percent of revenue and you're growing really quickly, you got a lot of better things to be doing with your life than over-optimizing the models. And I think, you know, and if you get around-

   14. JLJason Lemkin15:06

       Maybe even more

   15. RORory O’Driscoll15:07

       ... you might use some open source. Yeah, exactly.

   16. JLJason Lemkin15:09

       Maybe even more. Maybe even twenty percent you got better products.

   17. RORory O’Driscoll15:10

       Yeah, I think that metric, I actually meant to do this work, and if someone has done it out there on internet land, I'd love to see it. Just looking at a couple of hundred AI apps and just literally looking at the AI token spend as a percentage of revenue across them all. I'd love to know what the pattern is, because I totally see very different percentages depending on the token

3. 15:30 – 24:56

   SpaceX at $2 Trillion: Elon's Insane Plan to Build Data Centers in Space

   1. RORory O’Driscoll15:30

      intensity.

   2. HSHarry Stebbings15:31

      SpaceX, TerraFab, potentially two trillion dollars. We're reaching new heights. We started off at a trillion two, a trillion five. Now TerraFab and the two trillion dollar number is being mentioned. Rory, why don't we start with some context from you? You, you're the best at providing succinct context.

   3. RORory O’Driscoll15:50

      I'm, I'm... Okay. I mean, the big picture contest is-- context is that Elon made an announcement that they're going to build a fab, effectively build the equivalent, I think almost seventy percent of the value of all of TSMC, right, in the US, near the Gigafactory, because across the chip need for Tesla and the perce-perceive-- and the potential chip need, I'm picking my words carefully, for SpaceX to the extent that they build data centers in space, he doesn't think TSMC will be able to make enough chips to support his needs, and therefore continuing a pattern of vertical integration which they've had for extended period of time, they're gonna build a fab, right? Not just any fab, but the most advanced modern fab on the planet for probably CapEx cost of twenty-five billion, right? That's the announcement. So I can s- and it's not clear the ownership, by the way, but it's w- uh, I think the usage, the idea... I, I saw some numbers like twenty percent. It's kind of some kinda joint Tesla-SpaceX venture. Twenty percent of the volume in the end will go to Tesla, eighty percent will go to SpaceX and data centers. So that's the story. The second piece of context is, Harry, you said SpaceX now being talked about at two trillion dollars. Let's be clear what you're saying about that is... 'cause I, I'm gonna push back strong. Polymarket said the probability of SpaceX being worth two trillion dollars on the IPO went up to fifty, sixty percent, right? From a lower number, right? And that's what Harry is attributing information s- um, signal to. I would point out that Tesla stock didn't move. So if this really is, even if it's eighty percent SpaceX, twenty percent Tesla, in the market, nobody blinked, right? Where actual money's ch- where actually significant money's changing hand. So I am significantly more skeptical that six months from now, people are gonna attribute another four hundred billion of value to a statement that I'm gonna build a fab.

   4. JLJason Lemkin17:48

      Unless they, unless they, unless they saw your math, the eighty/twenty, and really thought of all the value going to SpaceX, right?

   5. RORory O’Driscoll17:54

      Even if all the... I mean, y- yes, okay.

   6. JLJason Lemkin17:57

      Yeah.

   7. RORory O’Driscoll17:57

      So again, it's back to the same eternal Elon discussion. At every point in time, with every one of his companies, you have things he's already done that you can value on a revenue multiple, things that have been an-announced or in process, and there are various stages of doneness, and in that case, you have to assign a probability to getting it done.And if the probability is 100%, then announcing a fab means you're worth the fab. If the probability is 1%, then announcing a fab means you're worth 1% of the fab, right? And everybody gets to pick their percentage in that continuum, right? Right now, clearly, get... I mean, TSMC itself is just over a trillion in market cap. It's like basically saying if it really popped up by $400 billion of value, it's like basically saying TSMC has spent 30 years building the most modern fabs out there. You've announced that you're gonna do the same. You do have customers for those chips in the main, so I'm gonna give you a 50% probability of getting it done. It's a pretty high Elon-attributed probability number.

   8. HSHarry Stebbings18:52

      But do you think that's unfair? I wouldn't bet against it.

   9. RORory O’Driscoll18:56

      I mean, it's very... Um, I always struggle to describe this. He is the person who's achieved more than anything else entrepreneurially in the world today, period, full stop, on hard engineering problems far beyond any piece of software, right? So that is, is, is it rational to say that if anyone can do it, he can? Yes, 'cause he'd done it two or three times with cars, with rockets. Not irrational from that perspective. You still have to say, is his record on timing of being right about when things happen and when they come a little more spotty, right? I mean, I actually just went into ChatGPT and said, "Make me a chronological list of every prediction from Elon about full self-driving." And then I did another one, "Make me a chronological prediction of every prediction from Elon about when Starship will be flying and will be able to reach, you know, Lo- Mars." It's a long line of it's gonna happen three years from now in the case of FSD. So I think with the caveat that we're dealing with the most accomplished entrepreneur of at least the last thirty years, maybe one of the top two or three ever, you still have to say his record of predicting timeliness on terms of these things is somewhat... It takes a lot longer than you think up front, and you gotta figure out as an investor how you factor that into the valuation. And everyone's entitled. The beautiful thing about markets is everybody gets to play their own way, right?

   10. JLJason Lemkin20:22

       I'll tell you what was interesting to me. I watched yesterday on YouTube, they had a Jay Leno where he was the first one to test the new Tesla Semi, okay? And the team from Tesla came over, Franz, the head designer, and the head PM for Tesla Semi, and they were talking about it, and they were talking about energy. And the designer said, "Yeah, we strongly believe across all of Tesla, the future is fusion. It is fusion to power our trucks. It's just we believe that fusion's from the sun. There's no point in doing it on Earth, and we will soon power all of our semis through fusion." And this isn't-- This is a thoughtful lead designer saying this vision that has been there and they believe it. I think it's a great story that can happen, that we're going to build more power, uh, than it, I guess, exists in the world today, and 80% of it's going to space. 80% of these chips that come out of this are going to space to power fusion. You could-- You can mock that or say it's gonna take nine more years than we thought, but it does, it, it does create a pretty powerful vision for the IPO and beyond and beyond. Um, a- and I mean, that's pretty... Now, now you see it all coming together for SpaceX for real for the first time, w- rather than we've, we've got internet satellites and spaceships. Like, it, it sort of made sense, but when we're harnessing the entire sun because it's pretty doable because we've built a lot of it already, um, starting to sound cheap at two trillion. Who else can harness the sun?

   11. RORory O’Driscoll21:51

       Ju- just to push back a little on one word. I, I, you know, 'cause I, I, I, I think it does all make directional sense, but I just gonna call you on the word mock, 'cause I didn't mock.

   12. JLJason Lemkin22:02

       Yeah.

   13. RORory O’Driscoll22:02

       I was very clear-

   14. JLJason Lemkin22:03

       I think you did some

   15. RORory O’Driscoll22:03

       ... I don't mock.

   16. JLJason Lemkin22:03

       Some, some, yeah.

   17. RORory O’Driscoll22:05

       I think you've just gotta s... Look, someone can be 10X more accomplished than you, right, as an entrepreneur and a human being, but when you're investing money, you're still entitled to say, what probability do I say, ascribe to that 10X more accomplished person being able to do the next thing? A- and therefore, you have to look at this and say, for how long will this be supported by a future statement, and when will it be worth something on twenty times free cash flow?

   18. JLJason Lemkin22:32

       But you know why it's interesting? If you really believe in DCF and free cash flow for real in the public markets, and I still get confused, if Starlink really has 53% profit margins and is wildly profitable, the fact that this extends the Starlink vision two orders of, five orders of magnitude, it's actually a reason to say, hey, if I believe in this at all, my, my DCF has gone up. How much? I don't know. It, it's gone up because this is a ma... Starlink is so profitable at scale. Like, jaw-droppingly profitable, right?

   19. RORory O’Driscoll23:03

       And two, two comments. First of all, big picture, you are correct. The reason Elon can do it and no one else can is he's gonna articulate these big step function stories where, as one investor in one, many of his companies pointed out to me, and it's a great point he made of this. They're not like software companies that incrementally grow every year. They're kinda step function technical challenges that you accomplish maybe every five or seven years, and then you harvest on that while you're building the next step function challenge, and then that gives the next lift. And I mean, I think Starship's a great example of that. You had the, "Hey, I launch rockets, and all I do is get government contracts." And then you're like, "No, I launch rockets, and now I have a cellular service for remote, for remote cellular." And now the next turn of the crank is maybe if I can get Starship working, you can have cellular for everywhere and data centers in space. So you are right. These are big, chunky visions, each of which, if realized, gives you an extra, pick a number, hundred billion, two hundred billion, three hundred billion of net present value of thing. But you just got... So I agree. I, I, no one else can tell the story, and no one else is credible to tell those stories. You've still gotta go back to what's the probability of happening, when does it happen, and what's your cost of capital between now and there?

   20. JLJason Lemkin24:18

       Yeah, and I, I, I would just argue if you're being, uh, if you're, if you're the classic optimistic analyst, Wall Street analyst, you can probably justify the two tril- Harry's $2 trillion valuation by saying, "The odds that this occurs are 80%, but, but we're ascribing only a 30% chance it happens on time. There's an 80% chance that... And within five years it achieves similar profit margins to Starlink." And you roll it all back and you can justify 2 billion over one point X trillion, right? There, there, uh, I think you could do it on a spreadsheet.

   21. RORory O’Driscoll24:45

       And that bet will be available to you, and have at it.

   22. HSHarry Stebbings24:49

       Well, in the, in the, in the week of bold $100 billion bets and why the fuck are we doing seed stage-

   23. RORory O’Driscoll24:54

       Anything

   24. HSHarry Stebbings24:54

       ... SaaS investing, Jason,

4. 24:56 – 33:06

   Jeff Bezos' $100 Billion Fund: The End of "Doing It the Hard Way"

   1. HSHarry Stebbings24:56

      uh, [laughs] Jeff Bezos seeks $100 billion to buy and AI transform manufacturing. Wall Street Journal broke this one. Jeff Bezos raising $100 billion, manufacturing transformation, fund and acquire companies across semiconductors, space, defense, inject AI into their operations and make them much more efficient. Um, he's apparently been touring Singapore and the Middle East to charm some sovereign wealth funds to give him the money. How did we think about this? Again, it was another week of, I feel irrelevant at early stage [laughs] reading about another $100 billion-

   2. JLJason Lemkin25:27

      I think it's a great classic Indian Creek Island investment. So you're sitting in Miami in your couple hundred million doll- dollar home-

   3. RORory O’Driscoll25:34

      I love you, Jason

   4. JLJason Lemkin25:35

      ... you've, you've got Jassy and team running the hard business. You don't have to do that that much. Luckily, they're doing the hard work. And this, now I get to think big. I get, I get to think big at Carbon or on the yacht, and I don't wanna go small anymore. And I've already done it. You know, I've already built Amazon, so I'm... You know what I wanna do? I'm gonna remake some industries. Uh, I, I, you know, I was with my friends at Pura Vida getting our smoothies, and we're all gonna remake industries. And this is the Indian Creek Island bet, and I get it, right? You don't wanna screw around anymore on, um, on, on, on, on, at Billionaire's Bunker. You just don't want to. Do you think he'll be able to raise the $100 billion?

   5. RORory O’Driscoll26:16

      He could just sell stock. If he wants $100 billion, he can get it himself, so I'm sure he'll get some significant slug of capital. I mean, it's hard, I mean, I, I don't know $100 billion. I, I, yeah, it's so out of my pay grade, but-

   6. JLJason Lemkin26:28

      The only problem is SoftBank seems tapped out. They're hitting their debt limits they just announced this week, right? That they're flashing above their covenants, so, um, but I- I don't think he would announce it, uh, if there wasn't a re- that he didn't believe he could do it, right? So you got, you gotta, you gotta announce a decent probability.

   7. RORory O’Driscoll26:45

      I wanna come back to what you said, Jason. I thought that was actually very insightful, the Indian Creek comment, right? And I, you know, you, you do see this of, you know, I did it the hard way. I'm now 50, I'm 60. I'm not 22 anymore. I've got more money and less time, so I'd like to insert myself further along in the value creation process to make it happen quicker, is the logic. You're right. 'Cause I was th- reflecting back, AI is this cool new technology that could transform all, loads of industries. Just like 20, 30 years ago, the internet was this cool new technology that could transform a whole load of different industries, right? And if you think you had really... And when Jeff Bezos was starting out, there was three different plays you could make. You could say, "Hey, internet's gonna transform retail. Let's focus on retail. I should build software and sell it to retailers so they can kind of move onto the internet. Build Shopify." Right? The second thing you could do is say, um, "Hey, the internet is gonna transform retail. I should buy Walmart, 'cause I'll kick ass, and I'll make them become an internet company, and I'll do it that way." Or the third you can do is to say, "I'm gonna do the hard thing. For the most amount of money, I'm gonna transform retail myself by building a full stack retailer. I'm gonna call it Amazon, and I'm just gonna kill everyone." Right? And only the, and the last one was, it turns out, the $2 trillion opportunity, right? Um, from zero. So your, your IRR is from effectively no money in, you make a couple trillion bucks from a value creation perspective. Shopify, roughly a couple hundred billion dollars agreed, 'cause that's the best e-commerce technology provider. And you know, to be fair to Walmart, if you'd had half a trillion dollars lying around at the time, you could've scored a double because it finally adopted the internet, and, you know, you make a 2X on, on your, on a lot of money, and you make half a trillion bucks. Because now Walmart's got a market cap plus or minus of a trillion dollars, and they're very much a winner in the internet age. And I was just thinking, those were the three games that you play. And back when you're 25 and you have incredible drive, m- you don't have half a bil- half a trillion dollars lying around, you do Amazon. But you're exactly right. If you're in Indian Creek and you're like, "Oh, I don't have 25 years of, you know, working out of a desk," I'm like a 2X on a hun- you know, taking $100 billion and buying a bunch of companies and, you know, j- uh, injecting AI into them like I could've injected internet into Walmart, maybe that's the play. It's inherently less disruptive and more financial engineering than doing either of the Shopify play or the Amazon play. Uh, so yeah, I, I, I agree. I like the framing of the, it's what you do when you have too much money to wanna do it the hard way.

   8. JLJason Lemkin29:30

      If you talk to billionaires today that aren't pulling their hairs out 'cause they're running public SaaS companies, okay? It, it, the vibe is similar. They wanna do something huge in AI right now. They don't necessarily wanna run it themselves. They don't wanna be CEO again, right? But they're very motivated to do one of these plays. So we're gonna see a bunch of these plays. It's what everybody wants to do. It's logical. It's, it's logical from, from, uh, from, from billionaire island.

   9. RORory O’Driscoll29:55

      Yes.

   10. JLJason Lemkin29:55

       It's logical.

   11. HSHarry Stebbings29:56

       I, I, I love seeing Sergey Brin rock up to a random hackathon in Miami. I'm not sure if you guys saw this.

   12. JLJason Lemkin30:02

       Yeah.

   13. HSHarry Stebbings30:02

       But in Miami, he came out at the end and, you know, was a judge or whatever standing on ceremony of a very grassroots hackathon in, you know, a random part of Miami.

   14. JLJason Lemkin30:13

       Maybe the only, only place left in the country hospitable to billionaires. So we'll, we'll watch, we're gonna watch it accelerate.

   15. RORory O’Driscoll30:18

       Oh my God, the oppressed species of billionaire.

   16. JLJason Lemkin30:20

       No, no, I do think, you know, when I think about this, the New York QSBS and other stuff, not, not, we don't have to do it. What I do think it, when you saw Sergey there, right? And he did, he didn't even move to the billionaire bunker. He moved to a different, different part of Miami Beach. But, um, uh-I, I do think what we're missing is I th- I think that it is the only pla- may become the only place in the US over the next couple years that is welcoming billionaires. Texas does, but Austin even doesn't. Austin does not. Austin has mixed views. But say what you will, and then I know it's hor- I mean, you know, Florida welcomed... I mean, look, I mean, the, it's terrible. The OnlyFans guy, I mean, very, very ch- very controversial subject matter, but where did he live? Pompano Beach, Florida. Okay? Florida said, "You be a billionaire here," okay? And so we are see, we, we're underestimating it's not just taxes with the Sergey, it is you may only feel comfortable if you're Bezos or Sergey in Miami soon. We are, you're... Why would you feel comfortable in California or Washington and New York? Seriously, why would you feel comfortable? Uh, maybe Utah. I would feel, I... You, you just don't wanna be attacked constantly. No human being wants to feel that way. You wanna go where people will le- let you just be yourself and raise 100 billion or do whatever. Like, leave me alone. Let me, let me live. And that's what I think people are missing with the golden goose. They're making billionaires uncomfortable, and it's not just the money, it's being uncom... That, that Sergey. He's, he's gone. He ain't coming back, except for staff meetings and hackathons in, in Mountain View. He's gone. I, I'll tell you yesterday, I, I, I'm here in Utah, and I saw Ryan Smith yesterday. I love him, right? Founder of Qualtrics, okay? People love Ryan. And he took his money and bought the Jazz, as well as hockey team, and he had a rough first year with the Jazz 'cause he traded some top players, but I, I, they love him here. They love Ryan here. And I don't think in the Bay Area anyone by m- people are vilified. The billionaires are vilified. Why would you stay? And it's, and it's only going to accelerate. So it's, here's the thing, it's hard to predict the outcome, right? I really don't think adding QSBS to New York is going to lead to the exodus that the people want it to do. We can talk about why, but they did it in California and it, that alone didn't work. But when you are uncomfortable living somewhere, you leave. And it is Ryan Smith is lo- beloved here in Provo, where I am today, and Ev- Sam Altman is vilified, and D- Dario gets a pass maybe because he gave away 80%, but, um, it's who wants to live, who the hell wants to live where you're vilified? Who the hell wants to live there?

   17. RORory O’Driscoll32:56

       Could put Sam some slack. He apparently has no OpenAI to give away, so it's, it is-

   18. JLJason Lemkin33:00

       Howard Marks left. I mean, he's old, but he did leave. Uh, it's, uh, you wanna be where you're

5. 33:06 – 40:40

   The $20 Billion "Acqui-hire": The Groq Deal Broken Down

   1. JLJason Lemkin33:06

      comfortable

   2. HSHarry Stebbings33:06

      Speaking of like the world-hating billionaires, Groq announced, uh, essentially the debrief on the $20 billion deal to Nvidia. Uh, less than $100 million in ARR on being acquired. Um, Jonathan, the founder, uh, is gonna make, uh, about $950 million after what will be a double taxation. Um, showing it's quite a costly thing, taxes, in terms of the IP and team acqui-hires that we've seen. How do we think... And then Chamath also reportedly made $950 million, to which he responded on Twitter he made much, much more. H- how do we think about the analysis of this breakdown?

   3. RORory O’Driscoll33:42

      I think there's three different things you said we'd talk about, and I think you should break them apart. You know, one is, um, w- how often do you see this kind of hu- sub $100 million ARR revenue businesses going for this kind of value? Then the second thing is what was the structure and why does it result in double taxation? And then maybe the third thing is why does poor Chamath need to tell us he's rich all the time? It's okay, we believe you're rich. You know, you may have to f- [laughs] you may have made other people poor, but we stipulate that you are rich, and even you are smart. You did a great deal here. You know, let it go, poor guy. Therapy will help. But let's go back to the first one.

   4. HSHarry Stebbings34:21

      Right.

   5. RORory O’Driscoll34:22

      Um, how, you know, how often... Uh, 'cause the first question you asked in the notes, which you always ignore when it comes to the show, is when do you see this kind of transaction price as if revenue doesn't matter? That was the question, right? When does someone pay $20 billion for $100 million in revenue? And I was thinking about that. It's easy. The answer is when the value to the acquirer is so high and they have the market cap to do it. And Nvidia, with a $5 trillion market cap, can pay $20 billion for something that's valuable. And there is another good example I thought of at scale, 'cause it happens a lot at small scale. There are loads of tech M&A where, you know, some shitty little company's doing less than a million in revenue, and someone buys it for $100 million, which, you know, is 100, 200x revenue multiple. But we don't make a noise about it 'cause it's just so small, and the reason they're doing that is 'cause they can run it through their channel, and they can convert that million in revenue into 20, 30, 40 million very quickly, or it has strategic value to them, right? The number of times it happens at $20 billion is low, but WhatsApp is the other great example of that. Um, Facebook paid $16 billion for WhatsApp, and it didn't have a dime of revenue, right? And it was a great deal, and it's still a great deal. So it does happen, but there's only a few number of buyers who can afford to do that.

   6. JLJason Lemkin35:40

      The Groq one, you know, they just announced at GDC last week that it's going into production, so that's different, okay? The, the... And I'll tell you what I find interesting in general for venture. So, look, they had $100 million in revenue. They proved the concept. They prove it sort of works, and Jensen said, "Within a year we can get this into production." Um, that, that's worth billions, right? And so it illustrates how weird... M&A's so weird. Um, this deal probably was a multiple of the last round. The mult- last round was at 6.9 billion. The, the, there are... This is less common these days, but classically rounds would be 2 to 3x the last of a growth round, okay? That, that has collapsed for some reasons recently, but that, my second, my first startup was acquired for exactly 3x our round. Literally, our acquirer downloaded our certificate of incorporation, found our per share price, and showed up unsolicited with an offer 3x, okay? That's what I think hap- happened here. What is so weird, though, is that it's a reminder that so much of M&A, one way or anotherIs focused on revenue multiples, either directly or potentially, and then they're just abandoned after the deal. [laughs] They're just, "You're, you're worth the, you're worth 10.2X ARR," and then we fire the sales and marketing team after the deal closes and roll it up into our core product. [laughs] It's, uh, it's an odd thing. Um, necessary, but odd, right? There's so many weird ways they are valued.

   7. RORory O’Driscoll37:03

      A- a- agreed. And yes. Uh, and it's, it's a weird thing 'cause there's often this huge gap between what you're worth st- you know, what you're worth standalone might be $2 or $3 billion, what you're worth to your acquirer might be $20 billion. And it's a question of, how does that 17 billion of value get allocated? And obviously sometimes the buyer is trying to grind you down to $1 more than your standalone value. And then sometimes, like in this case, they're like, "Hey, we will pay you a fair amount of what it's worth to us," which is way more than you're worth on a standalone basis. But kinda segueing to the next thing, in return for that, you're gonna use this structure which is wildly tax inefficient, but it's the only way for us to get this thing done quickly and without government review. Which is the next thing to say here, which is the point, the other point you're trying to make is, is that, you know, the CEO, I mean, no one's gonna cry for someone who made $950 million. And they're not even a billionaire, so no one'll hate them, so that's great. I mean, it's actually a win. Good. Another 50 million and Jason, the, the, the pitchforks would be out. But these transactions are very capital in- uh, tax inefficient. Because what happens is the company sells the assets to NVIDIA, books a gain because the assets were in the books at sub-a-billion and now they're getting sold for 20 billion, so you have to pay tax at the company level on that. And then you dividend or redeem the money out, and individual investors have to pay tax on the gain. So it's fairly inefficient, so you're probably wasting plus or minus 4 or 5 billion bucks on a $20 billion transaction because of double taxation.

   8. JLJason Lemkin38:33

      And it's probably to, to the founder, Jonathan, it's, it's roughly 60% effective tax rate. And, and you can't hold NVIDIA stock. You're cashed out. Like, there's a lot of it, there's so many inefficiencies in this deal. One, you don't even get the IP, right? You d- or you don't, you don't get the company, you don't get anything. And it's a 60% tax rate to the founders and no ability to roll over the stock. Um, you know, avoiding antitrust, is it worth it? Probably for the $950 million. But man, this, this has gotta be the most inefficient thing ever [laughs] convoluted to avoid antitrust. It's so expensive.

   9. RORory O’Driscoll39:06

      And, and it is worth pointing out, it's just quite terrifying from a government perspective. You now have a process whereby the government makes the rules that enforces the antitrust, and the government... And basically you've got two choices. It would appear you either lobby extensively at the highest levels of administration and you get a waiver from the top down. Per that Wall Street Journal article this week, which was pretty good. And option B is you, uh, pay double, you do it this way and then you pay double taxation, and the government wins either way. [laughs] You know? Wire me the money and I'll let you off, or wire me the money after it closes, but wire me the money either way, you know? It's a really perverse incentive. I mean, whoever comes into the, um, antitrust division next time and says, "I think we should clean up the rules and make it much more transparent," it's probably gonna cost the government 20, 30 billion bucks in terms of, you know, some combination of kickback and tax avoidance. There you go.

   10. HSHarry Stebbings39:58

       I have, I have to say I do like it. Jonathan was in the desert and the dark for many years, and he is a founder who's been a real, respectfully, cockroach, who's gone through the hard times, he's gone through the criticism. He's also just a good dude. I, I like him a lot. And yeah, he's, uh, so it's nice to see good people winning.

   11. RORory O’Driscoll40:17

       A- a- right. J- just like Chamath. Another good guy who's been through the wilderness and has now got his $950 million. So there, I'm sure that's the point you're trying to make, Harry.

   12. JLJason Lemkin40:25

       Much more.

   13. HSHarry Stebbings40:26

       He, he needs money, Rory, okay?

   14. RORory O’Driscoll40:28

       He could. He could.

   15. HSHarry Stebbings40:29

       Yeah. He, he can now, now c- buy some more Loro Piana. Uh, d- Rory, you brilliantly said to me, "You know, that's great, but what about me?" I, I own stock in Amazon and I own stock in Figma,

6. 40:40 – 58:51

   Figma's Death Spiral? Why the Markets Are Terrified of AI Disruption

   1. HSHarry Stebbings40:40

      okay? Google launches Stitch. Figma tumbles. Figma tumbles is an, an understatement. I saw a tweet wh- it, it was actually an announcement that someone posted, and Sequoia were buying 35 million bucks of Figma stock. And I was like, "Fuck, if, if Sequoia and Andre are buying 35 million bucks, I'll put in some of my money. That's a good sign for me." I'm down 22%.

   2. JLJason Lemkin41:06

      Yeah, looks like about-

   3. HSHarry Stebbings41:07

      22%.

   4. JLJason Lemkin41:07

      That number looks like, yeah.

   5. RORory O’Driscoll41:09

      Yeah. It's $21.66 a share. I remember... Look, when it was at 108 and you asked me what I thought it'd be, I said 35, and I was wrong. I was t- you laughed at me and I, 'cause I was so pessimistic and I was wrong. It's 21. Wow. No, it's-

   6. HSHarry Stebbings41:23

      Does this have a floor?

   7. RORory O’Driscoll41:25

      Of course it has a floor. I mean, stop. You know, like, uh, the p- again, it's like, it ha- you know, it has a floor based on its cash flow, which is strong. It has a floor based its growth rate of that cash flow. The third element is the probability of disruption. And you know what? It's about... The, the tricky thing about the equity business in the short term is everybody gets to speculate on that probability of disruption. So you take the cash flows, and then if you love the story, you apply uplift. See Elon for details. You take the cash flow, and then you apply the... And if you're really scared about the story, you apply terror, down-lift, which is what's going on here. Now, in the end, you say there's no floor. In the end, if the business is worth it, it will grow, and it will generate the cash, and they'll get to do what the Palantir guy does, which I so love, which is every earnings call, he basically slams all the haters and says, basically, "Fuck you, I'm making money and you all were wrong." Until, uh, y- in the short term, the market gets to bitch and moan and have its opinion, but the floor doesn't come 'cause the market changes its mind. Maybe it will, maybe it won't, but that's hardly in your control. If you're running Figma, the floor comes if you execute, you demonstrate that you've been able to adapt, you know, uh, to an AI n- uh, AI first world. You generate the growth, you generate the cash flows, and eventually it'll turn. But that's why it takesThat's why drawdowns are shitty. That's why drawdowns are hard.

   8. JLJason Lemkin42:47

      Well, what, you know, on this, on this, on the, on the Stitch Figma thing, I mean, I've used Stitch, of course, as you would imagine. Um, I, I, I think most folks that, that chimed in on this never used it. Um, I, I'm confident 98%. To say that-

   9. HSHarry Stebbings43:00

      For, for those that don't know, S- Stitch is what for those that don't know?

   10. JLJason Lemkin43:02

       It is a new design tool that Google launched, and the bar at Google to launch a new AI tool is pretty low. They try a lot of stuff, and they abandon almost all of it because then they focus on a few core products. So you literally cannot take it seriously when Google launches a product because you have no idea whether they will stick to it. They launched a Sona. Is it Sona? Sorry, I keep getting this wrong, Harry. The, the audio one, right? What's the one? So, the, the, the audio one?

   11. HSHarry Stebbings43:26

       Oh, Su- Suno. Suno. Suno.

   12. JLJason Lemkin43:27

       Yeah. So Google launched a Suno competitor. It's, like, cool, but it's not nearly as good. Like, it doesn't really work, and, and sh- will they keep with it for five years? I'll bet you dollars to donuts they don't because it's not core, okay? I used Stitch. I've used all of Google's design products. I think the odds that they desi- decide to build a Figma competitor from this for a decade approach zero. So on the one hand, massive market overreaction to a, to a proof of concept. Give me an effing break if I'm Sequoia or whatever. On the other hand, the markets are saying, "We are extremely worried about disruption. We are extremely worried about disruption. You better prove to us, Figma, Atlassian, Salesforce, you are ahead of disruption and not behind it." And the market said, "We don't believe it." And I agree with the markets here because Figma Make is one of the worst products I've used in the last six months, but this, this, uh, but, but Stitch on its own, at least it's better than Make. At least it can take context from a website and not, and not hallucinate. But the market should be w- like, where... Show me the money. Again, where is Figma's $300 million of revenue from disrupting Replit and Lovable like we talked before? And so if you haven't delivered like Palantir or started to deliver like Salesforce, the markets are gonna frigging panic that your revenue is not that durable. This is what I think it all... Like, I didn't get the 2026 panic for a long time. I was slow. Now I get it. The markets are rationally saying, "We no longer believe this revenue is particularly durable," SaaS, old, old SaaS people. P doesn't believe it. Qualtrics couldn't finish its debt offering this week. Salesforce barely got its debt done. And why? They d- the market's just... It's not that they think that, that Figma is a bad company. They just don't believe this revenue's gonna last a decade anymore. They don't believe it. And so you're gonna see more and more of these panics for anyone not accelerating. Pe- they're just gonna panic every time it happens.

   13. HSHarry Stebbings45:24

       Jason-

   14. JLJason Lemkin45:24

       Yeah

   15. HSHarry Stebbings45:25

       ... we just released a show with the CRO of Figma.

   16. JLJason Lemkin45:27

       Yeah.

   17. HSHarry Stebbings45:27

       And I asked him, "How are you seeing AI implemented into your sales teams?" And he said, "Honestly, we don't really h- have that ability, and we haven't done it yet. Um, and oh, and, and we're hiring a lot more in sales, by the way. We're not reducing head count at all. That, we're not seeing that. Uh, and oh, by the way, we're not seeing, see pricing change at all." How do you feel when you hear that? Because-

   18. RORory O’Driscoll45:54

       Oh, you're just, you're just serving up a soft-

   19. JLJason Lemkin45:55

       That one ironically, Harry, ironically, that one does not worry me as much as the product, okay?

   20. RORory O’Driscoll46:01

       I totally agree.

   21. JLJason Lemkin46:01

       I will tell you what I've learned. You, you and I, you formally on the other 20VC, me and formally, I've t- I know. I've talked to, I know a lot of the CROs and CMOs at leading AI companies. Um, the ones I'm close to are pretty good, but I also see tons of folks I call recycled mediocre. They are folks that bombed out of old B2B companies that barely did anything there, but because they have the right logo, got hired to a sup- They're all over the hot AI companies. So many recycled mediocre, and they're gonna hire 250 reps and not train them, and they're gonna build infographics. But the products are so strong, and the demand is so strong, it doesn't effing matter. So if, if the guy, if, if, if, if Figma Make was so great and, and their AI product was doing $500 million, you, you, you could, you could sell it with folks fr- fresh out of a non-technical junior college. It'd be fine, right? Um, so, so my point is even though I talk a lot about AI go-to-market agents, and I believe they're great and they work, they don't fix product market fit. And A- sales tools, sales does not fit product market fit, and we're seeing broken, we're seeing decaying product market fit. That's why the market panicked on Figma. They're seeing hints, just hints of decaying product market fit in the AI era, and you should panic.

   22. RORory O’Driscoll47:13

       Yeah. I, I, Harry, just to pile in on that 'cause I actually have these conversations with my companies all the time. I actually t- I didn't think... I totally agree what Jason said. It's like when my companies come and say, "Hey, you, you've got this pro- we want to talk about AI," and they say, you know, "Hey, look at us. We're using AI in go to market." Or they say, "Look at us. We're using AI to build engineering." I'm like, "That's great, but nobody gives a rat's ass. That, that's like jacks to open. That's not solving the core problem." The core pro- unless you're, you know, making something like cars where it doesn't matter, it's just back office efficiency. If you're a software company, the number one question is how does AI change the end product you deliver your customers? That's what's gonna determine success or failure. So I, I thought, uh, funny, I was wrong there. I'd have guessed you'd have piled onto that guy and kind of bludgeoned him while he was down 'cause I thought Harry served you up a softball for you to say, "Hey, the idiot is not using AI," and I'd have argued with you, but I think you nailed it. Look, you could be using AI well or badly in go to market. You can be using AI well or badly in engineering. It will catch up with you over time if you're not using it well. But that's not what's driving, you know, 30, 40% price declines. What's driving that is exactly what Jason said, is the market not looking at this and saying, "There's disruption risk here. I don't know the terminal value here. I don't... I'm just nervous, so I gotta be paid for that risk." And-

   23. HSHarry Stebbings48:32

       Oh, God, he, he didn't take my softball, did he, Rory? That was-

   24. RORory O’Driscoll48:35

       He didn't.

   25. HSHarry Stebbings48:35

       Norm- norm- normally he's so disciplined. He d-

   26. JLJason Lemkin48:38

       But Rory's got the important point. You, y- there's good A... There's d- you gotta have the right AI or your company's gonna declineListen, would I, would I... Listen, I'm sure the Figma guy's great, but honestly, if I interviewed a CRO today and didn't have any AI agents that he, he or she had brought in to our last podcast, I would recommend to the CEO, "Don't hire her or him," okay? For sure. But would I think this was- would I be much more worried than if I talked to a CTO and this, the new CTO they wanted to hire didn't really believe in, in using agentic coding? Then, then I would ask for my money back. Can I have all of my investment back in 1X? You can keep your markup, just give me my 5 million back. [laughs]

   27. RORory O’Driscoll49:14

       I'm gonna go one level more than that, is that, you're right, not using AI in go-to-market, bad. Not using AI to build product, maybe I want my money back. But if you're a software product and you don't think AI is going to disrupt not just how you build but what you build, then you actually probably wanna actively short it. Like for example, they're not doing that, but if Figma or Salesforce or someone was to say, "I don't think AI is relative, is relevant for our customer base," and they don't wanna use AI in design, if someone was to take that pay- you'd be like, "Oh my God, you're just gonna be, you know, just left behind." Now, obviously-

   28. JLJason Lemkin49:45

       Yeah, and that's why Figma's insensitivity to how mediocre Make is really worries me.

   29. RORory O’Driscoll49:51

       That's actually an interesting market.

   30. JLJason Lemkin49:51

       I wouldn't care if, if, if Dylan or the team said, "Listen, we're- Make isn't good enough, but what... Give me time. Give me six months, it's gonna be great." But saying this product that is the worst vibe coding tool I have u- that is used in the last six months, the fact that there is no public awareness that this is an issue re- really worries me.
7. 58:51 – 1:05:56

   The Broken VC Math: Why You Need $1BN To Do Series A

   1. JLJason Lemkin58:51

      do it, right?

   2. HSHarry Stebbings58:52

      Speaking of Figma, uh, I, I'm gonna go a little bit off-piste here, but I, I think it's worthy. Jason, we were on Twitter about it earlier, joking. Um, Mamoun announced raising the new KP funds, a billion dollars, uh, for the early, two and a half billion for the growth.

   3. JLJason Lemkin59:07

      Yeah. Growth seems small.

   4. HSHarry Stebbings59:07

      Um, I mentioned meeting him at, uh, seems small.

   5. JLJason Lemkin59:10

      Seems small.

   6. HSHarry Stebbings59:10

      I mentioned meeting him for the first time at SaaS, Jason, if you'll believe it, ten, 10, 11 years ago, uh, in a side room. He was kind enough to give me time. My l- my takeaway is, honestly, you can't do early, and you're gonna kill me, Rory, with less than a billion if you're gonna compete to lead As. And my reasoning for that is A is now a 30 to 40 million, and if you wanna lead them, you need to be able to write $25 to $30 million checks. I think you need 20 across a firm. So if you need 20, $30 million checks, you're at 600 million. I would argue that your fund scale is as small as it could be to lead As today.

   7. RORory O’Driscoll59:53

      I don't entirely disagree in the sense that, you know, it's a $900 million fund, and you're exactly right. I mean, the math of what you threw out is correct. Series As tend to be-- You're, you're writing a, an average of a $20 million check. Our reserves have consistent-

   8. HSHarry Stebbings1:00:08

      But I don't even think 20 is enough these days, Rory.

   9. RORory O’Driscoll1:00:10

      I, I know. Let's do just an average, right? Yeah, 'cause you, you know, if you, if you hustle, if you find some deals where it's a little off the beaten track, I've written, I've written As where we've gotten 20% ownership for 12 or 15, right? So it's not all, but, but let's just go at your average, Harry, 'cause rather than arguing that, right? You know, it's 50% reserves. We, you know, over like six or seven funds, we've been 50% reserve. So you end up with $30 million in the average deal. You know, and then the last comment is a portfolio concentration versus diversification question. I, I, I think given the higher time to exits, you probably tend to be nearer to 30 than 20. So yes, I, I think, you know, there's a, there's a certain small S scale required to play meaningfully in the Series A business. Yes.

   10. HSHarry Stebbings1:00:51

       Rory, can I ask you, you've got 720 of investable. You can't have a reserves of 50/50.

   11. RORory O’Driscoll1:00:57

       720?No, I didn't say 50/50. You didn't pay attention, Harry. 50% of it... Yeah, 'cause there's two ways of expressing reserves. It's just simple math. Let me help you. Uh, one way is expressing it as a percentage of original capital, and in other words, if I put in 20, do I reserve 10? That's 50% of initial capital. And, and mathematically, that's the same as saying two-thirds of the money goes in in the first check and one-third goes in in the later check. You're right, I'm not reserving 50% of the total amount. Do you understand me? Those are literally just-

   12. HSHarry Stebbings1:01:26

       Uh, uh, now, now I do with that clarification.

   13. RORory O’Driscoll1:01:28

       Yeah.

   14. HSHarry Stebbings1:01:28

       Thank, thank you for clarifying that.

   15. RORory O’Driscoll1:01:30

       I think I used the prepositions correctly the first time as well, but okay, it's good to be clarified. But to be fair to you, people do express it both ways, and sometimes precision is important. I always think of it as the amount of money you've put in and then the amount of money you have in your back pocket to defend that money if you need to, or expand on that position if you want to. So I always think first check. And what it says is, and this is another insight, unlike for seed where you also have a big fund, for, for that kind of Series A game, the Series A is not for us, especially for a firm that just has, you know, checks for As and Bs and of this size, it's not an option value on putting a ton of money in later. Most of your value is made on that first check, right? Whereas these folks who have seed or even A funds where their real plan is to put $200 million in at the B or C when it's working, right? To some extent, the A is an option value, but just, just as Jas- for Jason, the C check is the check. For us, the A or B, 'cause we're roughly about half and half, is the check. You're not saying, "Oh, I'll put in a little now and write more later." That's a... That's not the way the game can be played.

   16. HSHarry Stebbings1:02:34

       Rory, are you finding it increasingly uncomfortable with the expansion of Series A rounds because our checks are getting stretched bigger and bigger and it's ruining our math?

   17. RORory O’Driscoll1:02:44

       I mean, it is somewhat uncomfortable, but I think you have to find the deals where that's not the case or decide in some cases to reach. I mean, and that's... I'm gonna put boats... I mean, put board size of the challenge out there. You know, you, you... There may be some deals that are too capital intensive and you decide, "I don't wanna do that because I'm just n- not getting paid for that risk." But you're right, the average... I, I looked at this math just last week. The average round that we play in has crept up, right? Not just the amount we do, but the average round that we play in has crept up over the last year, year and a half, right? So yes, it's not I would say to the acute level of, "Oh my God, you know, we're perfectly happy with the checks we're writing and the round sizes," but yes, there are times, especially for example, you know, we haven't done any at scale of this, the kind of the Neolab C checks where you're just so outclassed with your $30 or $40 million check, it's barely worth playing.

   18. JLJason Lemkin1:03:38

       How big is the Hummingbird Fund they just announced?

   19. RORory O’Driscoll1:03:40

       It's 800.

   20. JLJason Lemkin1:03:41

       800. What was, what was their... What, where have they grown their fund size from over time from doing inception investing? [laughs]

   21. RORory O’Driscoll1:03:47

       It's, it's 200, 300 of, I think, initial capital. It's the same fund they always had, but adding a growth fund to a rounding error.

   22. JLJason Lemkin1:03:54

       Yeah.

   23. RORory O’Driscoll1:03:54

       Right? Mm.

   24. JLJason Lemkin1:03:56

       And then didn't Balderton lead the seed in Revolut?

   25. RORory O’Driscoll1:04:00

       Yes. Reluctantly.

   26. JLJason Lemkin1:04:00

       And then who did they just do at a billion this week? It's just, it... The, uh, the game, the game is, it does change. We were really good at doing Revolut at four. Now we're... Now, now billion dollar rounds are a good entry point for us. [laughs] It's just a lot of change, isn't it?

   27. RORory O’Driscoll1:04:15

       Yes. There's n- anyone... Look, we track it on aggregate, right? Versus our 2010 checks, you're probably up roughly two X in terms of the valuation, and I think that's significantly lower than the industry as a whole.

   28. JLJason Lemkin1:04:31

       His point's hard to argue with, which is if you wanna own 15% of a company or whatever your target number is, and deal sizes have inflated, th- there's a basic math you have to do, right, with reserves. And that math is, in many cases, highly stressed in the market today. It's just a f- like, it, it's a fact. Like, you know, you used to sol- It was very easy to solve your fund size before, right? It was $60 million per partner for seed, uh, maybe 100 for A or B, and then it would go up a bit. The math was so simple that all these funds were... But that math just is, is broken today, and it creates interesting... I, I don't find it super interesting, but it, it, it, it is a little bit broken, right? And so if you're Gary Tan, you say the $100 billion outcomes make it irrelevant, right? And I don't know how they work, but I was just looking and I was writing an an- I was writing something up on Wiz and it's Cyberstart's owned 4% at exit, okay? So that, that... I don't know whether that's dilution or his model back then, but the model still works for a seed fund at 4% of 30 some odd billion, right? Um, but that, I think we're gonna see more and more of those, right? Dilution and time. We'll see s- more and more seed investments eroded to three, 4%, right? And if they... I'm just doing one example. They'll be eroded. And, and if the exits are, uh, you know, north of $10 billion, it's okay for a seed fund, right? But it, it, it's, uh, it's tough.

8. 1:05:56 – 1:19:07

   Win or Die: The Terrifying Reality of the Unicorn "Dead Zone"

   1. JLJason Lemkin1:05:56

      I don't have the answers. I, I just think the, the old math was easy, right? We, we need to do 15 to 20 investments per fund, $15 million the average check size, and you could roll up into fund sizes that, that didn't make you fall out of your chair. [sniffs]

   2. RORory O’Driscoll1:06:10

      At, at, at the risk of being a dick, the math is easy both times 'cause math is independent. [laughs] You just don't like the answer, right? Multiplying, multiplying a pre-money of 50 is no harder than multiplying pre-money of-

   3. JLJason Lemkin1:06:20

      I think the money inherently creates more risk unless the outcomes are massively higher.

   4. RORory O’Driscoll1:06:25

      Brilliant. That's a good point.

   5. JLJason Lemkin1:06:26

      It's just we are levering up our risk, t- to Harry's point. We're levering up our risk.

   6. RORory O’Driscoll1:06:29

      I totally agree. I was just being a mild little jerk 'cause I'm thinking I'm getting grumpy. Uh, exactly. It's not that the math is complex, it's just that the consequences are unpleasant. And it's what you say. Everyone... Look, we said it over and over again. Everyone's been pushed out on the risk continuum. The whole-

   7. HSHarry Stebbings1:06:45

      But it does feel like times are changing faster than fund sizes are able to adapt in a way that they haven't done in previous cycles. Like our normalization of billion dollar plus rounds, hundred billion dollar plus raising-

   8. RORory O’Driscoll1:06:56

      I think that's well put

   9. HSHarry Stebbings1:06:57

      ... so much quicker than fund sizes can match.

   10. RORory O’Driscoll1:06:59

       Yeah, I think that's actually true. The pa- That's actually a good reflection. The pace of change... 'Cause I've lived through '95 to '99, the run-up and the billion dollar funds, and I also lived through unwinding, watching all the funds being unwound in '02.I remember, and then, you know, obviously 2007 that unwa- this... And even 2021, this feels faster than that, right? The action on the table and the need to play at a high le- yes, I think, which is why I think every VC is stressed right now. No matter how successful you are, no matter how well your last deal, uh, the, a deal that you did three years ago is doing, everyone wrestling with doing deals now is grumpy, stressed, and feeling, feeling the pressure.

   11. JLJason Lemkin1:07:39

       But I think there's one risk that is under-discussed, okay? All this fun math can lead to concentration risk or ownership risk. Like, at least for a smaller fund, I, I have to deal with concentration risk or ownership risk. That's the, that's a simple trade-off. You can't... That's my maths, right?

   12. RORory O’Driscoll1:07:53

       Agreed.

   13. JLJason Lemkin1:07:53

       The one that we are just ignoring because times are so good on paper is who the hell is gonna buy these companies if they don't IPO? What the hell are Replit, Lagora, Harvey, Lovable... What, what, how much is Lovable worth in the last round, $8 billion?

   14. RORory O’Driscoll1:08:08

       $6.6.

   15. JLJason Lemkin1:08:08

       Okay, let's be honest. Who the hell is gonna buy them if they don't IPO? You really think Google's gonna buy them for $32 billion? It could. Look, don't get me wrong, it could happen, and, and acquisitions are not up, right? Uh, dollars are up. So I just... My point that is under-discussed is we are doing these, these post-billion dollar deals like, like candy, and at least in the, in the, in the beat- in the bubble of '21, there were PE exits. There were many exits out there. We have outstripped any current ability for these companies to have any exit. So you are going all in on the IPO and not... without any worry, rhyme, or reason. And I think a- so many folks sub-Anthropic are gonna get their arses burned because they'll end up in the dead zone. They'll have great companies without great IPOs and zero M&A opportunities. And I'm not saying don't do it. I want my markups on paper. I, I gotta do an LP announcement this week. I want my, my, uh, my, my TVPI and my IRR to look good, but it's also terrible. It's terrible to raise north of a billion. It's terrible 'cause you just outstri- they're just this... They're, they're not... You know, Salesforce and, and Amaz- I mean, Groq is great, but a lot of this stuff is not Groq.

   16. RORory O’Driscoll1:09:21

       [sighs] Agree with everything you're saying, and what's hard about you saying it is that the strategy that has worked has been precisely the strategy of doing those rounds above a billion and getting the round beyond it. And, but you're right. It, it's all predicated on being able to exit these companies in an IPO. And I will say, ju- just to remind you, you can imagine a world of IPOs where some of these companies exit, but if the last rounds don't have a block, it's not necessarily gonna be above the last rounds. There are some awesome AI applications companies where you kind of go, "I totally see how that's worth $5 billion in three years based on fundamentals, and right now it's valued at 10. And three years from now, I could contemplate it going public at $5 billion." And you kind of go, that last round of 10 is gonna have to convert and take 50 cents on the dollars unless it has a meaningful block, in which case it will get more of the company.

   17. JLJason Lemkin1:10:12

       Yeah, for sure. I just worry there's some ratio, Rory, you can name it, but there's some ratio of potential acquirers real- divided by unicorns, and I think we're at the lowest ratio of our careers.

   18. RORory O’Driscoll1:10:23

       Yeah, no, absolutely.

   19. JLJason Lemkin1:10:24

       The lowest ratio of potential acquirers divided by unicorn, unicorn plus, up to decacorn, uh, they're just not there. We've lost all of PE, and NVIDIA isn't buying 100 companies. Microsoft is not buying 100 companies.

   20. HSHarry Stebbings1:10:37

       So what is the subsequent thought then, Jason? Sell aggressively into secondary markets which are more liquid than ever? Like-

   21. JLJason Lemkin1:10:42

       Well, probably-

   22. HSHarry Stebbings1:10:43

       ... help me understand

   23. JLJason Lemkin1:10:43

       ... for early-stage investors, sure. Se- se- sell while the... That's the Hopin lesson. I know you love to talk about it, Harry. Uh, maybe that's the lesson. Um-

   24. RORory O’Driscoll1:10:50

       I don't think it is. Uh, can I just push? I, I don't want... Actually, I'm gonna... I don't want to use the Hopin example because then people will... 'Cause I actually think it, I'm gonna make it a more interesting discussion. 'Cause when you do Hopin, people go, "Well, my company's not Hopin." Um, no pun intended. I think you're saying even for your fucking great com- excuse my language, great companies, where you know in the end they're, they're not gonna be Hopin, they're not gonna be a, you know, vanish in a puff of blue smoke, you're still right, which is y- those last rounds might be at prices you'll never see again, and what should you do as a seed investor? I mean, what would you do if a company where you invested at 50, you thought it was worth... it could be an M&A at 2 billion at some point in time, and suddenly you get a round at 5 billion of new money and there's a secondary opportunity. You're a starter for 10. What do you advise?

   25. JLJason Lemkin1:11:36

       Yeah. M- and, and listen, maybe down, maybe just as we're now okay with down IPOs, like we're okay, it's just mathematically true-

   26. RORory O’Driscoll1:11:42

       Yeah, we are

   27. JLJason Lemkin1:11:43

       ... maybe we'll all be chill with down M&As and all these w- folks raising at nine and ten can sell for one or two in a few years and everyone will be happy. I'm just not so sure that they will, and I'm, I'm... But I'm more worried there's just not gonna be a lot, a lot of acquisitions. They're very specific. They're very specific to either we're desperately behind on AI or we need to jump forward years. That is a very narrow subset versus, uh, making sure accounting software at 5 billion is better for accountants. I believe that's a great market. I just don't believe the hyperscalers are gonna buy these companies.

   28. RORory O’Driscoll1:12:16

       No. And they... Yes, because by definition at the app layer, you're not getting the hyperscalers. And the odd thing is, actually, I just realized this for the first time, the odd thing is because of this story of eat the work, the TAM is meant to be larger. That's the whole point of these application platforms, and I believe it. But Jason, to your point, what it means is you are definitionally therefore the new company is larger in terms of value than the old company you're replacing, which means the old company can't afford to buy you.

   29. JLJason Lemkin1:12:44

       Yeah, no chance.

   30. RORory O’Driscoll1:12:45

       Right? If you're Harvey and you're worth 10 billion, and West... It's not really, it's worth more, but if, you know, the old practice management law software is only worth 2 billion, they're not gonna buy you, right? You've got... It's, it's basically it's win or die. To your point, I think you're exactly right because, uh, because these TAMs are bigger... Uh, uh, yeah, when the TAM becomes bigger, the new company has, gets marked up and has the more, has potential to be a bigger outcome. But what it means is once it gets marked-To that bigger outcome via late-stage round, it precludes the prior generation buying in. If I was running one of those prior generation companies, right? If I was the system of record, you, you need to be doing is buying the not marked up, you know, $500 million valuation company and getting something out there, right? But you can't aff- No matter how hard you try as the old generation legal software company, you can't afford Harvey at $10 billion. So it doesn't matter what you want. Y- They can't-- You can't afford to buy them, and they can't afford to sell to you. I think you're exactly right, Jason. It's kind of structural.

Episode duration: 1:19:18