← The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
20VC: Are Burn Multiples BS in an AI World | Sam Altman Needs $1TRN of Energy | Klarna, Figma, Stubhub, all Down: Are Public Markets Turning? | FiveTran and DBT: Is the Wave of Consolidation About to Begin?
01:16:32
AGENDA: 03:58 Understanding Burn Multiples and Capital Efficiency in an AI World 11:54 What Metrics Founders Need to Focus on in a World of AI 19:31 The Role of Kingmakers in Venture Capital: Harvey, Abridge, Profound 33:42 Klarna, Figma, Stubhub, all...
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- [00:00]
Harry Stebbings
There's only two ways of pricing a deal. You price a deal on hope or you price a deal on the multiples. A $15 million revenue company that's perfectly good and has reasonable growth is actually of zero value to a VC because we're in the upside option game.
- [00:14]
Jason Lemkin
And I hear too many folks leaning, they're like, oh, you're triple, triple, double, double or better, you're golden. Don't worry, kids. And I think that's terrible, terrible advice in 2025. Terrible advice.
- [00:24]
Harry Stebbings
Whatever the prize is for being the best company in AI OpenAI is going to get that price. Have a great day.
- [00:30]
Podcast Host / Announcer
This is 20 VC with me, Harry Stebbington. Here's my favorite show of the week. Jason Lemkin and Rory o' Driscoll are back to shoot the shit on the biggest news in tech today. We have Sam Altman needing a trillion dollars to fund energy requirements that are the same as Japan. We have the largest LBO ever in ea. We have Figma down, we have Klarna down, we have StubHub down. It does get more optimistic, don't worry. And it is a fantastic show. As always, I want your feedback. Let me know what I can do to make these shows better for you, harry@20vc.com. But before we dive into the show today, let's talk about agents. Specifically Piper, the AISDR agent brought to you by Qualified. The agentic marketing era has arrived. And if you're a B2B marketing leader looking to scale a pipeline generation, Piper, the AI SDR agent.
- [01:22]
Jason Lemkin
Wow.
- [01:22]
Podcast Host / Announcer
It is here to help. Piper is the number one AI SDR agent on the market according to G2. And hundreds of companies like Box, Asana and Brex have hired Piper to autonomously grow inbound pipeline. Fucking sign me up. Anyway. Qualified customers see massive business impact with Piper. 3x increase in meetings booked and 2x increase in pipeline. Wow, that is some results. Hire Piper, the 1 AI SDR agent and grow your pipeline today. Learn more at qualified.com 20VC that's qualified.com 20VC with the 20VC spelled out letters, for goodness sake. And while Piper builds your pipeline, HubSpot gives your business the AI tools to scale faster. Think about listening to this podcast. Right now you're probably multitasking and catching 70, maybe 80% of it. How dare you?
- [02:12]
Rory O'Driscoll
This voice is so captivating.
- [02:14]
Podcast Host / Announcer
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- [03:37]
Harry Stebbings
You have now arrived at your destination.
- [03:40]
Rory O'Driscoll
Guys, I'm so excited. This, I always love this.
- [03:42]
Podcast Host / Announcer
And it's evening time here.
- [03:43]
Rory O'Driscoll
It almost feels atmospheric. I've got my questions ready, we're good to go.
- [03:47]
Podcast Host / Announcer
And Jason, I want to start with.
- [03:49]
Rory O'Driscoll
One that you just suggested, which was fantastic. Iconic did a report and there was a really interesting takeaway for you. Can you explain what that takeaway was and how we should think about it?
- [04:00]
Jason Lemkin
Yeah, they did a 73 page state of the software report. We don't all have patience with over 80 charts. But the one one that kind of hung with me along with the triple, triple, double, double discussions we've had here that you had from Heming from General Catalyst, right? You know, what's the point of venture in 2025? Rory's other points, that 70% of the money is going into less than 20 deals. But this one analysis that Iconic did was interesting, which is that yes, AI native companies, the ones we're all so excited about, growing so quickly, under 100 million ARR. Have terrible free cash flow margins. Minus 126% it's much worse. Non AI companies are minus 56%. They're still burning, right? Classic checks. But because they're growing so quickly, actually the burn multiples are much lower. They're actually capital efficient because they're growing so goddamn quickly that even if they're burning a lot along the way.
- [04:53]
Additional Guest / Commentator
Right.
- [04:53]
Jason Lemkin
Even if they've got afterburners on, they're getting to Mach 10 or whatever it was in Maverick so quickly that if the capital efficiency is better, this is where VC should be putting all their money.
- [05:04]
Additional Guest / Commentator
Right.
- [05:04]
Rory O'Driscoll
Can I interject and just ask for an explanation for those that don't understand why the burn multiple is better if they're spending more? Can we explain it for those that.
- [05:13]
Jason Lemkin
Don'T understand, it's basically how many dollars of air are do you get out of each dollar that that you're spending? How much revenue are you creating for each dollar of venture capital? You're lighting up fire? It's a weird metric because you could be seemingly efficient and run out of money.
- [05:28]
Additional Guest / Commentator
Right.
- [05:28]
Jason Lemkin
If you don't have enough money in the bank account, right. It doesn't mean you're profitable. David Sacks sort of coined it. And I think when everything was the same in SaaS and B2B in 2021, it made a lot of sense. All the companies were the same. They all kind of grew the same. As you have companies with lower gross margins. At first they kind of broke it. Then VCs stop wanting to fund everything in 2022 that broke it and then AI breaks it. Because we've never seen growth like this. But the margins are lower. A lot of them have token costs. We talked a lot. Some don't. Talked about folks like Higsfield that are somehow almost cash flow positive. 50 million or lovable and Replit that are burning a few dollars of venture capital. But even if you throw how much lovable raise in the last round, Harry?
- [06:06]
Rory O'Driscoll
200.
- [06:06]
Jason Lemkin
200. Okay. But the point is. Oh my God, let's imagine you throw 200 into lovable and they're burning $6 million a month. That would shock most. CVC is right. But if they're going to add 300 million of RR, it's actually the burn multiple is actually quite low. It's efficient from a company ARR building perspective. That's the thought. And. And then you should put even more of your money into these companies. Right? The theory is you get the most leverage out of your venture dollar in these types of companies. Right. Because you're getting the most ARR per dollar invested.
- [06:36]
Harry Stebbings
I think. You know, there's the old expression about models that's also probably true about ratios and rules of thumb, which is all models are wrong, but some models are useful in the same way. All ratios are wrong, but some ratios are at times useful. And I think the burn multiple is a very useful ratio, but I think Jason said it really well. There's a whole bunch of implied assumptions that go into that, not all of which are true if you use it blindly. That was a brilliant insight when David coined it. It really is helpful to compare different companies at different stage and get a sense of capital efficiency. But there's about three or four different assumptions in it that if you forget them and just focus on the burn multiple, you're going to blow up. And it's worth disaggregating that. First of all, let's say what it is. Burn multiple basically says it's a ratio between the amount of ARR you add and the amount of money you spend to add it. So if you spend $2 in total burn for every $1 of ARR, your burn multiple is 2. And if you think about it, big crude comment here. If you're being valued at 10 times ARR, so you just spent $2, you added $1 ARR, that's worth $10, you're up, you put in 2 bucks and you got 10 dealmen of market cap. So it is a very valid construct. So at that level it totally works. And obviously this is one of those weird multip is better. One is better than two. And there's some idiosyncratic stuff like when it crosses into positive, it goes into a negative number. Makes you kind of head hurt. We track it a lot internally, so we've wrestled all those things. But at a high level it's a super good way of comparing things companies with different growth rates and or even just different absolute sizes. Super good insight. Embedded in it though is a whole bunch of assumptions. One is about boring economists. They have cetera, paribas, Everything else being equal, the implied assumptions are the ARR is real, but we know it's often not and it's net ARR. So you're taking out churn. But if you're growing fast, you can hide churn because you're churning 12 months ago as customers, which is maybe 2 million and this year you're at 10 million. So churn is understated. So you can hide that. That's the second thing. So is your ARR real? Is your churn real? It does pick up on gross margin, but again the same thing. If you're growing hyper fast and your margins are moving, you're not picking up on it. And then last probably is less so for these companies, but definitely true for the AI model companies. It doesn't take into account Capex, which isn't true for the $100 million ARR companies, but it's definitely true at Capex. And you can't ignore even In a crazy world, 10 billion of CAPEX in a company. All those things are what says the model when you're comparing. It's not like with like that's one big picture comment is there's a whole bunch of applied assumptions in there. Which is why even though we love those kind of metrics and the one Justin you mentioned, we were chatting before, that kind of the magic number, which is what sales and marketing we actually coined back in 04. Right. They're all good assumptions, but we've actually come back to saying there's a real advantage in seeing the GAAP revenue accounting also to make sure all the money is, for lack of a better word, just showing up for real. So there's a lot of noise in that multiple. And I think when they were all SaaS, recurring revenue businesses, all seat based, all 90%, 80% gross margin with no Capex, all enterprise sales with low churn, it absolutely made sense you could compare two companies. And that's why by 2019 or 20 it almost felt like fill in the form, give me the valuation. None of those conditions are true now I think it's totally up for grabs.
- [09:56]
Rory O'Driscoll
Does it as a framework carry no weight then given the volatility of all the different inputs which mean the output is less reliable, respectfully, is it even a reliable framework to look back on?
- [10:06]
Harry Stebbings
It's a decent framework, we still use it. It's absolutely decent framework because there's things you can do to kind of get the same idea. You can look at, for example, you can look at delta gaap. In other words, you can see how the GAAP revenue changed. Because if you were doing 2 million at the start of the year in ARR and 10 million at the end of the year, the delta ARR is 8. But if you also another way to get to the same thing to check for quote honesty is to look at are you recognizing 2 million of GAAP run rate in January and are you recognizing 10 million of GAAP run rate in December? And it kind of checks on that. So there's things you can do to deal with that, but there's a lot more noise in the system. You have to worry about churn. And there's other issues even beyond that we can come to but even just at the churn, are you picking up all the metrics? Is it forward looking enough? Especially on these trials, there's an implied assumption, remember going Back to my simple model, I was spending $2 million getting $1 million of ARR being valued at 10 times and therefore creating $10 million of value. If that ARR evaporates a year later, then I didn't create value. So the implied assumptions around stickiness, all of those things are up for grabs. It is still useful, but we're far beyond the stage, which we were in 2019, where you can just plug the numbers into the number cranker and come up with a rough and pretty accurate estimate of the valuation of a company. We are not at that stage anymore. We are not in Kansas.
- [11:25]
Jason Lemkin
This is a meta question that I think about mostly when times are good and when companies aren't running out of money. But venture, in some ways is an ar arbitrage. Going to your point, when you're north of 10x revenues, Venture works. You put in this small amount of money and the magic thing is we can talk about free cash flow and profits, but the reason it's, it's a, it's a tolerable business is we really get to trade on air, even through the IPO to some extent, right? We get to trade on this ARR and it's as long as it lasts, it's a great deal. And as long as the multiple is high enough, that's where the leverage is, right, That I get paid off this ARR. And so if the burn multiple is attractive, it just makes the whole thing on afterburners or steroids, doesn't it?
- [12:05]
Harry Stebbings
High is bad, low is good, negative is better. But that's not obsessed on the ratio. The real comment I think is saying is when all you're graded on is growth, it's not easy because growth is really hard. But at least it's a one dimensional scorecard, especially on ARR, when you're graded on growth plus profitability, which happens to us all at some point in time, it gets a lot harder because you're right, there's often, especially in enterprise software companies, an ability at the margin to push really hard on the sales and marketing pedal or the free user pedal and you get some revenue, but just not commensurate with the marginal spend. And as long as you're just being rewarded for growth, you can do that. But once you have to deliver profitable growth, it all gets harder. That's not the shoe that's dropped yet, but it will. And I just want to make one other point on that. It's just so important. People talk about burn multiple and they're like, oh my burn multiple is Good. But they sometimes just forget that there's also absolute burn and then not having money. You know they do forget because the implied assumption again I remember thinking when David Psych, probably this, a very clever comment is if you have a good burn multiple you should in theory be fundable. If you're adding a lot of ARR and you're spending a lot of money to add that ARR, then in theory you are fundable because you are venture value accretive. But that's a theoretical construct and cash in the bank is a actual material construct. And sometimes I see people tell me their burn multiple and not tell me their cash balance and I'm like so yippee, you could have a great burn multiple and you still could be out of cash on Friday. I need to know more. So to your point Jason, you can't let the ratios lose sight of just having money versus not having money. And you see that behavior sometimes where you're like I don't care about your burn multiple, I care about the fact you've less than six months cash. What are we going to do about that?
- [13:45]
Rory O'Driscoll
Guys, I have many companies with good burn multiples and they are going out to fundraise now and they are not getting love, they are not getting attention, they are going Harry, I don't get it. I've been brought up to understand burn multiples, to understand growth rate, what is going on? And I'm just seeing a very stark binary world of haves and have nots. Are you seeing the same? And if you are, what would you advise this generation of founders who have good companies and good numbers and are feeling very confused by a rejected VC community?
- [14:18]
Harry Stebbings
Wow, it almost sounds like therapy, doesn't it there? I'm confused, I'm rejected. But on a serious note, it's a super interesting subject because there's an embedded set of assumptions in there which is at some high level. Does no one give a shit about anything that was founded before 2022? That's really what you're saying is all these old things, how uninteresting are they? But I think the high level comment is it's not that simple. It's not going to be just no one cares because look, look at the recent IPOs. Many of them were non AI native by definition the average IPO just went public was plus or minus 10 years old by definition it's pre chatgpt. So they've built perfectly good businesses capable of going public, maybe getting some lift from AI, but they're a thing. So I Don't think it's all going to just go away. But I think what you are wrestling with is winning AI first world in terms of mental models. So when VCs look at any deal, there's only two ways of pricing a deal. You price a deal on hope or you price a deal on the multiples. When you price a deal on hope and growth, you can lean in on anything and you can get prices that make no sense because the growth ultimately comes and it all pays off. Once you start valuing things on quote, unquote, the fundamentals today, then you can value a public company because at $400 million it's not nothing. But what we're talking about before we got on a $15 million revenue company that's perfectly good and has reasonable growth is actually of zero value to a VC because we're in the upside option game. It's a perfectly good company. Someone should lend them some money, they should get profitable. But at super subscale, the mental model of the VC is saying a lot of the time you can't get from here to big ipo. And that's the business I'm in. So therefore I don't have any embedded option value. So therefore I can only value on fundamentals. And if you're doing $400 million, I could multiply 400 by four and tell you you're worth $1.6 billion. You might like it, but I'll give you the money. But if you're worth $4 million, you have no value because $4 million is never going to be an IPO, therefore I'm just not going to do it. So yeah, there's a lot of companies that are going to have to build a much more capital efficient model and again, maybe can make great outcomes. But it's kind of. It's the zeitgeist, it's the group thinking that's not in your favor. I don't know, Jason, does that kind of resonate?
- [16:26]
Jason Lemkin
I think that's right. I see something that's worse to Harry's point. I think Harry's point on X was, listen, I've got a couple of companies that are growing better than Triple, Triple Double Double and they have an AI element and they're interesting and they're struggling to get funded because they're not ultra breakout. That's a slightly different point. And not only is that true, I'm seeing something more problematic that's at the edge of toxic, which is that boards and investor syndicates that I'm a part of aren't aligned on this. They're not seeing it. I am seeing many VCs that have been around for a while, especially ones that are doing just fine.
- [16:58]
Additional Guest / Commentator
Right.
- [16:58]
Jason Lemkin
Maybe that aren't going to every AI hangout in San Francisco or everything.
- [17:03]
Harry Stebbings
Who.
- [17:03]
Jason Lemkin
When they hear numbers like this, there's no concern. I had a portfolio company kind of like this. And my advice to these guys is just take it if it's decent, just take it. Because some of these VCs are still living in the past. They're still living in the past and I think they give terrible, borderline, inadvertently toxic advice. They're still giving 2022, 2021 advice from the corner office. And I think it's dangerous for founders.
- [17:27]
Harry Stebbings
Can you clarify that? Are you saying genuine comment here. Which, by the way, speaks to the complete lack of certainty about this issue. Are you saying the bad advice is to need money to raise money or not to? I mean, are you saying it's a dumpty.
- [17:40]
Jason Lemkin
Here's the bad advice. I mean, Rory, Harry and my company were at 15 million ARR. We're going 100%.
- [17:45]
Harry Stebbings
Yeah. Okay.
- [17:45]
Jason Lemkin
Our burn ratio is good. Yeah. We're an AI enhanced mug making company. Okay, it's good. But the TAM is not enormous. But the numbers are there, right? And I see VCs saying, Don't worry, you'll get the round done. Take our time. Let's optimize around price. Let's see how it goes. There's no rush. And then I hear, hey, you know, Scale wants to put in money at 250 on that deal. And my advice today is like, Rory's a pretty good guy, but even if he isn't, take that deal now. And I hear too many folks leaving, they're like, you're triple, triple, double, double or better, you're golden. Don't worry, kids. And I think that's terrible, terrible advice in 2025. Terrible advice.
- [18:22]
Harry Stebbings
I agree. I think that those are perfectly good. In fact, they're great numbers. Right? And with an upside story, you could fund them. But I agree, a totally non AI story. If you're doubling at some and you're still so far below 400, 300, 400 million exit value that you're many years away from it and you can get a deal done, you should take it. You shouldn't be optimizing what you're saying, which is good advice, is if you're one of those companies, you should be getting your funding done and being damn glad to get it done. And it may well Be that four years, five years from now, you'll have the last laugh. And he'll be sitting there going, I told you, you idiots. This is great. And you can email all the guys who turned you down and laugh, but right now there was a lot less money for that deal. And it makes, I want to say sense. Again, it's the comment of if you had 200 million, I can tell a story because again, I'm going to repeat myself. Of the 15 IPOs year to date, 10 of them have almost no AI story. So it's not like you can't make money outside AI. That's absolute bullshit. But to start today at 10 million and to believe in what, seven, eight years of compounding to get you to an IPO eight years from now, that's a much harder undertaking in a world where everyone feels that the AI is the story. So those companies. Jason, you're right, is that. And in fact we have one in our portfolio. I'm thinking of specific. You should just get the deal done, raise at a reasonable price, continue to grow, but be capital efficient. Don't get lost in just your burn multiple. Focus on your cash. If you're right about your business, you'll be right in the end. And I think a key part of being an entrepreneur is being willing to prove everyone right even when they all think you're wrong. But you should operate for the next couple of years as if cash is pretty damn tight and scarce.
- [19:57]
Jason Lemkin
I don't think there are any non AI deals anymore. There's cybersecurity, there's fintech, then there's B2B and B2C. I think that's all that there is in our world.
- [20:06]
Harry Stebbings
Okay.
- [20:06]
Jason Lemkin
Even if you're not an AI company, you are. I mean, you know the other thing that said in the iconic report that just came out, their September report, 94% of public software companies call themselves AI companies and the majority mention their AI agents. Adobe has 5 billion of AI influenced revenue. So my point is we're leaving the day where there are two types of companies. Now we can debate what an AI native is, but like I just don't think most VCs are going to pick up the email or the phone anyway. Like they're just going to assume everything as an agent. Like it has to.
- [20:34]
Rory O'Driscoll
One thing that has really shocked me is the mimetic. And this sounds obvious given the sheep plate analogies applied to venture, but it's how concerned investors are by going against a kingmaker, whether it's Harvey or Abridge or any of the king made companies. We have a couple of companies which are the second or the third. And going against the kingmaker in the valley is the most unpopular thing in the world. You cannot get funding and that's obviously very binary and of course you can. I'm being deliberately binary, but wow. Investors are not willing to fund anything if it touches a kingmaker or is in close proximity. In other words, founders listening. When you raise, raising to deter others from raising is a really working strategy right now.
- [21:21]
Harry Stebbings
It's definitely a strategy and it does have an impact. The closer your customer base is to also being valid companies, the more it might act as a deterrence because your customers might also feel that you're the king. But I wouldn't over. I do see the effect. I mean maybe there's two separate things. There's. Do I believe that that thinking exists in venture? Yes, I do. I don't fully share it, but I acknowledge that you have to factor it into your decision making and your risk analysis. The question is, is it a binary? No. Or is it a you factored in and then look at the fact we're the latter. We have done deals where the leader has been funded by one of the top firms and we've also done deals where you look at funded by the top firms. Oh, and by the way, they're doing really well. Maybe you're not going to get there. So it definitely is a factor. Then the second question is, provided that second company can access capital, do the customers give a shit? And the answer is they do. In some markets where it's very Valley centric. If your first customers are also VC customers are VC backed companies, then you get this do loop and look, the reality is someone's raised money from Sequoia, they have a big portfolio, they're known to be aggressive. You're like, hmm, do I want to do that? You know, if you compete against that, if you're selling to oil and gas companies, they barely can tell the sequoias from their KP's. You know what I mean? Right. So it's TBD. I totally agree with the thing. It's important but not dispositive, I would say.
- [22:41]
Jason Lemkin
So what's different? Now going to Harry's point, right? VCs have always been less excited in investing in number two and number three outside of a 2021 bubble. I remember when Sequoia, Sequoia called it the Postmates effect. In 2021 there was so much money to be made that Sequoia decided they Were okay investing in number two and number three, because if you could make billions off Postmates, you didn't have to be in number one. They called it the Postmates effect. But people also understand there's different number ones in segments. If you're really verticalized, there are different number ones. And Revolut and Chime are not the same company.
- [23:09]
Additional Guest / Commentator
Right.
- [23:09]
Jason Lemkin
And we can come up with a million examples. What is a little different in AI? In many cases, there's not an established brand and there's so much change and so much new budget and so much confusion that so many buyers are under pressure and have a desire to make a purchase. They want to buy a Harvey in Legal or they want to do something like Clay, which is powerful, but they may not even know what it does, but they know they're under the gun in gtm. And being number one is so powerful. When people know they want to do something, they've got to do an LLM for Legal. They've got to do this AI research for their clients and tell me who the hell to buy Harry. And that will calm down in a couple of years because the leaders will settle down.
- [23:49]
Additional Guest / Commentator
Right.
- [23:49]
Jason Lemkin
And it's why Lovable and Replit are in a death match. And it's very powerful. They're both at nine figures in revenue. They won't kill each other.
- [23:55]
Additional Guest / Commentator
Right.
- [23:55]
Jason Lemkin
And other folks like you want to be that brand that nervous folks don't know to buy. And I was just talking with someone at Bolt that closed a massive deal against Lovable the other day, and they'd heard of both of them, but no one at Lovable called them back. And so Bolt became trusted. So they bought Bolt because they are kind of equal on the discovery. But who do I trust? Do I trust the ones where the humans are in the deal and helping me, or do I trust the one where it's 90 days to get an appointment? Like when I was at Adobe, we waited five years to implement Salesforce. It's just not happening with AI.
- [24:22]
Additional Guest / Commentator
Right.
- [24:22]
Harry Stebbings
Two comments on that. One is, if we're actually going to be responsive to Harry's question, you have to separate being number one, which I agree with you. In the end, when the money is made, the number one makes, in a business market, 67% of the market. The number two makes 2030, the number three makes 10, and anything after that doesn't even matter. And in a consumer market, it's even more skewed. So I agree. In the end, when the total is written, you want to be in the number one in a segment and you'd be better, better off in a sub segment and being number one than being number four in a bigger segment. I totally agree with that.
- [24:51]
Jason Lemkin
Look, if nothing else, if you're not number one, don't spend like you're number one.
- [24:55]
Harry Stebbings
That's true.
- [24:55]
Jason Lemkin
Even if you're growing pretty quickly. Like Harry said, if you're the clear number two or number three, and 80% of VCs are going to drive by if you burn 100k a month, like, you actually may have the best exit, like for founders, dilution and time adjusted, but don't be burning 2 million bucks a month.
- [25:08]
Harry Stebbings
Which actually triggered something else that I should have actually said because I glossed over this and I think Harry hinted at it. But just to call it out, if two companies have $20 million, one from great VC, one from less well known VC, it helps at the margin. But what I didn't say and how he mentioned, I want to go back to it is the thing we're seeing now is because that first company got 20 million from awesome VC. Three months later they get another 60 million from a bunch of people who want to follow awesome vc. Now it's not a lot of fair fight anymore because now they got 80 million. So we're definitely seeing some of that where it's not so much the money itself that's creating the momentum, it's the fact that the money sucks in more money. In the end, SoftBank proved to everyone's complete satisfaction that money alone cannot make winners, which is very kind of them to run that economic experiment and prove the negative. So it's not in the end dispositive, but there's no doubt in my mind, and I think that's what you're referring to, Howie. You are seeing some cases where you go, wow, not only they got a great firm, they got Sequoia, they got Kleiner, they got whatever, but oh my God, they raised another 80 million bucks on top of that from other people. Now you got to say, not just I do this, put this 20 million in this other company, but do I think this other company is nuanced enough and clever enough and has a differentiated enough strategy to beat the wall of money. And if they've not, then it does cause a pause. So this is one of those examples, Harry, where. And I do this a bit during the course of the conversation, I end up going, hmm, I get that point. I should nuance what I'm saying a little bit. It ain't as easy. The wall of money Makes me trying to be pure and saying it's just about the company perhaps a little unreal in today's market.
- [26:40]
Rory O'Driscoll
Do you think we are near peak madness, guys? Or do you think we'll look back and laugh at ourselves for having this conversation given the might and the size of the markets that we're entering?
- [26:48]
Harry Stebbings
You mean that it'll be so much better? You mean it's like what's his name, Alan Greenspan, talked about irrational exuberance and everyone remembers that. But worth pointing out, the markets kept going for three more years and never went back to 96 level. So is that what you're saying? Is it going to keep going? Or do you think we'll be laughing because it's gone backwards?
- [27:04]
Rory O'Driscoll
I'm saying, are we just so fucking peak that we've got 25 million ARR companies being valued at 5 billion, 10 billion being valued at 30 billion mirrors being valued at 10 billion with nothing? Are we going to actually look back and go what morons. We're about to see the biggest transition in spend from software to human labor budgets and actually how small thinking we are.
- [27:24]
Harry Stebbings
One of those two things has to be true because that's actually the interesting insight back. If that massive transfer of labor doesn't happen, then all these valuations are wrong by an order of magnitude. One of two things is going to happen in the next five or seven years. Either A, you are going to see pretty profound productivity changes. You're going to see companies like OpenAI Lilly being 2 to $300 billion in revenue super quickly. Option B, AI is still going to be wonderful, but you're going to have a readjustment period that going to make your head hurt and you're going to go, what were we thinking? Without speculating yet though, we can in a minute on which of them it'll be. One of them is going to happen soon.
- [28:01]
Jason Lemkin
We're just getting started on what we're going to do in AI in B2B. It is so early, so much like so many of these other waves. The direction's correct, we're early. I feel it. I live it. Two hours Vive coding. I live it that we've replaced 11 on our team with AI agents. I can see the future, I think pretty clearly. We're just starting for venture and for investment though not only am I worried about, I mean we've never had $20 billion pre revenue seed rounds before, right? This is like never happened, right? But what I'm even more worried about that than now. We're back to the era where if you have $1 billion round, you can't even get in TechCrunch, you certainly can't get on 20 VC. There's no way Harry's going to slot you just because you're the 14th company this week to raise at a billion dollars for your AI vertical SaaS company. You're not getting on 20 VC. But when I met Harry, of course you'd get on the next week, right? I mean if you raised a 200 million, you'd get on one of the first 50 episodes. My point. What I wonder is, are our loss ratios correct if as VC firms, especially with larger funds. But actually I'm just as worried about seed funds because they're paying such high prices for such low valuations. As long as we get it, as long as we're cool if 80% of our unicorns implode or blow up or make no money, more importantly, just don't make money for venture as long as we've got it. All right, Even if Those are at 100 or 2x ARR and we modeled it properly, but I'm pretty sure we didn't model it right in 2020. 2021. Those unicorns, the B2B unicorns, we did not model them correctly in terms of our loss ratio and expectations. As long as we have. I'm cool with the party. It feels almost risk free again, like it did in 2021. It feels risk free.
- [29:34]
Harry Stebbings
Yeah. I actually think you need to just again distinguish a little. I don't, but the valuation and loss ratios both matter. But maybe just distinguishing them just a little bit more because I think of the loss ratio as the time you just picked wrong. Remember, it's worth pointing out that the number of times you picked wrong versus picked right, there was a product that got product market fit versus it didn't. If you get that wrong, there's nothing you can help. Your valuations don't matter. It's just you wipe out. That would be true if all your positive deals were pleasantly priced and if all your positive deals were were highly priced valuation separate. Which is okay, you got the picking right. But you can also make a second mistake. You paid up so much that you didn't make a return on those deals enough in itself or enough to cover your loss. So you got to break it down. You can imagine people failing because their picking ratio was bad and they just put too much of the money in bad companies. Or you can also imagine people failing where all their companies were great but the prices were so Bad that they only made a subpar return even though they only had a 30% loss ratio. Both things can. I mean the sad thing about venture is you actually have to get both things right to make money. Because again, it turns out to be a hard thing to do to make money. The question today, I mean it's funny because Jason said the loss ratios. I think the question Harry was leading with was the valuations just even if all these companies are amazing, will you make money in all these companies? A billion dollars? That's one question. And I think that the jury's out because there's an implied assumption there. If on top of your loss ratio starts going up, then you have a tough fund because you have both things going on at the same time.
- [31:12]
Rory O'Driscoll
I also think by the way that Alex Wang's acquisition created this very dangerous precedent in venture investors minds where they're like well if Alex is worth 14, Brett Taylor's worth 30 and then Iliad's worth 30 and then Mira's worth 10 or 15 or 20 or whatever it is. And it creates this kind of tidal wave of justifications for why we should pay entry prices where they are rather than accepting that Alex Wang it's just an anomalous event that may be seen in isolation.
- [31:37]
Harry Stebbings
Irving Fisher, the big American economist at the time famously said in summer 1929 stocks have entered, quote a permanently higher plateau. Well, it turns out he was wrong by 90%. So whenever I hear the word permanent I'm like permanent. Have valuations permanently changed now talking about.
- [31:55]
Rory O'Driscoll
Permanency of value creation or sustainability. Figma is down 63% since IPO day at peak now $53 a share. There's VCs who are still locked up. Maybe times haven't changed that much.
- [32:09]
Harry Stebbings
No surprises here. It turns out stocks that open 250% above their above their IPO pricing probably will go down from there.
- [32:17]
Jason Lemkin
Look, there's. You can't be critical about anything about Figma, but it's still trading at 26 times revenue. The bigger issue is I think actually you could argue that the markets are too generous today, right? The top group of public B2B companies trades at 20 times ARR. Only averaging 30% growth rate rate like the bars. Actually we're lucky. Like on the one hand we have this AI boom. On the other hand the. Perhaps you could argue because it's profitability or whatever, the markets are fairly generous today in ascribing relatively generous multiples to growth. That seems fairly modest based on, on our historical standards it's the bar is not that high on ARR growth to have a decent public multiple. If Figma was trading at 8x revenues, I'd be like, let's all quit. Let's just go golf and live off the fees like 2000. Let's not invest at all because the world's been destroyed. But Figma is, It's still at 26 times revenues.
- [33:09]
Harry Stebbings
Embedded in what Jason said, there's a meta worry here, which is this because whenever you're pricing a deal you're always going this is the way I think of it. You're always saying to yourself how much extra do you pay for how much extra growth? And if it's doubling, can you pay 20 times? If it's troubling, can you pay whatever. I'm just throwing out the numbers here and you're doing this, that and you mentally have a benchmark. And I always think the 10 year treasury is the benchmark for the financial interest rate world. In my mental model of SaaS for the last 20 years, the public company median was the equivalent of the ten year Treasury. And the public company, as Jason said up until about 2019 was 30% growth, roughly six or seven times revenues, NTM revenues. Then you said, okay, that's worth 30%. Then maybe 60% growth is worth twice that in multiple and you could build your little valuation ladder in your head from there. And you're right, Jason. Today that 30% growth stock in the public markets is trading at 20 times or 15 times twice the long term average. Therefore you say one of two things is true. Either it is different and because it's more cash flow positive now, or there's some good reason or even the core bedrock price is wrong. And when that goes down, everything drifts down with it. It's just like when the 10 year treasury trades. Everything that's linked to the 10 year treasury goes up and down with it. It if top tier SaaS 30% growth reverts to seven or eight times, which was where they were happily for a decade and a half and everything else goes down accordingly. It's going to be a tough day. Go team. That gnaws at me every once in a while.
- [34:47]
Rory O'Driscoll
We have seen Klarna as well be hit dips below IPO price. The StubHub was hit massively hard, absolutely bombed. Do you think there's going to be an impact here in terms of of people being less willing to go public with the more recent IPOs facing a harsher pricing environment?
- [35:05]
Harry Stebbings
Somewhere Bill Gurley is lighting a candle and Saying I told you so. Right? In many respects this is good actually from the banker's perspective. Actually cancel that. Not even Bill. It's at the banker's perspective, they're like. Because their argument is always you got to pay them on the upside because sometimes they go wrong. And this is what going wrong looks like. If you bought some of these at the ipo, you're a heart and puppy. If you bought stop up, I think you've been down pretty consistently a lot. Klarna traded up and then is down. So what it says is, what's the rational buyer of IPO stocks going to do? He's going to say, I actually want a little more kind of give in the valuation to make sure I can get this done. I'm probably going to want a wider spread because they all price off the public comps and they say, look, I can already buy 1 of 10 names at 10 times NTM revenues that are already public. If you're going to buy some new shit that I haven't seen before that hasn't traded before, I'm going to pay you eight times. So I can make a pop. And sometimes it goes wrong and they get a huge pop. But that's the thinking. You got to give me a discount to buy the new thing. Now they might say, hmm, I've been thinking there's more risk here than I thought seven. And you're going to see that. So I agree. You're going to see some reflection in the capital availability. I mean, it will impact pricing at the margin. I don't think it's the end of the world. I think, I think the trend is open given the markets, but there's definitely going to be a little more wariness and a little more focus on price from the buyers. And then the question to your point is what happens on the seller side? Do people say, I'm not going to go out because I'm not going to get my price?
- [36:31]
Rory O'Driscoll
Speaking of what happens on the seller side, EA going take private at a $55 billion largest take private of this kind. Jared Kushner behind it. I'm just like, wow, that's impressive. Jared. Really well done for being the broker behind this. How did you analyze. It's a momentous deal.
- [36:51]
Harry Stebbings
It's the largest LBO in history. It's 18 billion of leverage, which feels like a lot for a venture backed deal. But if this was an industrial manufacturing company, those dudes leverage those things kind of six times ebitda. So it's not a lot of leverage. If You're a recurring revenue boring business, but it's a lot of leverage for a hits driven games business. So interesting at that level, biggest deal ever. But I got to say, Silver Lake are part of this and they've been astonishingly smart at the decisions they've made from Airbnb to. I think the real killer is the Dell EMC acquisition where the Dell take private was a work of genius and has made Michael Dell one of the richest men in the world. So I look at it and I go, pretty smart money at the helm, quite a big ass deal.
- [37:36]
Rory O'Driscoll
Speaking of size, that blows you away, as we said, large deal there. One of the things that blew me away this week is the sheer size of data center requirements and energy capacity that Sam Altman needs. Needs with OpenAI, he would need more energy supply than India's capacity today. In 8 years. OpenAI planning to 125x energy capacity in 8 years. Is this sustainable? Is this within his. I need hundreds of billions of dollars more to make what I plan to do. How do you analyze this unwaveringly infinite, insatiable demand for energy?
- [38:12]
Harry Stebbings
Well, first of all, you're right. The energy demand is a outgrowth of the compute demand and the compute demand is an outgrowth of their ambition. And as long as the revenue keeps growing like it is and the capital keeps coming like it has, they're going to be allowed to make that bet. And as we said last week, it's pretty clear that he and the other five or six people making that bet, and it is only five or six people, are all going to make it until some unequivocal feedback comes back to say, dude, this ain't working and you have to stop. That hasn't happened today. Will it stop on the road between roughly a 12 billion run rate now and a $200 billion run rate in 20? I mean, my gut is somewhere along the line at will, but the way life works is if someone's rolled the dice and won six, seven times in a row, he gets to keep rolling. And that's all you can say, really. I've really internalized this whole debate of like, you can sit and stare back in wonder. And I actually find myself saying, what actually do you do with this discussion? I mean, do you want like, in the end, you know, it's fun to talk about. And each week, I mean, as we talk about it, you know, you do what a good little forecaster does. You update your priors based on new information. And that's what I'm doing, literally Every week. Because we have some version of discussion every week. And the weird thing is every week there's some hints that say, oh my God, this thing can work forever. It's typically, and this is my construct, it's typically in the technology. New things. Like I'm sure Jason thought Claude can now cope busily for 30 hours with no human intervention. It's like amazing shit on the technology.
- [39:40]
Jason Lemkin
I did three hours. I did three hours myself.
- [39:42]
Harry Stebbings
Yeah, nice.
- [39:43]
Jason Lemkin
It's a big change.
- [39:44]
Harry Stebbings
So it's huge. And so the technology keeps moving forward. Right? So if you look at this, my bigger heart. If you look through a science lens, this is all doable and possible. I think if you look through a finance and economics lens, at some point in the next two, three years, the scale of the ambitions becomes too hard to fund. And you can find evidence of that. And then you pay your money and you take your choice. And in the end you manifest that bet by deciding do you want to buy your puts or calls on Nvidia.
- [40:11]
Jason Lemkin
You ask about power for data centers. Here's just the weird thing I'm thinking about for what it's. I'm not an expert, right? I believe that Sam's going to solve this problem.
- [40:18]
Rory O'Driscoll
Problem.
- [40:18]
Jason Lemkin
But I believe, like a lot of things, it's hard for us to appreciate the scale of the problem. So just a little 100 billion that he's doing with Nvidia, just the one where they just announced, right. Needs more power than all of New York City. It will only be a couple years where the cities of the future don't even have humans in them. The next New York will all be GPUs and like 20 people managing an entire city, a New York city of data, of GPUs they will be producing. It's not just that it's a data center. It's the output of AI. Like an entire New York will have 20 people in it. We will be in this weird future where. How many major cities do we have in the US 20 or something like that. Half of them now will be just AI cities full of GPUs. Just this 10 gigawatts is more than New York. That's the weird thing. What are they even gonna look like? Our country will be dotted with these stargates that are larger than New York City with only hundreds of people working in them and the equivalent of billions of digital minds. I think Sam will figure out fusion and the trivial things on the way to get there. But Jesus Christ, half our cities in the United States may all be just these massive stargates with no humans.
- [41:30]
Harry Stebbings
I'm going to zoom back out to the kind of wider concept and the thing I said earlier, but the technology says it's going to be exponential. I think the economics will grab hold of it. I think what Jason said was a microcosm of what will happen. I don't think. I think the growth rate will slow more quickly. I think all the practical realities required to make that much power, to roll out that much data, to sell that much software, to get enterprise to adopt that quickly. I personally think that the rate of adoption forecast over the next four or five, that's implicit in all these data center assumptions, will, in retrospect, prove to be too optimistic. So there I've crept out on the limb and said it. We'll be revising those forecasts down over the next five years.
- [42:13]
Rory O'Driscoll
I feel very stupid, honestly, because I look at a trillion dollars required to fund data centers for OpenAI alone. I'm just like, I don't know where that money comes from.
- [42:21]
Podcast Host / Announcer
I know we said, oh, there's 5x.
- [42:23]
Rory O'Driscoll
The demand for anthropics round. That's cute. That's like 50 billion.
- [42:27]
Podcast Host / Announcer
This is a trillion dollars for data.
- [42:29]
Rory O'Driscoll
Centers alone, for OpenAI alone. Where is the money? Sovereigns don't have that.
- [42:35]
Harry Stebbings
Well, actually, funny enough, they do.
- [42:37]
Rory O'Driscoll
I mean, it's it all in.
- [42:39]
Harry Stebbings
Yeah, agreed. Well, that was just being precise. Right. Maybe the better point, Harry, is you're dealing with numbers at that scale. A trillion dollars is a lot of money. I mean, the joke used to be Everett Dickinson quote, was a billion here, a billion there, and pretty soon you're talking real money. Now that feels laughable because the real truth is in OpenAI land, a billion here, a billion there. Pretty soon you're not talking about that much. We're talking about a trillion. But a trillion. You're talking about real money.
- [43:04]
Jason Lemkin
The trillion. Here's there's again, I've said it many times. I have more and more respect with the way Sam communicates.
- [43:09]
Additional Guest / Commentator
Right.
- [43:10]
Jason Lemkin
Simple things said a little bit ahead of time, said more clearly than we realize.
- [43:14]
Additional Guest / Commentator
Right?
- [43:15]
Jason Lemkin
Including the beginning of Stargate, which I didn't understand. And why the hell Larry Ellison was there with Donald Trump. I didn't get any of it. I think he is willing the trillion into existence. I don't think the answer is clear.
- [43:24]
Additional Guest / Commentator
Right.
- [43:25]
Jason Lemkin
I don't think you can get every sovereign wealth dollar, but whatever it is, I think is sufficient. Here's my view as someone just that lives in AI state 12 agents vibe coding two hours a day. If I had to. If I had to only use GPT5 and Claude 45 and I couldn't get any more GPUs and I couldn't run any longer context and I couldn't do anything else, it'd be okay. Like it would be a bummer. And what I mean is it wouldn't have to stop, but let's say it had to slow down because there wasn't a trillion. So I think Sam is just willing as much of this into existence as possible because of the future. And if we come up short, if it's 400 billion or 600, like we don't have to buy all the GPUs like the world, it would be okay if they had to last six years instead of three years or whatever the depreciation schedule is. So I think he's willing it into existence without it being a certainty because we can't stop at 700 billion.
- [44:17]
Harry Stebbings
I think that's actually right and quite insightful and it allows us to make a really important distinction. And you see this a lot with the very best entrepreneurs. Right? The sheer act of willing something into existence like this is just amazing. And the broad direction they took in 2016 on has been entirely vindicated. And it's entirely probable that the same broad direction is correct for the next eight years. And what that means is as long as OpenAI stays ahead of that train and on top of that train, they're going to be the winner. Whatever the prize is for being the best company in AI, OpenAI is going to get that prize, and that's his job. And he's doing it better than any other CEO of this decade. It is also equally true, as any CFO who's had an ambitious CEO knows it is. Just because the CEO says we're going to treble next year doesn't mean we should buy real estate and hire people as if we're going to travel. Maybe we should plan for a double and be ready to hire more if it starts to happen. The problem is not big visions from the most visioning CEO of our decade. The interesting thing is if you start valuing Nvidia like as if all that's going to happen and more. If you start valuing Oracle as if all that debt's going to be paid off and more, maybe we'll look back and say we saw this visionary person leading us to the promised land with big metaphors like trillion and we foolishly thought it wasn't the metaphor. We thought it was a po and we literally borrowed money against the po. I think five years from now, that's where you could be. We said, oh, I get it. OpenAI is still the best company on the planet for AI. Its growth rate has slowed to a shockingly small 50, 60%. It's freaking amazing. It's doing $30 million billion dollars going at 50%. It's astonishing. But maybe they don't need a trillion dollars of capex this week. The ripple effects of that will be where the fun starts. And to me, that's at least as likely a scenario as we achieve the full kind of thing. Which gets to the metaphor of the CEO and the CFO of the We've all been on those boards where you have the wildly aggressive CEO and you don't want to trammel them. You don't want to say, don't be aggressive because their aggression is what made you all this money. But you do want to say, please get an experienced CFO who quietly will make sure that we don't run out of cash, that we don't actually. That until we see the revenue coming in. And that's obviously what the economy as a whole perhaps should be doing here. Maybe we shouldn't be borrowing every dime on the assumption it's all going to happen. Every time I do this, I say to myself, how much should I have in the S and P this year? But it's been up no cash.
- [46:40]
Rory O'Driscoll
I'm thinking less and less right now. I'm looking at it thinking, I can't be this good. This has to be a peak. This has to be a peak, baby. We said there about Sam, you earn the right to do the next thing. And he continuously does.
- [46:53]
Harry Stebbings
Yes.
- [46:53]
Rory O'Driscoll
And then you also said about revisiting your pride. I always thought that Zuck earned the right to do the next thing. He earned the right to do the next thing. And I have to say my faith in Meta's AI strategy has just dwindled and dwindled and dwindled. And I hold that in stark contrast to them being my largest public position, being very open, sympathize, you just never bet against Zuck. But I'm looking at it. I'm looking at Alex Wang, I'm looking at the treatment of Yann Lecun, I'm looking at how they structured teams. And I'm going, this is not well run. OpenAI anthropic are coming for you. Microsoft and Satya are fucking great. Sundar's got Google. Am I wrong to have such unwavering allegiance?
- [47:36]
Harry Stebbings
Well, it doesn't sound like you do. It doesn't sound like you do. You're voicing disloyalty here.
- [47:41]
Jason Lemkin
If yes, well, one thing's clear. Listen. He is not the communicator that Sam Altman is getting up there with the thick glasses, and I'm going to buy him saying things that just if I don't understand where the hell he's going and Harry doesn't understand it. Not saying he's not getting there, but good God, we don't under. If we don't understand. He's not one of the great communicators at the moment. Mark Zuckerberg. He might be a great connector with technology because this, this Facebook engine is unkillable, but man, he's a crappy communicator. Right, because none of us. I'm not saying his AI strategy is an S tier, but I don't think any of us understand it. Not for the life of us where the hell it's going.
- [48:18]
Rory O'Driscoll
I think you can say it isn't S tier. It's a desperate attempt to throw money at a problem and bring in dream talent and try and throw it together in a way that hasn't worked very clearly very quickly.
- [48:29]
Jason Lemkin
Yeah, but he was clear just this week. He'd rather burn the 20 billion in operating income and fail than become irrelevant.
- [48:35]
Harry Stebbings
That.
- [48:35]
Jason Lemkin
That, like that was Altman level of clarity, but maybe not in the way I wanted to hear it, but it makes total sense. Like he'll burn every 20 billion of operating income to be in play rather than not be at the game. Right, Agreed.
- [48:48]
Harry Stebbings
And I think there's a lot to unpack in that. That statement is the most important statement. The man who owns, with untrammeled power the 200 billion revenue, whatever it is, 70 billion free cash flow business is totally willing to spend the money. So the bet's going to happen. The bet's going to happen because that's his evaluation of the risk return. And then to the point you'd echoed back from me, when you're successful, you earn the right to roll again. And I said that and I stand by that statement. But there's two different statements. You earn the right to roll again. Which doesn't mean you were right. If there was a Couchy bet, and maybe I should check at that. Some version of this AI strategy will not produce meaningful revenue despite a $20 billion burn and will look more like Meta VR and less like Instagram and WhatsApp, two of the most brilliant acquisitions of the last two decades. I take that bet. And I'd also be glad to have back the leader who got too Remember, you get too white, you get too wrong. Wrong. The two right more than swamp the two wrong. If he was just building a venture portfolio, he'd have a 50% hit rate and he'd have a wild DPI. I don't get it for this deal, but there you go. Agreed, you do.
- [49:51]
Rory O'Driscoll
But it doesn't mean that you rate the quality of their decisions in the way that you used to.
- [49:55]
Harry Stebbings
Well, you're right, it's a harder bet. And that's why people are obviously vitally important, especially CEOs around trammel power. But to some extent the wider comment is the, the bet for the last 15 years was writing this brilliant invention that you had in 2003 and just optimizing it. And that's hard, but it's a lot easier than now. You got to invent a whole new thing a second time. And with the exception of Mr. Jobs, very few people have ever built a whole new thing differently. Because Jason's right, the zoom out comment here on risk, on AI is not. The AI is going to help us target ads better. That's in the noise. The big picture comment is if you spend two hours a day on ChatGPT, that's two hours a day that you are not spending on Facebook. And we live and die on our attention. So we're just going to make shit until somehow we get people to come back and play with us. We're going to have characters whisper sweet nothings in their ear, whatever it takes.
- [50:50]
Rory O'Driscoll
How significant do you think it is that ChatGPT now enables like a buy in ChatGPT feature, totally opening up commerce so users can absolutely buy by following recommendations and suggestions.
- [51:01]
Harry Stebbings
It's clearly a trend they're all exploring. I mean, Google, there's two different kind of even syndicate whatever protocols on this one from Google, one from ChatGPT on how to do this. All companies that are involved in E commerce are kind of looking at this. There's clearly going to have to be some monetization of all these free users because as we just discussed, this stuff is $1 trillion worth of expenses and $1 trillion isn't going to cover itself. There's only two or three things you can do with free users. You can sell them shit or you can sell advertising to them. So they're going to press this button. This is obviously going to happen. I'm sure the other shoe to drop at some point is advertising. So it all makes sense because it's one of only two ways to monetize the free users. So it's going to happen.
- [51:40]
Jason Lemkin
I just think it's an experiment.
- [51:41]
Harry Stebbings
Yeah, exactly.
- [51:42]
Jason Lemkin
I think we'll see a lot of these and it'll be confusing to us because they'll all get a lot of pr, they'll drag out the Collision Brothers or Toby and they'll all do joint print. But whether for OpenAI, this is a top five initiative, or whether this is just another integration, at the end of the day, I'm just not sure. I'm just not sure. I mean, is this the future of e Commerce? On ChatGPT, there's. We'll see. There's a lot of arguments. It isn't. There's a lot of arguments. That's not how people buy the hottest shoes or the hottest watch. Today there's a lot of data from Instagram and Pinterest talking about how people purchase. So you gotta do like 2 billion of revenue to move the needle at OpenAI for next year.
- [52:16]
Additional Guest / Commentator
Right?
- [52:16]
Jason Lemkin
Right. Will this math add up?
- [52:18]
Harry Stebbings
Maybe.
- [52:19]
Jason Lemkin
But if it's not material, it's just an experiment or a feature.
- [52:22]
Additional Guest / Commentator
Right.
- [52:22]
Harry Stebbings
I think what you said, Jason, actually that reminded me, and you're exactly right, is they tried versions of this in Facebook and Instagram as well. And what they discover is for whatever reason, people are really comfortable with advertising on these platforms and just less comfortable with purchasing on these platforms. And I don't know if the metaphor applies one to one, but it's hard not to imagine that if you were to pick the thing to do, that would be more easy, it would be some version of advertising. But we'll see. I like your comment. We're growing so fast, we're burning so much that if, if you're not actually stemming the tide at the billion dollar level, you may not even matter here.
- [52:54]
Jason Lemkin
You got to think in billions to have a new product.
- [52:57]
Additional Guest / Commentator
Right.
- [52:57]
Jason Lemkin
You've got a CEO of apps. I think that's a tough job. This is coming in like, you know, when it took a little while for Google Cloud and Google Apps to figure out its footing because the numbers were so big.
- [53:06]
Additional Guest / Commentator
Right.
- [53:06]
Jason Lemkin
It used to be Google internally almost made fun of Google Cloud for years because in the old Diane Green Day, it wasn't even a rounding error.
- [53:13]
Additional Guest / Commentator
Right.
- [53:14]
Jason Lemkin
It was a distraction. Now obviously it's a force of nature.
- [53:16]
Additional Guest / Commentator
Right.
- [53:17]
Jason Lemkin
It's a tough job because if I'm the CEO of apps, I've got to come up with a couple multibillion dollar revenue streams that get there in like two to three years. Like that's non trivial.
- [53:25]
Harry Stebbings
And then just for context, just to say it, because I can't stop myself. There's 1,000 billions in a trillion. And if you're going to spend a trillion in Trapex, you're implying that you have $1,000 billion dollars. It brings into scale you. Exactly right. Which in my view exposes the absurdity of a trillion dollars of Capex. It's going to be really hard to cover that nut.
- [53:44]
Rory O'Driscoll
I do want to discuss one very, I think important one which is 5tran in talks to buy DBT. Both were super hot companies. DBT was really super hot. 5tran reported last time 400 million of ARR. DBT said before it was 100 million. Taking them together, given growth rates, that'd be over 500 million if they were to combine. How did you guys analyze 5tran buying DBT in this, this combination coming together smart.
- [54:11]
Harry Stebbings
And I'll tell you why. Because the products seem to be adjacent. So they make kind of better together story. There's always puts and takes one level down. You know how well the customers overlap and that kind of stuff. But at a zoom out level. This is the kind of thing that simply has to happen over and over again in everyone's venture portfolio. Because we have 6, 700 unicorns, we've processed 5, 15 out the IPO gate year to date. So 20 for the year. That implies we've got 30 years of this stuff to get through. Every time two companies combine, we have the unicorn list. It takes two mid sized companies. I mean 400 was nearly there. This is part of the job venture is going to have to do to whip their portfolios into shape to be IPO able. It'll be noisy, it'll be hassle. I'm sure all the drama of private.
- [54:58]
Rory O'Driscoll
To private did the DBT invest investors.
- [55:00]
Podcast Host / Announcer
Do okay in this transaction.
- [55:02]
Rory O'Driscoll
How do you expect this to play out?
- [55:04]
Jason Lemkin
I thought when I saw it, right. Because I tried to do one of these myself recently. But I'm not Andreessen Horowitz. The fact that Andreessen is the lead or close to it in both deals makes it much simpler on many levels. Not only does it make it easier to get people together in the conference room, right. Not only does it mean you already know each other, but just on paper, If Andreessen owns 20% of 5tran and 20% of DBT and you combine them, it does kind of suck when you, when you own 20% of a portfolio company, combine it with another leader. Totally makes sense on the spread sheet. Great outcome. And Now I own 8%. After the deal, I go from 20 to 8 because I combined them and there's dilution and all this. It just is. It may make sense in the real world, but If I own 20 and 20 and I got 20 together, these deals, there's a million reasons you should mash your own portfolio together. It just makes it easier.
- [55:49]
Harry Stebbings
It does make it easier. But I understand what you're saying. And just to be clear, what you're saying is if I had ownership in one company but not the other, I have 20% ownership, so I have 20% of upside. And now you merge, it's a 50, 50 deal, there's some dilution, now you're down to 8%. And that is fundamentally the reason why these deals are hard. The preference stack makes it even harder. But even on an ownership basis, there's a little party who thinks I have this little at bat. And if this company takes off, I'll get 20% of the upside. And when you do this deal, you're saying if this combined company takes off, I'll only get 8% of the upside. So your leverage of your bet has diminished markedly. So I get, and I remember thinking that when we look at some of these deals, but what you've got to internalize, and I think these guys have done a really good job internalizing it, is 20% of something that's not going public is not nearly as interesting as 8% of something that is going public. And if you believe that it's not a continuum of value, a sliding scale of value, but rather it's like electron states, there's just a gap and then you got to go to the next state. If you're above critical mass and you can get public, you get the cheese. If you're below critical mass, then your only option is Thoma Brava and whatever pain that that involves. And we've had these discussions in some of our companies, would I prefer to have 20% of my bet? Yeah, but I'd prefer to have a bet that's worth something. And I don't mean worth it in the sense of a hundred million dollar company is not worth it. But if you want to get to the IPO and the IPO Windows 4, 3, $400 million, you got to do what you got to do.
- [57:12]
Jason Lemkin
Of course. But if you believe the upside is not bounded per se.
- [57:16]
Additional Guest / Commentator
Right.
- [57:16]
Jason Lemkin
If you're optimistic, it's so much better to combine two portfolio companies and own 20% together. I understand you can't argue the intellectual argument but it's tough. VC firms are a collection of GPS and it's a collection of interest. And if my one winner goes from 20 to 8, that's tough enough as it is. But owning 20% of something that is accretive, it's hard to argue against that intellectually or emotionally, isn't it?
- [57:39]
Harry Stebbings
Emotionally, yes, but intellectually, no. You're right. I get it. I do the anchoring. And something you guys asked about last week or two weeks ago about individual portfolios, again, I often do this. I sleep on my arsenal. And we've. Individual portfolios should be less diversified than group portfolios because there's some value to the firm. And this is another one of the values the firm has to be able to. We have to talk as a partnership and say, yeah, even though you're going to go from 20 to 8, this is something we need to do as we think about liquidity. So it's not ideal, but there's no point hanging onto a dream that's not going to happen when you can get a reality that is. And look, the fatal mistake that always scares me is not the delusion. The thing that scares me is you go from a decent deal that's well run, where you know everything about it, to merging with something else and then the combined entity screws it up. That to me is the really shitty outcome where you took your 20% bet and turned it into 8% of a disaster. Which is why picking the partner and having it make industrial sense is key. And that's why I think this deal felt to me from a distance like I'm not the infrastructure guy at scale. But it felt to me from a distance like that's a damn smart obvious combo that will get critical mass. I mean, you won't be looking at the S1 going, why are these companies together? You'll be going, oh yeah, I get it.
- [58:52]
Jason Lemkin
There was a deal superficially similar to this, right to the numbers that I tried to work on. There was the A investor, the seed and the pre seed. The A investor wanted to jam two of his companies together.
- [59:04]
Harry Stebbings
You were just telling him to.
- [59:06]
Jason Lemkin
The pre seed investor had another company that I thought was meant to mid from his portfolio that he wanted to jam together. But I get was almost as big but mid. And then I had this idea, I'm like, listen, I have a third company, a fourth company to combine. I have no shares in this other company, okay, I'm going to go through 50% dilution. But I know the CEO and he's the best in the industry and the aid and the PC idea were both fine, but both would maintain ownership and their own thing and their own properties and. And nothing's happened.
- [59:36]
Harry Stebbings
And that's why you need to be an active investor. That's why you need to be a board member. Because it is tempting to try and take care of yourself at the same time, but you can't. Because the whole point of this. Cause remember, the bad thing about doing that is you actually will create the situation I just talked about. If the CEO isn't saying these companies obviously belong together, then it's probably a dumb idea.
- [59:55]
Jason Lemkin
Yeah, when the CEO doesn't drive it. It's weird too, right?
- [59:58]
Harry Stebbings
Totally. No, yeah.
- [59:59]
Rory O'Driscoll
This is what happened with Clary, though, know.
- [60:01]
Jason Lemkin
And this one's easy to be critical of, right? It's easy to be a critic. It's just combining a series of some properties that Vista has underinvested in with another one that has scale but isn't growing. I mean, it's easy to say this is the bad version of Rory story. Rory saying we got to combine 800 B2B unicorns or whatever it is.
- [60:17]
Additional Guest / Commentator
Right.
- [60:17]
Jason Lemkin
But mashing together a bunch that are growing single digits is the suboptimal strategy.
- [60:22]
Additional Guest / Commentator
Right.
- [60:22]
Jason Lemkin
If that's the case here, I mean, drift is probably shrinking based on just looking at how the deal happened. Right? It's probably shrinking, but. And leaking all the salesforce tokens for Cloudflare. Leaking everybody's data too, because yeah, I.
- [60:33]
Harry Stebbings
Mean, they obviously have that drift because yeah, to take it on the chin and push back, but agree in a way, the combination of a sales loft type company and a clarity type company makes a ton of sense. You have a sales engagement platform and then you have a forecast. It's intuitively makes sense.
- [60:49]
Rory O'Driscoll
I wonder if Tech P now questioned their business model a little bit more when they see the multiples that you can get on the money that's being moved by your kush and your big firms combined by the increased loss ratio that will happen from an increasingly volatile new AI world. Are you suddenly going, shit, I'm not getting paid for the risk that I'm taking on the multiple on the upside, given the displacement on the downside, to.
- [61:14]
Harry Stebbings
Be explicit, because you didn't make it up, is what you're saying. Are the tech PE people looking at their business model that looks so secure for so long of buying SaaS companies and just running them, paying down the debt and optimizing and are they saying this mightn't be, this might have more risk than we thought and less upside than the other game.
- [61:34]
Rory O'Driscoll
100% buying your pipe drives or your Coopers or your. You name it. It's harder than ever because as we said opportunity cost wise you can move more money with better multiples elsewhere. And then secondarily displacement wise there's more and more ways in which they're getting attacked through better and better startups.
- [61:51]
Harry Stebbings
They might be saying that just like sometimes we say oh my God, PE looks so easy. They just have these big sums of money and they do it. I think it'd be a mistake. Generally the record of people trying to transition to a totally different sector is pretty mediocre to my view. Going from what they do to making non controlled late stage investments just because pick a name thrive do that well would be in my view stupid stupid because Trive are really good at that and they're not. They should be saying any deal we underwrite today you better have a clear understanding of the AI downside risk to Jason's point. And if you have a lot of downside risk, maybe you shouldn't be doing these because I do agree there is that it'd be fun to speculate on how. I don't know actually Jason, it's like how embedded would a non AI app have to be for you to say this thing is good for five more years of revenues?
- [62:40]
Jason Lemkin
The problem is I think PE thinks about this maybe from a slightly different perspective, but I think this is the concern anyone that like us has been doing B2B for a while. These products didn't change from about 2008 until 2023. They're the same products and the Brian Halligan will agree. And I said this with Henry Schuck and he's like yeah, I didn't, you know we looking back on it, none of our products changed for a decade.
- [63:04]
Additional Guest / Commentator
Right.
- [63:04]
Jason Lemkin
And so it wasn't just that we had high nrr which was the spreadsheet glue for the P model model. I led the seed round and pipe drive and that product didn't change for it took them four years to launch a mobile app. You had four used to have four years to launch a mobile app. That was my first venture investment. It was a billion dollar cash exit, billion and a half my first investment. Could you imagine today waiting four years to launch your AI co pilot like you're dead in the water.
- [63:26]
Additional Guest / Commentator
Right.
- [63:27]
Jason Lemkin
And so that was the part that was underappreciated under discussed. Yes, 140% NRR meant we could buy Marketo and fire everybody but the products can't be static and AI is the accelerant there.
- [63:39]
Additional Guest / Commentator
Right.
- [63:39]
Jason Lemkin
But that's why I worry. I worry there aren't enough buyers for any of this stuff.
- [63:44]
Additional Guest / Commentator
Right.
- [63:44]
Jason Lemkin
Because the rate of change, it's unprecedented in business software.
- [63:48]
Harry Stebbings
I just want to kind of double whatever cliche is on that. That is such a big insight. Right. And there's two consequences of that. Like, you're right. There was 15 years where we made the same product and you didn't have to think that much about product direction. At the macro level, it was roughly the same form factor. I mean, you look at Salesforce 2002 and 2022, it's the same thing. And that's now changed. That's huge. And it's huge. So there's two consequences, though, for both sides of the table. On the PE side, you're exactly right. You look at that and you go, I might get away with next 10 years making the same thing and not changing it. And so maybe I'm entering into some kind of tech risk that I've never before internalized. And the weird thing is, even on our side of the table for these new post LLM startups, I'm finding that, I think we talked about this before is that product market fit, when you locked into it in SaaS land, you just didn't unlock for 10 years. Whereas here you can lock in and out of product market fit as the models change and you look back on the product a year ago and you say, oh, my God, it feels totally obsolete. So there's more risk on our side of the table too.
- [64:48]
Jason Lemkin
I think that's why it's good. The growth is higher because the risk, it's less stable.
- [64:52]
Rory O'Driscoll
I think, to your point, Maura, it's what makes our job harder than ever. And I'm not asking for sympathy. I know it's not easy making money, but that's what makes it hard. On average, the predictability of markets in old days was easier.
- [65:03]
Jason Lemkin
Yeah, a lot of things. Jeff Lawson said, I'm still processing. It was a good show, even if people, they should go watch that one if they didn't, you know, his point was that if he were running Twilio today, it would be probably thriving because he sold at the API level and could benefit from the AI Boom.
- [65:17]
Additional Guest / Commentator
Right.
- [65:17]
Jason Lemkin
I've seen that with Revenue Cat and others in my portfolio and that the seat model is under risk.
- [65:22]
Additional Guest / Commentator
Right.
- [65:23]
Jason Lemkin
And I got burned out of LinkedIn people saying the seed is dead because it's obviously not true. At some level, seats are growing, but Good God. Now that we're running 12 AI agents, you know, we only need two seats.
- [65:34]
Harry Stebbings
Of Salesforce because you don't have the people.
- [65:36]
Jason Lemkin
We just don't. And yeah, and if Salesforce, if Agent Force can do all 12 of those agents, then we'll. We'll actually end up paying more to Salesforce. It hasn't happened yet. But this change of not needing as many seats, it's. We thought it was a layoff thing in 2022, 2023, oh my God. We're laying off people. Like, smaller headcount is an issue, but ultimately, if the economy grows, you can get past it, right? You get past the layoffs and the companies re. Accelerate. It's a transitory thing like a, Like a global pandemic. But the agents taking over humans and less seats in software, my God, it makes the PE model worse and our jobs harder. It just. Because now we have like six agents that plug into Salesforce. They're like six human equivalents. But Salesforce may change their API pricing, but they sure don't need a seat. It just makes it even tougher for PE to buy these seat models. Not only the products not last a decade, but the AIs don't need as many seats.
- [66:26]
Harry Stebbings
Two things on that. One is, you're exactly right. Seats don't have to go to zero to be a lot more variable than it used to be. But then the second is, I was thinking of you, Jason, because you are always, if I may say it so pleasantly, so brutal about the impact of AI in terms of employment and the consequences. And I always recoil because it feels a little mean. But I prefer the way you talk about it to this version of corporate speak. Let me give you corporate speak. I saw it and I. And I'm not dumping on it, but the CEO of Accenture, the quote when they said they're laying off a bunch of people. We are exiting on a compressed timeline. People were reskilling based on our experience is not a viable path for the skills we need. Now. That's just a brutal corporate speak epitaph. We think you're no good in the AI world. You're out. I just thought it's entirely correct. There's nothing objectionable about it. It was just such a wonderful mix of corporate speak plus finale. I just had to laugh and print that out today and look at it. Wow. There you go. We are exiting on an expedited timeline, on a compressed timeline. All you people who are no good, have a great day.
- [67:29]
Rory O'Driscoll
I'm going to finish on My wild card, which I'm not naming names, and it is not political, but we always stick to advice for founders. And as we move into a more and more political world, do founders have a primary fiduciary role to team members, investors, shareholders, to do what's best for the company over freedom of political expression?
- [67:53]
Harry Stebbings
It would trouble me to say yes, in the sense that it would trouble me to think that just because you're the CEO of a company, you're not entitled to your personal opinion separately from that. It's a reflection of the times that you'd have to even say that because you should be able to dissociate the two most of the time. And I have been on boards where we've wrestled with that. You have a particularly outspoken CEO, and I've come to the conclusion that if they're expressing their personal political beliefs on a personal basis, I would be actively resistant to stopping them, even if it.
- [68:24]
Rory O'Driscoll
Had an impact on the company.
- [68:26]
Harry Stebbings
I think the recent trend at the company level of saying less has been smart. I think a lot of companies took a lot more positions three, four years ago, and it's been almost. Almost fun to watch. Just like universities, they've realized that, speaking as a corporation, you probably should stick to the mission of the corporation in the university language. The University of Chicago principles have been proven to be so much cleverer than anything else that all those other people, all those other colleges are scrambling for that safety. And I think as a company, you probably want some version of the same thing. You just want to stay out of the culture wars, especially when the Soviet. So as a company, I think companies should stay out and I think think long and hard before getting into anything else. I think what's hard, and I'm just struggling with a little, is when you're the CEO, do you really give up all personal right to have a political opinion? It's worth pointing out that there are a lot of roles in society where the job does involve exactly what you said, Harry. Not having a political opinion. It used to be, for example, people in the military were scrupulous about not declaring their political opinion. When Eisenhower was solicited for candidate for President of the United States in 1952, they didn't know if he was a Democrat or a Republican and both sides asked him to do the job. I wish that wasn't the case, but actually, the wisdom from some of those old learnings of staying out of it is making me tweak my opinion a little. Do you understand what I'm saying? I Want everyone to be able to help. Because I think everyone in this country should be able to speak. It's why this country's so frickin amazing, right? And say their opinion. And we gotta get a lot better at not trashing other people for it. But I do recognize in some cases institutions, there are other examples of institutions that don't. It would seem a shame that that needs to extend, but I understand the point.
- [70:06]
Jason Lemkin
Well, I'll give you a tactical answer, especially for folks that are active on social media. Once in a while you'll say something that either you shouldn't or maybe you should, but you went too far or you said it the wrong way, right? And there's folks like Harry, I have known each other for a long time. I can't think of very many times, but I think a couple of times one of us has DM the other and so said, hey, here's a tweet, maybe you didn't really mean it and we've deleted it or modified it. It. It happens. Not, it doesn't happen all the time, but it's happened multiple times. There's a level of trust. And Harry and I have done this, and I've done this maybe with 10 CEOs that I know a little bit. Okay. Like I would do it with Jeff Lawson, who I barely know. I would do it with Brian Hal. I'm not saying I have, but I would do it with folks like we've had on the show, right? And I've done that multiple times. I've said, listen, Ubu. But just to let you know, this tweet may not have landed the way you thought, or it might bother some folks on your team. Or it might bother some folks. Right? I can only think of one public company executive who responded positively to that. Not that no one was negative. No. Because, no, I don't do this all the time. I'm not. I don't think I'm preachy. It's always a quiet thing. I try to be, but. But I only do it when it's when I know the impact was more than they thought. But I can think of one that all three of us know well, where he was like, holy crap. I didn't, I didn't like, thank you. Sort of thank you. Like it took a beat to be thank you. It wasn't an instant thank you at first. It was like, you're wrong, but it was a thing. But every other time, and not only, what I've been told by all the other nine is you might be Right, Jason? But I don't care. I feel so strongly about this. If I alienate 40% of my customer base, if I upset some of the less represented folks on my team, if I do whatever I feel so strongly, I don't care. I just don't care. And so, and so I've become much more reluctant to do that. And it's rare, right? I only do it the time where I think I can really be helpful. The moment I see what I think is a mistake, I do it maybe once every four or five months, but I can only think of one where it was well received. And so what I learned from that is that like a lot of things in venture, and these aren't companies I invested in, but these are public company executives. I know it doesn't really matter what I think. And I will provide some feedbacks at times and I'll provide it multiple times. And at some point, it's your company, it's your key. It's an interesting theoretical question. I think I 100% agree with Harry's point, which is this is bad for business.
- [72:19]
Rory O'Driscoll
How important is it to post that? There was no need to post that.
- [72:22]
Jason Lemkin
We agree, but what does it matter what you and I think? My learning is some folks who have been on your show, some folks who have very strong opinions that are very. I've talked to just a handful and they, they're cognizant of the risks. They're cognizant of the downside. It's not a mistake. Every once in a while someone makes a mistake, they're cognizant of what they're doing.
- [72:38]
Harry Stebbings
I'd love to ask someone like Brian Armstrong their opinion on this because remember, there is a distinction between, between bringing politics to work and not having that. Which I think has been validated as the correct strategy. And I think that's almost. I won't say fully a given now, but I think that would appear to be the consensus because everyone tried the other theory and tested it to destruction and failed. As a board member, I would struggle to attribute some business blame to someone having a personal opinion that's clearly their personal opinion because we have free speech in this country. It shouldn't be. And then you could say to yourself, well, let's just. I mean, you have to play out the other extreme. What happens if that personal opinion alienated 50% of the country such that they literally cancel all your business? Then you could argue at some point maybe you aren't the right person to run that company, but.
- [73:21]
Rory O'Driscoll
Or your team left. 10 great engineers leave.
- [73:23]
Jason Lemkin
But my learning is 9 out of 10 of the executives are fine with that. Let them go. I think Brian Armstrong was fine with it, wasn't he? And I didn't agree with Brian, but I think he said go, there's the door.
- [73:32]
Rory O'Driscoll
The one thing I do think is like the attention economy is also more fickle than ever. And just like deal and rippling was such a big deal actually everyone forgets it.
- [73:41]
Jason Lemkin
No one cares.
- [73:41]
Rory O'Driscoll
This story, whatever story, do you remember that Elon and Donald Trump broke up in the most blazing of rows?
- [73:47]
Harry Stebbings
I think that's actually very insightful, Harry. Just keep moving forward, you know, people move on. So the rear view mirror, it vanishes so quickly.
- [73:56]
Rory O'Driscoll
Guys, thank you so much as always, this has been wonderful.
- [74:01]
Podcast Host / Announcer
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Jason Lemkin
Wow.
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Rory O'Driscoll
This voice is so captivating.
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Podcast Host / Announcer
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