← The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
20VC: Lessons from Investing $2BN and Returning $8BN in Cash | Why Most Venture Partnerships are Broken | We Sold Salesforce Early and Lost Out on Billions | Are The Best Deals Always Expensive and Competitive with Jake Saper @ Emergence Capital
01:28:49
Jake Saper is a General Partner @ Emergence Capital, one of the leading venture firms of the last 20 years. Their many wins include being early investors in Salesforce, Zoom, Veeva and more. In total, the firm has invested $2BN and returned an...
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- [00:00]
Jake Saper
We have deployed a little less than $2 billion in capital. We've returned in cash a little over $8 billion. That fund I believe was Fund 3, which is the same fund that has Zoom. I think it's a 16 times DPI. We did this analysis on how have our deals fared certain graduation metrics relative to market. 9 out of 10 of our deals have gone on to raise successful follow in rounds. One out of five have gone on to raise rounds at north of a billion dollars. One out of ten of our early stage investments have gone public.
- [00:32]
Harry Stebbings
This is 20 VC with me, Harry Stebbings and I thought it is time for a VC VC show. It has been way too long, so joining me in the hot seat today is Jake Saper, General Partner at Emergence Capital, one of the leading venture firms of the last 20 years. Their many wins include being early investors in Salesforce, Zoom, Viva and many more. This was a real insider baseball VC conversation and I really can't wait to hear your but before we dive in today, turning your back of a napkin idea into a billion dollar startup requires countless hours of collaboration and teamwork. It can be really difficult to build a team that's aligned on everything from values to workflow. But that's exactly what Coda was made to do. Coda is an all in one collaborative workspace that started as a napkin sketch. Now, just five years since launching in beta, Coda has helped 50,000 teams all over the world get on the same page. Now at 20 VC, we've used Coda to bring stre structure to our content planning and episode prep, and it's made a huge difference. Instead of bouncing between different tools, we can keep everything from guest research to scheduling and notes all in one place, which saves us so much time. With Kodi, you get the flexibility of docs, the structure of spreadsheets, and the power of applications, all built for enterprise. And it's got the intelligence of AI, which makes it even more awesome. If you're a startup team looking to increase alignment and agility, Coda can help you move from planning to execution in record time. To try it for yourself, go to Coda iO20VC today and get six free months of the team plan. For startups, that's Coda iO20VC. To get started for free and get six free months of the team plan. Now that your team is aligned and collaborating, let's tackle those messy expense reports. You know, those receipts that seem to multiply like rabbits in your wallet, the endless email chains asking can you approve this? Don't Even get me started on the month end panic when you realize you have to reconcile it all. Well, Pleo offers smart company cards, physical, virtual and vendor specific so teams can buy what they need while finance stays in control. Automate your expense reports, process invoices seamlessly and manage reimbursements effortlessly all in one platform. With integrations to tools like Xero, QuickBooks and Netsuite, Pleo fits right into your workflow, saving time and giving you full visibility over every entity, payment and subscription. Join over 37,000 companies already using Pleo to streamline their finances. Try Pleo today. It's like magic, but with fewer rabbits. Find out more at Pleo IO 20 VC and don't forget to revolutionize how your team works together. Rome, A Company of Tomorrow runs at hyperspeed with quick drop in meetings. A Company of Tomorrow is globally distributed and fully digitized. The Company of Tomorrow instantly connects human and AI workers. A Company of Tomorrow is in a Rome virtual office. See a visualization of your whole company. The live presence, the drop in meetings, the AI summaries, the chats. It's an incred view to see. Rome is a breakthrough workplace experience loved by over 500 companies of tomorrow. For a fraction of the cost of Zoom and Slack, visit Rome. That's or AM for an instant demo of Rome today. Nobody knows what the future holds, but I do know this. It's going to be built in a Rome virtual office, hopefully by you. That's Romero AM for an instant demo.
- [04:02]
Unknown
You have now arrived at your destination.
- [04:05]
Harry Stebbings
Jake.
- [04:06]
Unknown
I am so excited for this. Dude, I loved our walk around London last night. I actually walked around and I was like, you know what James Corden does?
- [04:12]
Harry Stebbings
Carpool, Karaoke.
- [04:13]
Unknown
I should almost try and do this around London.
- [04:16]
Harry Stebbings
It was great.
- [04:17]
Jake Saper
I was thinking this is a PSA for anyone who visits London. You give the most enchanting walking tours of this place. Like some might say romantic. Just like incredibly beautiful. Such appreciation for the history of this thing. So thank you.
- [04:28]
Unknown
It was when I took you down the prettiest street and I was just like, meh, this is getting a little bit.
- [04:33]
Jake Saper
But we, we were able to talk about my wife in that moment which made it exactly.
- [04:37]
Unknown
Listen, I loved it because I also got so much context that I wouldn't normally get even in like, you know, prep calls, which I think are generally bullshit, to be honest. But I wanted to start with Zoom. This was your first deal at Emergence. I just wanted to start there. Talk to me about Zoom. How did it come to be?
- [04:55]
Jake Saper
So we aspire to be a thesis driven firm. Before I even joined emergence in 2014 and 2013, the firm had developed a thesis around the fact that there was an opportunity to replace WebEx, that WebEx was a tired product that wasn't very good. In fact, when I was interviewing an Emergence, the case they gave me to interview at Emergence was for a company called Fuse. Fuse was video conferencing software, an early competitor to Zoom. And I was supposed to diligence that case and then make the recommendation should or shouldn't invest, and they were going to hire me based upon that, ultimately concluded we shouldn't invest, made that case. Fortunately, I made the right call. That was also the decision they made. They hired me, fast forward a few months, I joined the firm and the very first deal that we're pursuing, where I'm tapped to lead diligence is them. So the good news was we had a prepared mind around the space. We also saw incredible early product led growth. The company was around 2 or 3 million in revenue, was growing very quickly, but obviously very, very early. And we believed in Eric. Eric was the VP of Engine at WebEx before, so knew a lot about the space. And he'd rebuilt the core technology called the codec, and it worked really, really well. My partner Santi, who ultimately led the deal, is from Argentina and he used the product to call his parents or to call his family back in Argentina and discovered like, hey, this thing works way better than everything else in the market. This codec is real. We should take this really seriously. And we paired that with the growth and we're like, let's dive in. However, the deal was not straightforward. The reason the deal was not straightforward is it was going to be the largest check we'd ever written at amongst the highest prices we'd ever paid. And the company was incredibly early. So for context, it was going to be a $20 million check out of a $250 million fund, which is a lot of concentration.
- [06:26]
Unknown
That's a lot of concentration for people. That's what, 7, 8%?
- [06:29]
Jake Saper
Yeah, it's huge.
- [06:29]
Unknown
That is huge.
- [06:30]
Jake Saper
It was going to be priced at $200 million post money valuation. And this again, remember, the company was at around $2 million in revenue and this was 2014. In 2014, this wasn't 2021 peaks. This was pre AI all the rest of it. But we really believed in the thesis, we believed in Eric and the product led growth was really strong. Even though it was early, it was super strong. So I'm tap to lead diligence. But the numbers are really going to matter here just because of the scale of this decision. I flew out to Boston because I was visiting my then girlfriend, Dani Hertzberg, who was an employee at HubSpot at the time. And I'm sitting in the HubSpot cafeteria frantically trying to build the financial model for this company to justify the investment. Brian Halligan walks over, who's then the CEO of HubSpot, and gives me a hard time. The first time I met him. That added to the stress of the whole experience. I don't have a background as a banker. I was an operator and a consultant before, so I didn't really know much about how to build a financial model. So I'm stressed out trying to build this thing, trying to make the numbers tie. And some numbers just won't tie. Specifically the Churn numbers. So Eric had given us a bunch of Churn data on his business, and I was trying to figure out how that ticked and tied with the numbers that I was calculating. It was just off. Fortunately, the way our firm operates is a fairly collaborative approach. So I reached out to my teammate Joe, Joe, who has a private equity background and was a Math Olympiad child kid. And I was like, help me. And Joe dove in and figured out that the numbers that Eric had given us around Churn for the business were wrong. Eric himself was miscalculating Churn. Specifically, he was counting upgrades from low tier to high tier as Churn. He was counting pausing as a Churn. He was unnecessarily burdening the business with Churn. Eric thought the business was worse than it was. This is the only time in my venture career where that has been the case, when you dive in and discover that the founder actually doesn't know how good his business is. So we go to Eric and we say, look, we found this. The business is actually better than you think. This was sort of an interesting choice because we did this before we had finalized negotiations. We gave him more leverage, but we thought it was the high integrity thing to do. Eric realized that and was like, I want to work with you. So we signed the deal. We were the first institutional investor. Life changing.
- [08:32]
Unknown
Was it very competitive?
- [08:34]
Jake Saper
It was competitive. It was competitive both because there was early growth, but also because the company was profitable. And so we didn't have to raise capital, which is part of the reason why the price got as high as it did. Ultimately, I think the reason why he chose us is because we committed to him that we would help him build out a proper enterprise sales motion on top of his product led growth motion. I think that's a really important point which is as exciting as bottoms up. PLG is all PLG companies eventually need to layer on enterprise software motions to be sustainable and enduring. And Eric, while he was great technologically, didn't know how to do it. So we committed to helping him doing it. We hired a guy named Dave Berman after we made the investment from Ringcentral and we built out a proper enterprise sales motion. The company's off their races.
- [09:16]
Unknown
There are so many things that I have to unpack off the back of that. The first is you mentioned he really chose you because you helped on GTM enterprise sales. Honestly, I don't want a founder to need me.
- [09:27]
Jake Saper
Yeah.
- [09:27]
Unknown
I often think about Keith Roboy's the best founders don't need you. They're made better when they don't need you. How do you feel about that?
- [09:34]
Jake Saper
I think the reason why a founder chooses a VC is because they believe that you'll help them bend the odds of success on the journey. It could be in helping them with something like go to market. It could be them, you know, helping bring them people to hire. It could be helping give with advice. It could be because you're a great therapist to the founder. There's lots of ways where you can help bend those odds. Ultimately, that's why someone chooses you. Because you need a reason, right? You need a reason to be chosen. I agree that in general, if the founder doesn't need to rely on you a lot, that's great. But the reality is the odds of success of these things are so low that if you can even bend the odds of success incrementally, it matters a lot.
- [10:08]
Unknown
Was Eric good at sales?
- [10:09]
Jake Saper
Eric was not an experienced salesperson.
- [10:13]
Unknown
Wow. And you're a politician. We're learning a lot about each other. Another thing you said about the prepared mind around the space, I honestly think that's kind of bullshit from large multi stage firms who kind of like to present these packages and actually they can lead you to the wrong conclusion. How do you feel about the benefits of firms having prepared minds versus actually just packaging on a venture product?
- [10:36]
Jake Saper
Yeah. So the reality is I don't think any venture firm makes all their money on prepared minds. I just think that that is bullshit. I do think, because I've lived it, that you can have a prepared mind and it can help you get there sooner, faster than others. I mean, in the Zoom case, it's a great example. They literally gave me my interview case on a competitor.
- [10:54]
Unknown
You must have just been like Ah, boom. I've done this before.
- [10:57]
Jake Saper
Yeah. So when we got the real thing, I was like, oh, great. I've already studied for like. They basically gave me the test before the test. So it is true we have had prepared minds, but sometimes it's not always obvious. In the case of Chorus, for example. So Chorus AI is that was an early competitor to Gong that was acquired by ZoomInfo for a little less than $500 million. We led the seed round. We were the early investors. There was sort of the first Voice AI company. We had some prepared mind around. We thought Voice would matter. My partner Gordon really thought Voice would matter in the enterprise. But we didn't have a full conception of what was going on. We just liked the young founder. We thought there might be something here. So we made the investment. Ultimately, it grew nicely and was acquired a little early, but it was acquired for a nice outcome. And that helped inform a broader thesis that we since developed around Voice AI. We made a bunch of investments in Bland and Regal and Assembled and a bunch of vertical specific ones as well. So I personally, I think we more broadly develop prepared minds from the portfolio company investments we make. Like, what is the thing about what's happening at Chorus that informs a broader thesis beyond the sales specific use case that Chorus was focused on, that could help inform how we invest more broadly.
- [11:59]
Unknown
Can I be honest? You make much money from a Chorus like you do the seed, it gets bought for half a billion, which is great. And I'm not. Is that in stock? Is that in cash? So many of these deals actually behind the scenes, you kind of make 3x and it's like not as good as it looks.
- [12:12]
Jake Saper
We made. I forgot the specific multiple. It was definitely more than 3x in that one. I don't remember the specific number, but I think it was north of 5x. The challenge with that is when you have a fund that's of a certain size, even if it's a 10x, it's still not going to necessarily move the needle. That fund, I believe was Fund three, which is the same fund that has Zoom. It's the same fund that has some other really large outcomes. And so that fund is already at a. I think it's a 16 times DPI. Even with a 10x on the chorus investment, it's not necessarily going to move the needle.
- [12:40]
Unknown
It's unfair of me because it's like kind of in the details. But how much of the 16x DPI is Zoom?
- [12:45]
Jake Saper
By far the most of it. But what's interesting is that fund Also had Sales loft. It was the highest multiple ever paid by private equity for a software company company's acquired for $2.3 billion. And we were the Series A investors there. So that was a very good outcome. But that returned the firm the fund a few times. I can't remember how many times it returned it, but Zoom returned it more than 10.
- [13:05]
Unknown
I always try and understand in the power law dynamics just how much of fund returns are in those.
- [13:10]
Jake Saper
The cool thing about that fund though, is even if you took Zoom out, it would still be a fund because of Sales Loft, because of Sales Loft, because of Chorus. And there's a bunch of others, and there's some that there's still a bunch of. They're still gestating. There's companies like Drone Deploy and others in that company. We just had a big crypto outcome in that company called Zappo that just distributed large multibillion dollar distribution.
- [13:27]
Unknown
Can I. You mentioned Coruscant and there's outreach and there's also gong. When I enter markets, I often like to think about like the distribution dynamics within the market in terms of is it a winner take all, is it relatively evenly distributed? How does this market play out in terms of Uber, Lyft or actually multiple providers? All kind of distributed evenly. Do you think about that? And like, I don't want to be in a market where kind of everyone gets a little bit like chorus and gong and outreach. No offense. I don't think it's a great market.
- [13:57]
Jake Saper
Yeah, I think you can make money both ways. So let's take. Let's take the winner take all market. So network effect businesses generally, obviously winner take all. In our experience. We invested in a company called Doximity, which is like, started as LinkedIn for doctors. Are you familiar with this one?
- [14:09]
Unknown
Yeah. It's a fucking beast. And no one knows about it.
- [14:12]
Jake Saper
Yeah, it's crazy. So we led the Series A there. My partner Kevin led that Series A. Kevin's still on the board there. And that company is just absolutely hitting and it continues to hit in the public markets. Like, read up on. It's amazing. That's a winner take all business because it's LinkedIn for doctors. And so having a number two there doesn't make any sense. So that investment, we definitely underwrote to that and it worked. But let's take the Bolt Lovable, that dynamic that we were talking about last night. For folks who aren't aware, these are companies that help you build web apps with no coding experience. So you can go to Bolt New and you can write build me a website for the new 20 VC product and have it blue and put these buttons here and make it do this, this and this and then it just happens. It's kind of astounding how easily it happens and it puts a lot of questions around what are the knock on effects of that in our economy. But those businesses will clearly disrupt the squarespace and the web flows and. Etc, etc, etc. And what's fascinating about that space is that there are many, many very large players in the incumbency which supports the fact that there could be multiple large players in this next generation as well.
- [15:12]
Unknown
Help me understand. We're so jumping around, but I love a conversation like this. So help me understand what happens to those players? Do they consolidate? Do we have PE providers come in? What happens to the webflows, the wix, the Weebly? There's a lot of webflows, wix, Weebly, Squarespace, just to name a few. And then there's the unbundled providers who are much more vertically specific. What happens?
- [15:32]
Jake Saper
There will be consolidation, there will be private equity and there will be a few that reinvent themselves. There will be a few that are nimble enough to figure out how to adapt to the new era, but I think most will get consolidated.
- [15:43]
Unknown
Do you think we overestimate private equity as a savior?
- [15:46]
Jake Saper
It's a really good question. Savior is too strong of a word because most private equity outcomes don't generate incredible returns for the vc. So savior is not the right. Maybe savior in the sense that like get your money back. The Salesloft outcome was an awesome one, but that was an exception where private equity is willing to pay whatever 20 times ARR. But most cases they're paying whatever 3 to 5x so it's a different thing.
- [16:06]
Unknown
Totally get that. Thank God. Love that. I mean I do look at your Anaplan's and your Coopers and I think how the fuck are they going to get their money back?
- [16:12]
Jake Saper
Yeah, again, some of these companies like catch a second wave and we talked last night, we talked a bit about like what about the even smaller ones? The ones that are at you know, 50, 100 million ARR.
- [16:21]
Unknown
This is what really worries me. Funded in the last five to seven years.
- [16:24]
Jake Saper
Yeah. What happens to those? I think all those companies are in this existential moment to figure out okay, what do I do? How much do I invest in agents? How real is it going to be? Are my customers going to adapt it? How complimentary is that to my core product? Or am I just kind of you know, shouting in the wind. And the honest truth is most of them aren't going to make it, unfortunately.
- [16:42]
Unknown
Do you think they are structured for embracing the next wave of AI?
- [16:46]
Jake Saper
Some of them are. So I work with one called Guru, which is a knowledge management software company. Rick, Rick.
- [16:51]
Unknown
I spoke to him before this about you.
- [16:52]
Jake Saper
Rick is a God.
- [16:53]
Unknown
He said you're a dick.
- [16:56]
Jake Saper
Rick is one of the most amazing human beings I've ever met. He looks like Jesus. He looks like a savior actually, if you look at a picture of him. But we led Rick's Series a probably in 2016. So I've been on the board there for almost a decade and it's a knowledge management product that grew really quickly and then during COVID started to stall a bit. And to Rick's credit and his executive team's credit, they realized as AI started to pop up, if I pair a knowledge management tool with generative AI and build generative AI enabled search and offer both knowledge management and an AI enabled search product together, that's a very compelling offering. They've done that and now growth has re accelerated through the journey. He did have to restructure the company. Right. So he cut the company. I think now we have like 60 employees or something. But he's doing that profitably and growing quickly again. So in some ways, like these moments actually make the business.
- [17:44]
Unknown
Can I be a dick though? Is that actually interesting like, and I mean like interesting from a venture outcome perspective on impact on funds, it's great and it's. But Glean is at 100 million an error. San is doing incredibly well and growing very fast here. We've got like a company that's kind of rearchitected itself and pivoted into a market with already growing fast players.
- [18:03]
Jake Saper
Yeah. What the other fast growing players represent is market pull. Right. It's that the buyer wants this. And so the burden on a company like Guru is to figure out how can I offer something that is different than what those players have but still tap into that market pull. In Guru's case, it's we have knowledge management and the enterprise search. In Glean's case, we're AI enterprise search only. And there'll be a bunch of people who just want that and there's a bunch of people who just want this.
- [18:24]
Unknown
How quickly do you know your winners when you have them?
- [18:28]
Jake Saper
So it's not always obvious and there's a lot of humility. I think that is important in this industry for lots of reasons, but that's one of them. So Bill.com, been around for a while. We were one of the earliest investors in that company as well. And that was not a straight into the right company. So it grew nicely before the financial crisis. Financial crisis happens and business starts to stall a bit. But then we helped them figure out the channel partnership strategy for them partnering with banks. I think specifically bank of America was the first one that unlocked, really accelerated that business to figure out like, oh, we can sell through these banks. Whereas low ACV products. So doing traditional go to market can be expensive. If we find a channel partner, the whole thing can work. And that business absolutely took off and has been an amazing winner since then. That's a great example of one that wasn't necessarily like this. It's kind of like this and then this and then this. That is very possible. And that company made fund one for us and it's part of the reason why that fund is so good. That's one example. I think another example that comes to mind around this humility point is a conversation I had in 2015 with a peer investor at another firm. I remember he came to my office and he said, I just made my career defining investment. And I was like, ooh, please tell me what it is. And he goes, Zenefits. This is a moment obviously where Zenefits was on an absolute tear.
- [19:38]
Unknown
I remember this.
- [19:39]
Jake Saper
He poured a ton of money in and my tenure, I think it was a principal or something at the time. So really putting your neck on the line to really put a lot of money into it. And he was like, I just made this is going to be it.
- [19:49]
Unknown
And to be fair, Parker is and was amazing.
- [19:51]
Jake Saper
Parker's a monster. Like there wasn't a bad bet. Obviously things happened to that company that made it not a successful outcome. We had just invested in Gusto, which was a competitor that was growing not quite as quickly as Enifits. But the reality is Gusto has endured and become a massive company and Zenefits didn't. Now, Parker went on obviously to build his own business that's doing quite well now, as we all know. But the broader point is just because something is a breakout right after you invest or early on, doesn't guarantee that it's going to win. The breakout can indicate market pull, which is the most important thing of all, but it doesn't necessarily indicate an enduring company.
- [20:24]
Unknown
Can you talk to me about market pull being the most important thing of all for people listening founders or investors? How do you think about that?
- [20:31]
Jake Saper
You want people desperate for your product. That's something that is so overlooked when someone's starting a company. I think particularly when someone's starting a company because they want to start a company, not because they're trying to serve a specific needle. You want people who have tried desperately to solve this problem themselves. It's not a desperate problem if someone hasn't. If your buyer hasn't tried to hack together something on their own to solve it, or if they haven't bought an inferior product to solve it, or if they're not spending countless hours themselves dealing with it. Otherwise, it's nice to have. So you need something that is just like, oh my God, this is a massive problem I need to solve.
- [21:00]
Unknown
How do you try and unpick that when you're doing diligence on a B2B company?
- [21:04]
Jake Saper
So when you talk to users or prospective users, when you talk to users of the product, the things I want to hear are things like, if my boss stopped paying for this, I'd quit. Or if my boss stopped paying for this, I'd pay for this out of pocket. When you hear phrases like that, you know, like, holy shit, this has changed someone's day to day life. There's real market pull for this.
- [21:20]
Unknown
Instantly think of linear, amazing, amazing tool. But I always hear that with that. How do you think about defensibility in a wave of AI? Because you could have market pull but also not be defensible.
- [21:31]
Jake Saper
Yeah, this is where the founder comes in. Right. So if you were to ask me to rank founder versus market versus traction, hypothetically, the first one is market pull. Like that is the most important thing, I think, when you're evaluating a potential investment or starting a company. The second is the founder, because it's the founder's job to figure out how do you build something defensible in that world of market pull? It's not enough to just build something obviously without. That's just tapping into the zeitgeist. And that's particularly true with a lot of the voice AI companies that are coming out right now. There's a lot of market pull for those companies, but their job is to figure out how they can parlay that landing wedge into something more durable. And different companies have different strategies for this. To go back to the bolt example, the thesis we underwrote to is that Eric and his team had built this technology called web container that allows you to host a web app dynamically in a really robust way. And we thought that was going to provide some defensibility to the business. It's still very early, so we have no idea how that's going to play out. But I think when you're making investment, you have to have a hypothesis about how the founder is going to build defensibility if he or she hasn't yet done it.
- [22:31]
Unknown
When did you think there was market pull that there actually wasn't?
- [22:34]
Jake Saper
Oh, I've got a good one. So we made an investment during COVID in a company that helped exercise instructors go out on their own, like, and build their own thing outside of their own thing. You're laughing because it's.
- [22:46]
Unknown
I'm gonna be honest. I could have told you that was a bad one. I thought it was just.
- [22:50]
Jake Saper
So I should reveal something here. My mother is a jazzercise instructor. Do you know what that is, I take it?
- [22:56]
Unknown
It's like jazz is a sport.
- [22:58]
Jake Saper
It's kind of like jazz is sports. It's. Jazz is dance. So this is. This was a huge craze in the 80s in the US it was, you know, dancing anaerobics combined.
- [23:06]
Unknown
I remember. Mr. Motivator.
- [23:07]
Jake Saper
Yeah, it's kind of like that. And my mom's been teaching this since before I was born, and she's still teaching it. The woman's almost 70. It's amazing. So I have a soft spot in my heart for aerobics instructors in general. But the thesis was, during COVID everyone's working out from home, and these people need a business in a box to help them run their own show so they can do it on zoom, et cetera. And the reality is there was market pull briefly for this product, and then when people went back to more normal life post Covid, you know, the gym teachers often went back to the gym, and so there was less market pull.
- [23:37]
Unknown
How much did you put in?
- [23:38]
Jake Saper
It was a series A, I think we put in, like, nine. We ended up getting most of the money back because the founder, to her credit, realized when the market pull declined and shut down the business and returned the money.
- [23:49]
Unknown
Okay, so my question to you on the back of that is, I would, if I was your partner, go upside maximization. It may not be a bad business. I don't think it's a good business ever. So it'd have been like a hard block on that one. Sorry. But, like, even if it works, the upside is highly questionable. Yeah, Maybe it's a $500 million business, which we say poo pooing. It's not at all. It's amazing. But for a fund that's the size of emergence, it is not going to make a dent.
- [24:15]
Jake Saper
Yeah.
- [24:15]
Unknown
How can you justify to me a $5 billion business on that business.
- [24:19]
Jake Saper
So if you think about this more broadly as a creator economy tool, like if you think that there's going to be more Harry Stebbings in the world, who are 16 in their rooms, who figure out I want to start my own business and you provide a business in a box for them that's potentially.
- [24:30]
Unknown
Interesting, that will not.
- [24:31]
Jake Saper
They will not. There will be no more Harry Stubbings. I will crush them.
- [24:34]
Harry Stebbings
I'm worried for the world if there.
- [24:36]
Unknown
Is more Harry Stemmings. But okay, so if there are far more, we are going to provide that business in a box for them.
- [24:42]
Jake Saper
Yeah, that was the thesis. I mean, remember in the peak of COVID you were making assumptions around how the economy would look going forward. And the reality is it's hard to forecast. And there was a world where people would be remote indefinitely and we wouldn't be back in more concentrated areas. And we made some bets that focused on that future. We made some bets that focused more on in office future. That's our job, is to call the future.
- [25:03]
Unknown
I do want to go back to the element you mentioned about Zoom, which is freaking nuts, which was 100x revenue 10 years ago. I mean 100x revenue today is more normal. I still think it's crazy and a lot still think it's crazy, but then it was completely unheard of. And so my question to you is, have the best always been expensive?
- [25:22]
Jake Saper
They are not always expensive, but they are often expensive. So if I look back at our portfolio, Gusto was expensive, Zoom was expensive, Yammer was expensive, Ironclad was expensive, but some of them weren't. Viva wasn't expensive because that was non consensus at the time. Salesloft was also non consensus at the time and was not expensive. More recently, my partner Loti led an investment in a company called Federato AI Software to help insurers underwrite better. But she made that investment before the Zeitgeist. Before people were like, oh, this is obvious and this is going to happen. And to her credit, there was a lot of questions and she pushed through and she got that deal done and she got it done at a pretty good price. And then the Zeitgeist hit and the company did a series B at a much higher price. So I do think that it is possible still in this world to be non consensus and right and get a good price. But it is also true that there are increasingly higher, more and more consensus deals. And you want to be in both.
- [26:15]
Unknown
Are the best always competitive?
- [26:17]
Jake Saper
No, I don't think so. Viva wasn't competitive. There is still a world where you have a unique insight that other people don't believe in and or you get to the person first where you can have a better deal. Most of them are competitive.
- [26:30]
Unknown
You mentioned many names, but some were like Gusto and then another was Viva. Gusto is a brilliant business, but it's raised a lot of money. Viva likewise is a brilliant business. It's raised next to no money.
- [26:41]
Jake Saper
Yeah.
- [26:41]
Unknown
Do you pre investment think about dilution potential downline and what that does?
- [26:47]
Jake Saper
Yeah, we do. So the framework we use internally to figure out if we should do the investment, it's called what you have to believe. The framework basically means you try to identify what are the three to five things that are specific to this deal that you have to believe for this investment to return the fund. And there's a bunch of things that go into that. If you unpack that, there's things like dilution, how much additional capital will they have to raise? Will the founder be able to raise that capital as well? There's obviously questions around defensibility, there's questions around market, there's questions around competition, there's questions around team, and all those questions depend on the company. So when we do the analysis, they're always unique to the investment opportunity and to the fund we're investing out of. So when we're doing diligence, what we're trying to do is identify what those three to five, what you have to believes are specific for the company.
- [27:29]
Unknown
So you will set those pre diligence.
- [27:31]
Jake Saper
Goals after you have the pitches, after you've spent some time with the founder and you've looked at the materials, you have some hypotheses as to what those could be. And then as you're doing the diligence calls and doing the actual work itself, you're refining them and importantly, you're gathering the data to help support or negate each what you have to believe. So every diligence exercise results in a chart. And the chart is, what are the three to five what you have to believes? What is the data supporting this? What you have to believe. And what is the data negating this? What you have to believe. And then we can all stare at this and say, hmm, on balance, do we believe it?
- [28:01]
Unknown
You mentioned the reference calls there, and when we chatted last night, you said that everyone is on at least one reference call. That's supremely strange, Bluntly. Normally that's like an owner of a deal and they'll do all the work and they'll bring it back and you'll have a discussion as a partnership. Yeah, but how? I mean, bluntly, it's not a very efficient way to do it.
- [28:20]
Jake Saper
Super efficient.
- [28:21]
Unknown
Talk to me about that.
- [28:22]
Jake Saper
Yeah, well, it's. It's important to understand in the context of emergence and how we operate.
- [28:25]
Unknown
Yeah.
- [28:26]
Jake Saper
So we're a focused firm, and we're focused in three ways. The first is in what we invest in. The second is in terms of how we invest, which relates to this question. And the third is how we grow our people. On the what we invest in side of things, all we do is B2B software. It's all we've ever done. It's all we ever will do. The first investment, 20 years ago with Salesforce, then the vertical SaaS thing happened. We did Viva. Now the AI thing's happening. We did together and Bolt and Bland and unified a bunch of others. So we're very focused thematically, and all of us just do that work. Just focus on B2B, which means we are uniquely able to invest collectively as a team and have everyone do the work. So on the how we invest, how we're focused side of things, this is where this comes into play. Every partner, on average, makes one investment per year. So we are super focused in terms of the amount of investing we do, which is obviously very high risk, but it's high conviction. And if it wins, it returns the firm fund many times older, which we've had been lucky to do with a number of funds. That approach allows us to work collaboratively as a team when you're only doing a relatively small number of deals. And the reality is this has largely worked. Our goal is to.
- [29:27]
Unknown
It has, but you've got to be really good pickers. One a year. I mean, no offense, I would not like to be you.
- [29:33]
Jake Saper
Yeah, it's a hard job. It's a hard job. And it's an average. Sometimes it's 2, sometimes it's 0, et cetera.
- [29:37]
Unknown
Does it ever set the bar too high?
- [29:39]
Jake Saper
Potentially, yeah. I think the good news is we've expanded our partnership so we now have seven partners. And so we have more shots on goal. When you think about it, less about me as an individual, just more as a firm. We're taking a little more shots, which I think helps us with the averages. But the reality is it's been.
- [29:54]
Unknown
But you've never lost a deal, which we chatted about last night, and I would say that that means you're not taking enough risk.
- [30:01]
Jake Saper
No, what you mean is none of my deals have ever gone to zero.
- [30:04]
Unknown
Sorry, none of your deals have ever gone to zero.
- [30:05]
Jake Saper
That's correct. Yeah. That does mean I haven't taken enough risk. And that's something I talk about with my partners a lot. Some of them may still go to zero, but you're right, I think part of it is we're investing in B2B software businesses that have recurring revenue models. And so in general there's relative downside.
- [30:18]
Unknown
Protection, even entry point.
- [30:20]
Jake Saper
And when and assuming I've done the I and we have done the diligence well and also back to the bend the odds of success, I genuinely believe this and some other VCs more skeptical will doubt me on this. But our job, by making few investments and by having everyone involved in the investment means all of us do help after we make the investment.
- [30:37]
Unknown
I'm like the world's worst interview because I just take everyone off on a different tangent. So go back into that why everyone's involved because they're all in on the diligence process.
- [30:44]
Jake Saper
Yeah. So let me explain the diligence process, but let me just finish that last thought. I really do believe this helps change outcomes. So we just raised our new fund and as part of that we did this analysis on how have our deals fared in terms of certain graduation metrics relative to market. Nine out of ten of our deals, our early stage investment seed series A have gone on to raise successful follow on rounds. One out of five have gone on to raise rounds at north of a billion dollars. One out of ten of our early stage investments have gone public. So we're good at picking and I also think we're good at bending the odds of success. And I think part of it comes back to this model of the fact that we do the work together as a team. And so back to your question. The way we do the work together as a team, we have the founder come in and present to our partnership relatively early in the process. So all the partners get to know the person, the founder, and then we have this discussion afterwards. Like is this something that we're excited enough about to make a priority deal? And those are holy words with an emergence. When you say the word priority deal, everyone's calendar gets blown up, everyone's weak. Whatever you thought you were doing, you are now doing something different. It basically means everyone is focused on doing diligence for this deal. So what it means is that for every investment we make, every partner does reference calls, every partner calls customers, every partner calls management references, every partner does back channel references and Many partners do on site visits where we actually go and we spend time with the team, we see what's happening in the kitchen, so we kind of pick up on all the less structured data points. And by having multiple people make that trip, multiple partners make that trip, you're collecting a bunch of first party data so that when it comes time to make the decision, when you're staring at that what you have to believe sheet, it's not just two people in the firm who have made this what you have to believe sheet, literally everyone has contributed to that. And one person can say, I heard this customer say this and the next person can say, yeah, but this customer, I heard in their voice they sounded a little more wishy washy. And then there is this process of seeking truth. In contrast to most firms and I've worked in other places, which tends to be much more an associate and a partner doing a bunch of work and then defending their investment against an onslaught of questions and doubters. And then if you survive that onslaught, you get to do the deal. Our process truly is a process of seeking truth collectively. That I think allows us to pick better and hopefully once we make the investment, help the company better.
- [32:51]
Unknown
I think one of the biggest mistakes that firms make is when they get associates to just go and do the reference course. I'm nothing against associates, but there's so much in tonality in the paws, in the facial expression. I completely agree.
- [33:01]
Jake Saper
It's a human business.
- [33:02]
Unknown
Completely. One thing that really struck me there is that is time. And we don't always have time. Jake, I would love to do multiple on site visits. I'd love to do all the time compressions, real in deals. How do you do an engaged and diligent process when you have real time compression and the end of the week to make your decision?
- [33:20]
Jake Saper
Yeah. So there are ways in which our process hurts us there and there's ways in which it helps. So it hurts obviously because you have to coordinate lots and lots of schedules. It helps because we can do seven diligence calls in the same slot. So if you just have one person or two people doing diligence, then yeah, their calendar is booked out. But if I have seven of my partners, plus principals and senior associates and associates and everyone working on this, you can do an incredible amount of work in a day. I've been amazed at how much work we've been able to do in a day when you have seven people doing it or 12 people doing it and you have one quarterback who's the diligence lead. Which is the role I played at Zoom, pulling it all together. What it requires is trust. It basically means if I come in with a founder and you meet the founder for an hour, but you don't know anything else about this person or the deal, you have to trust me that there's enough there, you are willing to blow up your schedule for the week, even though it's not your sponsored deal.
- [34:10]
Unknown
How do you do knowledge management across the partnership? And so what we do, for example, is we record calls. So then I can listen to the call Jake had with the customer and I'm there in the room. How do you do that? Shared knowledge across diligence process.
- [34:23]
Jake Saper
So we do record the calls. We also send out really detailed notes from every conversation. And then every night we send out an email with a summary of what's going on. So it's like, here's what we learned today. Jake did this call, Harry did this call. We talked to this customer. Here are the outstanding questions. Here's what everyone needs to dive in on. We need help with, et cetera. And so it's this constant stream of information that's bookended with these nightly emails. The other thing we do is we have a lot of calls at night. So one thing we realized is that if we're having these diligence calls, like particularly the internal calls where we're processing all the information, if we're doing that during the day, they get compressed because we have 30 minutes and we're just getting into the meat of it in minute 27 and then we have to go do something else. The reality is if you do the call at night, after kids go to bed, after you've had dinner with someone, whatever, you have theoretically an unlimited amount of time on the back end. Which means the reality is we do a lot of late night calls discussing what we've learned and trying to synthesize the day.
- [35:14]
Unknown
You mentioned the on sites the in persons love, that Covid meant that that was impossible. Do you think quality of investing went down dramatically in Covid?
- [35:22]
Jake Saper
Yeah, it's a good question. We actually still managed to do some on sites during COVID So I can tell you how you broke the law. Yeah, I know, I'll tell you like kind of a silly, crazy story. So there was a series A in a company called Regal AI. It was very hot. I think he had six term sheets from, from top venture firms. The company had grown from zero to, I think it was one and a half million in a year. Which pre AI was like very, very good. And Founders really credible, just great company. So a consensus deal. We got to know the founder relatively late in the process, but really clicked with both of them. But felt like we needed to spend time in person to really get there on both sides. But it was the heat of COVID so you couldn't find a way to do it to make things worse. It's not like they were in San Francisco and I was in San Francisco. We'd go to a park and walk around. The CEO was in Steamboat Springs, Colorado and I was in San Francisco. It's not an easy place to get to. So what we agreed to do, Alex Levin's his name. What Alex and I agreed to do was fly to the Denver airport and meet in a field outside the Denver airport and go for a long walk.
- [36:24]
Unknown
Was it raining?
- [36:25]
Jake Saper
It was not raining.
- [36:26]
Unknown
That would have been really like cinematic.
- [36:27]
Jake Saper
Well, the thing actually that made it worse and you can see how fair my skin is. I didn't put on sunscreen. So we're in this field and Denver's at altitude and I didn't put on sunscreen because I hadn't been outside in like a year. I didn't remember sun. And we're walking through that. We do this like four hour hike through literally a field outside of the Denver airport. And I get completely just like horribly red. Terrible. But the good thing was I really got to know Alex's vision. I got to really understand him as a person. I think vice versa. And we made the investment. I think the other thing that really helped with that, given that my partners weren't able to take that same sunburn walk with me is Alex and Rebecca, his co founder, did one on one zoom calls with every one of my partners. And so it was like a Trevor.
- [37:09]
Unknown
Get founders who were like, no, I'm sorry, we're not going to do. That's too intense and we don't need the time.
- [37:13]
Jake Saper
Yeah. There are certain founders who aren't looking for the product we sell. We sell a low volume, high touch product. There's some founders who really want that and there's some founders who are looking for a high volume, low touch product to get out of my hair. And I think the nice thing about our diligence process is actually selects for the right founders.
- [37:29]
Unknown
You mentioned zero to one and a half and it being like, wow, 100%. And I was so brought up in the light. Sasta. Jason Lemkin on what great companies are 0 to 10 in like two years. I think it was great. Have we misled a generation of Founders with triple triple double double being great. And now that is not enough. With Bolts and Lovables and McCools.
- [37:53]
Jake Saper
Yep, the market's changed. And back to market pull. There's more market pull in general right now than there was in the pre LLM era. It's just true. And that's both because the LLMs themselves are doing amazing things and also because everyone's boss is saying, go buy AI. Many of these products have tapped into these huge areas of market pull, but the reality is they still have to figure out defensibility, obviously on the backend, which we touched on before. But what that means is, yes, it is possible to grow faster. And we're seeing examples like bolt, which went 0 to 20 in two months. And we've seen a bunch of others that together is a good one. Where we were in the a 15 months ago, they were at 2 million revenue. The business is now north of 100 million revenue. These things can grow insanely quickly because there's just such market pull.
- [38:35]
Unknown
They have shit marketing.
- [38:36]
Jake Saper
Yeah, exactly.
- [38:37]
Unknown
Seriously, that is insane.
- [38:38]
Jake Saper
Random AI. It's really good.
- [38:41]
Unknown
So 2 to 100.
- [38:43]
Jake Saper
Yeah, in like 15 months.
- [38:44]
Unknown
I mean, that's absolutely. They really have terrible marketing.
- [38:47]
Jake Saper
Yeah. Well, you should tell them they'll have.
- [38:48]
Unknown
Brilliant marketing because theirs is so brilliant. Seriously, it's so brilliantly articulated. That's insane.
- [38:54]
Jake Saper
So what's changed? So market pull has changed. And I think you're right that if we tell founders that like the top decile is triple, triple, double, double, it's just not true anymore. It's more like the great companies are quadrupling year over year. But the thing that we. The rooster that hasn't come home to roost yet, which I think is. I don't know if that's the right way to say it or not, is retention. We still don't know for many of these businesses because they haven't had year two, three years of retention data, how that's going to look. And so if I were to posit a replacement for the triple, triple, double, double phrase, maybe it's something like quadruple 120. And what I mean by that is, yes, you should be growing very quickly, perhaps quadrupling year over year, triple, quadrupling, et cetera. But you should also have a net dollar retention of 120% or above.
- [39:41]
Unknown
Just for those that don't know net dollar retention, can you explain what a net dollar retention of 120 is?
- [39:46]
Jake Saper
Yeah. So there's different ways to calculate it, but in general, the way to think about it is if I had a dollar from a cohort of customers that I sold last year, then when they renew this year they're at 120, they're $1.20. The customers that churn from that cohort are outweighed by the customers at upsell. So the net there would be 20 cent gross.
- [40:04]
Unknown
Totally get that. So we want quadruple and NRR of 120.
- [40:08]
Jake Saper
Yeah, I think that like if these companies prove to have net dollar retention of 120% or above and maintain this growth, these are generational companies.
- [40:17]
Unknown
Couple of things there one margin. In a lot of cases these are essentially funnels for OpenAI are anthropic. How do you think about margin improvement over time, margin maintenance over time, given they are funnels for LLMs today?
- [40:32]
Jake Saper
I don't know if this is a commonly held belief or not, but I and I think we in general are not super concerned about the margin that OpenAI and the closed source models are commanding for two reasons. One is there's a lot of competition amongst closed source models and you've already seen pricing decline a lot. So most of our application layer companies that are providing applications on top of these products are seeing gross margin increase over time because of that competitive dynamic. The second reason I'm not that concerned about it is open source LLMs are really, really good and getting better. And so the reality is if you're an application provider and let's say for whatever reason OpenAI comes to you and says you know what, it's 10 times the price and that eats into your gross margin, you now have a credible ability to go and spin up an open source model and have almost no GROSS Basically have 100% gross margin. That's actually what Together AI does. So part of the reason why they've grown so quickly is because companies are like, you know what, actually we'll spin this up on my own. I'll have complete security, data privacy, et cetera and I control my own margins.
- [41:29]
Unknown
You said earlier we figure out what do you have to believe for this to be a good investment. So for the together, what was the, what did you have to believe?
- [41:37]
Jake Saper
Yeah, the clearest what you have to believe for that investment was that open source LLMs will be a dominant part of the market over time that enterprises that businesses are going to want to buy and use open source models and not just anthropic OpenAI and the closed source ecosystem. And the reality is we made the bet like that was trending positively. I think it's trended more positively, but it's still, frankly, a little TBD for me.
- [41:59]
Unknown
It's like, obviously it will happen, but it's just to the extent that it will happen.
- [42:03]
Jake Saper
Yeah.
- [42:04]
Unknown
Is it a 97 or is it a 60?
- [42:06]
Jake Saper
40? That might be the right way to put it. So that's why I use the word dominant. You need to be a dominant part of the market. Doesn't necessarily mean it's the majority. But if it's 1% of the market and not 20% of the market, then the outcome looks different.
- [42:17]
Unknown
Totally different. I would argue actually, though, as a partner of yours in this case, that even if it was 90, 10, because I think most enterprises are not as intelligent and not as adventurous as we think, and they will stick to the core providers. But Even if it's 10, the market is the world of companies, in which case 10 is still really interesting.
- [42:35]
Jake Saper
Yeah. And it's also a function of how good together gets at helping companies spin this up. How painless will it be if it becomes really painless? That 10 could be the whole world. You're right.
- [42:45]
Unknown
Do you prefer market creation, market expansion? How do you think about that?
- [42:50]
Jake Saper
What I want. So I borrow this from Mike Maples, our mutual friend. So I read his book Pattern breakers, which I highly recommend. One of his core insights is that you should be looking for a business that itself has a unique insight on an inflection that's happening. An inflection could be a technological inflection. It could be, for example, open source. LLMs are a thing. And so what is together? AI's unique insight on how to deploy that. And I won't go into the specifics, but theirs is really about how you maximize inference within that context. But in Zoom's case, obviously there was an increase in the use of video conferencing. There was distribution of mobile. You could actually run the stuff on the application, on the computer itself, on the phone itself. Eric had a unique insight on how to actually put the model, or rather, Eric had a unique insight into how to distribute this stuff with a codec on the product. It's a long way of saying, I think in both replacement markets, which Zoom was, and in new markets, which together AI is, you can find a situation where the founder is playing off of some sort of inflection happening outside of their business and has a unique insight on how to take advantage of it. So I would use Maple's framework, and I care a little bit less if it's a replacement or a new market.
- [43:52]
Unknown
I actually use it on every call I have really, which is that what do you believe that the world around you doesn't agree with? Which is kind of a similar way of getting to the unique inside. So I totally agree with you there. You mentioned, like, hey, the thing that we haven't really figured out is retention. And a lot of these companies, they just don't have the data to be fair on them yet. Too young, too young. Do you think the retention cohorts will be worse, better or as expected on the average?
- [44:18]
Jake Saper
I think they'll disappoint and I think there'll be outliers that are better than we expect.
- [44:22]
Unknown
What would drive the outliers?
- [44:23]
Jake Saper
Yeah, I think that there will be businesses that find some sticky wedge that enable them to.
- [44:30]
Unknown
This is why we did solve like deeply entrenched in patent lawyers. Very, very core to workflows across teams.
- [44:37]
Jake Saper
And so this is interesting. And this is why, while adding AI into SaaS has differences, there's a lot of learnings from the previous SaaS eras that we have to take into this next era, one of which is workflow is sticky. Right. All those lawyers who, the majority of them will exist at least in the medium term if they spend their day in this piece of software, it's really hard to rip out. Salesforce isn't the best CRM now. And I say that with a lot of love, as that was our first investment and love, a love for Benioff. The reason why Salesforce is dominant is because there are tens of millions of people that work in that thing on a weekly basis.
- [45:12]
Unknown
And so when you think about where is sustaining value in a world of AI, how do you answer that question?
- [45:17]
Jake Saper
Well, part of it is if you can build something that people use every single day, if it becomes part of the way they go about their lives. I think that's part of the reason why OpenAI is powerful, because they've built a little bit more on the consumer side of things. But they built a situation where you kind of build the muscle memory now to open that app instead of Google when you're searching.
- [45:34]
Unknown
I totally agree with you. I think brand is the Trojan horse that everyone is forgetting. Everyone has a consumer front end. Anthropic has a consumer front end. How many people go to Claude?
- [45:42]
Jake Saper
That's part of Anthropic's challenge going forward. They've got an incredible coding machine.
- [45:47]
Unknown
Do you think we'll see the specialization of LLMs? I mean, if I'm Anthropic now, I'm like, for fuck's sake, Just appreciate that you have cursor codium and you have an unbelievable coding be that. And that's a huge business. Do you think we'll see that specialization or not?
- [46:00]
Jake Saper
I can't speak for anthropic and it seems like Dario is focused more on the long game of how do I do this AGI thing safely? And so my guess is his ambitions are focused there. But I do think that you're going to see a lot of specialized LLMs and I think that a lot of them will come from open source. Back to the earlier point, you're going to see people who say, you know what, I'm trying to solve a problem in the mortgage world and I'm going to build on top of an open source LLM a tool that helps me analyze and make recommendations on how to write the best mortgages in a very specific way. And the cool thing about that and this ties into. So we had a thesis back in 2017. My partner Gordon started it called Coaching Networks which was a poorly branded but I think correct insight that the way AI will take place in business software is as a coach that'll show up and say, hey, I see that you're about to write this mortgage. Here's all the data you should actually be using and here's some suggestions on how to do it. It learns on what actually happens. You write the mortgage, you don't, does the person take it or not? Do they pay their loans or not? And then based upon those outcomes, it makes better recommendations to anyone else in that situation in the network. So we call that Coaching Networks. The reality is copilot is a term that took off, but what's cool about that is it's domain specific. And if you build domain specific large language models using that data, you're going to have insights that even an OpenAI won't be able to have.
- [47:15]
Unknown
You mentioned copilot there we see people like Klarna who say, ah, we're replacing all of our SaaS tools and we're building them ourselves and AI allows us to build all of these tools ourselves. And people are genuinely asking the question, really especially vertical SaaS, are all of these tools dead? And we'll be able to have very custom applications that we build ourselves. How do you think about that?
- [47:34]
Jake Saper
So I have a strong take on this and I realize that it is a self serving take in that I am an investor who invests in B2B software vendors and so I obviously hope that B2B software vendors continue to exist in this world. But I believe that B2B software, and I believe software vendors have an important role in the future, even if the bolts of the world, the curses of the world, make coding cheap, easy, in some cases free. And there's three reasons why I think that's the case. The first is when you're buying software from a vendor, you're not just buying the code, you're buying an opinionated perspective on how to solve a problem. And that's a really important point. Ultimately, if there's a software vendor who has dedicated their lives to figuring out the best way to solve a problem across a bunch of different use cases, they're going to have a lot more insight on how to solve it and they're going to have that proprietary data, sort of like I mentioned in the mortgage use case, that a closed source model is not going to have, that you can't just get off the shelf. So that's like the first reason you're buying an opinionated perspective. The second is the very factors that are making this software easier to build yourself also make it harder to maintain. Right? So you could spin up something in Bolt or lovable or with cursor, et cetera, yourself, and that thing becomes out of date in six months or even faster. And so unless you have someone and some process to constantly keep it up to date, the software is out of date immediately. Which is often why enterprises start with build and then go back to buy when they realize, oh yeah, we built it, but we can't maintain it. But the third and most important reason why I think software vendors still have a role in the future is because the buyer wants a throat to choke. Ultimately, when you buy something from a vendor, I am getting a guarantee that you will serve me well, that the software will not have downtime. You'll be there when I have questions around support and perhaps that you'll guarantee some outcome. And this starts to move into the world where software pricing is evolving and could look more like outcomes based pricing over time.
- [49:20]
Unknown
One thing you've got there is creation. Fundamentally, the majority of enterprises, especially in Europe, do not know what Slack is, let alone what notion is. So the fact that they're going to create their own verticalized AI tools is absolutely fucking moronic. I mean, it's really stupid. Maintenance. The average company has 172 tools. Are you seriously saying you're going to maintain 172 tools? Absolutely moronic. Again, the accountability element, we need someone to blame. Yeah, that's why we have consultants. So former consultant, but we need to blame you it's not my fault. McKinsey told me. McKinsey told you to do it. Fine.
- [49:52]
Harry Stebbings
So I totally agree with those.
- [49:54]
Unknown
You mentioned pricing there. Everyone's saying on the back of that we're going to see this total shift. You know, I interview a lot of people. I interviewed Anton from Lovable the other day and he said he didn't know which company he would short, but he would short a company that has kind of archaic per seat pricing and doesn't adjust on a pricing model basis. What do you think is the future of B2B pricing in an AI first world?
- [50:14]
Jake Saper
Yeah, I think there's a spectrum of pricing. So you have the classic per seat, then you have usage models which look like all sorts of things and then you've got true outcomes based. I think we're sort of in a world right now where most of the forward leaning AI providers are experimenting with usage based and that could be usage based obviously on how much tokens you're using, et cetera. But it could also be if you have an AI agent like we work with a company called Assembled in the support AI space and they'll charge you based upon basically how many interactions the support bot is having with your customers then over time.
- [50:45]
Unknown
Do you think that's great? Sorry, I'm interrupting that. Like compare that to fin, which is intercom, who actually do it on like outcome based, which is like solution granted.
- [50:53]
Jake Saper
Yep. Yeah. So I think that the direction that this world moves over time is solution granted. I've spent a bunch of time learning about the Fin approach. It's hard for now, and the reason it's hard for now is there's a few reasons. One is back to the accountability part. It's hard to establish causality if many support tickets, particularly higher level support tickets, have multiple touches, right? Like so someone, you know, a bot touches it and then maybe a human weighs in a little bit over here and then how do you establish, you know, who was the winner? You don't want to create an antagonistic relationship with your buyer. If you're like, okay, I did all this and they're like, no, no, you only did some of this, I'm only going to pay you this. And all of a sudden instead of having like a monthly, like an easy bill, it's like you're negotiating every month with the customer. That sucks. I think that like over time we'll start to figure out some of those hiccups and bumps, but I think we're still in kind of early land on outcomes.
- [51:39]
Unknown
It almost doesn't work. When there's human in the loop, there are certain situations.
- [51:42]
Jake Saper
So the easiest form of outcomes based pricing today in AI is AI enabled services. And this is a business that takes on the whole delivery of a product. So they say not I'm going to sell you an AI tool to help you do support. It's I'm just going to do all your support, I'll do the people, I'll do everything else. We invested in a company called Mechanical Orchard that does this. Moving mainframes into the cloud using AI. They built a tool that's basically cursor for mainframes. But what they don't do is sell that tool to bank of America and say, hey, use this tool to move all of your use AI to move all your stuff into the cloud. What they instead do is they sell a service. So we say we're going to use this really cool AI tool we built and we're going to move your product into the cloud. It'll take 50% as long and we'll charge you only 80% as much as the incumbent. And if it doesn't work, you don't pay. And that's outcomes based pricing. So if you're moving kind of in that direction, it's easier to establish outcomes based pricing because there's no questions did you do it or did you not do it?
- [52:35]
Unknown
Do you have margin degradation on AI enabled given the fact that you own the full vertical and you have to kind of ingest that all yourself?
- [52:42]
Jake Saper
It depends on pricing. So this is a really interesting question. So if you're pricing on labor basis, which is generally how most services are priced today, you in some ways are taking the risk upfront because you're saying like, okay, if it's going to take me this long, then I'll charge you this. But if your AI doesn't work, then you could be in a world where your margins are really degraded upfront. If the AI does work, then you actually capture way more margins. And so you have to be really thoughtful about how you price and you're basically taking a bet on yourself, like, how good is my AI?
- [53:15]
Unknown
Can I ask you, when we look at this distribution in an AI wave, who does it benefit most? Incumbents with incredible distribution advantages? Is it startups with none of the technical debt, the ability to move fast, integrate quickly? How do you think about that?
- [53:28]
Jake Saper
There's a third category, and I don't really know how to describe it, but we talked about a bit earlier, which is these growthy stage companies, which is.
- [53:34]
Unknown
Like your Notions of the world notions.
- [53:36]
Jake Saper
The ironclads, the companies that are above 100 million ARR are growing nicely and still dynamic and young enough to make changes. But they're not startups anymore. I sort of segment the world into those three kind of buckets, just way oversimplifying. The biggest thing I've changed my mind around in the past 12 months relates to that, to this question, which is I was fearful when the power of LLMs came out that most of the value would accrue to the incumbents because of their data and distribution advantages. What I under appreciated, which is just the recurring lesson of startups, is the value of focus. The reality is it doesn't matter how much distribution Salesforce has, how much data they have. If you are a startup who's just focused narrowly on solving a very, very specific problem, if you're unifi helping with the go to market stack in much more narrow way than Salesforce is, you're going to run just way, way faster and customers are going to want your product more. We're seeing that play out. And so the thing I've changed my mind on is I'm less fearful that incumbents will be able to accrue most of the value. The reality is it's still early days in this game and things could change. But thus far the focus startups are outpacing the incumbents. The growth ones. It's more of a mixed bag for lots of reasons. There's ones that are a little more ossified and aren't necessarily taking advantage of the stuff and there's ones that are still young and dynamic enough to actually pivot it and take advantage of it.
- [54:52]
Unknown
I've been phenomenally impressed with the speed of incumbent shift. When you look at your Adobes of the world, I think we always say, ah, they're so slow. They're so slow. Actually incumbents are shipping faster than ever. I've been very impressed by that. How do you think about the oh, Google could just build this. We've been investing for years. Everyone's like, oh, email, auto complaint, oh, Google could build that, whatever it is. How do you feel when you hear that?
- [55:12]
Jake Saper
Yeah, this is where I go back to solving a narrow problem. Like start by solving a narrow problem because Google's not going to solve that narrow problem as well as you will and you can expand from there. I mean Viva is a great example. When we made the investment in Viva, a CRM for pharmaceutical companies, the entire market for that was $400 million globally. That's not Big enough to build a multibillion dollar business.
- [55:30]
Unknown
For context, Viva today is a $35 billion market cap.
- [55:34]
Jake Saper
That's right. So they obviously found a way to expand. So they started narrowly, right, and then they became the board level vendor to the world's largest pharmaceutical companies. And that's a really important phrase I think most startups don't think about. How can you become so important to your customer that you're discussed at the board level? And if you achieve that, your ability to upsell is obviously much higher. And so Veeva's now upselled all sorts of stuff to these massive pharma companies and has a $35 billion market cap as a result. The same is true in the AI era. Right. If you're building an autocomplete tool in Gmail, if it's a horizontal tool, yeah, you're probably gonna have your lunch eaten. But if it's for a very specific use case, and it works really, really well, you earn the right theoretically to expand to sell that same buyer some other thing. So you can use it as a landing wedge and then expand to sell something that perhaps is more defensible.
- [56:21]
Unknown
I also find that you continuously underestimate how big the landing wedge is.
- [56:25]
Jake Saper
Yeah, that's right. Particularly if you're really good at solving a problem. And if the pain point is really big, if the pain point's really big, you not only have customer demand for it, people are willing to pay a lot of money for it. The other thing that's true is in the AI era, a lot of these businesses are able to capture some labor spend in addition to software spending. And so that narrow wedge, while it may be narrow from a software spend perspective, may not be narrow from a total spend perspective.
- [56:46]
Unknown
Do you buy that? Sarah Tavel's written before about paying for the work, not just for the software. Do you buy that? And I'm not disagreeing or agreeing with her, but I'm saying, do you buy that transition? I think a lot of buyers will find it difficult in their minds to justify paying for labor when it is software.
- [57:03]
Jake Saper
So what I've seen thus far, and it's still early days, is that most buyers of this stuff aren't firing people. What they're doing is not hiring new people. And so they're trying to be more efficient with whatever they currently have. Like, I just invested in a voice AI company in healthcare, and we talked to a bunch of their customers. The customers were like, we love this thing, it's amazing. And we're like, okay, great. How Many headcount did you reduce? And they're like, none. I'm like, wait, why do you love this thing? And he's like, well, I love it because I've grown my business three times with the same headcount. And so I think right now, and I think part of it's emotional, people don't want to fire their people. Understandably, businesses are able to grow more efficiently than they were in the past because of this stuff. And therefore these software vendors should be able to capture some of that labor.
- [57:43]
Unknown
We mentioned Salesforce multiple times in the next wave of AI. Respectfully, everyone on the show has said, look like Salesforce would be one of their biggest shorts.
- [57:51]
Jake Saper
It's not mine.
- [57:52]
Unknown
Why? What would the bull case be for Salesforce?
- [57:55]
Jake Saper
So I think that the incumbency advantage of Salesforce that we talked about before is very real. The fact that millions and millions of people use that product every single day, you can't underestimate that.
- [58:05]
Unknown
For such core workflows.
- [58:07]
Jake Saper
For such core workflows. That's not the one I'd short. If I were to short a stock publicly, it'd be IBM. IBM, still spend, still makes so much money from selling these refrigerator sized mainframes. I think the thing that people don't realize is that 75% of the Fortune 500 still run their core applications on refrigerators in their closet. It's written in a language called COBOL that no one writes anymore. And IBM makes a ton of money selling maintenance and new servers every year, billions of dollars every year to support these massive companies and their legacy code. It's been trapped on these machines. And AI is I believe, the critical enabler to get this spaghetti code into the cloud and hosted in a much more efficient manner. And so if companies like Mechanical Orchard succeed in doing that, the IBMs of the world are in trouble.
- [58:52]
Unknown
Given, as you said, that the dominance of still companies, as you said with refrigerators running their software, do you think we overestimate adoption of AI in the short term?
- [59:02]
Jake Saper
Good question. My guess is there'll be a little bit of a trough of disillusionment, just like there always is in technology adoption. Everyone's trying everything right now. The good news is there's a lot of movement from experimental budget into real budget in these enterprises. But the bad news is a lot of these companies that aren't actually delivering enduring value are going to get cut and there'll be some buyers who say, this thing didn't work as well as I want, so I'm a little disillusioned. The other thing that could happen is there could be sort of an FTX moment in B2B AI as these agents come out. These agents are incredibly powerful and they do things for you. They send emails, they buy things. They can take action, which is very powerful. But with great power comes great responsibility. And it's very possible, in fact likely that some big enterprise is going to deploy an agent and the agent's going to do something really bad. They're going to send a bunch of emails to customers or prospects that they shouldn't. It's going to buy a bunch of things that shouldn't. It's not hard to imagine what could happen. And there could be a bit of a backlash to say, like, oh wait, this isn't good, we shouldn't do it. The reality is like we do need to figure out the guardrails for these products so that they're deployed safely.
- [60:01]
Unknown
You mentioned disillusioned there. We've seen a huge amount of disillusioned talent within venture firms. Leaving what?
- [60:08]
Jake Saper
A transition.
- [60:09]
Unknown
I'm pretty good at this. I've done a couple of these shows.
- [60:12]
Jake Saper
Impressive.
- [60:13]
Unknown
Honestly. It's like 3,000 in. I can do a transition, but I'm glad you noticed that one. But there is, there's a huge amount of disillusion. Partners, we've seen it with new firms, we've seen it just with departures with that fundraising. And my question to you is, you've never lost a partner, which is nuts. What do you do that no one else has been able to do?
- [60:33]
Jake Saper
We grow them from within.
- [60:35]
Unknown
Why is that important?
- [60:36]
Jake Saper
So I'll explain how most venture firms work and I'll explain how we work and the difference. So the way most venture firms work is when you're looking to hire investors, you hire two profiles. You hire either seasoned, often ex CEOs into the business who have presumably a great network and a great brand and what have you. And. Or you hire an army of junior people and you give them a checkbook and you say, you've got two years, prove to me that you're good. And the incentive that creates is those people write as many checks as they can. Of course, that's the incentive. And at the end of the two years, one of two things generally happens. It's almost always never enough time to really see if these investments are good or bad. And so the person often leaves. They either leave because the firm says these investments aren't trending so you're out, or their investments are good and the person looks up and Says, you know what, if I build my career here, there's no chance I'll ever be an equal partner. Because that is how most firms work. Most firms don't have an equal partnership. Most firms have founders that retain carry after they depart. And as a result, if you're really good and you pour your entire career into something, you make great investments, you don't ever get to capture a portion that's fair. And so what you're seeing is a merry go round in venture capital. And what that means is that you've got a bunch of people that leave. They go from firm to firm or they start their own firms because of these dynamics. It is really, really bad for our founders because what happens is these founders become orphaned deals.
- [61:56]
Unknown
No one talks about this. And it is really.
- [61:58]
Jake Saper
It's a big deal. Yeah, it's a big deal.
- [62:00]
Unknown
Why is it a big deal? And what should founders know?
- [62:02]
Jake Saper
So unfortunately, I've been part of a lot of boards now with orphan deals where the original investor who made the investments leaves the firm and then that company doesn't have support within that firm. So when it comes time for a new round, time comes the pro rata. The odds that you're going to get it are lower. All of a sudden that founder has to start to scramble and figure out what do I do? Or a new person comes onto the board who maybe is less constructive than the person that was chosen by the founder. And that could have negative implications. There's so many ways in which the founders can feel kind of tricked isn't the right word, but it's like they signed up for something that's not what they bought. When you buy an investor, like when you buy a board seat, you're really hoping to buy that firm, but also that person, right? These journeys last a decade. You're hoping to sit across the table from that person for a decade plus. And you kind of know that's why the vetting process is so important. That's why I flew to get sunburned in Denver and with Alex, et cetera. If there's a merry go round where people are leaving, it sort of strands these founders without the person that they originally wanted.
- [62:56]
Unknown
10,000% is signaling a real risk. Or do you agree with the multi stage funds who say it's not really, it's just used by seed investors, an instrument to keep their jobs.
- [63:06]
Jake Saper
It comes down to the topic we talked about before, which is focus. So most multi stage firms treat their seed programs as an option program. They write small checks. Often it's their junior people writing these small checks. They use it as a way to track the company to see if it breaks out. If it does, then they try to pour in and get proper ownership. That's the way most seed programs are run in multi stage and it's not great. It does provide signaling risk. It also doesn't help the founder as much because they don't get much love from the firm. The way we try to do it is the same. We try to do everything else, which is with focus. So when we make a seed investment, we treat it like a core bet. It's a partner that's doing the deal. We're generally owning double digit percentages so that we really care. It also allows the founder to raise a round from someone else if they need to because we already have our ownership.
- [63:44]
Unknown
How ownership sensitive are you?
- [63:46]
Jake Saper
It depends. It depends on the context. I mean, we try to be pretty ownership sensitive.
- [63:50]
Unknown
Will you do a deal with 8%?
- [63:52]
Jake Saper
Sure. I mean we did zoom at 10%. So it also depends on the stage.
- [63:56]
Unknown
But is that the bottom? How do you differentiate between, oh, it's a stretch, but we'll do it and I'm sorry, that is too low.
- [64:02]
Jake Saper
It comes back to that what you have to believe framework. So if you have to believe this investment will return the fund and ultimately if it's a low ownership investment, but we think this company is going to be salesforce and it's not going to be super dilutive going forward. They're going to have to raise a ton of capital going forward and it can return the fund. Then we'll do it. This is a game of outliers and you have to convince yourself that this one's an outlier. I mean, you have to convince yourself that all of them are outliers. But the lower ownership you have, the.
- [64:24]
Unknown
More the ownership do you buy that it has to return the fund Thesis that we really just have such a fixation around inventure, when actually part of me is A, if it returns half the fund, that is still very good, and B, we always underestimate the size of our winners.
- [64:40]
Jake Saper
Yeah, so both of those are true. So we've been around for 20 years. We have deployed a little less than $2 billion in capital. We've returned in cash, a little over $8 billion in cash. And that doesn't include all the private holdings, obviously that are worth a lot more. The reality is the bulk of that $8 billion has come from a handful of companies and so the outliers really have driven those returns. But what's interesting, as I said before, is even if you did remove some of those outliers from some of our funds, they would still be top decile funds because of the choruses of the world. They get bought for 500, but you invested the seed and so it's still good money.
- [65:13]
Unknown
What was the best fund?
- [65:14]
Jake Saper
The best fund thus far is the Zoom fund, which is our fund.
- [65:17]
Unknown
Three over a Salesforce fund.
- [65:20]
Jake Saper
Yeah, we sold Salesforce too early, like Exit Matters. And that's something else that doesn't get talked about enough in Venture.
- [65:25]
Unknown
I actually had this written down when you mentioned it earlier. Public sale.
- [65:28]
Jake Saper
Let's talk about it.
- [65:29]
Unknown
Let's talk about public sell, which is like public sale. When do you sell?
- [65:31]
Jake Saper
Yeah, so it's a really hard. It's a hard question.
- [65:33]
Unknown
When did you sell Salesforce?
- [65:34]
Jake Saper
So very early, shortly after it went public. Yeah, it was bad. I wasn't there for that.
- [65:40]
Unknown
You were six.
- [65:42]
Jake Saper
Exactly. I was young, but I was there for a lot of our. When do we sell Bill? When do we sell Zoom? When do we sell Blend? When do we sell Viva? I've been there for a lot of the more recent.
- [65:51]
Unknown
Do you have a formula or framework?
- [65:53]
Jake Saper
Yeah, we do. Every quarter that there's earnings, we do an analysis that's led by the sponsor. In almost all these cases, we're still on the board of the company, and so we have inside information, which is the reason why we hold the position. If we didn't have inside information, we'd have no defensible reason to hold the position. But as long as we're on the board, we have that information, we can hold it. And so the sponsor takes that inside information and basically updates the partnership and says, here's what's going on, and then we make a decision. And because we're on the board, we can only make that decision within a specific window after the announcement, for legal reasons, obviously, of whether or not we hold, sell, et cetera. In some cases, we buy. So in the case of Doximity, we were huge believers. We invested at the. A company did really well. We actually bought more at the IPO and that's been a great investment. We've already returned 3x from where that was. But it's a hard decision because every quarter you look at it and you say, okay, I know what's going on with the company. I don't know what's going to happen in the macro. Right. There's all sorts of uncertainty in the macro. So that weighs into it. And you do your best do you.
- [66:49]
Unknown
Feel pressure from investors when they are less liquid times and you could liquidate positions for sure.
- [66:55]
Jake Saper
The nice thing is the vast majority of our investors are big charity foundations and endowments. And these folks don't. Aren't as concerned with I need cash right now. They really want us to maximize the size of the outcome. And we've returned, as I said, over $8 billion on 2 billion deployed to them. And so they trust us generally. We did an analysis recently on how good we have been at the public's.
- [67:16]
Unknown
Oh, what did that show?
- [67:18]
Jake Saper
So the analysis was if we had sold all of our shares and all of our public companies at lockup, meaning once the lockup expired, we sold it immediately. So that's scenario one. Scenario two is we did what we did. So what have we actually done so far? So basically our track record of selling.
- [67:35]
Unknown
Which is case by case, dependent case.
- [67:36]
Jake Saper
By case, but we basically just took what we've done so far, like how much gains we've returned from those deals. And then the last thing we looked at was what is the value if we had sold at the very peak price of those stocks, which was often in 2021. Any guesses?
- [67:48]
Unknown
You've got a fourth option which is just hold in perpetuity.
- [67:50]
Jake Saper
We could hold in perpetuity. We could hold in perpetuity. We've done that to some degree. Like in the case of Viva, we've distributed 90% of our position, but we still have a meaningful stake in it. Just because we owned 30 something percent earlier.
- [68:02]
Unknown
Well, I mean, number three, sell peak price is obviously going to be the optimal return for sure.
- [68:06]
Jake Saper
But any guesses as to the swing between what we've actually done and peak price versus what we've actually done? And if we've done lockup so sold.
- [68:13]
Unknown
You'Ll massively fuck yourself. Yeah, yeah. That's like our Salesforce alone. You just kill yourself.
- [68:19]
Jake Saper
So the numbers are this. If we had sold them all at lockup, we would have returned $2 billion less to our LPs. What's interesting, and this just is like totally coincidental, if we had sold all of our shares at peak price of whenever the peak price proposed for that stock, we would have made $2 billion more for our LPs.
- [68:38]
Unknown
No, no, but it's just like, I mean this in a nice way. That's not true. Salesforce. Salesforce would have been another $200 billion gain.
- [68:46]
Jake Saper
Yeah, yeah. So to be clear, we excluded Salesforce in the analysis just because it was so. It was so long ago. And also we made such a bad decision that analysis is on the stocks we're managing now.
- [68:55]
Unknown
Okay.
- [68:56]
Jake Saper
It's the stuff that's currently public.
- [68:57]
Unknown
Including Zoom?
- [68:58]
Jake Saper
Yeah, including Zoom. Wow. Yeah, exactly.
- [69:00]
Unknown
Because sales was not like.
- [69:02]
Jake Saper
Basically what we're trying to say to our LPs is like, this is how good we are currently at doing this. Like over the past, whatever, five years we've been at managing our public stocks. And the answer is we made you 2 billion more than if we'd just given you. All right now, we could have made you 2 billion.
- [69:14]
Unknown
Do you agree with Roelof's thesis that actually us as venture managers with inside information are best placed to manage companies even in public markets?
- [69:23]
Jake Saper
Well, obviously to some degree I do, because we're still managing a lot of those positions. I think that if you believe that if you stay on the board and you're super active, then you do have more insight. The downside, honestly, is just time just taking away from new investments. There's huge benefit to the firm to have the connectivity to those incredible companies. And one other thing that we've started to do, I mentioned last night at our walk, which has been pretty cool, is we've been funding really early stage AI companies, particularly within specific verticals, and trying to pair them up with these giants. And so if we pair you up with like a really big company that has great distribution and you can do some sort of deal which may involve some equity, where the big company gets to buy a little bit of the small company, but the small company gets the incredible distribution advantage of these massive companies we're already a part of. There's this beautiful symbiosis that has been playing out for both sides so far.
- [70:10]
Unknown
We mentioned the signaling earlier. I think one thing that we don't talk about enough but is really important is reserve investments. How do you think about reserves, reserve allocations and the decision making attached?
- [70:21]
Jake Saper
Yeah, it matters. Some of the secondary purchases, both in terms of actual secondary and third and second, third investments that we've made in some of these winners have been hugely important from a returns perspective. In retrospect, it's always hard to know because we've definitely made some really bad third check investments in companies that we thought were trending that didn't end up trending.
- [70:40]
Unknown
What's an example of that and what did you get wrong?
- [70:43]
Jake Saper
Yeah, one of the big examples, like when we look back at failures in our portfolio over time, it's been when we thought there was product market fit, but there wasn't the term. I'm Using for now is I'm calling it Mirage Product market fit, where it's like company's grown really quick. You can fool yourself into thinking this company has incredible product market fit. But there's a couple different downside cases where you think you have it and you don't. One of the cases in traditional SaaS is you're selling a product to a very diverse audience who's all using it for different things. And so you think like, oh, I've got product market fit. But the reality is like someone's using your thing for this over here and another person, a completely different type of customer is using it for this. And so how do you figure out your go to market motion? How do you figure out your product development motion when all these people want completely different things? That's like what can help companies blow up. There's a second sort of dynamic that's now happening with these AI enabled services companies where let's say you go out and say, hey, I'm going to be an AI enabled accounting firm, I'm going to charge you 15% less than the incumbents and I'm using AI. And so it's going to be even better, higher quality, et cetera. So faster, better, cheaper, et cetera. Well, yeah, of course customers are going to buy that because it's cheaper and faster and better. So you're going to grow really quickly. What that doesn't tell you is have you used AI to provide a high margin service? Right. You can sell a lot of something, but if you haven't figured out a way to have a good business model around it, then it's not really product market fit. And this happens in consumer businesses as well, where people sell a dollar for whatever, $1.50 or whatever, and then you're underwater from a gross margin perspective. The same thing can be true in AI enabled services. And all that can lead to a situation where you as an investor, you as a founder think, oh my God, I've got product market fit. You pour more cash and you don't.
- [72:21]
Unknown
You have unanimous decision making on initial check, which partly I think is strange, but it clearly works on reserves. How does that look?
- [72:30]
Jake Saper
It's similar, but in that case the deal sponsor is so much closer to it that we trust their judgment more.
- [72:35]
Unknown
Do you worry that it's bias? Yeah, they like the founder, it's their name on it. They want to keep it alive. In a lot of cases, yeah, I.
- [72:41]
Jake Saper
Think when it's a keep it alive scenario, we're a lot more thoughtful and we'll often get someone else involved because every reserve situation is different. Right. If it's a reserve where it's like it's pro rata on a series B where we did the A company's performing well, it's a little more straightforward. The hard thing comes into play where it's a series C and you need to put an inside round together to figure out what to do, et cetera. In those cases, we actually have the founder come back in and present to our full partnership. We are all up to speed on what's going on and we can check the founder because you're right, there is a bunch of emotional investment, there is bias involved. But if the founder comes back to us and gives us the story, we're able to poke and prod a little bit.
- [73:15]
Unknown
I remember Mike Maples, our mutual friend, said on the show, 99% of the time bridge rounds are a bridge to nowhere. Do you agree with that in your experience?
- [73:23]
Jake Saper
So there's a business that was actually bought by a British company called Sage, called Intact. Yeah. So Intact was the kind of number two cloud ERP player. We were the early investors there. And that company, ERP is a tough thing because it's the most mission critical system of all. So it's really hard to rip out someone's erp, but by definition once you get in, it's really sticky and so you can stay. That business grew slowly and then had some cash problems. We decided to bridge the company and that saved it. We figured out that business, also figured out a channel partnership motion they figured out through accounting firms actually. And that business took off and was bought by Sage, I think it was for a billion dollars or something. And we made a ton of money on that whole thing, but also on that bridge because that bridge was obviously in favorable terms given the condition the company was in. And so that's obviously a cherry picked example. But there are examples where it's not a bridge nowhere.
- [74:11]
Unknown
When do you think IPOs will return?
- [74:13]
Jake Saper
I tend to think next year. I think there's enough uncertainty in the market right now, particularly in the macro and the political situation, that there's a lot of people that are nervous. So my best guess would be the beginning of next year.
- [74:23]
Unknown
I've peppered you with so many different questions. I do want to do a quick fire round.
- [74:28]
Jake Saper
Let's do quick fire.
- [74:29]
Unknown
Okay. Are you ready?
- [74:30]
Jake Saper
Hit me.
- [74:30]
Unknown
You can buy and hold one public stock for the next 10 years. Which one and why?
- [74:35]
Jake Saper
I think Microsoft. And the reason that's the case is because I'm obviously long B2B software and that's probably the best index.
- [74:42]
Unknown
They just put that category so richly. Your upside there is just going to be like.
- [74:46]
Jake Saper
Yeah, but if you believe that they'll continue their dominant position, then it's just, it's sort of an index on the growth of.
- [74:51]
Unknown
Sure, but you'll get like a 30 to 40 to 50% price increase.
- [74:54]
Jake Saper
Yeah, but you're asking me to hold one stock and so I'm putting my entire portfolio in something. I'm going to put it in something that's safer.
- [74:59]
Unknown
You don't want some super risky GameStop shit.
- [75:01]
Jake Saper
Yeah, it's not my style.
- [75:02]
Unknown
Jesus, Jake, come on. You got a seed fund, you got a series A fund and you got a growth fund. Which do you invest in for each? And you can't say emergence.
- [75:11]
Jake Saper
Yeah, you got to bet on yourself now.
- [75:12]
Unknown
You can't say emergence. Come on.
- [75:14]
Jake Saper
I generally like the stage specific firm. So like on the, on the late stage, I like the maritech folks and I like the Green Oak. Green Oak folks. And like Thursday on series eight, I mean, similarly, I like the folks that tend to be more thematic and focused. So like Maveron is great in the consumer side of things. USV a ton of respect for. They tend to be deeply focused, obviously, crypto and other things. And on the seed front, it's similar. Our friend Rick Zullo runs a fund called Equal Ventures, which is a seed fund that is super duper thesis driven. I respect it. He makes contrarian bets super early.
- [75:43]
Unknown
What deal have you lost and who did you lose to?
- [75:46]
Jake Saper
The first deal I lost. I think I've lost two or three deals in my career so far. The first deal I lost was ironclad and I lost it to Jess Lee at Sequoia. It was super painful. So the context is I had gotten to know Jason, the CEO there before he started the company. So he was at a coffee shop and met my wife because she was wearing, I guess, a HubSpot shirt. And like he was curious to learn about sales. This is what they tell me. And they talked and Danny was like my wife. Danny was like, this guy's amazing, you should meet him. So I met him. I really liked him. He started the company. At the time, we weren't doing much seed investing, so I didn't look at the seed. And then at the A, we had invested in a company called Simple Legal, which was like billing software for lawyers. And on their roadmap they had contract management. They hadn't built it yet, but it was on their roadmap and so we made the investment. And then I called Jason and was like, listen, man, I really love spending time with you, but I think I should not be part of the Series A. Because of this. He agreed. And so we didn't participate in the Series A at all. And then the Series B came super quickly. And to Jess credit, she ran fast and got in front of him first and put the term sheet in and won it. Obviously the happy story is I ended up investing in the next round. I think as the only external investor in the next round. Yeah.
- [76:53]
Unknown
What was the price of that?
- [76:54]
Jake Saper
Somewhere in the 300s, something like that. Maybe 400. I don't remember specifically. The company's now north of 100 million revenue. It's doing quite well.
- [77:01]
Unknown
How do you think about that? So I don't mean to pick on them, but if we actually pick on them, okay, it's like a three, four billion dollars company. If we want to be really generous in the public company, really generous, I.
- [77:12]
Jake Saper
Think it could be much larger. I mean, I'm obviously biased, but like.
- [77:14]
Unknown
Document 300 million entry price with dilution with like a 5x.
- [77:19]
Jake Saper
Yeah, I think there's potentially much more. I think in part because if you look at DocuSign as a comp like that business got very large and was just literally signatures. We now do that as well. In addition to contract management, which is a much bigger thing, we also have this AI product that we've built called Jurist, which is a Harvey competitor. Pretty cool. And it's growing real quick. And so I do think there's real upside to it, but we'll see.
- [77:41]
Unknown
What's your biggest win and what did you learn?
- [77:44]
Jake Saper
Like, obviously being involved with Zoom very early was huge. I think the two learnings I had there are market pull, incredible market pull, and then founder insight. If you can find something like that founder insight around creating something differentiated, it's a recipe for success.
- [77:58]
Unknown
What's been your worst deal and what.
- [78:00]
Jake Saper
Did you learn thus far? I haven't had any zeros. I'm sure I will. The exit I've had that was the worst exit was a company called Comfy, which was building energy efficiency software. So basically it provided employees within an office the ability to change the lighting and temperature from their phone wherever they were and would actually follow them around and remember their preferences and change the building accordingly. It's actually quite cool. The business grew really quickly from a bookings perspective. They would have these big seven figure contracts from Salesforce and others, but the people in Charge of deploying the product, didn't care. And so there was a huge incentive issue between the buyer and the implementer in that business. And so we have huge bookings and we didn't have great deployed arrow, and that gap bit us in the ass. We ended up selling the business to Siemens. We actually made a little bit of money on the deal, and Andrew, the CEO, and I stayed close. He actually bought me a gift certificate to the French Laundry, which I still haven't been able to use because the reservations are so hard to get. To thank him for helping navigate through the outcome. He ended up making a good amount of money.
- [78:55]
Unknown
Anthropic at 60, Grok at 50, OpenAI at 300. Which do you buy and which do you sell?
- [79:02]
Jake Saper
So I sell Grok. I don't yet know how it was, what niche they've carved out in the market. OpenAI feels expensive, but they have a strong consumer brand. I probably buy Anthropic, assuming they can figure out the app stuff more. I think that the underlying stuff happening there with the models seems quite promising.
- [79:18]
Unknown
What's the craziest thing you've done to win a deal?
- [79:21]
Jake Saper
Assembled, which I mentioned before, is AI for support teams. We led the Series A there. It was also a very consensus deal in the sense that the three founders came from Stripe. They had built the tool at Stripe to serve Stripe, and they were like, oh, this thing is bigger than just one company. We could spin it out and start the company. So Stripe did this seed. I think it was the very first deal that Stripe did as a seed investment. As you can understand, the Series A was very frothy because everyone and their sister wanted to invest in these hot Stripe founders. I'd gotten to know the founders for a while, had tried to push Brian, the then CEO, to let us invest, and he wanted to run a process. And I get a text message from him. I think, as I'm coming back from my honeymoon and I'm all blissed out. And he's like, hey, man, process is live. Do you have time? And I'm blissed out and not in a place where I'm running after deals. And I was pissed because I had been in front of that one for a while, and I was really excited about the company. But I flew back, worked really hard. My partner Yaz, who was then an associate, did an insane amount of work to get us up to speed, and we got into the top three of the bidding process with them, and then they went silent, and I was like, that's not good. And then I got a phone call at 9pm from the CEO and he said, so, good news, you've made it top listed into the top three. The way we're going to decide this, we're going to have a mock board meeting in one hour. I'm going to send you a bunch of materials as if this is a board meeting. And then we're going to hold a board meeting, the three of us and you, and we're going to see how you perform. And this is exactly what happened at like 11pm he sent me these materials. I prep, and then we have a board meeting. And he saw how I showed up as a board member and ultimately chose us. I'm very passionate about board service and the right way to show up as a board member.
- [80:54]
Unknown
Do you know who you beat?
- [80:55]
Jake Saper
Think Index.
- [80:57]
Unknown
Who? When you hear them as being on a deal, are you like, oh shit, I need to get my game?
- [81:01]
Jake Saper
The reality is there's not a specific person or brand where I'm like, oh shit, I'm fucked. That's part of why my job is to get to know people. Early in our last fund, in fund five, we did this analysis. We knew the founders on average 13 months before we made the investment. We know it matters.
- [81:19]
Unknown
Penultimate one. Very often older partners hog carry pools. How does the carry distribution look in the partnership?
- [81:26]
Jake Saper
I am so, so grateful for this. So as I mentioned, we grow partners from within. We think it's one of the things that makes us different. Part of the reason we're able to retain incredible people like my partners Loti and Yaz and others who have come up behind me and me and Joe and Santi and Kevin, all the people that have been grown within the firm is because our founders made the very generous choice when they step away from the business and retire to forfeit their carry. This is not something that's talked about in venture, and I had no idea about this when I was considering which firm to join. But the vast majority of founders of firms, when they retire, they retain a meaningful portion of the ownership of that firm. That creates really bad incentives for the really high performers. Because if you're a really high performer, why would you stay at that place? You'd go start your own thing, right? And that's part of the reason why you've seen such a proliferation of new funds pop up. The amazing thing about our place is I have no reason to leave because the generosity of the founders who stepped down and said, you know what? We want to empower the next generation, we've made Enough money. Here's our carry. It means it's ours to run. And it means I can look you in the eye if I'm recruiting you to be a principal and groom you into my next partner and say you have a real chance to be an equal partner alongside me.
- [82:31]
Unknown
Final one. When you look at the next 10 years and you think about excitement, I like to end on a theme of positivity. When you think about the exciting things that come. I'm very excited by drug discovery, especially around my Ms. My mother's got Ms. And what will be enabled. What are you most excited by when you look forward to the next 10 years?
- [82:48]
Jake Saper
I don't know if this is an answer to your question, but I'm going to say something that's been on my mind. I had a conversation with Sam Altman 3 months ago where he was talking about the cognitive dissonance that he lives with every day, knowing that the gains that took place, the improvements that took place between GPT2 and GPT3 and a half, which just took a few years and were incredibly exponential and obviously three and a half was the moment that the world changed, are very likely to be the same or probably dwarfed by the improvements that we'll see over the next two or three years. So how do you make decisions right now about what to invest in, about how to live your life, about how to raise your kids knowing that that change is coming, that cognitive distance is very hard to live with for all of us and certainly for Sam, who has a courtside seat. And so I asked Sam, how should we think about raising our kids knowing that this is changing so quickly? And his first reaction was, don't teach them to code. And then he was like, what I mean by that is teach them the logic of how to think like that. But you don't necessarily need to teach them the mechanics of coding because that's obviously likely going away. But what he said was very specific. He said, you need to teach them how to understand how people are thinking and feeling and how to influence that. And I excitedly came home and told my wife, who is a career leader of big revenue teams and who is now teaching the course on sales and persuasion at Stanford Business School, you're the future. And I'm grateful that I had kids with you because it means that our girls are going to get this just inherently by being, you know, having you as their mom. So when I think about the future and what I'm excited for, I'm excited for all of the things that are more rote and less creative to go away. And I'm excited for the fact that we can hopefully be more human. I can connect with you more and spend more of my time understanding how are you actually thinking? How are you feeling? How do I make you feel better? How do you make me feel better? Hopefully we'll have more. As I played for you before moments where my 3 year old sings what was the song?
- [84:42]
Unknown
Shake it off.
- [84:42]
Jake Saper
Yeah, Shake it Off. This is the Taylor Swift song. We can have the machines put the music behind it and we can focus on her and elevate her.
- [84:49]
Unknown
Jake, I so appreciate you coming to London. I so appreciate the walk around London. The loveliest thing is kind of making a new friend. I know it sounds strange, but it's a really cool thing.
- [85:00]
Jake Saper
I feel the same way, dude. I really enjoyed it.
- [85:02]
Unknown
So I so appreciate you and thank you for being so great.
- [85:05]
Jake Saper
Thanks for having me.
- [85:07]
Harry Stebbings
So I have a real debate. That was one of the best shows I think we've ever done and I think it was so good because we had a two hour walk around London the night before and so really had a chance to get to know each other. I want to hear your feedback. Do you think that's one of the best that we've done? And do you think we should do walks the night before instead of, say, prep calls to really build the context? If you want to watch the full episode, you can find it on YouTube by searching for 20VC. That's 2.0VC. But before we leave you today, turning your back of a napkin idea into a billion dollar startup requires countless hours of collaboration and teamwork. It can be really difficult to build a team that's aligned on everything from values to workflow. But that's exactly what Coda was made to do. Coda is an all in one collaborative workspace that started as a napkin sketch. Now, just five years since launching in beta, Coda has helped 50,000 teams all over the world get on the same page. Now, at 20 VC, we've used Coda to bring structure to our content planning and episode prep, and it's made a huge difference. Instead of bouncing between different tools, we can keep everything from guest research to scheduling and notes all in one place, which saves us so much time. With Kodi, you get the flexibility of docs, the structure of spreadsheets, and the power of applications all built for enterprise. And it's got the intelligence of AI, which makes it even more awesome. If you're a startup team looking to increase alignment and agility, Coda can help you move from planning to execution in record time. To try it for yourself, go to Coder io20VC today and get six free months of the team plan. For startups, that's Coda io20VC to get started for free and get six free months of the team plan. Now that your team is aligned and collaborating, let's tackle those messy expense reports. You know, those receipts that seem to multiply like rabbits in your wallet. The endless email chains asking can you approve this? Don't even get me started on the month end panic when you realise you have to reconcile it all. Pleo offers smart company cards, physical, virtual and vendor specific so teams can buy what they need while finance stays in control. Automate your expense reports, process invoices seamlessly and manage reimbursements effortlessly all in one platform. With integrations to tools like Xero, QuickBooks and Netsuite, Pleo fits right into your your workflow, saving time and giving you full visibility over every entity, payment and subscription. Join over 37,000 companies already using Pleo to streamline their finances. Try Pleo today. It's like magic, but with fewer rabbits. Find out more at Pleo IO 20 VC and don't forget to revolutionize how your team works together. Rome A Company of Tomorrow runs at hyperspeed with quick drop in meetings. A Company of Tomorrow is globally distributed and fully digitized. The Company of Tomorrow instantly connects human and AI workers. A Company of Tomorrow is in a Roam virtual office. See a visualization of your whole company. The live presence, the drop in meetings, the AI summaries, the chats. It's an incredible view to see. ROAM is a breakthrough workplace experience loved by over 500 companies of tomorrow. For a fraction of the cost of Zoom and Slack, visit Rome. That's or AM for an instant demo of Rome today. Nobody knows what the future holds, but I do know this. It's going to be built in a Roam virtual office, hopefully by you. That's Romero AM for an instant demo. As always, I so appreciate all your support and stay tuned for an incredible episode coming on Wednesday with one of Europe's greatest Niklas Osberg, co founder and CEO at Delivery Hero.