← The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
20VC: a16z Raises $10BN in New Funds | Mercor Raises $350M at a $10BN Valuation | OpenAI Restructuring: Who Wins and Who Loses | Why IRR is a BS Metric and Three Ways to Win in VC Today
01:24:09
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- [00:00]
Jason
I just can't think of a retail IPO that would be more popular than OpenAI. To me, going from 23 billion to 30 billion. I don't even consider it an up round. It's not enough.
- [00:11]
Rory
If they really have gone from 100 to 150 in less than six months, then I can make this conversation really quick. There's no way they should sell. Andreessen Hertz is the red army of the venture industry. What you're basically saying is, Rory, you can win a deal. Not because I've grafted for 30 years and return, frankly, billions of dollars to my investors, but because I'm on a fucking pod. If that sentence is tr. If that sentence isn't true, then 100%. Marc Andreessen was right all along.
- [00:37]
Jason
I think Bezos would lay off half his company and in a. In a fortnight if it was the right thing. I don't think you even care.
- [00:42]
Harry
Andreessen Horowitz is the red army of the venture industry. I think that has to be the quote of this series. This is my favorite show of the week. How can you not listen to that intro and just be like, I want to listen to this show? This episode was so much fun to do. We cover everything from OpenAI structuring to Synthesia rejecting the round, to RAMP's new potential round, to many, many more. This was so much fun to do. I want to hear your feedback on the show, harry0vc.com but before we dive into the show today, now, most people who get scammed never talk about it. And if it can happen to tech savvy professionals, CEOs and investors, it can happen to anyone. But the problem isn't just losing money. It's that today's scams, they're built differently for a very new world. One where AI can generate convincing messages in seconds. And fake sites look more sites than the real thing. Traditional tools were not built for this future. And that's why Guardio exists. Guardio is this incredible predictive and proactive engine. It leverages advanced AI threat detection to block highly targeted, socially engineered scams before they ever reach you. From phishing emails and fake login pages to financial fraud, Guardio protects you across the ways people actually live and work online. And security shouldn't be complicated. Guardio continuously monitors across all your accounts and devices, uncovering risks in real time and guiding you to close gaps before attackers exploit them. Trusted by over a million users, Guardio is setting the new standard for personal cybersecurity. Visit Guard iO20VCToday to start your 7 day free trial. Because the threats of tomorrow, they're already here and Guardio is built to stop them. And as Guard IO protects your clicks, Acuity Scheduling ensures our time stays on track this show is brought to you by Acuity Scheduling, the flexible scheduling software that helps you focus on what matters most growing your business With Acuity, you can manage your calendar. You can accept secure payments, offer clients a seamless booking experience that reflects your brand. I've been using my complimentary subscription and it's been a game changer for staying organized and saving time. I especially love online booking. Clients can book, reschedule or cancel anytime and the booking page looks fully branded with my logo and colors. The calendar management tools let me set buffer times and sync with other calendars so I never feel overbooked. And with secure payments, I can collect deposits or full payments upfront through Stripe or PayPal, making the process smooth and professional. Head over to acuity scheduling.com 20VC for a free trial and when you're ready to launch, use the offer code 20VC20 to save 20% off your first Acuity Scheduling subscription. And finally, we have to speak about our newest sponsor. It's Intercom. If you're looking for a way to transform your customer service, let me introduce you to Fin, baby. Fin is the number one AI agent for customer service resolving up to 93% of customer queries automatically. There is no other agent that can do that. Not 93% of customer queries. Okay, no other agent can do that. So why choose fin? Fin is the best performing AI agent for cs. Fin doesn't just answer questions, it takes actions. It automates the most complex customer qu queries like refunds, transaction disputes, technical troubleshooting with speed and reliability. I wish my team was speedy and reliable. Beats every competitor in every head to head bake off, completely configurable and code optional setup. My word. I mean the benefits just go on and on. It's easy and efficient implementation. It works on any help desk with no tedious migration needs. It's trusted by over 6,000 customer service leaders, including top AI companies like Anthropic, Lovable, Synthesia, Klei Vanta. So if you're ready to transform your customer service team, scale your support and give team members time to focus on the really high level strategic work. Learn more about fin at fin AI forward slash 20 VC.
- [04:53]
Rory
You have now arrived at your destination.
- [04:56]
Harry
We have so much to discuss this week. It's my favorite show of the week.
- [05:00]
Jason
It's at least in the top two each week, isn't it? At a minimum, it's got to be in the top two.
- [05:04]
Harry
I would say it's a top two show for sure, right? Yeah, always a top two. Does that, does that make you feel special now? Yeah.
- [05:10]
Jason
They say the silver medal is the toughest one of the Olympics, but I don't know about Rory. I'm good with it here. I'm good with silver.
- [05:17]
Harry
Okay, so we were talking about where we were going to start, Rory, before this, and you were like, I think we should start with OpenAI, given the news today. And so learning from the feedback that we get, I would love to start with you just explaining a little bit about the news that's just come out about OpenAI and their structure. And we can start there.
- [05:33]
Rory
Sure. I mean, the big news today is OpenAI cut their dealers, they cut their deal with Microsoft, and they cut their deal with the attorneys general, the plural of attorney general of Delaware and California, which means they have been able to implement the restructuring, which means they can raise their capital, which means they are out of the messy, complex trap they had put themselves in all those years ago in terms of their structure, and they've gotten it done. That's the big picture news. There's lots of information one level down about who won, who lost, who got what, economics, but that's where we're at. It's still got some opposition. Elon can still litigate and say, I don't think you should do that because I gave this money to a charity. But possession is 9/10 of the law. And once the attorneys general have allowed it and they've actually converted, it's a lot harder to unwind. So as of now, as of this morning, as I understand it, there is the charity, the charitable foundation, which is now one of the most well capitalized charitable foundations on the planet. Underneath that there is the company itself, OpenAI, which is a. It's a PBC. I can never remember the initials. Basically a for profit company, but also has to take into account more than just shareholder maximization. So that's the entity that's created and that's the entity into which you can invest. There are other companies like that. I think Patagonia, for example, has the same status. This is not a crazy thing now. This is not some weird. Like the old OpenAI used to have, this disclosure. You should regard this as a donation. It can all go to zero. This is a real honest to goodness American corporation, a different kind of American corporation. But they can go public with this They've gotten out of the straitjacket and it's big news. It means, you know, IPO is one enormous step closer. Not saying they have to, not saying they will. But big news today.
- [07:15]
Jason
I'll just throw one thing that jumped out at me on the deal. The overall structure. Microsoft owning 27%, the employees owning 20 something percent, the nonprofit owning 20 something percent. Those are all roughly what we all expected, right? There's, there's some nuances on how AGI worked. They're a little interesting. But the craziest thing in this deal, because it's unprecedented, I think, in our lifetimes, is OpenAI said that Sam Altman will still have no shares, no shares in the combined entity. At the same time, we've got Elon Musk arguing he deserves a trillion dollar pay package so the robots don't kill us, which I think he deserves, okay? I think his VCs will say he deserves it, okay? There is something unimaginable to 99 to almost anyone in the world saying he should have a trillion dollar pay package. But the scale has to be relevant to the, to the outputs, right? I don't believe it will ensure the robots don't kill us. It's a little crazy. But on the other hand, Elon wants a trillion. And everyone was saying, show Sam the money. When he was fired as CEO over a very long weekend, right? The night of Knives or whatever, was fired, fired by this crazy nonprofit. Everyone had to revolt to bring him back. Fast forward to today, that same nonprofit's in charge still. There's been turnover, but it's still sort of charged. And he has no shares. We could hypothesize why. He's pretty transparent. I actually think it gives him in some ways more power as well as less power. You can't assail the man for capitalism when his other billion dollar entities are the ones that let him finish off the McLaren collection. But we've never seen someone own nothing, have we? It's crazy.
- [08:41]
Harry
If we just drill down on winners and losers from this structuring change, who are the winners and losers here?
- [08:47]
Rory
I think the lesson here is lesson that every attorney knows, which is you often hear this expression when litigators what's the case worth? In other words, they look at the filings on both sides and experienced litigators look and go, okay, we got these three points. They got those five points. In the end, we're going to win on the three, they're going to win on the five. This is the way it's going to come out. And then there's a whole load of human drama because humans are like that. And we yell and we scream and we have juries and all. And then typically things settle out for what they're worth. This settled out for where the cases worked. Let me tell you what I mean by that, right? When you look at the thing, not only no surprise, but, you know, no surprise. For a long time, Microsoft had a fair amount of leverage. They used it. They got a great deal. They put in $13 billion. They got a 10x on their money as of today. They got a lot of AI leverage. They got some going forward AI property rights. They got a significant going forward contract for Azure business if they want it, which we can come back to. Overall, they didn't push it to the point of breaking, but they got pretty much what they were going. And they still have some rev share, which surprised me. So they got a great deal. Microsoft corporate development and lawyers deserve a gold star from their shareholders in a way that, frankly, Microsoft R and D does not. And the proof of this is this morning, Microsoft stock is up nicely. They're like, thank you for the $100 billion. We're up. There's three big winners. The second big winner is the charitable foundation. There are some people again even today griping and saying, we did this all for charity. It feels wrong that there's any capitalists involved. And I get that, especially if I'd given the seed money. But stepping back, somehow in the midst of this, we've ended up funding a wonderful $135 billion charitable foundation. That's a significant contribution to whatever good they hopefully will do with that money. And they already made some announcements about AI for medicine. So there's $135 billion out there that's not going into someone's pockets to buy yachts, boats and football teams. It's actually going to try and solve world's problems now, whether they can or not. TBD, but yay, because I would have laughed in 2016, but the people who started OpenAI saying we want to do good for the world have, at a big picture level, succeeded. They built something, what, $130 billion, which is a foundation that they can be part of. So it's a win for them. Obviously, the employees own a third and now it can get liquid. Yay them. And then the remaining, the investors can kind of exhale, get a sigh of relief. SoftBank can put in their 22 billion. And the investors, as it grew, I mean, SoftBank will own about 10% and everyone else will low single digits and everyone won and everyone got roughly what the leverage would make them get. And then the final winner, I just got to say, and I noticed a lot but Brett Taylor just wins the best board chairman of the year award again for the second time in the last five years. He totally won it as board chairman of Twitter where he jammed that down Elon's thro for $44 billion despite his opposition and he won here today cuz he unraveled the mess and set it.
- [11:41]
Harry
All up for a win so there's no losers.
- [11:44]
Rory
Well the losers would be the Elon feels he didn't want any of this to happen so he's miffed. And the people who think my God, it should all have stayed not for profit, they feel they're losing. There's a lot of that Twitterverse comments today. But pragmatically speaking, I mean Microsoft put 13, $14 billion in here and they've made a 10x which is a good return. But we'll talk about returns. It's not like it's rapacious relative to the risk they took. No one else was writing OpenAI $1 billion check in 2019. Microsoft did and they got their return.
- [12:15]
Jason
And the IP for the IP?
- [12:17]
Rory
Absolutely no. So yeah, I don't think anyone got much more than they deserved for the risks they took and the work they did.
- [12:24]
Jason
So I can tell my LPs that the little 6% stake deal I'm doing today is okay. Because here's look at OpenAI. I don't need to get double digits point to this one. Don't beat me up on the double digits.
- [12:35]
Rory
Totally no, exactly. And you're right Jason. It just shows rules of thumb are made to be broken 90% of the time. Your ownership target is a really meaningful metric and it should run your business on it. And 10% 1% of the time, who the hell cares 1% of the biggest company on the planet is $5 billion.
- [12:53]
Jason
The one micro thought I just thought was all the circular financing Nvidia giving them money amd giving them 10% of the company Oracle raising unprecedented amount of debt. So what I mean is I don't know how much equity OpenAI needs but it seems to me if they're coming up being the first trillion dollar startup and more if they could IPO at 2 trillion which is crazy by any historic so is a CEO with no stock, maybe they can raise another 200 billion. Right? I mean at least in theory that's a lot of capital to access. But My point is this unlocks maybe four times more equity for them. Potentially if the public markets are different than the private because of the potential valuation they could IPO, they may need an extra 200 billion to go the distance.
- [13:36]
Rory
I think that's an excellent point, Jason. And it means that there's one more set of winners here. All those people who stock popped because they have a bullshit promise from OpenAI to buy a whole bunch of their stuff in the Future with money OpenAI didn't have, now at least can say they can go get that money. I mean, as you know, I'm skeptical that Oracle will collect the last dollar of that cloud contract, but at least you can now say hand on heart, the customer. OpenAI now has a sensible corporate structure. They obviously have an amazing business and if they need to raise another 100 billion, it's not like crazy anymore. It's just banking and Matt, so you're exactly right. This thing may fail for there may be business issues around, you know, return on thing, but we're out of the stupid corporate structure getting in the way of everything.
- [14:20]
Jason
I just can't think of a retail IPO that would be more popular than OpenAI. Right. Just bringing everyone out of the woodwork to put a little bit of their life savings to ignore the Even if the valuation makes no sense, this would have to be the most popular retail IPO of all time. Right?
- [14:37]
Rory
I think yes, you're exactly. And it's now it's doable. Yeah. I mean people aren't going to be reading the prospectus and saying maybe we won't make profits. They're not going to be reading the thing about $250 billion of cloud commits to third parties. They're just going to be. Let me get some of that OpenAI to your point, I'd be interesting to check on the secondary valuation population today for OpenAI trades. The weird thing right now is SoftBank is closing two separate deals right now. They're closing their roughly 300 billion pre direct investment and they're also doing a share buyback from some existing employees at 500 billion. So I mean literally you have the same security trading at two different prices. And I think that's true for other investors too. They've locked in the earlier price because when the other investors, I think Tribe is in this too. When they committed to OpenAI a while back, they said hey, we'll give you money at 300 billion but you got to get your conversion done first. So now that the conversion's done, they're Going to put the money in. But already, they've already had a markup before the money. Oh my God. They've had a markup before the money's gone in because Softbank is marking itself up by doing business at 500 billion in a secondary. So literally you're going to wire money at 200 billion or 300 billion, whatever the number is, and then next day you can say, hand on heart, current valuation of this is 500 billion. So there you go. You're 40% IRR in an hour.
- [15:54]
Harry
Do you think there'll be a trillion dollar company in 2026 on the current trajectory?
- [15:59]
Rory
Maybe. All I can answer is on the current trajectory and without the euphoria Jason mentioned, it's probably two years because you do get some attenuation of growth at scale and at the current thing. I mean at 500 billion and 12 billion, let's call them boring GAAP revenues rather than ARR. It's kind of 40 times GAAP. And if it's 25 times ARR run rate, my guess is it would take two years in the normal course. But you might see that euphoria moment. It's not crazy. It's not like it's never going to happen. It's within the trajectory, it's within the strike zone. If anything, like the current growth rate continues, if it slows. I mean, as a reminder, when you're trading, and we saw this in 21, if you're trading at 40 times revenues and your growth rate slows, it's nasty and you fall sheer. But right now they're growing so they can get it.
- [16:45]
Harry
I would love a $2 trillion IPO. That sounds great.
- [16:49]
Rory
It'll be fun to watch the bankers beg for that. They might pretty much do it for half nothing just to be on the biggest IPO of all times. I mean, I think technically Saudi Aramco had a kind of a couple of trillion dollar market cap, but nobody really cares. Let's get real. It's an oil company in Saudi Arabia. This would be one for the ages. And I think every banker on the planet will be making decks as we speak and calling on Mr. Waldman and Mr. Taylor.
- [17:12]
Harry
Dude, you'd do it for free.
- [17:13]
Rory
For the credit, you probably would.
- [17:15]
Harry
Okay, we're going to talk about Andreessen's new funds. Andreessen dominates so much of the venture microphone today. $10 billion split across $6 billion in growth. One and a half billion dollars in AI apps, one and a half billion dollars in AI infra, $1 billion in defense. My word, what a big race. I would love to understand. Is this just a new normal of General Catalyst and Lightspeed and the mega platforms? R.A. different. How did you analyze this news?
- [17:47]
Jason
Honestly, I thought they were small. And what I mean is I didn't think it was small until I saw the breakdown of the funds. At first, when we talked about this before. I'd like 10 billion. That's unprecedented. Right. But when I look at that in the new Sequoia Fund. $200 million Sequoia Seed Fund. That's not that big compared to 20VC. What's the 2020 feces? 150 out of 400 or something, right?
- [18:07]
Harry
125. Yeah.
- [18:08]
Jason
Yeah. Rory's more A and B. It's not. 200 million doesn't really get you out of bed at scale. And then 1.5 billion for AI apps when you're investing in 11 labs and friends and replit doesn't seem to get you very far. The seed funds and the AIF fund for Sequoia and Adrissen were smaller than I would have expected in today's insane world where even 50 million at a YC demo day could be a low valuation. Right.
- [18:35]
Rory
Wasn't expecting that. No, I thought it. Look, is it the new normal? Yes, it is the business model that Andreessen and a couple of other firms have brilliantly pursued. This is the world we live in today, and as investors, we'll live in for the next four to five years. Somewhere down the line, you'll either have the it works over across the cycle and then this will be the norm forever. And you could envisage a world where this is a little like where venture becomes more like investment banking, where there's Goldman Sachs, JP Morgan and the rest of us are boutique players. Right. Or the other thing that could happen is the returns from the bigger funds are slightly disappointing and does a little bit of a tilt back to more mid and small cap ventures. But this is the dominant modality today. This is what top dog venture investing looks like. This kind of scale, this kind of dollars at work and there's four or five other firms doing this.
- [19:29]
Jason
Is there any excuse that I can't compete with Sequoia? I mean, Skale can outbid them. I think you can compete with a $200 million seed fund or a 1.5 billion AB fund. I think you can compete.
- [19:41]
Rory
I agree. The sentence I can compete at a seed with Adreessen because of check size doesn't make sense except in one very derivative way. Because I agree at the end of the day, if someone's raising 10 million and you have 10 million, the other guy has 10 million. End of just one of two arguments against what you're saying, though, right? The fact that One checkbook comes 10 out of. Let's just pick it happy. One checkbook comes 10 out of a $400 million fund, and one checkbook comes 10 out of a 10 billion dollars colossus. Let's just say there's two ways in which the Colossus has an advantage. The first is they can literally decide they're not pricing this round, they're buying an option on the next round. If Harry's trying to make his money on seed, and they're simply trying to set themselves to make the money on the B, they can, by definition, pay a higher price. Because any option always trades higher than the intrinsic value of the asset in question by virtue of the time value. So they can pay a stupid price, right? Because they have a different model. And then the second way they can win, and I'm really internalizing this now, is the Wall of News, right? At the end of the day, when you have a $10 billion fund, you always have shit going on. You don't talk about your bad stuff. And provided you're modestly competent. And these guys are far beyond modestly competent, they're extraordinarily competent. You always have some good news in the portfolio. You always have exciting things. You're probably going to be in some winners. So the wall.
- [20:58]
Jason
I don't buy the Wall of News anymore.
- [20:59]
Rory
What?
- [21:00]
Jason
I'll tell you why I don't buy a wall. I've learned this first from Dr. Harry Stebbins, and now I've learned it others. Okay, look, Harry's in some great, great investments that he quietly but, but relentlessly reminds us of the perplexities and the mercures. However, he says it with his British accent. How do you say more core in British mercure? He like. He elongates the vowel or something like that, right? And he tells us all the great stories. What I'm saying is you can get coverage. You don't have to write $10 million checks to be the With Participation Fund guy. Scale could do 50 deals if you wanted with Participation from Rory from Scale, who we love from the pod. So just the option thing's a bigger deal. I just Wonder if a $200 million seed fund at Sequoia. How many options can you afford before your whole fund is options, Right? That's the question.
- [21:48]
Harry
The one thing I will say Is the with participation thing does not work for publications. And this is very in the weeds and granular. With the with participation, you playing in rounds with smaller checks does not work unless you have an existing brand for random tier 2, tier 3, firm. If you were to do with participation, none of the tech crunches, the only.
- [22:09]
Jason
One in the end of the fifth paragraph.
- [22:11]
Rory
No, they.
- [22:11]
Harry
Honestly, they don't. They really don't. And so, and so, yes, we has.
- [22:15]
Jason
A following now after this pod. He's got a pretty big following hour.
- [22:19]
Rory
Even if I did, even if I did, which I would stop, it makes me cringe. But even if I did, actually, you'll be proving my point, which is, it's not because. I mean, what you're basically saying is, Rory, you can win a deal not because I've grafted for 30 years and return, frankly, billions of dollars to my investors, but because I'm on a fucking pod. If that sentence is true, if that sentence isn't true, then 100%. Marc Andreessen was right all along and he said, I don't think in the end investing is a media business, but I do believe that. And I'm going to give them enormous credit. I admire people who pull off strategy, articulate a strategy and pull it off. They tilted the table with their media strategy. And here I am on this podcast in my little tiny, humble way, trying to say, okay, this is the new game. So I do disagree with you, Jason. And I think the wall of sound is a combination of the 10 billion and the media presence they generate and all things. I think at the margin, the bigger funds are harder to beat. And you just have to say that it's not by any means impossible. But what I'm saying is, Andreessen, I think this $10 billion raise, and I think, by the way, the structure actually also makes sense. The three different individual funds and then the growth fund. And it makes sense, I think, both for structural investing reasons and probably also for human capital management reasons. You can give your chief lieutenants each a little fiefdom where they can feel in charge, which is a good way to keep them. I think this strategy works and as I said, provided the long term returns are there in terms of tilting the field of play in their favor, I think it's been successful.
- [23:52]
Harry
I would argue actually that there is massive advantages to them. I get you, Jason. We've got $275 million for a Series A fund versus their one and a half. That is a lot more money for management fees to pay great people that is a lot more carry. That is a lot nicer offices, which founders do get wowed by. Like it or not, they get wowed by it. That is a lot more events to host where you can have serendipity. There are a lot more things I think that scale and AUM buys that do increase.
- [24:20]
Rory
One of my favorite expressions is from the Russian Red army, which is quantity has a quality all its own. In other words, when you want to take Berlin at some point, what you do is you just get 2 million people willing to die and you march them forward. Right. And you know, Andreessen Hertz is the Red army of the venture industry. Now they got the 10 billion and they're going to march it forward.
- [24:40]
Jason
But it's not, of course it's 10 billion. It's 10 billion of 30% carry and 10 billion of 2% fees and $10 billion of all this. But when you break apart the funds, I really don't think Sequoia having 200 million is that different than what Harry has. And I don't think a one and a half billion for their AI app funds. I think it's only twice as scale. So I just don't think like air cover, it's an excuse. You have to work twice as hard as they do. That sounds right. You should have to work about twice as hard. But it's not as. It's not really 10 million and a billion. Right. From when you break the funds up.
- [25:13]
Rory
Right, I agree with that. You do have to work twice is hard. As a comment, the definition of a good strategy is if you have a strategy that doesn't allow you to have to work that hard. Therefore, by definition, having 10 billion is a good strategy. I think the interesting thing, and we said this before, but my big aha is this. The only people for whom this might be a net negative is the LP investors. And we don't know that yet. Maybe it'll be a wildly successful strategy, in which case it will run the table, or maybe it'll be modestly successful, in which case in five or seven years the LPs will start going, hey, you know that late stage fund, it gives me a good return, but it's 12, 13%. And maybe I can get that in the markets now that there's more IPOs. Maybe we should just throttle back our allocation. We love the early stage stuff, some version of that. But until something like that happens, for every other player in the market, having 10 billion is better than not having 10 billion. So that's where the game is I.
- [26:04]
Harry
Do also think for everyone listening, they don't often understand the stapling that is required to be in these funds, which is if you're an LP and you want to be in the early stage fund, you will often, very often with top tier brands, have to put in two times that into another fund to get that $1 in the other. And you don't get your pick of which fund very often, you have to be across all of them.
- [26:24]
Rory
Yes. And when you see that, you realize that intuitively leaders of venture firms understand the concept of bundling at their core. Right. Bundling and rent extraction is fully understood.
- [26:37]
Harry
Jason, you said about this company McCor, I think it was, I think it might be a 20 VC company to be fair. Yes, but they announced Yesterday they've raised $350 million at a $10 billion valuation, led by the person who led their last round at $2 billion only eight months ago, which is Felicis. Now this company has gone to 500 million in revenue faster than anyone else I believe in history. I think it was 17 months also. Again, this is not biased. I hate fricking bias shows. I listen to them. A lot of people say it's not real revenue, it's gmv. I wanted to hear how did you guys feel about this round, the speed of revenue acceleration? If it's real revenue, I want your thoughts.
- [27:21]
Rory
I mean, it is quote, unquote, real revenue. They ship things, they get paid. Gap requires you to book it as revenue, maybe step back and give people some context. What they do is they provide humans with specialist knowledge and their customers are the large foundation model companies. And what they do is they bring this human talent to bear to help the foundation model companies train the models by providing human feedback. People would have heard RLHF reinforcement learning through human feedback. These are the humans that do that. So if I'm OpenAI and I want to, quote, teach my latest model how to do advanced math, what I need is a whole bunch of doctorates and PhDs who understand math that are available to pose questions to the model judge. Model questions give feedback on which answer is correct, which answer is not. So by giving this human feedback, I think of it as you pound the model into submission where it eventually says, okay, I've learned this shit by adjusting the weights. That's what's going on here. We think of this all as happening in Nvidia GPU chips. There's an astonishing amount of human training that is required, required to make these models work. So that's kind of the market these guys are playing into scale AI, which was acquired by, partially acquired by Meta, is in the same broad market these guys have done. Merka has done an amazing job because five years ago, as Jason said, I love the expression, five years ago we were labeling cats. You had people often overseas charged with labeling cats and not getting a lot of money. I think Mercour realized that the market today is not labeling cats. It's in fact answering complex physics questions, matter questions, bio questions, because the models know how to label cats now and what they need to do is the outer edges of human knowledge. So it's a very different set of humans that you need. And Mirko did an amazing job of assembling all these kind of high end folks and making that product available to the model companies to do it. That's kind of what they do. And in that context, the growth quote isn't surprising because if you think about it, these model companies have grown faster than any company in human history. They're spending 3,400 billion dollars on compute, they're probably spending 3,4 billion dollars on RLHF and they were spending 0 or 5 years ago. It's an explosive growth market. So it didn't happen in a vacuum. This happened because our customers want their stuff.
- [29:39]
Harry
I actually obviously spent quite a lot of time in the market, which will surprise you, Rory, to hear that I've been thinking about markets more deeply. But it all started with talent acquisition. If you got the talent and could provide it, fantastic, we'll pay you. That's pillar one. Pillar two is get the talent number one. Now we want data acquisition, which is you provide it to us, not we extract it, you provide it to us and then you measure the quality of it too. That's the second pillar. And now we're adding the third pillar, which is the implementation layer, which is we now expect you to not only do those first two, but we expect you to implement it efficiently and make sure our models get off the ground more effectively. And with that you also see increased pricing and the willingness to spend much, much more from the model provider. The other thing I will say is you have concentration of buyer unlike any other industry. Two buyers are 50% plus of every one of these labeling providers revenue. So there is real revenue concentration that it's high quality customers. But you do have that dynamic as well.
- [30:40]
Rory
Agreed. And that was well put because it makes it an interesting question from an investing perspective. On the one hand, there's nothing better than a customer who's well funded. We just agreed they're well funded. Who's got an urgent and compelling need to get a bunch of stuff done that you can help them with and wants you to grow with them. And what you're saying is, you're exactly right. OpenAI and all these people, five years ago, they had simple requests. The more the complexity goes up, the more you meet that complexity as a vendor, and Merkur has done that in spades, the more revenue they're going to give you. So they're going to be shoveling money at you because you're solving their problems. They got a lot of shit to be solving. They don't need to be thinking about this. Mr. Merkur, if you can make this go away and get me 500 doctors and this data and this answer and integrate it to our system, I will pay you money, because money I have in spades. Time I don't got for sure.
- [31:25]
Jason
But I've got to imagine you guys, and especially Harry would know better than me. I don't think it's stress. It may not be stress free. I have a portfolio company that was doing a vaguely similar attach to a, to a large business model where the contract was growing to eight figures. That renewal was stressful. AF once you get to eight figures, okay, I know. No, I know these guys have more money and time than engineers. But there's point where you turn around, you say, maybe we should do a little, you know, OpenAI is building its own chips. I'm not saying this happened at Mercur or scale. I'm just saying Harry's point of having to radically go up the value chain is both revenue, but more stress. Because I don't, I don't think anyone's just shoveling money at Data Dog and Mercury without even thinking about the margins.
- [32:09]
Rory
Jason, I totally agree. And that's what makes the adventure fun and challenging is that you look at the checklist and you have one enormous positive great big honking market growing like a weed. You're exploding. And then you got two negatives. The first is your margin profile is not amazing because the gross revenue is 500 million, but you give 70% of it to the doctors and the mathematicians who are doing all, whatever it is, some percentage, I'm not going to speculate. And then the second fact you have against you is massive customer concentration. And at some point they're going to say, I'm giving you 200 billion, which means you're making 30% on that 60 million. Hell, maybe you do it for 40. You prefer to be OpenAI and have 800 million customers than to be Merko and have two. When you look at those positives and negative, what you say to yourself is, this is fundamentally a Bet that the AI CapEx train will keep running for two or three or four more years. If the AI Capex train slows down, is that enough?
- [33:00]
Jason
Is two to three years enough?
- [33:03]
Rory
You're right, Jason. At least three to five years. In other words, that it's a permanent new thing at groat because OpenAI is not going to focus on getting efficient until it's dealt with hyper growth. So as long as it's not getting efficient, you probably can lean in. If it slows down, then the positives, which is the growth rate, goes away, and then all the negatives come back to bite you. So if you were to say to a public or a hedge fund guy, find me a bet that had the maximum exposure to hyper AI Capex growth, this would be right up there with Nvidia. Yeah, I like this risk, man.
- [33:35]
Harry
If you're doing this at 10 billion, what are you underwriting it to? What does that math look like?
- [33:39]
Rory
I mean, as we're going to discuss later, you should be writing anything to a 3x. So you got to be 30 billion to make it worth your while. I'm just doing the math in my head. Even at 5x revenues, my God, that's 6 billion. You're underwriting a lot of training data. That's the sobering thing.
- [33:56]
Jason
In the short term, though, in the short term, if they're at 500 million, at 10 billion, growing at an unprecedented rate, we're all ignoring gross margins in 20, 25, 20, it's only 20 times revenue. It doesn't seem. This is where actually we're seeing revenue compression, which we talked about with Cliff and others. He doesn't like the revenue compression at canva. Right. This 20x ARR was your last deal. Lower than that, Harry and Rory? Higher or lower than 20x ARR? The last deal you did, it was higher.
- [34:22]
Rory
And I'll admit. And Jason, you're exactly right, actually said something else that was really insightful. Your comment is there's two modes of thinking about an investment, and I think it's really insightful. Jason, there's one more that says pencil me out the next five years. How do I think end state? What market do I have? And therefore, what return are you underwriting? And I think if you assume five times revenue and you want to be at 3x, you're underwriting $30 billion, which means $6 billion in trading revenue. Which makes a man pause. On the other hand, you can say it's growing 5x and if the multiple just stays contact and it grows 5x for another year, I'll be 5x up. And in fact, that's just what happened on the last round. It was at 2 billion, I don't know, at 100 million and now it's at 10 billion at 500 billion. So the near end revenue traction is saying to everyone, as long as this keeps happening, you can go into it quickly because what you look back now, I mean, because, you know, we're talking about, is it worth 10 billion? But go back, give them credit. You now look at the 2 billion that somebody paid six, seven months ago and you're like, oh my God, that seems cheap because you're like 500 million already. So when high growth happens, it's tempting and it often pays to lean into that growth. And yeah, you very quickly, just like, I think the anthropic round at 67 billion earlier this year now looks dirt cheap if the hypergrowth comes at the size of growth we're dealing with now, which is not to your point, Jason. Trouble, trouble, double, double. I don't know what the word is, but fipple, fipple, deckle, decal. I don't know. If you grow 5 or 7x, you can grow into almost anything. So this whole thing, top to bottom, is one big ass bet on AI Capex hypergrowth. And as long as it keeps happening. I don't want to quote Chuck Prince, but we all know the quote.
- [36:05]
Harry
No, we don't.
- [36:05]
Rory
Oh, you're young then, Howie. Chuck Prince famously said in 2007 at Citigroup, some version of, as long as the band keeps playing, you got to stay on the floor and keep dancing. And it turns out he should have sat down and not danced anymore, obviously, given the way 2008 happened. But in other words, it's the quote of, when things are working, everyone just tends to lean in.
- [36:26]
Harry
Well, when things are working, everyone just tends to lean in. Baby Ramp is a fundraising machine. They raise every few months. Reports that they're raising a new round at a $30 billion valuation, reportedly. What are they doing with all the money? Do they need it? Is this a game of customer acquisition and brand? Do we just do rounds now to continuously stay relevant to Jason's point?
- [36:50]
Rory
We talked about this a few weeks ago on the last raise, and I have nothing to say that I feel like I just had these comments. There does appear to be a comb of insane demand for the stock and ability to use that to create this aura of inevitability. And to some extent, as I remind you, this is more than most companies. This is one where constant growth requires lots of capital because you're in a capital advancing business. So you probably have every dollar you add of revenue takes $5 of capital because you've got to finance purchases, because you're effectively recreating Amex. So it may well be, I haven't seen the numbers that there's a larger demand for capital here than the average deal. I'm sure they can leverage some of that. But if you're going to a billion dollars, you probably have a $5 billion balance sheet. I remember doing the math at one point in time. So if someone's lending you 4 billion of that, they're probably going to want a 1 billion equity cushion.
- [37:42]
Jason
To me, going from 23 billion to 30 billion, I don't even consider it an up round. It's not enough. Let's say I was a seed investor. I've probably had a token of dilution. Okay. So let's imagine I'm down to, to 2%, which would be great. I have a $400 million position at the last round, right? Yeah. Now it's worth 480 million with dilution after this next round. I mean it's a lot, but like it's not doubling my position. Like a classic round is these, these little rounds. 22, 25, 30 and then maybe not at ramp, but with a lot of AI companies, a lot of dilution or a lot of others. Right. You could see 10% annual dilution in these of kind companies or more. You might go from 22 to 30 and have the same price per share. It's possible, right? I just don't really care about these micro step ups that look great. You're like 30 billion. Well, if the last round was at 10, impressive. Right. If the last round's at 3, like Mercur are very impressive here. I'm like, meh, that's cute.
- [38:36]
Rory
But I'm pushing back. Just another spin on what you're saying is with the exception of the new AI companies, that probably is the kind of IRR you should expect to get in a mature growth private company. One of my insights over the last sometimes I just realize the obvious is that there's really early and late stage venture and then there's venture for companies that already could comfortably be public. And I think we need a different word for that. It's not even late stage, it's private as public Ramp could just as easily be a mid cap stock at this point in time public, right? And you don't expect mid cap stocks to gap up 3x in a year. You expect the overall market will go up by 11. The best companies grow 30, 40% year on year. I look at this and I go there's no reason to assume that the return to the stock should be different just because it's held in a different corporate structure. The company is the company independent of its public or private. The reason I mention such pedantic lent is I think as you think about these super late growth fund things, the return they will realistically get absent the AI lift is some version of what was the small cap high growth public market return for those guys. Because you're going in Jason correctly with your venture rule of thumb and even on a late let's call it a late stage company company doing 50 million going 100 million it should be that two 3x step up financing event to financing event. When you're doing a billion dollars you're near profitably should be public. You're going to see these much smaller percentage step ups because you really are a different asset class. Your public stocks hiding in private. Which is why the stripes most recent change was from 91 to 110. It's the same kind of thing.
- [40:19]
Jason
But you just said we're still underwriting. Harry asked you what we're underwriting to, you said at least 3x. So if I'm underwriting a 3x and I did the last round at ramp at 23 meh, it's not really getting me to my 3x.
- [40:31]
Rory
Listen, you are, dare I say it confusing on your pronouns you said we're underwriting or you're underwriting to a 3x. I'm trying to underwrite to a 3x. If you're running money doing companies at 30 billion pre, you're probably not on writing to an overall 3x on your fund. Now you might get the most iconic company of its generation. OpenAI will give you a 10x. But I don't think you are underwriting to a 3x when you're doing ultra late stage billion dollar revenue run rate $30 billion valuations and you're definitely not underwriting to a 30% IRR. So this is what you get. Again go back to there's no reason to assume that just because the companies are still private versus public that you should get more return than you would have gotten if they're public.
- [41:16]
Jason
I'm with you. My only meta point is And Harry's made this in the early days, like the massive dilution at Anthropic and others. Right. I'm just less excited. I found that things that move the needle for my little portfolio. Some of these headline rounds don't always do it. Like it's not always that simple. Right. It could be years have gone by, there could be a massive increases to the round, massive dilution. You might have forgotten that the last round was. Was pretty high too back in 2021. Like you might even be flatter down. It looks great. But like I just. They're not always as sexy for the IRR or the markup as you might expect, that's all.
- [41:51]
Rory
I totally agree. That's because you're busy trying to turn 10 million into 100 million or 200 million. But there's someone else out there who is very happy to turn a billion into two billion. Very happy indeed. And it's going to make more money than you. Just to make it even sadder, dude, way more money.
- [42:06]
Jason
And keeping your IRR, trying to keep your IRR above 40% is not easy. Later in life of the fund, it gets really hard. Right, agreed.
- [42:13]
Rory
And for those guys, a different game. So, yeah, the AHA is the two biggest changes of the last three to five years have been the advent of what's happening in AI and the transformation of the late stage and IPO marketplace to this ultra, ultra late stage where companies are way beyond the IPO threshold and still private. Those are the big two changes in the game.
- [42:37]
Harry
I completely agree. And on the second, I go back to actually Jason's point on the modest size of the Andreessen funds. Because when you take the $6 billion growth fund minus fees, you're at 4.8. You've got 20 $200 million checks. It's not that much. It actually feels very reasonable in terms of size.
- [42:53]
Jason
To their credit, in that chart that went around, they did do a good job of recycling. They did an excellent job of recycling.
- [43:00]
Rory
And recycling is good.
- [43:02]
Jason
So we can assume they get the full six out. But fair point, it's not a lot of checks.
- [43:05]
Harry
David. David George is very, very good. I'm always impressed by him. I want to move to Spray and Pray. There's different models of venture. You can be concentrated or you can be spray and pray. Spray and pray for those that don't know, is obviously having a broadly diversified portfolio, investing in lots of different companies rather than few with more money. There's always a question of does spray and pray work? There was some data Released by Carter. What did the data say and how do we think about Spray and Pray today?
- [43:33]
Rory
I disagree. I read the data. I also read Jason the blog post on sastr. I think your characterization is. Your characterization of Spray and Pray is wrong. To be very direct, I think the data was awesome. Let's start back with the comment. The Carta data was awesome and very pleasing. Stepping up what it told people for listeners is they looked at all 547, 2018 Series B investments and then they did a histogram of where they come out in less than a 1x1 to a 2x.
- [44:02]
Jason
Oh, that was series B.
- [44:03]
Rory
So 547 and then 18% of them greater than a 5x. About 10% of them greater than a 10x and one deal. Figma. We turned 100x. That's a pretty sizable chunk of information. What's it telling you? I find it really interesting because in fact we typically do A's and B's. And I was very happy actually, by the way, it was exactly what the distribution for our fund model we think has to be, which is 30%. They were actually 35. We would have said 30 less than 1x. We do wider buckets, 1 to 5x 50%. They broke that into two buckets and greater than a 5x 20%. So the distribution on 547 deals match pretty much what we're saying. The interesting thing is if you hit those three buckets correctly, the blended return, I know it from our fund model is 3.7x growth 3x net to the LP. If you look at that business, if you look at all those things and you get enough slots in the buckets, in each of the buckets, the good buckets, the 5x bucket and the 10x bucket, you end up with a 3x net to the LP. The first piece of good news is if you do it right, the return was available to you. The interesting thing is to your point is the right strategy, Spray and pay. That's why I was jumping back on it. I don't think that's what it said. I mean, I think it says you got to pick very carefully because obviously if you do a lot of deals, I mean looking at the same data, Jason picked on the negative, which is 2/3 of all deals are less than a 2x which means they just don't help. Correct, Jason, that was the point you made in the blog.
- [45:30]
Jason
Yes.
- [45:30]
Rory
And what it says is picking is so important.
- [45:34]
Jason
But did it say that?
- [45:36]
Rory
No, you didn't say that. But I think the Data says that.
- [45:39]
Jason
But here's the thing. First of all, you're right. I mean, to me, the data was shocking to someone that is a concentrated investor, because this is scary risk for me. But it did blend out to 3x net plenty good. Right? So you're right. But at series B, everyone thinks they're a great picker, don't they? This isn't pre seed. Everyone's a great picker at series B. Right? Does everyone have the same logarithmic distribution across these deals?
- [46:03]
Rory
No, they probably don't. I'd say three things. Everyone thinks they're a great picker. Not everyone is a great picker. But the third sentence is you have to be a great picker to win. There's two strategies you can face with this opportunity set of 547 Series Bs in one year.
- [46:19]
Harry
Right?
- [46:20]
Rory
It's a very clear data point. Right? If you're not a good picker, you will end up with more. Remember, Jason's does a different set of buckets, but his buckets are more scary. He's two thirds of all these deals are less than a 2x. And that's on average, if you skew instead of 66%. If you skew 75, 80% in that less than 2x bucket, your math doesn't work. And it's not that hard to be that bad because on average it's 66% is my point. It requires a fair amount of discipline and picking to pull this off. I don't think the spray and paste strategy would work here. It might work at seed. I'm not as familiar with seed, but here the cost of spraying just gets too high. The only way it does, and I can see Harry doing his I don't agree face, is I think there's actually three approaches. There's picking, there's spraying, and then the third one, which is someone big like Andresen can do, which is optioning. You can spray if you're just doing options, but if you spray and that's the only way you make your money, the probability of being wrong is just too high.
- [47:19]
Harry
So that's exactly what I was going to say, which is actually in reference to an amazing graph that was released a month or so ago about seed bets by multi stage firms. And Andreessen did 72 see bets compared to scorer number two at 27. And exactly to your point there, Rory, you said you can't win without being a great picker. I'm not saying Andreessen are not great pickers. I'm not saying anything against them, but you can. If you have 72 option bets agreed.
- [47:43]
Rory
There are three strategies. There's spraying, picking and optioning. And because the beauty about when you can option, you can afford to spray more. Optioning allows you to spray more. Right? You're exactly right. No, I think that's super clear at every stage. And again it goes back to. Structurally. Once upon a time you thought seed was all about option value and anything beyond that wasn't. Because we're dealing with gargantuan sums of money. It is now plausible that for some people, A's and B's are partially options. And really, if you're going to deploy 200 million in the growth round, you don't want to be totally slipshod at the A and the B, but you can think of it as more option value. And that's absolutely a superpower that a wall of money gives you. I can't afford to do that because most of my money goes in on my initial round. At most 50, 60% comes in follow ons. I can't afford to be wrong on 2/3 of my money to be right on one third. That's not going to make me a dollar.
- [48:37]
Harry
Does the ever expanding outcome scenarios that we're seeing today, before $30 billion was insane valuation for a company. Now we're kind of like meh with ramp, 10 billion with McCool. We're not blown away by it. The outcome sizes are getting so much bigger. Does that not favor spray strategy? Because all that you need to do if you're early is just get into the winners. Who cares? Not who cares, but 500k or 2 million, it doesn't matter. Spray the 500ks because the only thing that matters is McCor and ramp and everyone are in yours.
- [49:11]
Rory
No, because what you're doing is you're taking a plausible theory and extrapolate and you know, and extrapolate into the point where it no longer holds true. You can spray as much as your bankroll will allow you. The more bankroll you have to build up option value. Well, step back. You could be talking about two things. How. And you got to break them apart. Are you saying simply spray Because I'm not going to make my money on follow ons. But it's the seed argument. I have to be in the very best deal and I have to cover wide versus concentrated to do that. That's one thread. And then the separate thread would be how much easier is the spray constraint if I also have option value at the back end and that's easier, there's no doubt. Let's agree the following the more option value you have at the back end because you have a $10 trillion fund, the easier it is to spray because you can amortize the cost of the losses over the one winner, provided you get to stick 500 billion in the winner. The rest is noise.
- [50:04]
Harry
But if you're a seed fund and you're David Tisch today, and he won't mind me calling him out, he explicitly does respectfully spray and pray. He does 50 plus companies plus plus in a portfolio with low ownership. But my word, he is in some of the biggest companies, including Ramp. Consistently again.
- [50:24]
Rory
But going back to the Carta data, what I like about Carta is it's actual data, not words. There were 547 Series Bs in 2018. I'm going to guess graduation rate probably. But that implies 800 as that probably applies 1,600 seeds. So even what you are pejoratively calling spray and pray is doing 50 deals out of 1,600, there's still a huge element of picking involved in that. The only people on the planet who have a structural business where they can de emphasize picking because they can write option checks at scale is Y combinator because they have a structured advantage in terms of their economics, they are the only people who've built a mass production seed business. But for everyone else, if you're trying to pick even 50 and there's 1,600 places, and we know that at the B only 500 of them get to the battle, there are 1,100 places to put that money that doesn't work out, you can always say, it'll always be true that if you pick the single largest outlier in any vintage. Like if one of those deals was Figma where the B made 100, so probably the A made, I can tell about 200 and the C probably 4 or 500, I don't know. Right. Of that order of the numbers are available. 300, right? Even if it's 300, if you did an index and did every deal, you made a 300x and you did all 1,600 deals equally, it's only a 0.2 return. Do you understand me? In other words, if you put a dollar into everything, your FIGMA check doesn't quote unquote, return the fund. If you did the whole industry now maybe an OpenAI would. Maybe there is one deal so big that it would literally return the vintage, such that if you just bought the entire vintage, you're good. That probably happens maybe once. Everybody every decade or two. Most of the time, even at the seed stage. You can't just say it's spraying is my point. There's an element of picking up and down the stack.
- [52:16]
Harry
I get that.
- [52:17]
Rory
I mean, it's funny. I was mocked the Jason headline. Only one in three deals double investors money per cart a day. It's so sobering. It makes you remember how much of this business is disappointment. You remember your deals, you remember your 10 Xs and your 15 Xs and your 20 Xs, and you just forget.
- [52:35]
Jason
You.
- [52:35]
Rory
You just. And I think actually the best investors, and you become numb to it. Rory, I don't. I get all sad. I'm a bit lame.
- [52:43]
Harry
I had a shit outcome this morning, and I'm really, like, upset by it.
- [52:48]
Rory
Yeah, you get vested.
- [52:50]
Harry
I had the worst. Which is a company gets bought by another company and you get stock at some insanely high price. I mean, it's just the worst.
- [52:59]
Rory
That's not the worst. No, the worst. Let me do it. The worst is you're on the board, you try and sell the company, it doesn't close, you're on the hook for shutdown costs, and you have to wire 300 or 400 grand just to pay severance costs, which you should do as a board member, and you're probably legally obliged to do, and then write that money off straight away because you waited too long. That's the worst. Wow.
- [53:19]
Harry
I thought my day was bad. That's perspective for you kids.
- [53:22]
Jason
That's why I just do everything on a safe. I have no rights, no visibility, no financial statements, no understanding of anything. But if it goes south, I can just go ghost them.
- [53:35]
Harry
Are you serious, though, Jason?
- [53:36]
Jason
What?
- [53:37]
Rory
No.
- [53:37]
Harry
About just doing everything on a safe?
- [53:39]
Jason
No, but. But the safe does have some comforts. I. I do like the post money cap. As a seed investor, I don't have to worry about the pool or other things. And I like the fact that it's a medium commitment. I don't always love being the only guy in the cap table, the only director. The safe is like, listen, I'm only sort of committing guys. Good luck to you. If it goes great, I'll invest some more. If it doesn't, I'll write cheery responses to your monthly updates. But you didn't ask me to get married and commit, so I'm not committed. You think I'm joking, but the stuff Rory talks about, it's awful, right? This end of life stuff or a decade of a struggling company where you're on the board. I'll take the safe over that because the commitment is low back. If you're going to raise in Saturday on a safe, she can't expect too much.
- [54:27]
Harry
Speaking of commitment and marriage, I'm really intrigued to hear your thoughts on this one, Jason, because you've said, like, oh, I encourage founders to sell. I encourage founders to sell when the offer comes in.
- [54:36]
Jason
So there's no regrets. So there's no regrets.
- [54:38]
Harry
Synthesia, one of the hottest, fastest growing AI companies, you're now at 150 million in error, reportedly turned down a $3 billion offer from Adobe to be acquired. And they're going to be raising a new round at well north of 3 billion following this. Jason, if you were on the board, would you have told them sell for 3 billion?
- [54:58]
Jason
Yeah, I would have told them to sell, yes. And I'm not saying it's the right decision, but one, he's been at it for a while. Like Synthesia is one of these stories like Replit and Vercel that, like, blew up with AI. But it's a journey, right? And there's competition and it's a while. And I would tell him to take it. Unless you're 100% sure you're going to build the $20 billion public company, $10 billion public company, and if you are, do it. But I like to stress the test, right? So I'm not saying that's the right thing to do, but I want to be the guy that gives that advice.
- [55:28]
Harry
10 or 20, because that's two different outcomes.
- [55:31]
Jason
Even 10 is not really worth it for a founder. It is worth it for the VCs. Excel gets another play, right? Here's the issue, right? 3 to 10 for Excel, huge difference, right? So let's say they own 15% out of a what, $450 million fund? Who knows? Let's make it up, right? So Instead of a 1x fund returner, it could be a 2 or 3x. You make that bet as a VC all day long, right? For the founder, let's say, owns 10%. What the hell's the difference? There's no difference. We've had billionaires on ours. You've had billionaires, Harry. I don't think Jeff Lawson would be living a better life with half the money or twice the money. It's the same, dude. So, like, there is a weird disconnect between 3 and 10 here for VCs versus founders, because one extra fund in 3x, that's a lot more carry.
- [56:09]
Harry
So I would Say with an Excel and index. You're absolutely right. They'll absolutely take the risk for another term because they have the luxury of doing so. They don't need to return cash to LPs in the same way that maybe other managers do. If you are not a tier 1 GP though, you will want to provide DPI to your investors.
- [56:24]
Jason
I don't believe that. I don't believe that. I don't see it. I've asked my LPs, I've asked a few others if you're a strong manager. Okay. If you have a track record and their goal is not a 3x seed fund, but if they really want 5x or north out of you, they get the game. As you got to keep playing another card. No. What matter matter what they say. I. I've asked my LP and I guess it's a small set. Do you want more money back? Right. Even ask my most conservative lp, like a university endowment that is small, right? That has stress. I asked, well, would you want your money back? I mean, with the game, they're like, no, we're just telling you we're really worried about it. Like, we really want dpi, but we don't want it. We want you to play another card. So I think if you tell them I seed it into synthesia and we've got a chance to three exit, they're going to tell you to go for it and that we're going to trust the fund manager's discretion here. I just don't know that there's this massive DPI pressure if you have a hot. If you have a hot hand. I think there's DPI pressure if you have a mediocre hand, in which case, so what? Because it's not enough dpi. What the hell's the. This is the other thing on X. What's the hell's the point of returning? 02% of 20% of your fund? Hooray, I got an exit today. I returned 21% of my fund. Like, that ain't the full job, friends.
- [57:30]
Rory
So the first question really should be what Jason said is, Victor, I admire Synthesia enormously as a company. We tried to contact them. They didn't get back to me. They got the deal done. I'm so disappointed. We have another investment in the space. I love the space. I admire Synthesia a ton. The first question is, how do you feel about the business? You threw out a statistic there. They said they were at 100 million in ARR when they took the Adobe money. In April. If they really have gone from 100 to 150 in less than six months, then I can make this conversation really quick. There's no way they should sell because that thing's exploding.
- [58:03]
Jason
It's a good point and it probably is. I don't think that's Sony baloney. That sounds right to me.
- [58:07]
Rory
Even if not, even if they got doubling kind of growth. It just feels like a good category. There's a reason we made another investment space. We like the category. I think there's Runway there for that kind of human interface to compute. I always tell the CEO, now would be a really good time for you a to look into your own heart and see how you feel. And if there's something about the business that's really worrying you and you haven't told us, now would be a good time to share. And sometimes stuff comes out right.
- [58:35]
Jason
The other reason I tell CEOs this one, I would tell Victor to sell at 3 billion and it's okay. If he says no, I would do it because I wanted to be the guy. Even if it wasn't in my direct interest as a gambler. I want to be the guy that has that conversation with him. There's another thing that's under discussed and I've had this conversation twice with founders in the last 12 to 18 months in similar situations is are you really an IPO guy? There was one where I love everything about this company. I love the founders. I love everything. There's nothing negative. And I told them to take the offer even though I didn't want them to as an investor. I told them to take the offer because they said, are you sure? You're such a great set of founders. But I don't know if today I see you living the what these public companies CEO life like. I just don't see it. The, the way you have to do it, the constraints, the stress. I just don't think that's what you want to do. So I think you should take the deal because I don't know if it's Synthesia or Synthesia prime. You're going to get another offer like this before the ipo. That's the thing. You have to assume it's IPO or bust. Then you're going to bring in an outside CEO or you're going to. It's just a mess. So that's the question I have.
- [59:36]
Harry
Do you.
- [59:36]
Jason
Can you really run a. Do you really want to run a public company for real?
- [59:39]
Rory
That's an excellent question, Jason. Genuinely, that is really an excellent. Because you're right at 3 billion, there's not going to be a ton of people coming into view offering. You either got to become cash or partisan and settle down and just become the Collison brothers and compound private forever to universal befuddlement, or you got to go public. And the fact, by the way, that it is perceived by so many CEOs as a pain in the butt is, in my view, the thing about being public, that has to change because what you're doing is you're allowing this thing to get in the way of people's entrepreneurial ambitions. I think you're right that it's a pain, and I think it's a shame that it's a pain. And I hope it changes.
- [60:15]
Jason
I mean, I was at this Dreamforce Benioff dinner was great. And I saw maybe 10 public company B2B CEOs that we know that have all been on Harry's show and Rory's invested in some of them. And it was great and it was fun. I got some hugs. Believe it or not, I'm a. I don't give the hugs. I like to get them. But, man, the stress on those guys, you could just smell it out of the pores, you know, the stress. The weight of being a public. It's so heavy today. We could see it when we had Jeff Lawson on and Cliff didn't have any of it at Canvas.
- [60:43]
Rory
He didn't have any of the weight.
- [60:44]
Jason
It's crushing.
- [60:45]
Harry
I have Mike Cannon Brooks on the show from Atlassian.
- [60:48]
Jason
Yeah, some crushing weight there, too. I saw it. Some crushing weight I saw on that one, right? You saw it, right?
- [60:52]
Harry
The weight of being the unreasonable man. His co founder calls him the unreasonable man. The guy who wills things into existence. And the weight of that you could see on his face.
- [61:01]
Jason
And when I look at the ramp and the Merkur and the stripes, like, these are epic companies, right? But I don't see that weight yet. I'm not saying it's not. It's the hardest job in the world, don't get me wrong. Right? But I don't see the deep crow's feet and like, you know, Aaron Levy going from. From going gray at 28 or whatever. I just don't see that level of. Of Anvil level, Wiley Coyote weight on their heads yet.
- [61:25]
Harry
That will go to something about anuril and capital efficiency. Rory, I just have to ask you, you said there about like, hey, we tried to get in contact with Synthesia. They didn't get in touch I've learned over time if you want to be in Anduril, the next best thing is just to pay the higher price for Anduril, not to try and be in the next one. You said you've got another play in the space. Why not just be in Synthesia? And do you not think this market takes the way most markets do in terms of composition and the winner accrues the most value?
- [61:52]
Rory
I do. I think it's a broadsway. We have a very different product. It's kind of real time interactivity versus asynchronous avatars. So there's a big difference in terms of the interactions. Company called Tavis. So basically instead of of pre recording an avatar saying something or having an outreach, you actually have real time interactivity with the avatar at high level. It's the same conceptual trend. But I agree. We looked at Synthesia wannabe at the time, I'm not gonna mention the name. And we decided Synthesia is one you're not in the business of doing modest number twos. Agreed. So you're playing the broad trend in a related but different market. I agree. You never wanna do the number one. Wouldn't have me. I couldn't get into them. Or they just raised around you either pay up for the later round. I made that mistake in 2013. I won't mention the two companies, but we had missed the rounds that were the typical scale round for company A. We actually had a chance with a lot of networking to do a very late stage round in company A. Or we could do a more normal scale round in company B in exactly the same market. The two most head to head companies I've ever done, we did b. We got a 2x. We didn't do a. We left a 15x on the table. Literally every time we discuss this in the off site. One of my partners, I love them dearly, the canonical example has become that decision and I'm like, am I going to hear about this till I die? People. I know I got that one wrong, but they're right. They're right to mention it. That was a. You thunk.
- [63:18]
Harry
True.
- [63:18]
Rory
Exactly. You never want to do the way behind. Exact same category number two. If they're way behind, it's just too hard. I remember the week I got that learning. I can tell you where, exactly where I was when I took those two phone calls.
- [63:31]
Harry
Okay, we can do Andrew Capital efficiency, we can do Amazon layoffs, we can do Amazon Cloud wars or Oracle debt. You choose.
- [63:40]
Jason
I feel bad for Roomba but you choose, you want to do Roomba, kind of. Because this whole talk is about how everything's up and to the right. Poor Roomba gets an offer from Amazon to buy them for 1.7 billion blocked by antitrust. They raised 200 billion million of debt to finance the gap and now it's all spent and they're probably gonna go bankrupt. This is why maybe, maybe, maybe take the synthesia offer. Owning maybe a half dozen roombas over the years. It's a tough, it's a tough end to founder journey, isn't it?
- [64:07]
Harry
Do you sue the government in that case?
- [64:10]
Rory
No, I think in the UK it's called Crown immune. It's hard in the UK you have Crown immunity where literally governments are protected from incredibly dumb acts because of the government. I think over here we have more rights. But still, and I'm winging it here now and I can't remember, did they actually. If the DOJ blocks something on Antitrust gown, you can take them to court and those DOJ decisions have been overturned. I can't remember in this case, did they take it to court or did they just decide to fold? And if you decided to fold, then you probably can't sue because you had a statutory remedy and you chose not to take it. Again, zooming out for people, the story here is Irumba had a deal to be sold to Amazon and the FTC led by Lina Kahn chose to block that deal because I think Benedict Evans said in his plea because of an insipid monopoly in the house vacuum cleaner marketplace. Very tongue in cheek.
- [65:01]
Harry
Right.
- [65:02]
Rory
It was an absurd decision at the time. It only got more absurd since because unfortunately the poor company, which is a consumer hardware business with all the gross margin profile that requires struggled on a standalone basis and you write now faces the risk of going bust. It's a horrible and unfair outcome for which the government and Lina Kahn and the FTC is entirely responsible, based on an outdated, stupid and foolish paper and a foolish belief about how things work.
- [65:29]
Jason
It's also another. I mean there's the whole how the antitrust killed the company, it's the edge of no politics rule. Right. But not past it. It's also a reminder that when you go into the M and A offer, the synthesia, sometimes you'll get the acquired will pay a multiple that only sort of kind of makes sense, a revenue multiple that makes sense for them, but you couldn't get. And so you know, when you get one of these deals, it's tragic, it died, but you got to Take it.
- [65:54]
Harry
I don't know. If you're a synthesia, you're looking at Dylan and Figma going, God, do I want to put myself in that potential 18 month waiting period. By which time I'll be 400 million in revenue being acquired for 3 billion.
- [66:06]
Rory
No, how you said an international. You think you're getting this great multiple of, oh, they're paying me 30 times revenue, but the damn thing's gonna close in 18 months, by which time you might be down to 10 times and it's just not gonna feel that much like. I don't think Wiz has closed yet. I could be wrong. I think Wiz early, but that's the.
- [66:22]
Jason
Crazy one that hasn't closed. It's crazy, right?
- [66:24]
Rory
If you think about it ever's like, yeah, you got a 2 1/2x in six months. No you didn't. You got a 2.5x in two years. Right. And this prolonged antitrust process really is kind of sand in the gears for a lot of these M and A decisions. And at the margin probably pushes people to either A push on or B, in the case of the crazy deals, when the acquirer only wants the people, then they do the Silicon Valley aqua hire routine. But when you're buying the vacuum cleaner company, you want the fricking vacuums.
- [66:53]
Harry
That duration period though is also why I think it's our responsibility as early stage managers to be much more proactive in secondary markets because we get cash back way sooner. And the age old thing of a 4x fund over 17 years is the same as a 2.5x fund over 10. And duration matters and time matters. And IRR is king.
- [67:11]
Rory
It's not the only king. Because look, in this very show Jason was going, oh, it's only a 30% IRR ramp from the 22 billion to 30 billion. From an IRR perspective that looks amazing. So I don't think IRR matters. I actually think, for the record, I think the correct, the correct formulation of the optimization function is the maximization of multiple subject to a constraint on a minimum irr. Just to be a total geek here, basically you should know what your target IRR is. And let's just say it's 25%. Let's just say you want to maximize the multiple provided you don't dip below 25. That's actually what you're trying to do. For example, a 30% IRR in one year isn't as good as a 25% IRR for four years. But if you hold on too long and that 25 starts dipping to 19, 18, 17, then you've gone to a different place. That is the rule. Because in the end you want the maximum amount of capital to invest because you are held accountable at the investor level at the IRR basis. Because at some point they're looking at you, they're looking at the public markets and they're saying risk adjusted, I need me my 20%. So it is the constraint because it's what prevents money from coming down the spigot to you. But you're actually trying to maximize your multiple.
- [68:22]
Harry
So this shit is hitting the fan at Amazon before we do agree or disagree. 10%, largest layoffs in history, 10% of white collar that is falling behind in cloud wars from 50% of cloud revenues in 2018 to 38% today. Raymond James sees Amazon's AI cloud share falling to 7%. Then we had the outage. Billions of damage. This was a bad fortnight.
- [68:47]
Jason
You know what, maybe it's not fair, but what I was thinking is contrast this with Sergey Brin coming back to Google, everything else happening. Maybe, maybe it was a tough time for your founder to leave and go to Miami. Maybe it seemed like a very stable time to do a transition. Right? I mean Jeff Bezos long time as CEO, but maybe stepping down just before AI hit was suboptimal for Amazon.
- [69:10]
Rory
Yes. Or maybe it was brilliant for Jeff because maybe he's off the hook because you're implying in that had he stayed all these bad things wouldn't have happened. And it's plausible just given his world top two or three entrepreneurial achievement of the last three decades. But it's just worth pointing out what the two big problems they have are. The first problem is in their retail business. They over invested for Covid and now they're trying to replace people with robotics because the technology's there and that's just something that had to be done done that's just more of the same. And in cloud it's less that their core AWS business has folded up. It's like all the new compute, which is 10x and 20x larger in terms of demand for these customers is AI related compute. And you've neither built something compelling standalone nor have you partnered except to be fair, a little bit went anthropic. You didn't make a meaningful partnership and you had, you haven't found a way to get some of that compute.
- [70:07]
Jason
But he had four years. Andrew Jassy took over in July 5, 2021. Bezos checked out right at the peak of the last era when products were frozen in time for a decade, when AWS was the same product for a year. So are most of the companies we invested in. All three of us in 2021, they were the same products as 2015. It was the great time to go to Miami because nothing was changing in the world. It was just stock prices were going up in revenue, but the products were the same. So why wouldn't you retire? There's not going to be any change.
- [70:36]
Rory
Punched out at the top. No. Gets. Gets an A plus plus for market.
- [70:39]
Jason
No, I think he gets an F. Oh, God. If he sold his company, you get an A plus.
- [70:45]
Rory
That's true.
- [70:46]
Jason
Yeah. Like my last deal, sales loft, December 2021, you know, two and a half billion. That was the last deal of the era. You know, Kyle and team get an A plus for timing. This is not the same.
- [70:56]
Rory
I want to congratulate Kyle. Exactly. This is not.
- [70:58]
Jason
This is not the same. This is punching out at 2021 and not punching back in like, like Sergei.
- [71:03]
Rory
Cynical comment here. You're right. But when you've got a couple hundred billion dollars, my guess is you're not maximizing money. You're maxing psychic pain and joy. My guess is his psychic joy in the last three or four years doing what he's been doing has been significantly higher than the psychic pain that would have been involved in realizing you've never done a big acquisition in your life. You've got to do a huge corporate deal in AI to matter. And B, all those people you hired in 21 trying to do the right thing for people Covid and Expand, you all got to lay them off.
- [71:32]
Jason
I think Bezos would lay off half his company in a fortnight if it was the right thing. I don't think you even care.
- [71:37]
Rory
Well, he'll have that chance.
- [71:39]
Jason
I mean, Chegg had to bring in poor Dan Rosenwig out of retirement to rerun Chegg after laying off 80% of the company. They had to bring him back. They got to bring Bezos back.
- [71:47]
Rory
I think. And to be fair, one thing we shouldn't do here, and you saw a lot of it with Google too, is that you don't want to overcompensate. I mean, if you look at the two, if you kind of. There's a bunch of bad news in one day, and it is bad, but a lot going on, the layoffs. But again, going back to your position in retail is broadly good. I think you've become a little schlocky in terms of shopping experience. But you have dominance because of your distribution and you're doubling down on that. You're reinvesting in robotics, you're cutting costs. And Amazon wins in their retail business because they can deliver shit faster than anyone else on the planet pretty much anywhere. And you're doubling down on that. So that's like a win on the compute business. On the AWS business, your problem is you're not relevant in the new world. So just knuckle down and figure that out. To be fair, of the three hyperscalers in the pre AI world, if you look at it, Google was able to be relevant because they had their own model. Microsoft went and rented a model from OpenAI, and now the contract's nearly up. And they did it to make a lot of capital gain, but they didn't actually, in my view, really develop something compelling that they owned from it. And you did nothing. So you lose. You need to do something. They got a set of problems on the AWS side. They have to get AI relevant without frankly doing what Oracle I fear is doing, which is taking on a whole bunch of subpar economic transactions. They do have a good slog of anthropic. Not as much as Google, who I think owns 14%, but I don't.
- [73:11]
Harry
Google own 14% of anthropic Google.
- [73:14]
Rory
Yes. Google wins. Yeah. Again, we should be promoting all these cop dev guys that are doing great.
- [73:19]
Harry
Unbelievable. Guys we're gonna do Agree or disagree. Okay, I got three statements. Rory, you love this. Hide your excitement.
- [73:26]
Rory
Rory, it's too much getting shit out of your ass. I hate it. No.
- [73:29]
Harry
Oh, I know. When the previous hour and a half wasn't.
- [73:33]
Rory
I did. I do research, Harry. That's the difference between us.
- [73:37]
Harry
Ah, dear, very fair point. I can't disagree with this. Okay, first one. I would rather own Brax at 13 than ramp at 30. Ramp is at a billion in revenue. Brax is at 700. They're both around the break even to moving profitable phase.
- [73:54]
Rory
And you've given me all the information except the only information I need, which is what's the growth rate?
- [73:58]
Jason
Brecht said 50%. They just said they're going 50% now. I don't know what RAMP is. This is where my cognitive bias. I'm going to go for Brex because it's lower. I can't help my. I cannot help myself. I can't help myself. I don't have that much money to invest. If you gave me a great deal at 100. If you gave me ramp at 100 million and Brexit 30 or 40, I'm still going to do Brex, probably.
- [74:19]
Rory
I could assign a homework assignment that would make this actually an interesting discussion. Watch. We have all the data points we need. We have the relative size, the valuation, and the growth rate of Brex at 50%. The correct question is, what growth rate should Ramp have such that you're indifferent between those two prices? If ramp is at 100, you probably want ramp. If ramp is at 50, you definitely want Brexit. Actually, the fundamental, fundamental question I would argue in all of venture is how much extra do you pay for how much extra growth? If you could buy Ramp at whatever it is, $700 million, 50% going at 13, break even and ramp 1 billion at 30 billion, there is an equilibrium growth rate that would make you indifferent between those two prices, because it's actually a very fun exercise, because it actually is the core problem you face over and over again in venture, which is, how much extra do you pay for 70% growth over 60, over 50, you're paying almost two to two and a half times the revenue multiple. How much more growth would you want from that?
- [75:17]
Jason
This is your job on the show, Rory. You got to tell me.
- [75:19]
Rory
Yeah, no, it's hard to think and talk at the same time. Keep going.
- [75:23]
Harry
You weren't relying on us for analysis.
- [75:25]
Rory
Were you, Rory Shakara? Yeah, I was. Keep going.
- [75:28]
Harry
Okay. Andreessen deserves the prize for best performing mega platform of the last 12 months. Discuss.
- [75:38]
Rory
They're going to get the prize no matter what I say. It doesn't matter. They're getting the 10 billion. That's prize enough for those guys. They'll be fine.
- [75:44]
Harry
I've been impressed by them. I've invested with them across the board. And I think one thing that people often say about Andreessen, with absolute respect to them, is they have so many people. And that almost suggests that they can't all be good. They have so many people. So, like, whatever, I have worked across the board with the different partners. They are as good as the partners at smaller firms with three to five partners. And they've been fantastic. Like, I am a big bull on Andreessen now, where I was not before.
- [76:10]
Rory
I agree they've been operationally excellent. I mean, what they did is, I've been thinking about it. What they brought to the venture business from 20078 on is they went into it solving the problem from the founder back with operational excellence. And on that, they've delivered in spades. They figured out what the founder wants. They've aggregated and delivered to him. The return profile of that has been excellent. I mean I've seen the numbers. They've been excellent. And the question, that was the question and they pulled it off. And that's why I think it's smart the way they have. I mean obviously they've just lost. I can never pronounce a gentleman's name. Andrzej, but very impressive. I've heard him speak. Who's going to do his own thing? Yeah, I mean super talented guy. I heard him speak. I'm very impressed. They have a constant churn and I was thinking even that's okay because they have a platform that transcends. They'll find other good people. They'll have, they have the little pockets to play with so they can, you know, they can give you your little infoworld, they can give you Chris's crypto world. Everybody can have their thing. It's just like investment banks where you're the second co head of North America. Everyone's got a great title and Mark and Ben sit at the top and life is good. It's a well functioning scale machine. And the take 15 years ago was venture couldn't scale and it's TBD how far it can scale but they've scaled it far more than anyone else would have thought 10 years ago.
- [77:25]
Harry
When we sit in look at Series A, we don't sit in and be frightened by Index or Excel or the big European players. We sit and be frightened of Andreessen coming into Europe. They're the ones who beat you.
- [77:36]
Rory
Okay, good to know.
- [77:37]
Jason
You want to be in the top two choices for a founder at your stage. That's when you win. In Venture it'd be nice if you're in every stage in every deal. Right. And I think Andreessen has elements of that today. A top two choice in so many stages from so many types of founders. YC has that in a sliver, as do others. If you're not man, it's just a different game than when you're a top two choice. It's just a different game. That's what you want. So I agree with you. There's only, only two people can be in the top two, right?
- [78:03]
Harry
Final one of all the could be public but are private late stage companies. I would rather be a shareholder today in Anguril, the hottest at 50. Agree or disagree and if disagree, which would you rather?
- [78:19]
Rory
I'd prefer to be an angel because I actually think the mission is great. Let's start with that. I think I give them huge credit for Stepping up to defense in 2017 when a lot of people wouldn't. What they're doing is good for defense, good for the country, and hopefully going to make them a lot of money. I don't know if 50 times revenue for a defense contractor is as good a bet as 20 times revenue for an Anthropic or an OpenAI where you've got myriads of customers. Where in Anduril's case, you're dealing with the dysfunction of the government as the major customer. But just from a God genuine comment. I think the people who did that early should be incredibly proud of what they've done and they've moved the needle in a very, very hard market and they've pulled it off because maybe it's not worth 50 right now, but they've bullied their way into being a prime and they win. So that's cool.
- [79:10]
Jason
No one not interested in the company personally, just personally at this point in life I just want to do things I'm interested in in to a fault. Not interested in building weapons and stuff like that. Just not my vibe. 2. I don't go to enough parties in SF because if I did, and this sounds facetious, but you know what, I'm joking. I'm never really joke. Fully joking is where it does. There's no better brag at a party than Andrew that you did it right. It's the ultimate founders fund brag. It's just. It's just the ultimate brag. You know one of the psychic benefits of investing is bragging, right? At many levels there's different types of bragging. There's bragging because I have a sense of worth in my life that I don't. I'm bragging because I wrote a tiny check but. But I'm validated in my, in my, in my soul. This job. There's so many levels of validation, but I just don't go to enough of those parties since 2020. But if I did, I'd want to have that one on my chips to, to talk about at parties. But I don't care and I'm not into bombs and weapons, so I'm out on this one.
- [80:03]
Rory
The amount of self knowledge embodied in that last two minutes from Jason is just stunning. I mean, the therapy is clear, silly.
- [80:09]
Jason
Working dude, but it's just called being happier.
- [80:14]
Rory
I think it's actually called getting older and wiser. I love it.
- [80:17]
Harry
Listen guys, on that incredibly hearty note, thank you. This has been fantastic and I've loved it.
- [80:22]
Rory
All right.
- [80:23]
Jason
Rock and roll. Thank you. Harry, thank you.
- [80:24]
Rory
Rory, thank you.
- [80:28]
Harry
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