The Twenty Minute VCWill Open-Source Threaten Anthropic's Business & Do Margins Matter in a World of AI | Matt Murphy
EVERY SPOKEN WORD
65 min read · 13,423 words- 0:00 – 1:21
Intro
- MMMatt Murphy
I think the foundation models, let's say specifically Anthropic, have such special models. This can be hard for somebody to just kinda say, "I've used open source with my data." It's going to be functional and positive for some amount of what you're doing, but I just don't think it can be powerful enough to really displace-
- HSHarry Stebbings
Now, joining me in the hot seat today, we have someone I've known for 10 years, Matt Murphy, partner at Menlo. He's the guy that led the deal into Anthropic, but then he follows it up with, check this out, investing in Lovable and then investing in Lagora. I mean, this man is just hitting banger after banger. Matt is on a tear right now, almost more than any other venture investor. And so it was an incredible opportunity to sit down with Matt. He's a dear friend, and this is honestly two friends having a great discussion. Ready to go? [upbeat rock music] Matt, I cannot believe it, dude. It's been, like, six or seven years since we did our last show, which worries me because I was, like, 23, and I just look back now and I go, "Harry, you knew nothing, my dear friend." And Matt was so wise and is so wise, but thank you for joining me once again. It's so good to see you, man.
- MMMatt Murphy
Like, it's great to be here. It's, it's, it's, it's taken me seven years to earn my way back onto the show now that you've become so
- 1:21 – 5:12
How Menlo Got Into Anthropic
- MMMatt Murphy
famous.
- HSHarry Stebbings
Oh my God, dude. Yeah, I mean, that's super kind of you, one, but hell have you earned your way back. Like, the last few years has just been ripper. And I wanted to start with a, a relatively obvious one, which is Anthropic. I think it's at the cornerstone of, of Menlo and of the last few years for you investing. Can you actually just tell me, how did it come to be? How did you get introduced?
- MMMatt Murphy
Yeah.
- HSHarry Stebbings
Was it obvious? How did the investment meetings go? Just, just take me to it.
- MMMatt Murphy
Yeah. Well, uh, he'll be mad if I don't give him a call-out, but, um, Anjaney, you know, Mittal, uh, was the one who introduced me. So Anj worked, uh, for me, with me at, uh, at, at Kleiner Perkins when I was there as a young kind of associate. But he has... He was so spiky at the time, so he's always kinda just been in the flow. We were talking about AI and he said, "Hey, Matt, you gotta meet Dario and Tom. This is the one company..." You know, uh, said, "Let's do it." Got on the phone with Dario and Tom the next day, and I, you know, I personally was like, "All right, I'm, I'm in." And I'll give you the kinda, like, the, the broader story, but there were part- there was part of it that was really easy and part of it that was hard, as you can imagine. So, you know, y- at the time you have, like, a $600 million venture fund. You kinda try to average $15 million into, into a company, and along comes a company that's, like, pre-revenue and, you know, uh, and wants a $4 billion plus valuation. Too early for our growth vehicle. Uh, where does, where does it kinda fit? But, you know, the easy part was, okay, OpenAI is absolutely ripping with ChatGPT taking off, but Dario was the creator of that within OpenAI, as you know. The reason why he left is because basically he's like, "OpenAI is doing too many things. This is the one. This is the one big opportunity." So you had that kind of, like, unique insight, knowledge, conviction around this opportunity. You meet him and he's just, like, this amazing technical thinker, researcher. A lot of the best researchers wanna work for someone like that because it, it kinda mirrors them. It's like that's, that's the leader they, they gravitate to. And then, you know, another easy part of it was they had, um, you know, they had basically... And it was pre-revenue, pre-launch of the model, but all the benchmarks you could see that they were kind of better or at the same level of performance as, as ChatGPT at the si- at the time, and they'd spent, like, I don't know, a 50th of the capital. So these compute multipliers, you're like, "All right, there's something special under the hood technically." And my partner Tim Tully, who was the CTO of Splunk, great, uh, thankfully, you know, part of the team we've built out here, had Tim to kinda dive in with Tom. All right, so that's all kinda like, look, this is a massive market. This, these markets are never dominated by one player. There's going to be an alternative. Who's better positioned to be the number two player than, than Anthropic? The hard part was what I mentioned, like, you know, "Wait, why are we doing this? It's like, uh, a, a $4 billion valuation, a venture fund. That's not what we're gonna... What we should be doing. What are LPs gonna say?" But fortunately, and grateful-
- HSHarry Stebbings
Did Dario set the price? Did he come into meetings being like, "Hey, the round is $4 billion"?
- MMMatt Murphy
I don't remember exactly that part of it. Um, but basically, you know, uh, if, if there was a mistake, and, and it's hard to look at this, uh, through the lens of having made any mistake, it's basically like, "Hey, look, the opportunity's there for you to lead." Um, but I'm like, "Well, you know, we can't really do this out of the growth vehicle. In the venture fund we can only do so much." So we said, "Hey, we want... We're all in. We wanna be part of the round." And I'm very grateful that I have a set of partners who are just like, "Look, let's just do this. Let's just get into this. This is one of the biggest waves. We've pivoted the firm to be all in, in AI, AI. Let's jump on this thing and see what happens." And that led to everything from there. But if I had a partnership that was more rigid, uh, around, "Hey, that doesn't fit," then this never would've happened, and we would've never gotten to the point where we led the next round and all of that. Um, but anyway, so that's, that's kinda the, the, the quick story
- 5:12 – 7:25
Ownership Doesn't Matter Anymore
- MMMatt Murphy
of it. Very fortuitous.
- HSHarry Stebbings
How big, how big a check did you write?
- MMMatt Murphy
Uh, the first, the, the first check was a little over 10. Um, and then, you know, the... So that was kind of the starter check because the average, like I said, you know, you try to kinda, in a venture fund, kinda have this kinda narrow window of what you invest. But then the next round is when we did the 500 plus SPV.
- HSHarry Stebbings
Let's just go back to that 10.
- MMMatt Murphy
Yeah.
- HSHarry Stebbings
10 at four. I would be sitting in your partnership going, "Well, let's just, like, outcome scenario plan this."
- MMMatt Murphy
Yeah.
- HSHarry Stebbings
If it's a f- $40 billion company or an $80 billion company, let's say you do 80, it's a 20 X. With dilution, traditional set is 50%, it's a 10 X. We're gonna turn the 10 into 100. Wow. Thanks for returning 12% of the fund, Matt. How did you escape that thinking and, and get to a-
- MMMatt Murphy
Well, well fir- well, first of all, I'm glad you weren't in my partners meeting. Um
- HSHarry Stebbings
[laughs]
- MMMatt Murphy
But, um, no, seriously, I mean, there, there was, there was that in the room. And, um, and, and at the same time, you know, I had a, a, you know, a couple other partners, and this is what you want. You wanna have partners that debate things, you listen to. But it's like, look, there's never going to be a perfect entry point into this market. If we wanted to be in this market, this was the way in. If we said, "Hey, look, this... We're just kinda priced out. We can't be in foundation models or neo labs of any kind," then okay, you, you, you sit on the sidelines. But we were like, "We have to be in this market. We're building the firm around AI, and this is absolutely the best company. So just don't overthink it and get in." And honestly, I think that's been really a hallmark of how we've operated. I, I think other firms can be... And not to throw any shade at anybody 'cause I have such great respect, but, you know, you kinda get into these situations where we have to own 15 or 20% ownership, or we don't do this and don't do that, and I think the new Menlo that I'm part of has shown extreme flexibility to just do what makes sense. Let's get in this great company because once you're in, hey, if it takes off, there's plenty of opportunity to put more capital in.
- HSHarry Stebbings
So do we think that ownership today is less relevant than it ever used to be, given outcome scenarios being so much larger than they ever used to be?
- 7:25 – 10:18
When Does Price Actually Matter?
- MMMatt Murphy
By far. I mean, look, if you can get ownership, it's magical because, you know, just i- if you own a lot and the company's worth a lot, that's gonna be great. But, you know, A, there's a lot, you know, more capital coming in, so it's hard to even maintain that, that kind of ownership. But we're in an outlier business right now, right? Like, I, I think for a long time, I mean, you know, I've been in the business for 25 years now. You know, you, you were kinda saying like, "Hey, great outcomes are 300 million, 500 million, a billion." Like, so you're like, "Hey, you have to own 20% to get a, to get 100 million or, or whatever." Like, no, that's not... Those, those are like... And I know you talk about it a lot on your, you know, uh, show with Roy and Jason, all that. That's, that's not how the game is being played anymore. It's, it's like you have to be in the big outliers to drive great returns, and you're better off being in them at a very small percent than owning a large percent of a company that exits for 3 to 500. Those just aren't gonna move the needle.
- HSHarry Stebbings
Is there a stage where price does matter for you?
- MMMatt Murphy
Well, I mean, we don't, you know, we, we, we announced our, our new funds, so we're not, you know, we're, we're pretty full stack. We can take big concentrated positions. Fortunately, we've got LPs who like to co-invest with us. But, you know, we don't have a $10 or $20 billion fund, nor do we aspire to have that. So there's some quantum of capital that's like, "Hey, that, that's for somebody else, the, the, the next, next round." But I don't, I don't know that it's as much of a valuation thing. I think it's more... 'Cause I would rather, you know, to be in the most amazing company. I would rather be in the knot.
- HSHarry Stebbings
Before we move to SPVs, new funds, you name it, I, I do just have to ask, in terms of, like, levels of dilution, with the increased outcome scenarios and increased outcome sizes, do you think we're just normalizing an entirely new level of dilution that's inherent within these companies, or is that exclusively for the frontier model companies?
- MMMatt Murphy
I think it's pretty rare, as you know, to find companies these days that don't end up raising a lot of capital that way outside of the, the frontier companies. And look anywhere in the AI stack, even the application companies. I mean, there's, there's part of it that companies are growing faster than ever, so they want the, the capital to, you know, really be able to play, play offense, and there's also kind of a part of this dynamic in the market right now where there's this signaling effect that every X months or a year, you know, you raise capital. That's, you know, employees wanna hear that to keep up with the labs and, you know, some of the retention. You know, you have to do more secondary. So there's just... The, the landscape is just very, very different than what I grew up with.
- HSHarry Stebbings
And what I grew up with. You're forgetting I have been doing this for 11 years now, my friend. I, I remember the days-
- MMMatt Murphy
You're even a veteran now.
- HSHarry Stebbings
I, I know. It's terrifying. Um, can I ask you, on the second round that you mentioned there where you're like, "Okay, we really sized up," how did you think about that one, and how did that come to be?
- 10:18 – 13:43
How Menlo Sized Up for the Second Anthropic Round
- MMMatt Murphy
I mean, like, if there was a playbook that I would love to repeat, uh, it was this. I mean, so we basically built a relationship, got into the company and said, "Look, we need to go all in Menlo style, you know, our recruiting team, our, uh, you know, our BD team, and just get close to the, the founding team. See, build relationships, see how we can add value." And there's a lot of examples of that that we probably don't have time to go into. But we got to know them, and we got to see them operate, right? So let's say that we in... the round closed in something like March. The model was launched in April, so you start at zero. And then sometime, you know, through the year, you know, you'd see them adding 10 this month, eight the next, so the, the revenue started to build. In parallel with that, you had Amazon and Google come in both with the big investments as well as technical partnerships around Bedrock, Vertex, uh, and then distribution relationships. So you're like, okay, so let's, let's take a look at from when we invested to now. Um, they've got a capital partner, a distribution partner, a technical partner, two of the biggest in the world. They're alternative to OpenAI, who's kind of tied to One Cloud with Azure, so it's like, hey, this is the multi-cloud provider. And then you just saw this kind of revenue drumbeat start. But the seminal event was, uh, we held our LP meeting in, uh, in November, and we had an Anthropic executive, uh, named Nirav, who's kind of a, a jack of all trades at, a very valuable one, at Anthropic come and present, and he blew everyone away. Like, after the meeting, our LPs were like, "This is crazy. Like, this company is amazing." Even my partners were like, "Uh, this is so amazing that we're in this company." It was just the description of, like, the power of the models and how it was impacting so many applications already, human behavior, all that. Um, and we had had a bunch of inbound leading up to that. So we literally came out of that meeting and said, "All right, we've gotta do this. We've gotta figure out a way to lead the round." And two weeks later we signed a term sheet. We, you know, uh, aggregated all the kinda demand from RLPs and folks we knew, and, you know, the rest is kinda history.
- HSHarry Stebbings
Are we in a new venture world of SPV usage? Um, w- we do them for very late-stage opportunities, too. How do you think about that and when to go aggressive on the SPV strategy and when it moves out of fund strategy?
- MMMatt Murphy
Yeah, I mean, I think it's really, like, what, what guardrails or kinda parameters have you set on your fund in terms of how much you want to put in, in, in a fund. So if, you know, you've got a billion-dollar fund, you might say, "Hey, we only want $100 million max in a company, uh, but, uh, look, we, we feel su- we- maybe we did 50 in the first round, and we wanna do 100 in the next round, so we can't put it all in the main vehicle. So let's do, let's do an SPV." So I don't think you have to do it. Um, I think oftentimes it's, it's, it's valuable to, to be able to do it because you can play offense if you need to right, uh, more capital, uh, to, to win a round. And, and obviously it can be helpful to a company that you come, you come with more strength. You know, I mean, there's, there's a side of it where you could say, like, "Well, look, it's, it's kind of a, you know, extra economics at times to, to, to go outside your, you know, your fund mandate and, and be more full stack and not let somebody else take it." But I think for the most part for us it's, it's just like let's kinda keep our fund size at a level that we think makes sense for the environment, and if a, if a amount of capital per company goes outside that, then let's bring in our LPs.
- 13:43 – 22:00
When to Take Money Off the Table
- HSHarry Stebbings
Can I ask you, along the way, how do you think about when is the right time to take money off the table?
- MMMatt Murphy
It's tough because in this environment obviously the markups are happening so quickly, and, you know, you're like, "Well, relative to when we invested, this multiple's amazing." But it's complicated, right? Like, I, I think A, if you're a believer, I think more than ever we're in an environment where your outliers, your winners will compound and drive fund returns. So those are certainly not the ones you wanna sell from. Now, you know, you can argue you might have some LPs, some, you know, if it's an older fund, some dynamics like that where you wanna give, uh, liquidity, but that would be, like, maybe you take 10, 20% off the table. But for the most part, uh, if we're in a winner, we wanna run, we want it to run, we wanna put in more capital. Um, and then at some point, you know, you feel like the company's maturing or maybe, maybe they're waiting a super long time to go public, and you'd like to, say, take some, you know, chips off the table. But it's not, it's not something we spend a lot of time on. We spend more time obviously on hopefully making great investments and then being a great partner to those companies as they scale in all ways, including capital.
- HSHarry Stebbings
Can I ask you, when was the most nervous time along the last 18 months for you as an Anthropic shareholder? It looks... It's amazing today. It's a great state of play today. Um-
- MMMatt Murphy
Yeah
- HSHarry Stebbings
... when were you like, "Oof"?
- MMMatt Murphy
Yeah, I mean, I, I'd say, like, well, um, maybe I'll go back even... I'll expand your, your window to 24 months. Like, you know, when we did the SPV, it wasn't... Anthropic wasn't a household name yet. Like, we saw everything going on and, like, how amazing this company was, but from the outside it wasn't quite as obvious. So, you know, even to get, you know, the whole syndicate that we pulled together, and, uh, I had to give my friend Ravi and Byron a call to bring them into the round as well, um, which all worked out. Um, but it wasn't, um... It, it, it was just, that was very nerve-wracking because Menlo had never done an SPV before.
- HSHarry Stebbings
This was your first SPV?
- MMMatt Murphy
It just happened to be over 500 million. So you can imagine, like, what I never... And by the way, it gives me great empathy for, uh, entrepreneurs, which I have anyway, 'cause I understand how hard this is. But, like, being on the front lines, having to be the person kind of, you know, capital raising, talking to these investors, getting, you know, an occasional turn-down, um, having to answer second and third-order questions, sometimes annoying, no offense to anybody, um, that's tough, man. That's really tough. So that was, that was my most nerve-wracking, but at the same time, coming out the other side of it, the most exhilarating, and obviously the, uh, all that, all that work was, uh, very worth it. Um, I'll run through a couple other. The Deep, the DeepSeek moment, you know, that was like, "Oh, my God, what's happened?" And now you can't even remember that. Uh, then there was the, then there was the Dao, the Dao moment. And, uh, you know, it's just like this environment is so dynamic, right? Like, everything's moving so quickly that there's just, like, a new challenge and opportunity, uh, both crisis and opportunity seemingly every six months or so.
- HSHarry Stebbings
It's a weird thing. You know, Marc Andreessen says, you know, often ventures about, you know, the VC firm lending their brand to legitimize the company, and then there's a strange moment when the company and founder lend their brand to legitimize the VC firm. [laughs] And it's that weird transition of power between them. When there were, like, the SPV stuff and then, like, you know, Dario constraining, was that a nerve-wracking time? I imagine, like, Dario cranking the whip on SPVs and who can move what. I'd slightly shit myself, if I'm honest, Matt. [laughs]
- MMMatt Murphy
Oh, you, you mean, you mean the thing that came out recently around people doing SPVs, not my SPV.
- HSHarry Stebbings
Yeah.
- MMMatt Murphy
Yeah. 'Cause that was, that was fully supported in partnership with the company, just to be clear. We partnered extremely well. It was great. Um, I think the problem is, you know, it's secondary markets, SPVs, they've just become too annoying and aggravating in the market to, to founders, and someone else is basically like, "I don't want you marketing my stock. My... And I, I wanna be, I wanna be the one who's figuring out who's in the cap table, who's an investor." And, you know, I think that, um, there were a lot of people You know, claiming they had access, who would kind of round up, uh, people to invest in their SPV, and then they would try to go get access. There's just a lot of bad actors out there and, and so I think it needed a bit of a, you know, a salvo across the bow to just kinda be like, "Hey, um, settle down everybody, because if you're not directly in our, you know, uh, in partnership with us, uh, you shouldn't believe this is real."
- HSHarry Stebbings
Oh, my God, dude, I saw, like, SPVs for SpaceX on Instagram Reels, and at that point I knew that it was a heated market. I always normally say when you're a taxi driver, we call them cabbies, when your cab driver in London starts talking about the price of Bitcoin-
- MMMatt Murphy
Yeah
- HSHarry Stebbings
... you know it's time to sell. Um-
- MMMatt Murphy
Yeah
- HSHarry Stebbings
... Anthropic has been incredible for, for Menlo and for you, and it's been a massive brand builder in AI, positioning you as one of the leading firms. Another that you've done is Lovable. You know, we've spoken about it at length, you know, off scene, uh, off show. You did the round at 6.2.
- MMMatt Murphy
Mm-hmm.
- HSHarry Stebbings
C- can I ask, when you do a check like, like that in this specific case, what do you, like, underwrite Lovable to? How do you think about what it can be?
- MMMatt Murphy
Yeah. Well, I mean, you know, that was another wild story where you see a company go from zero to something like 300 million in a year. I think we intercepted them around... Well, we, we, we, we kinda got, tried to get in when they were around 30, 30 of ERA, but we, the round we did was around 150. So, I mean, like, you're, you're kind of looking at, like, this is a phenomenon. So there's, there's numbers and then there's the market and then there's the founder, right? So the numbers were just, like, ripping and you're like, "All right, so this company is gonna go from zero to 300 in a year, even if you assume it decelerates to whatever, you know, a 3X growth rate, that's 300 to a billion." And I'm talking about when we first made the investment. And then, you know, you compound out from there and you're like, "How..." I mean, never s- just, uh, certainly in the first, uh, let's say 23 years of my venture career, you never saw anything like that. Now, there's a few more examples, but clearly this was an outlier even amongst outliers. I think the thing that we also really gravitated to here, aside from, like, you know, Anton, he's very visionary. He's kind of like the, he's kinda the voice of the, of the category. I think he's got some very unique and distinctive plans about why, you know, this kind of 99% of people, as he likes to call it, everybody who was never a coder and programmer, but every g- making everyone become creators. So you had, like, this massive vision. We felt like an iconic, uh, entrepreneur, and then, like, crazy numbers that you could, you know, you could do whatever model you wanted, and you're like, "Look, if this thing keeps compounding and this is really the company that we believe, this will be one of the most valuable companies of all time." So, you know, there's-
- HSHarry Stebbings
Do marg- do mar- do margins matter anymore?
- MMMatt Murphy
They do a lot and, and, you know, what we're, we're in this kind of like, uh, tricky period as investors where right now a lot of great companies have, uh, low margins and, you know, let's say, like, 20% to 30% margins and, you know, they've all, they, they all probably have a path to get to 60 or 70. You know, a lot of companies, just because the cost of compute and inference, it's harder to say you're gonna be an 80, 90% gross margin company anymore. But, you know, uh, great companies are, you know, 60, 70% gross margin. But, you know, the path to get there is like, "Hey, I'm gonna do some optimizations," uh, you know, "I don't, I'm not completely tied to, you know, uh, to, to, to inference around, you know, my cost structure, and I'm probably going to do something complementary to the, to the leading labs with my own data and build a model that kinda gets my gross margin up." So you're intercepting a lot of these hypergrowth companies with margins that are atypical for what we usually invest in, and you're trying to figure out which ones actually have a credible plan to get to a great margin structure. And for what it's worth, I think Lovable's one of those.
- HSHarry Stebbings
The margin structure
- 22:00 – 29:41
Why Menlo Raised Only $3B When They Could Have Raised Much More
- HSHarry Stebbings
of Lovable will be changed greatly with the utilization of open source, which is obviously much cheaper. Um, that goes against one of the other investments being in Anthropic. Do, do you see them as, like, hedges against each other? Do you worry about the progression of open source, given how much can be done now with open source? I'm intrigued how you think about that.
- MMMatt Murphy
Yeah. I mean, first of all, I think, like, uh, Anthropic is a fantastic partner to Lovable and vice versa. Um, but, like, this market is so big, so there's really two dimensions to that. One, you know, uh, people, some people worry about Lovable and Anthropic tripping over each other. I think Love- Anthropic always comes to things a little more like the technical user, and Lovable comes at it more from the, the lay user, and sure, there's probably some overlap in the middle, but I think there's plenty of big space, uh, for each one to do extremely well and, you know, look, Cursor was about as cr- in the crosshairs of Anthropic as possible, and they, I think they still had a pretty darn, darn good outcome. Um, but the whole open source topic, look, it's, it's like any market. When you, you start off in a certain way and it's just like, "Look, I wanna get something running. I, I wanna get it out there and, and, uh, just prove I've got, you know, a, a cool product." And so you just default to the simplest thing. Over time, you do more optimizations, right? And so I'm also on the board of OpenRouter, a company that you all talk about quite a bit, and I love hearing you guys mention them. And, and, you know, that's, that's kind of like this, the North Star there is like, hey, you ought to have some intelligent layer that intercepts an API call from any application and basically says, "What's the best model for me?" Like, across whatever efficiency frontier I'm trying to optimize for. Is it, is it price? Is it reasoning? Uh, or is it performance? You know, latency, things like that. And it's scale, like, that's the kind of stuff you need, uh, as a company to manage and optimize your business. And so wave one of AI is like, "Let's just get, let's just get it going." Wave two is like, "Let's get a lot more sophisticated about what we use and when and how."
- HSHarry Stebbings
If you're getting sophisticated about what you use, when, and how, cost optimization comes into it, so I, I do just wonder, like- If open source can do 96% of enterprise workflows, does that not dramatically reduce the TAM of frontier model companies? And maybe we're so early that it's still $10 trillion for a TAM, but, like, maybe Anthropic and OpenAI solve cancer and climate change, [laughs] and your email tagging is done by open source. Is that how you think?
- MMMatt Murphy
No. I, I think, um, I think the foundation models, [clears throat] especially, well, let's say specifically Anthropic, um, have such special models, uh, performant intelligent models. It's gonna be hard for somebody to just kinda say, "I've used open source with my data." It's going to be functional and positive for some amount of what you're doing, but I just don't think it can be powerful enough to really, you know, displace it. Um, so I'm, I'm in the mindset generally would be like you're gonna use multiple models, let's say if you're someone, pick a, pick a, pick a company that maybe you use 50% Anthropic and 50% open source in your own model. I don't think it goes to that n- you know, 90... Well, you were talking more cost, but I don't think it goes to that 96%, because what's happening is companies see this. Like, "Yes, I can get lower cost, but if I use Anthropic, it actually increases my customer retention. I, I generate more revenue. I, I get users to engage with the platform more." And that is what the data's suggesting now with a lot of application companies, but there's certain API calls that just don't need that level of functionality. And frankly, it's, it's good for everybody. It keeps, um, Anthropic on their toes to keep innovating. Most innovative company around, so they'll keep innovating, not, not stay still. And, and then, and then startups innovate in their own way with open source.
- HSHarry Stebbings
Do you think the costs have to come down for AI? Sam Altman said very clearly that they are doing cheaper and cheaper, uh, uh, kind of tokens and, and reducing the cost significantly. Does AI have to get significantly cheaper, and will we see this cost curve come down massively?
- MMMatt Murphy
Well, I mean, I think it's like, like any product, you know, the, you can argue that the cheaper it is, the more it kind of opens up the market because it's, uh, you, you can, you can do more for less and that all, you know, that, that, those economic curves always spark, um, activity. But, you know, I mean, look, even in within the Anthropic family, right, like you- you've got Sonnet, you've got Opus, you've got, uh, Fable. So I mean, par- even the la- even Anthropic itself is innovating around, you know, hey, it's not one size fits all. So I think, you know, you're going to have the combination of something like that, a family of models from Anthropic, and then a set of open source models, and things that you train with your own data, and you're gonna look across that whole tapestry and say, "Hey, I'm, I'm using 50% this, 30% that, 20% this." And that's, those are the kind of optimizizations that happen at scale, and that's the stage or market that I think we're just entering into, which makes it a lot more fascinating, frankly, 'cause there's going to be so many kind of second- and third-order companies that, that spike and take off versus, you know, the whole market being concentrated.
- HSHarry Stebbings
I'm incredibly naive, and so I, I don't understand something, which is, like, we see, um, you know, obviously OpenAI have Halipino, reportedly Anthropic working with Samsung to create their own chips, some, um, DeepSeek are creating their own chips, uh, Meta creating their own chips. Do you have to be full stack today, do you think? And is that why we're seeing everyone move into the chip layer?
- MMMatt Murphy
Well, I think, I think it goes back to, you know, what I said about, you know, optimizations. I mean, you know, uh, Google with their TPUs a long, a long time ago, Amazon with their Trainiums. I mean, just at some scale you look at your bill and you're like, "I'm paying somebody way too much," you know? And, and you say, "Well, I'm willing to pay that for some part of, you know, my cogs because that's just so much better and different, and I can't compete with that." But maybe there's some other types of activities they're doing that I can really leverage my own technology and bring my cost structure down. And, you know, I mean, uh, the chip business is hard. Good luck wading into that, right? You know, it's, um, it takes a special team, especially if you're going to compete with Jensen and a lot of other, uh, options out there right now. But, you know, these companies are smart and they're looking at, like, "Hey, look, there's some ve- very specific thing that we do in our model, that if we had a chip that just behaved like this from a, a, you know, I don't know, from a m- memory cache, whatever, like, it would make us so much better." And I'm sure for some percentage of the workload, whether it's in training or inference, that could be a big deal. So that's probably worth the swing, um, you know, if you're, if you're a $100 billion revenue company.
- HSHarry Stebbings
When we think about kind of full stack versus not being full stack, you know, I, I've had the founders of Nebius on the show. I just had Lynn from Fireworks on the show today. And, and Nebius said they were moving into the OpenRouter business and would actively take it. Um, and then I [laughs] asked Lynn this morning, "Is there value in it?" And she was like, "No." [laughs] Now, I-
- MMMatt Murphy
In the routing, in the routing business?
- HSHarry Stebbings
Yeah. Why do you think there is? What, what am I missing?
- MMMatt Murphy
Well, I don't... Like, first of all, what OpenRouter has is, like, they've just got this groundswell of organic activity with developers who come to them 'cause they, they trust them. They know it's a great inference marketplace. They love their intelligence. Like, I don't think a ton of developers flock to Nebius. Like, if I'm a developer, I don't wake up and be like, "Hey," uh, you know. So they're, they're kind of in the wrong part of the conversation.
- 29:41 – 31:05
OpenRouter: Why Matt Thinks It's Already a Beast
- MMMatt Murphy
But if you're on Nebius and they're your underlying provider and they provide routing, okay, fine, you know? But if you're, if you're a company that's, that's building and thinking about multiple cloud platforms and you wanna kind of even obfuscate that, then, you know, OpenRouter's a great solution.
- HSHarry Stebbings
How big is the routing business gonna be, do you think? Like, how big could OpenRouter be? Is that, is that a $50 billion business?
- MMMatt Murphy
Um, I mean, their trajectory is insane. I mean, I, you know, I forget what they've publicly announced, um, so I better not say anything. But like this, this company, uh, it wildly profitable. Um, and, you know, uh, at, at a scale that would probably shock most people before this whole open source model, alternative model, model optimation- optimization market really takes off. I feel like we're just on the cusp of it, and this company is already a beast. So I have, uh, massive and very high hopes.
- HSHarry Stebbings
And we mentioned Lovable earlier. Um, in terms of like other application [laughs] companies that you, you are in, in a very meaningful, another that we have together is Legora.
- MMMatt Murphy
Yeah.
- HSHarry Stebbings
I love Max, think the world of him. What an absolute beast. Uh, remind me, what, what round did you do for Legora? You did the-
- 31:05 – 34:33
The Legora Investment: Is Anthropic a Threat?
- MMMatt Murphy
The round that just happened, you know, about, uh, six months ago.
- HSHarry Stebbings
Okay. And what size chat did you do?
- MMMatt Murphy
Uh, it was like, uh, it was kinda sub 50, but in that range.
- HSHarry Stebbings
Okay. And so you were like, "Great, let's get a foothold in here, and we can put more in with time and partner more closely with this business." [laughs]
- MMMatt Murphy
Exactly.
- HSHarry Stebbings
Everyone tells me, and again, you know, you can be like, "Harry, for goodness sake, it's like Friday morning. I wanted a chilled interview. You can put me back down." But everyone te- tells me, "Oh, Anthropic's the real threat." And I'm like, "Are you kidding me?" This is like a heavy GTM business focused on building relationships with lawyers, doing legal deployments with G... I mean, it's, it's completely different. How do you answer that statement when everyone's like, "Well, Anthropic Legal's gonna beat them"?
- MMMatt Murphy
Yeah. Well, first of all, Max, Max is special, as you know. Part of my diligence was watching, uh, you know, your, your interview with him. But he, he's, he's just an execution machine and, uh, just a lovely person to be with. I think, you know, there's always... For a while here, we're in this period of, for a long time it felt cleaner, like, hey, there's a model and there's an API, and then there's application companies. And, and obviously that's kind of gotten blurrier and blurrier, and there's a period a couple months ago, it's like SaaSpocalypse, you know, everything's going away. And I think some of, a lot of that has kind of faded, and now we're kinda sorting out like, okay, well, which, which applications really deserve to live and why? And I think, you know, not speaking for Anthropic, but my, my view is they're kinda like, look, if the model just kinda does something and your application isn't distinctive enough, the workflow, the value you've built on top of it, and the model takes that market away, well, then it probably wasn't that, you know, defensible anyway. I think in the case of Max and Legora, you know, they have lawyers and FDs getting in there and understanding these, these workflows. Um, it's kinda like crosses organizational boundaries. Like, I think it's very hard for a model just to come in and be like, "Oh, you know, there's multiple constituents here," 'cause you've got corporate lawyers, uh, law firms, and when you're on a case, you've got a client, you know, multiple law firms. So it's, it's just an, uh... it's not quite an N-squared problem, but it's complicated, and you need workflows that understand that. You need context even within your own law firm. So I think there's just a lot of... I know there's a lot of value to, to build and create on top of all that, and, um, love the way they're executing.
- HSHarry Stebbings
Does Legora have to succeed outside of legal for it to justify the valuations that it will want to raise at? You see Harvey-
- MMMatt Murphy
Yeah
- HSHarry Stebbings
... talk about moving into compliance and tax and duh, duh, duh, duh. And I, candidly, I, I think Legora will too, but it's 'cause they... If you wanna raise it $10 billion, cool, but like there's a price at which, you know, you need more than just legal.
- MMMatt Murphy
Yeah. I mean, I... Look, Max, I don't... I guess maybe he hasn't been as public about it, but absolutely that's part of the strategy. You know, when we got to know each other and we were thinking about the round and justifying not only the current round and hopefully, you know, participation in the future round and working with the company, the vision is much bigger than that. It's not have to, it's just, it's just, you know, you've built this base platform that happens to be really, really good at understanding complicated, you know, service, uh, you know, uh, sophisticated service teams, you know, legal, tax, um, you know, accounting, all this. Why wouldn't you expand into that? And then there's probably another leg of the stool out there yet that we haven't even seen, uh, that we'll be talking about maybe next time I'm on.
- 34:33 – 37:18
Series A Is the Worst Insertion Point Right Now
- HSHarry Stebbings
Can I ask? I think Series A is the worst place to be today, and, and my partners always hate me for this 'cause [laughs] all Series A founders are like, "Great, we won't go and see them." Uh [laughs] , but it's the worst place to be. You have like $1 to $3 million in revenue and you're at 200X ARR, $2 to $400 million with little PMF. Do you agree that right now, insertion point-wise, Series A is the hardest, and that's why we're seeing everyone flock to growth and pre-seed? And, and how do you think about that, having seen so many cycles?
- MMMatt Murphy
Yeah, I mean, it, it, it's tough. I mean, you nailed it. But I mean, what we're doing is a, a barbell strategy right now, right? So it's like, hey, when, when, when is a certain company in a category establish themselves as a leader? Because, you know, in that kinda 1 to 3, you may n- not even know who the competitors are yet, right? And you're going to pay as if they're going to be the winner because that's just the way the valuations are in that kinda, let's say, 1 to 10 range. So we've moved our... You know, we have a fund called Inflection Fund, and we always called it early growth. The real- early growth to us meant like $3 to $10 million of ARR. The reality is, like for the good companies, that window used to last like a year, year and a half. Now it lasts like a week, or in the case of Max and Legora, that's what they do in a day. So, uh, you know, like it's just... That, that was a hard strategy to keep pursuing. So that's kinda like the Menlo Inflection classic kind of, uh, investment. But really it's been more to these outliers where they've completely, you know, broken out somewhere above 10 or... And that's kinda like market specific, where you feel like, um, they've been anointed the, the winner or you believe they will be. But to your specific question around Series A, yeah, that's the other side of the barbell. And so what we've done is gone, you know, much earlier, so spending more time. We've have the specific seed strategy where three partners can, you know, write up to an $8 million check like on the spot. That used to... That number used to be three, so we kind of expanded the aperture and the flexibility for the team to move quickly. But the, the hard part in A right now is that C day, the, the time between those two things has really compressed. And if you really look at, like, the, the data points between those two rounds, like, okay, so they kinda built more of the product. Uh, they kinda have, like, five POCs or maybe they had five POCs, and now they have a million of ARR. And you're like, "I know anybody can do that." Not anybody. I don't wanna oversimplify. But it's not really that much of a signal, and yet the valuation goes from 50 to, you know, to 200 or something like that. So that's, so that's the hard part. So we, we've really moved earlier, um, you know, kind of the, the pr- I wouldn't say pre-seed, but more like that, that, that seed motion has become much more prominent for us. Get in early, especially, you know, too, a lot of these technical projects.
- 37:18 – 43:25
The Barbell Strategy: Go Earlier and Go Bigger, Skip the Middle
- MMMatt Murphy
We have a very specific r- strategy around Neo labs too. We're in about seven of them. Um, but we're not going in with, like, 200 million. We're going in where we can get ownership early or be part of something that we think ultimately could be a winner and, and, and, and pile in. So we've, we've adapted to the environment with a bunch of strategies that allows us to pursue this barbell, uh, on the later stage and getting even earlier on the seed stage.
- HSHarry Stebbings
I think one of the worst performing groups in terms of venture in this vintage will actually be the small s- boutique seed funds, which is what every single LP that you speak to today, Matt, wants. Every LP, this is the funniest thing. Every LP wants San Francisco specific seed fund only under 100 million, and I think this will be the worst performing category of venture in this vintage because firms like you and Founders Fund and Benchmark and Sequoia and Accel, and y- k- list goes on and on, are so effective with a very good seed product.
- MMMatt Murphy
Yeah.
- HSHarry Stebbings
That it ... If you're a $50 million seed fund and you're writing $2 million checks, dude, y-
- MMMatt Murphy
Yeah
- HSHarry Stebbings
... I, I'm too, I'm too big to be friendly and I'm too small to lead.
- MMMatt Murphy
Yeah.
- HSHarry Stebbings
Do you agree, or would you say I'm wrong?
- MMMatt Murphy
Yeah, no. I mean, look, I, I think the biggest thing that's changed from the time, you know, my, for my early days in the business, but for a long time, is people used to have their swim lanes. And now more and more everyone's full stack, including our part- our good friends down at Benchmark adding a, adding a growth vehicle, right? Um, but it's ... And then everyone used to make this argument in the seed world like, "Oh, there's negative signaling if you let an institution in, in there," and I think that's kind of out the window as well. Because for the right companies, like, everybody's getting preempted and the rounds are bigger. Maybe we're back to, you know, more collaborative rounds 'cause they're bigger. Everyone used to be like, "Well, I have to have the whole round," and now you see a lot more syndication. But this whole notion of swim lanes is gone, you know? And that's just the, the times we're in.
- HSHarry Stebbings
The syndication element's actually nicer I find.
- MMMatt Murphy
Yeah.
- HSHarry Stebbings
It's nicer to be able to be more collaborative. [laughs] I like that-
- MMMatt Murphy
I agree
- HSHarry Stebbings
... a lot more.
- MMMatt Murphy
I mean, believe me, for the first, uh, 10, 15 years of my career, every Series A you led you would bring in another kinda top-tier firm alongside you, and the view was like, "Look, we're gonna, we're gonna work more effectively together. We're gonna be better helping this entrepreneur grow in scale." And then for 10 years it became no, no, everything has to be one investor. And some of that's obviously a function of, of ownership, but, uh, I like the syndication part.
- HSHarry Stebbings
Totally. When we talk about seed funds of that size being challenging, Series A being a difficult insertion point to stay in and the barbell approach, the $3 billion fund size, we, we talked about it in the show with Rory and Jason. Um, a- a- a- and we didn't really get it in the nicest way. You've got Anthropic, you've got Lovable, you've got Legora, you got OpenRouter, you got Fireworks, you got ... The list goes on and on and on of great companies. You could raise way more. Why did you raise three, and is the future of venture not much bigger platforms like GC and LightSpeed and all the big names we know so well?
- MMMatt Murphy
When you take on more capital, like, you ... There's implications of that in terms of how you run the firm, culture, how many people you have. And we love to be a relatively small and mighty machine with, you know, roughly, let's say, 12 partners and a great set of, you know, principals, associates, things like that, that make us better and stronger. But, like, when you go full full stack and you have, like, five different teams, you start doing sector, like, everybody's kind of out for a pass and sometimes, I've seen this at other places, where you feel like, well, I could do whatever. I could do great things, but, but I can't really index on this small group of people. There's too many. The, if one group doesn't do as well, then they kinda drag down, you know, how this, this other group. So it kinda leads to a bit of, um, less, less feeling of, like, alignment, uh, agency, collaboration together. And that's what we've really wanted to, to keep at Menlo. And despite having two funds and kinda two ICs, we have a very fluid, uh, amount of work across those two groups where partners from the venture fund can lead in a f- uh, investments in our, in our growth fund, et cetera. So it's really more like how do we want Menlo to be to meet the market? Um, how do we wanna run internally? How do we wanna keep our team relatively small with great people and not feel like we're, you know, more, more a company but we still really are a firm?
- HSHarry Stebbings
Dude, I'm just a humble British podcaster. We don't talk about scale here, okay? We're, we're just, we're, we're everyone's friend. Um-
- MMMatt Murphy
Your firm, your firm's not so tiny, my friend.
- HSHarry Stebbings
[laughs] Um, but, uh, my question there actually is, you know, I know Josh in Thrive very well, dear friend, and he's always said to me that, you know, people have a lot more plasticity investing across the stage than, than one thinks. Do you think people are like, "Oh, they're a growth investor" or do you think people do have that plasticity to move across stage and a great seed investor can be a great growth investor?
- MMMatt Murphy
I think you, I think you're best off if people pick a, uh ... I'll use the word swim lane again, meaning like, hey, you ... It's just hard to cover everything, right? Especially in seed. Like How am I supposed to be wandering around, you know, Stanford labs, meeting with researchers, and also chasing the, the 20 best growth potential investments in the world? It's just, it's just too much. And I think the pattern recognition, the, the density of the work that you apply to a certain area makes you better. And so that's roughly how we've split our team is, you know, uh, early stage team, outlier, you know, growth kinda companies, and everybody really focused. But if something comes up that's a great fit for somebody across the fund vehicles, then fine, there's fluidity. But I really do feel like you're best off by being super, super focused with, let's say, 80% of your time.
- 43:25 – 54:59
Can a Great Seed Investor Also Be a Great Growth Investor?
- HSHarry Stebbings
Totally understand that rationale. Um, but can you believe in the more-
- MMMatt Murphy
But like even when they're like... Think about sector-wise, too. You know, all of a sudden, um, you know, um, uh, processors, G- TPUs, GPUs are hot, right? And then you've got defense tech, it's hot, and everybody's kinda rushing in. You can't go in there and just kinda spearfish one investment that you run into and feel like you've got the expertise. You need to understand that landscape. You need to understand the entrepreneurs. You need to understand the, the buy side. And if you haven't really worked in a semiconductor company before, which I did, that's where I started, you know, my, my career at a startup before I joined Founders Perkins, it's, it's so hard. Um, you know, take, can take two, three years to get the right chip out. You think you got a design win, it evaporates. Very, very hard.
- HSHarry Stebbings
What about Ari Vishria and Steve Vassallo with Cerebras? I mean, they directly did a spearfish on this one company.
- MMMatt Murphy
All right. Well, I've, I've, I've talked to Eric about this, and by the way, you know, uh, you had Bruce Dunlevie, like, one of, you know, epic semiconductor investor, and he's like, "All my partners..." And maybe you even said this on your show, but like, you know, all his partners told him not to do it. But like, I would, you know, every once in a while, as a firm, you can do something that's a little bit like, "There's something really special here. We might get a zero, but if this works, wow." And I'll... That's, you know, I'll take you back to our investment in, in Anthropic. Like, same thing. It's like, "This doesn't really fit. This isn't what we normally do. But wow, if this works," I mean, you got such a special founder in Dario and an amazing market, and if these guys become the two, and that was the goal at the time, this is gonna be wildly, um, successful. Now, did we ever realize they were gonna be the normal, number one? That was, like, a little, uh, twinkle in the eye. Um, but that's the upside you get by getting yourself in these companies.
- HSHarry Stebbings
Can I ask you just on geography, we've spoken about Lovable, we've spoken about Legora, two companies based in, obviously, Sweden, and then you have Anthropic and you sitting on the West Coast. How do you think about the centrality of power with AI moving back to San Francisco, all the brightest minds, all the best researchers are there being the common theory, with also a portfolio that's very global in terms of winners?
- MMMatt Murphy
Yeah. San Francisco was a weird place for a few years. You know, like, all the cool kids wanted to be in New York, and, and San Francisco felt a little bit like a, a, you know, a, a ghost town, very concentrated in SaaS, not, like, that much interesting stuff going on. And I love seeing it have its moj- have its mojo back, right? That's like, when these waves come, the Bay Area usually leads, and so it's just giving so much more energy. And people who are, like, lifetime New Yorkers who would never think about living, you know, living in the Bay are now coming out here. I think more college grads are saying, "Yeah, New York's cool, but I gotta get out there and be part of this AI thing." So I think it's great for, um, the Bay Area, and I think, like, the, the concentration of that talent is what has always made the Bay special. You know, you just kinda, you, you're, you're just constantly talking and meeting entrepreneurs and understanding how everyone's pushing themselves, not just, like, their work ethic, but more like technically what they're working on. Your context that you have by living in the Bay Area is probably, like, 10 or 100X if you're just some really great company somewhere else. Now, you know, uh, kudos to you and not, you know, just you personally, but, like, you know, what's going on in Europe right now, like that whole, um, DeepMind diaspora. You know, you mentioned a couple of companies like, uh, Lovable and Legora that we're in, and we're eyeing a couple more. Like, that's, that's new for us. We would always be like, "Oh, we can't, you know, go to Europe. It's kind of a, you know, a, more of a cottage industry there," and, you know, where does the, you know, talent really spike? But the one thing I'll, have always thought about Europe is if you're an entrepreneur there, it, it was harder. So there's kind of more grit to be a great entrepreneur in Europe than, let's say, in the Bay Area, where, you know, it's, uh, it's not that... It's not incredibly hard to get into YC and just be a founder. I think in Europe it's always been a lot harder. So if you have the grit to get off the ground in Europe to be a global company, that says a lot about you. So I wouldn't say we're putting boots on the ground there, but we're spending a lot more time and, uh, definitely interested in doing more there.
- HSHarry Stebbings
Totally agree. Anton at Lovable always says building in Europe's like, you know, hard mode. Um, can I ask you, when you lose a deal, is there a commonality as to why you lose?
- MMMatt Murphy
The thing that's most often is that you were late to the party, right? Like, you know, you were not intentional enough that this was a company that you wanted to be tracking and building a relationship, so you're coming in, you know, a couple weeks or a month before the round and somebody else has a year-long relationship. That's, that's usually a, a death knell. Um, and then-
- HSHarry Stebbings
The, the big- the biggest death knell always for me is, like, when it's like, oh, I worked with them at my previous... I worked with Matt on my previous company for seven years, and I'm like, "Okay, fuck, I'm done." [laughs]
- MMMatt Murphy
And so, I mean... And relationships mean so much in this business because it's, it, it is, like, high trust matters so much, and both, like, within a venture firm and with the companies, uh, we work with, and so it's hard to establish that in some, you know, shotgun wedding, some sprint. So we try to be very intentional about getting out ahead of things. You know, I'd say For the best companies, they're always going to be this like, uh, kinda jump ball and it, and it's incredibly important to know someone who's associated with the company, uh, who can kinda help, um, guide you in, land the plane a little bit. And if you don't have that and another investor does, like, "Hey, this person has worked with this board member for 10 years, and they had a great experience and some big outcome." You know, it's, it's, it's, it's more things like that. It's rarely just, like, straight up, you know, valuation, stuff like that. Yes, valuation can be painful, um, but for the right companies, you know, you do what it takes to be in.
- HSHarry Stebbings
The single biggest mistake for me is always actually focused around ownership. There've been several companies where we've had, like, 1% offered to us, Deal, Eleven Labs, StarCloud, where we were like, "1%? We can't be doing that." And now I look back, and all of them would've returned [laughs] huge amounts of money.
- MMMatt Murphy
That's the way I was trained, and I learned that for most of my career, so it took me a lot to kinda shed that. And you know, that's a lot of what venture-
- HSHarry Stebbings
Do, do you think, do you think that, do, do you think LPs understand that? 'Cause LPs always like high ownership portfolio, uh, you know, constrained portfolio sizes, concentration, benchmark. Do you think they get that the game has changed?
- MMMatt Murphy
Well, I think they see the, I think they see the results, right? So, like, maybe not up front, but we're pretty explicit with them that we kinda have like, "Hey, here's a, here's a core position in a fund, and then here are what we call, like, tracker checks or starter checks." Or frankly, even look, like, look at our Anthology fund, right? Like, that's over 50 companies, somewhere between 100K and one million, where you kinda get in a seed round. And the companies that have graduated out of th- that have been OpenRouter, Whisper, Axiom Math. So you know, there's a couple things. One, that gives us a bit of proprietary, you know, quote, "deal flow." Um, but it gives you the opportunity to be in the cap table, get to know the entrepreneur, and then pounce when you see something's working. And I would say if you get even a wedge into a company, you're 10X more likely to be able to participate significantly in the next round or lead. I think LPs get that, or they are getting it.
- HSHarry Stebbings
I totally agree with you. And you do those checks so you can concentrate capital more with the progression of the company. I went viral on VC Brags. Uh, Matt, when you y- did our last show, I was the very amenable and sweet and nice little kind of Harry Potter venture. Now I'm quite binary, and apparently a lot of people don't always like what I say. And VC Brags in particular took real, uh, problem with me because I said basically I turned down a company the other day because they were going from, like, one and a half to five to 15, and there's an opportunity cost of capital so it's very real, and the growth expectations are just very different. In other words, triple, triple, double, double.
- MMMatt Murphy
Yeah.
- HSHarry Stebbings
It's just not exciting enough anymore.
- MMMatt Murphy
Yeah.
- HSHarry Stebbings
And, and so I got chastised for this. Are you with me that fundamentally if I bring you a one to five and then a five to 15, again, it's great. I'm not belittling it, but that's just not the venture game today.
- MMMatt Murphy
It's not.
- HSHarry Stebbings
No.
- MMMatt Murphy
It's not. And it's, and it's hard to say, and it's hard to change, you know, the context, the 20-plus years of context around what good and great was, but that's the reality. The environment has changed. And so if you look around and you're like, "Well, that used to be top 5%," and now it looks more like top 50%, well, you know, uh, we're not trying to be in top 50%, right? So that's just the reality. I mean, it's not, it's not, it's not controllable by us as investors when we look around and see these companies doing zero to 100 in, in a year. Never seen anything like it, and there's more examples of that than I can probably count right now.
- HSHarry Stebbings
What company are you not in that you would most like to be in?
- MMMatt Murphy
There are, there are several. Um, one company that I've really admired and, you know, uh, as the kinda like outlier entrepreneurs, we... I- in my history going back, like, you look at the companies that became great, you know, when I was early days at Kleiner. It was like, you know, uh, Jeff Bezos and later on, uh, Daniellak and, and the Collison brothers. And like, somehow or another, these amazing founders end up manifesting the company. I don't necessarily think it was that they chose the right market or... I mean, somewhat they did, but it was really just the force of nature, the creativity, the vision, the execution, their ability to raise capital, hire the best talent, all that. So anyway, I think, um, an example of that in Europe, just 'cause it's close to home for you, would be someone like Matti at Eleven Labs. Um, very, uh, big respect, um, for him. So you know, um, for, you know, I don't wanna give everyone on the podcast my whole pipeline, but just because that's one you, you know well, I'll, I'll throw that out there.
- HSHarry Stebbings
What was the most controversial deal inside Menlo that you remember?
- MMMatt Murphy
The obvious answer is, is, is Anthropic in some ways, but I'm, I'm trying to think about... And then by the way, there was two, two controversial points around that. One was, you know, the first just, like, is this really what a venture fund does? And then the second was like, we've never done an SPV before. Are we really gonna go down this path? Um, you know, I mean, I don't, I can't really remember offhand anything, like, that was that, uh, you know, um, um, profound and felt like, wow, we're kind of putting the, the reputation of the firm, especially the, you know, the, the, the bigger SPV, uh, on the line to, to kinda pull this off and, and, and, you know, breaking, breaking new ground. I think, you know, the great thing about our partners, um, we've got a very technical group. We're small enough to have high alignment. We respect each other a lot. It's easy to make, you know, we listen to each other, make a decision. So I don't find things that controversial. I don't really ascribe to this point of view where you need, like, a bunch of nos and there's one person who's a yes, and that leads to an outlier. I know there are examples of that, but that's not really been my experience in the firms I've been part of or with our team.
- HSHarry Stebbings
Final one before we move into a quick fire. I, I am not great at maths, but if I do like a little bit of a back of a napkin on, on, um, Anthropic and distributions, it'll distribute Around $10 billion in carry. It's quite a lot of Monopoly money, Matt. Um, do you-
- 54:59 – 56:33
Menlo's Anthropic Carry
- HSHarry Stebbings
[laughs] how do you think-
- MMMatt Murphy
Not in carry. Not in carry, right. No, our position is, is north of that, but that's not... That... You can do the math on what carry usually is. So it's not quite that on, on carry, but our... Yeah.
- HSHarry Stebbings
Okay. Okay. To- totally understand. Well, two to $3 billion-
- MMMatt Murphy
It's a very big number
- HSHarry Stebbings
... two... It's a very big number.
- MMMatt Murphy
Yeah.
- HSHarry Stebbings
How do you think about firm sustenance when there is such a big win? We have seen firms candidly struggle to maintain dominance when everyone makes so much money, bluntly. How do you think about sustenance post such success?
- MMMatt Murphy
You know, I think Menlo has always had a challenger mentality since myself and Venky came over a little over 10 years ago and kinda Sean Carolan came back and, and, you know, Mark Siegel was the partner who was there who kinda put the band together. And ever since that moment about 11 years ago, it's just been a grind, a fight, uh, a, a build, exhilarating to kinda get to this point. And I feel like everyone we've brought along has kinda felt Menlo move up that stack and be more and more successful. So I think what's driving us is what you would expect. Less about that monetary outcome and, holy shit, we've put ourself in a place to be one of the hopefully leading firms in AI, and how do we really compound and double down on that advantage? And that's the energy I feel every day, certainly from myself and all my partners, and I, I just can't see that going away. It's kinda like, it's kinda like we arrived. We're here. What do we, what do we do with that? And, you know, the money's great, but that's not what... That's not why we did all
- 56:33 – 1:01:29
Richer Investors Make Better Investors
- MMMatt Murphy
this.
- HSHarry Stebbings
I think richer investors make better investors because you do not worry about downside mitigation, but you focus on upside optimization. How big can this be? What happens if this works? You're not worried about LPs not re-upping. You're not focused on risk mitigation. Do you agree with me in thinking that?
- MMMatt Murphy
Of course I do. And I think it's, it, it, it's at a firm level and it's at an, at an individual level. And, you know, there's been times in my career, you know, where you, where you feel some, some doubt, either from yourself or those, those around you, and it, it makes you dramatically worse, right? And so what we try to do [laughs] is have a high-trust environment, build people up, and everyone is going to fail in this business, right? It's just kinda recognizing that sooner and kinda landing the plane or doing the right thing. The worst thing in the world is to kinda hold on and just go to try to, you know, um, act like the reality is not, is not the reality. And oftentimes you're doing a founder a favor by even helping them, you know, kinda, kinda land the plane. So, um, so yeah, I, I, I think it's an, an important point and an important thing, you know, to, to, to manage in this business.
- HSHarry Stebbings
Totally get that. Dude, I, uh, I would love to move into a quick-fire round.
- MMMatt Murphy
Cool.
- HSHarry Stebbings
I have, uh, pushed and prodded around many different areas, so I, I appreciate the patience.
- MMMatt Murphy
All right.
- HSHarry Stebbings
What have you-
- MMMatt Murphy
So if this, this is where the really, uh, uh, off-putting stuff comes or... I, I'm ready.
- HSHarry Stebbings
Dude, dude, you were born ready for this. What have you changed your mind on in the last 12 months?
- MMMatt Murphy
Oh, I mean, certainly just, um, how big companies can be and how bold Menlo should be in, in, in pursuing those. Um, that we need people who are, you know, free thinkers and willing to take those, those kinda risks, and that's more, that's more true than ever, like just how big a company can be.
- HSHarry Stebbings
Biggest miss, and what was your lesson from it?
- MMMatt Murphy
The things that I would look back on at the time as the bigdis- biggest miss no longer feel that way. So that's like, like... I'll, I'll give you one. You know, we were at the, like the one-inch line, um, winning Plaid back in the day, and I've, I have the utmost respect for Zach and the company and what they've done. But at the point in time, I felt like when I lost that, that that was like existential to, you know, my, my career and ability to, to win and, and, you know, they're, they're, they're a great company. But I guess what that did is just more conditioned me around, like, you know, um, one loss doesn't define anyone. Now, okay, if you didn't win Anthropic, that would've been extra painful. But the point is, like, you just gotta keep, keep going and finding that, that, you know, next big one. And if you, if you focus on the right big trends like we did around AI and get out ahead of it, that these cycles come along. And, um, uh, that's what I've been more focused on than worried about a loss.
- HSHarry Stebbings
You can invest in one seed fund, one Series A fund, and one growth fund. Which fund do you invest in? And they can't be your own.
- MMMatt Murphy
All right. Seed fund, um, you know, I'm, I'm, I'm less like plugged into the seed fund world for reasons that you and I have already discussed. I don't follow a lot of seed funds around. Um, but I, I, I've had a great le- relationship with Chad at Susque for a long time. You know, Brook Byers was a, you know, one of the quasi-mentors of me when I was at Kleiner, and we got to know each other and seeing him kinda grow and thrive, and I, I really appreciate his perspective on things. Uh, you know, I mean, Series A, um, you know, Benchmark, I've worked with, uh, Chathan and Eric a ton, and, you know, uh, great respect. Um, hard to say... not, not say Sequoia as well. But anyway, since you asked for one. And then growth fund's a little trickier. Um, you know, uh, there's so many great full-stack firms, so it's like there used to be a very clear set of growth funds. Like when we were talking about swim lanes, it used to be like, okay, well, there's IVP and, and, you know, there's Meritec and, and I have high respect for both of those folks. But now the reality is the, the growth funds that you look at, it's like, well, it's, uh, Lightspeed, uh, you know, Thrive, you know, folk- folks like that, that we, you know, you know, partner with a lot and even Sequoia and Andreessen. So it's harder to just kinda pinpoint one growth fund because it's, it's like a, it's like a blend of a dollar. There's not... There's no way to really index on that market anymore.
- HSHarry Stebbings
I get you. I'd probably say just size of firm You'd be like, you know, when you reach, you know, $5 billion plus, you're probably a growth fund at that point, my friend. [laughs] Like, that might constitute it, but yeah, I, I get you. Um, I think also, by the way, everyone who was a boutique growth fund is now just a growth fund. I think you will see all of your IVPs, your MarTechs just raise large funds.
- MMMatt Murphy
Yeah.
- HSHarry Stebbings
You, you can't play growth with under a billion.
- MMMatt Murphy
I agree. I agree. That, that... The growth market has changed dramatically.
- HSHarry Stebbings
Yeah. I, I, I think, yeah. Um, where is overheated right now, do you think?
- 1:01:29 – 1:02:40
Where Is AI Overheated?
- MMMatt Murphy
Oh, um, robotics and neo-labs, you know, and maybe, maybe defense tech, but just because there's so much going in. But, you know, I like all three of those sectors, but, uh, like neo-labs. Uh, DeeDee put out a-- My partner DeeDee put out a text, I mean, a tweet, uh, yesterday on how there's, like, 60 neo-labs. I told you we're in seven. But, but, you know, some of them are very, you know, generic, like we're building-- We're getting a band together, we're gonna build something really cool, researchy, and we'll see what happens. And then others are like Chai, where it's like, "Hey, we're, we're going to be very focused on creating drugs and antibodies," and, and, you know, or Axiom focused on math and things like that. But, you know, there's 60 plus of these and, uh, you know, when the dust settles, uh, that, that's... I, I don't know what's gonna come of that. You can't, you can't expect all of these companies to have great acqui-hires, and there's no way in hell that, you know, we're gonna have 60 independent model companies in addition to all the open source and everything. So I think that's way too big of rounds they've raised for where they are. Huge concentrated positions for some firms, so I think that's a challenge.
- HSHarry Stebbings
Totally agree with you. Um, where is under-invested?
- 1:02:40 – 1:04:15
Where Is AI Underinvested?
- MMMatt Murphy
I think that there was a bit of a false negative on some of the infrastructure stack, you know, whether it's like, um, you know, uh, observability, agent frameworks, you know, all this kind of stuff that started maybe three, four years ago and a lot of these companies didn't end up panning out, right? And now the problem was, goes back to what you and I talked about earlier, people were very focused on, like, single models, so you didn't need all the surrounding infrastructure. But now as the, as the, as the kind of the whole ecosystem has gotten so much bigger and you're doing optimizations, you wanna manage your, your spend, you need to, you know, uh, have much more robust observability solutions. You need something like OpenRouter. I just think, oh, we're, we're in this company called Gimlet, which is, you know, kinda like this technology layer to, uh, kind of obfuscate the underlying chips and technology stacks like CUDA, et cetera. So there's so much more there, and I think we started off investing in that area two, three years ago. Nothing really came out of it. Now these companies are really taking off. So that's one we're excited about. Kind of the develop- the developer stack, all the tooling above the, the foundation model.
- HSHarry Stebbings
Final one for you, dude. What are you most excited about when you look forwards 10 years? So, like, for me, you know, my mother's got MS. I'm incredibly excited to think about medical breakthroughs for, you know, diseases where we always kinda just accepted that, oh, it's a chronic condition, and you're like, "Oh, okay, I'll just live a much worse quality of life with that, then." I'm excited for breakthroughs there. How do you think about where you're most excited?
- 1:04:15 – 1:06:34
What Matt Is Most Excited About in the Next 10 Years
- MMMatt Murphy
Yeah, I mean, well, I'll just pick on that one and then riff from there, but, like, we're totally excited about that. We have about eight of these models. I mentioned Chai, but we have a company called Zaira, Vilya. I can go down the list of companies building specific models to do drug discovery. So I think... And then we did something like Assort Health for very, you know, for better healthcare delivery, right? So, like, the whole medical system, which we all know is kinda broken even though the US has great healthcare, there's so much more that can happen and come to us from, both from therapeutics, um, as well as just kinda workflows and how the medical system operates. And of course, you know, that's a very near and dear mission to Anthropic and Dario. Um, but aside from that, like, the thing I'm most excited about probably goes back to, like, where Menlo is now and watching, uh, how we really lean into and take advantage of this opportunity with the team we have now that we've assembled. Um, that to me is probably the most rewarding thing in my career, is kind of where the firm is and the people we have to execute going forward. I'd say from, like, a, you know, trend of AI and all that, these things only come around, as you know, every 10 years, and this one feels like the biggest. I've been through four or five in my career. And so I am just completely fascinated to see what this looks like. 'Cause we kinda know what it looks like now, and we kinda think we know what it's gonna look like in a year or two. But given the pace of innovation, what in the world is this gonna look like in five or 10 years? Nobody can tell, and I think the how many things will be transformed over that period of time is going to be more mind-boggling than what we've seen in our society in, in, in my lifetime and, and your, and your shorter lifetime. So I'm super excited to be investing in the middle of that and, you know, partnering with great partners and, and people like you who I wanna syndicate more with.
- HSHarry Stebbings
It is the greatest time to do venture. I do feel very lucky to be doing venture in this moment. Like-
- MMMatt Murphy
Me too
- HSHarry Stebbings
... what a privilege.
- MMMatt Murphy
Totally. 100%.
- HSHarry Stebbings
Dude, you are a star. Thank you so much for doing this. Uh, I hope that I've improved as an interviewer in, you know, six years. May- maybe not, but, uh, I will continue to try. But you've been amazing, dude.
- MMMatt Murphy
Thank you for having me on. You went from, uh, great to, uh, greater, and, uh, I hope, I hope you'll invite me on before another, uh, seven years, and always, uh, love chatting with you.
Episode duration: 1:06:44
Install uListen for AI-powered chat & search across the full episode — Get Full Transcript
Transcript of episode SIYWWDUKmUI
