← The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
20VC: Sequoia's Leadership Transition | Michael Burry Shorts NVIDIA and Palantir | Gamma Raises $100M at $2BN | Has Defensibility Died in a World of AI | Datadog Surges as Duolingo Plummets: What is Happening
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- [00:00]
Jason
Tools are great when the AI is part of your team for real, not VC talk. The amount of revenue that it's accessible is so high.
- [00:08]
Harry
Sell shit to the people who are making AI and if they grow, you'll sell more shit too.
- [00:12]
Jason
You just can't take that early first month explosion as seriously as you used to. It's not as defensible.
- [00:18]
Harry
The pace of evolution is so fast. If you decide, well, what I knew six months ago is still useful, you're probably going to be wrong very quickly. That's what I find the most stressful about right now.
- [00:28]
Sara
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- [02:59]
Rory
Not 93% of customer queries. Okay, no other agent can do that.
- [03:03]
Sara
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- [03:27]
Rory
My word.
- [03:28]
Sara
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- [03:56]
Harry
You have now arrived at your destination.
- [03:59]
Rory
Guys, it is so good to be back with you. I've just come back from my AGM and it's a humbling thing for me because for 10 years I did this show solo and, and then I go to my AGM and you know what? Everyone says, oh, we love Rory and Jason. We love Rory and Jason. And I suddenly realized that I wasn't the star of the show.
- [04:19]
Harry
Just kick us off. End this now.
- [04:22]
Rory
Fine, I'll kick us off with big, big venture news. We've said before about, you know, Sequoia being the kings of venture leadership transition at the top. We saw Roloff both moving out as steward after a three year tenure and being replaced by Pat Grady and Alfred.
- [04:39]
Sara
Lynn, which was I surprising news to the venture ecosystem. I'd love to hear how you thought about it.
- [04:46]
Harry
Sure. It just brings home how tough Venture is right now. This is the best firm in the world and they're feeling with what's going on in AI that they're behind. I think everyone in venture, especially if you have both a large existing portfolio and you're trying to compete these new deals in the last three years, everyone is feeling stretched. Everyone is feeling tired. Everyone is feeling it's brutally competitive. This is going to sound kind of not schadenfreude, but it's more reassuring in a way. I get up and I go God, we need to do better. We need to sort this out. And then you realize the best firm in the world is having exactly the same feelings. That was the first comment. Just super indicative of why do you.
- [05:22]
Rory
Think a leadership transition is showing that they're behind in AI?
- [05:26]
Harry
Look, whenever you have a CEO change having, it's because something is wrong. And again, if you want to kind of go down in the weeds of the interpersonal stuff and people's perceptions of other people, we can talk about that later. But my outside in reading is in part this is disadvantage about how the firm is doing relative to the competition. Look, I'm not saying they are behind. I'm saying there's a perception internally that they could do better. They missed some rounds and some deals they passed in some great companies that can be frustrating.
- [05:52]
Jason
Well, maybe two thoughts. One is maybe in general, in general, more people should be stepping aside today. I think more people, VCs, executives, founders. And I'm not saying this is exactly what happened at Sequoia. I mean that's the articles, right? It's about AI and missing cursor and missing these deals. Maybe that's true. Most folks from the last decade or 15 years are not the right people for the next decade. I could only imagine we don't even need half the VCs we have today for the the AI world. Maybe they'll spend the money, maybe they'll throw a few nickels into cursor. 30 billion, get a few logos on the website. The old playbook don't work and the pace is so fast. Take your coins, take your. Take your Nvidia shares and buy a beach house. Seriously, check out. It's a good time to check out guys.
- [06:40]
Harry
One of the things I admire most about Sequoia is their toughness and their willingness and ability to evolve. I'm not commenting on the merits of the case but if the internal group feels they need to make a change to continue to execute what they did not do is that fatal error, which we can talk about in politics in a second is you know, it's someone's turn and they said it's so and so's turn so we'll leave him in. They did the exact opposite. They ruthlessly said if we're going to compete, we need these people, not those people. And they made a change and I admire that. All they needed to do was call a vote and have a discussion and sit down with the partner in question and have a discussion. I think that's healthy. I think some of these orgs where so and so can't be touched. You always say to yourself, does that create a false sense of security when you just can't afford to have that in this market? To me, I think it's like a.
- [07:22]
Rory
Specialization in leadership that's correlated to actually the winners and losers in venture in the next 10 years. And I think the winners are Walmart, which is your mega platforms, it's your.
- [07:33]
Sara
Thrive, it's your lightspeed, it's your gc.
- [07:35]
Rory
It'S your walls of money. And it's your boutiques, which is Chanel's Walmart versus Chanel. And the boutiques are your benchmarks, your USVs, your specific products. And I think when you see this splintering of leadership between Alfred Lynn on early and Pat Grady on growth, I wonder if it's this kind of attempt to play into one of those. Because right now I do see them and I love Secor and I respect them intensely.
- [08:00]
Sara
But actually in the middle, which I.
- [08:01]
Rory
Think is quite a hard place to be.
- [08:03]
Harry
It's an interesting comment. They are more like a manager of managers. You have an early stage team and a late stage team. What that means, by the way, and I want to top this second and then come back to the megaphone comment, what that means is the person on top is no longer even a manager of venture firms. He's a manager of managers of venture firms. One of the big ahas is being on top of those organizations where you have these structures. Underneath is just a very hard and precarious place. If you're not actually running one of the groups that's putting out the money. If you've allowed your job to become helping other people do things, who in turn are managing money, you're more removed from being able to eat what you kill and it just becomes a more precarious position.
- [08:42]
Jason
Having watched venture firms and law firms and others, I really can't think of something more dysfunctional in many ways than partnerships. One of the reasons partnerships are dysfunctional, and maybe it does have us, then maybe we could move on, is that it's almost impossible for performance to tie to economics. If Harry and I are equal partners, if the three of us are equal partners and I have all the winners, it's all fun the first year, but the second year I've got the winners. And then Harry made that big bet and it blew up on us. And we're friends, but like, but our carry is equal. And then we're raising another fund and we have to argue over carry in the next fund. I just. My limited experiences and partnerships, the daggers are always out. And I love your Kumbaya view, Rory, but I haven't seen it in the real world.
- [09:24]
Harry
I push back hard on that and say, I didn't say the daggers weren't out. I think again, respect, look respectful, professional. Because seriously, let's talk about this. In the end, economic performance drives change. One of the things about Sequoia you got to admire is they didn't do the. We've made this decision. Let's stick with it for five or six years. They did. It's not working. Let's make a change. It's very Sequoia. It's very on brand.
- [09:47]
Rory
Listen, I want to discuss Michael Barry.
- [09:49]
Sara
Famed for big short pulls. Another big short. A big short from Michael burry.
- [09:54]
Rory
This time, $1.1 billion short on Nvidia. And Palantir had some pretty significant ramifications on market. How did we think about Michael Burry and the subsequent downfall that it caused?
- [10:06]
Harry
Zooming out. You look at the AI Capex spend and you go, at some point this is going to overshoot, then there's going to be a downturn. Uncontroversial statement. Even Sam Altman would say it. And I did the numbers because it's not my normal, but I actually did. I decided in this case, I've been opining on AI CapEx and I said to myself, what would it look like to make Michael Burry's bet? And let's make it real here, actually look at the numbers. Nvidia stock on Monday was 188 bucks. If you wanted to buy, puts at 180, which means these things have no value unless your Stock is below 180. And let's just say you buy December of this year. So you got 47 days for that stock to go down. For every $9 you bet, right, you make 2x your money if the stock goes to 160. So you got to call it. It's at 188 now you got to get one and you make 8x your money if the stock goes all the way down to 100. In other words, almost halves, right? If you're buying, puts you betting that in the next 47 days, you got to have that stock go from 188 to 160 just to make a 2x on your money. And Remember, if it doesn't go down, you lose it all.
- [11:08]
Jason
You don't even get a quarter.
- [11:10]
Harry
Yeah, you lose it all. It's not like a. So I look at that and I'm going, hmm, I've got to get it right to make a 2x and that's pre tax, right? I'm saying would I have the guts to do this? I believe the capex is overinvested. I believe at some point it'll correct. Would I take that bet? Would I put a million dollars in where I could get $2 million if Nvidia goes from 188 to 160 by December 20 or whatever it is and I lose it all if it stays above 180? No. Right. One of the interesting things he did was he released Mike Berry. He released his filing early. In other words, he didn't have to disclose it until the last day. I think it's 45 days after the end of the quarter. He disclosed it early and to me that was probably him trying. Cuz if you're taking a very tightly coupled time bet, we've only got 47 days to be proven, right? You have every incentive to pile out the bad news and shit talk the stock to try and move it down. You're not just a passive investor, you're actively trying to say hey everybody, look, this is a pile of shit, it's going to go down. And that's what he was doing in a very polite way by giving people the information earlier than he legally had to. And as someone pointed out, he filed on the last day every other time and this time he filed early. So this was someone saying, hey everyone, look, this is my bet, so that's what it takes. And I just did the other math, interesting math is if instead you decided no, I don't think it's going to crash in 47 days, but I think it's going to crash over the next two years. So I'm going to buy these long dated options leaps. So I'm going to buy puts, same thing I'm going to buy puts, stocks at 188. I want to buy puts at 180 and they're going to cost a lot more. They're going to cost like 50, 55 bucks per trade, right? And now you lose money unless the stock in two years gets to below 150. And to get a 2x to get that same 2x it has to go below 100. I mean people talk about shorting and obviously shorting is more risky than buying Puts, but it just brings how hard a business it is to bet against AI Capex. That was my big takeaway, is that.
- [13:08]
Rory
I don't understand as an asset allocator how you can rationalize that as an economic decision to make against other asset classes. What you have to believe for that 2x to be real risk adjusted. It's not a good decision to make.
- [13:20]
Harry
I think. Yes, it's a very hard decision to make. There will be one moment. Remember, we did see a 80% NASDAQ decline in 2000. If you time it right, you look like a genius. But it's so hard. I agree with you. On average, the return, especially to amateurs like me trying to do options, it's just net negative because it's a zero sum business. Unlike equity investing, where there's an intrinsic overall return. For every winner in options, there's a loser. For every idiot like Rory, there's a smart guy the other side of the table who prices it better. So I agree. I struggle to think how most people can make money shorting, which is why to your point, Harry, in some weird kind of way, it's kind of good that there's some guys like that out there. Was it Jason, you made the point just keeping the whole system honest. That's an expensive way to be a policeman. You gotta bet your own money to police the system.
- [14:06]
Jason
It's courage if you're great at it. Rory's point is it's almost impossible to be great at this. If you are, you get leverage. You do get leverage on your investment. So it's a great way to get leverage. But man, you better be really good at it, right?
- [14:18]
Harry
You gotta be right. Jason, the thing that really impressed me when I did this analysis is you're not just gotta be right, but you gotta be right on timing. I think it's easy to be roughly right. I'm gonna say it here. I think. Michael Murray. It's very hard to imagine a company trading of 110, 120 times revenues like Palantir growing at 50 or 60% last quarter. Great, amazing quarter kicking off cash. It's very hard not to imagine the next two years that doesn't have a significant correction. It's very hard to imagine that the AI Capex boom doesn't have a significant correction. But going from that kind of arm wavy bullshit podcast statement to actually being able to make money on it, that's damn hard.
- [14:56]
Rory
You said about the excitement waning from AI and air being let out of that bubble and excite all predicated around.
- [15:04]
Sara
Oh, well, will the revenue show up? Will the revenue show up? Well, the revenue is showing up. Altman says OpenAI is going to hit.
- [15:11]
Rory
20 billion ARR this year. Anthropic projects 70 billion in ARR by 2028.
- [15:17]
Sara
The revenue showing up in the billions. Are we not answering our own question? And do you think we're almost being.
- [15:24]
Rory
Overly negative in asking where is it showing up? Where is it showing up when it's already showing?
- [15:29]
Harry
Agreed. And you are. And they are upticking their estimates, not just a few. I mean, I regard if you're changing a 2027 estimate up, I don't care. But the real fact is, if you're changing your 2025 estimate up as the year goes on, that's an enormously positive signal. I think Antropic in particular has been doing that. So you're right. The revenue is showing up, the growth rates are showing up. And even when you look at funny core weave had a little bump today. But their problem is not lack of demand. The problem was, oh my God, we couldn't get the data center up and running. So it's very hard to make an intellectual case right now for anything other than there was massive demand for compute and there is massive revenue traction. So what you're left with is saying some version of I don't think it'll grow quite as quickly as other people think. It's all in the hypothetical. Right here, right now, the revenue has shown up.
- [16:13]
Rory
Gamma announced last night, I was reading at midnight after my AGM, Gamma raising $100 million at a $2.1 billion valuation, having hit 100 million in revenue with 50 people, 2 million ahead.
- [16:28]
Jason
Yeah, we run Saster on Gamma. It's great.
- [16:30]
Rory
It rocks.
- [16:30]
Sara
And so I guess I'm just asking.
- [16:32]
Rory
Are we being overly British?
- [16:34]
Sara
Are we looking for a problem that's not there?
- [16:36]
Harry
First of all, I'm definitely not being over British. And if that's what's happening, it's time to end this show now. Sorry, Harry, But I think you're right, actually. There's wisdom in what you're saying. I mean, look, it's the cynics sound smart and optimists get rich. This is a great, enormous megatrend. It's the biggest mega trend maybe since the early days of the Internet. Maybe it's even bigger. It's an enormous, ginormous megatrend, and leaning into it is the only sensible thing to do. And playing against it is dumb as rocks. The only reason you even have this discussion is you have to have the second order comments is to make your question useful because on an overall trend basis you're of course right, the demand is huge. It's some version of the question are we going to sign 80 billion of capex for next year or 40 billion? Both of them are still huge. Both of them are still. The trend is exploding. Both of us still everything's amazing but one of them is 40 billion more than the other. And that's where you do have to start saying things are enormously great. But are we over extrapolating? So I don't think it's being negative to simply say in a hyper growth company exactly how much, how much should you lean in? How much risk should you take? That's all that's going on here.
- [17:41]
Jason
Let's talk about Gamma and I actually did all company meeting for replit last night. They're at they want to end the year 250. I can tell you what I learned from both but we use Gamut. Saster folks may not have heard of Gamut. Folks talk about it as like an AI PowerPoint but they miss the point. I'll tell you how we use it. We use it now instead of when we have we have you know we have to close 8 million of sponsors at Saster a year to keep the lights on instead of sending them the same dated prospectus which we did before Gamma the same crappy thing. Now Gamma automatically pulls all of our data from Salesforce in our marketing automation system if they've been before it knows the exact number of leads and ROI from the calculation, knows who their competitors and similar companies are and makes a fully dynamic piece of collateral for them in about 10 minutes. Now it's actually a great deal. We spend 100 bucks a month for Gamma. Now a couple of ways to think about that one. It ain't much for what I just described is it? But it's 1200 bucks a year. How much do we spend for Google Slides? 0 it's built in how much do we spend on PowerPoint? I don't even know where my key is to Microsoft Office. So it is a stealth TAM expansion that we're spending $1200 a year on PowerPoint but we are because Gamma I'm the biggest super fan. It's all over Sasser because you can do epic things that we would have to wait for a marketing ops team three weeks to never do and do a crappy job of. Now we do it in 10 minutes. If they keep going it's a billion dollar ARR business 20x revenue doesn't sound expensive compared to some of the deals we've done, does it? It doesn't sound expensive. It was 1 to 100 in 11 months at 20x revenue. Sounds cheap and profitable. Yeah. Now I look, there's some meta issues. I think we're going to see a lot of these folks adding revenue teams, adding sales teams, adding marketers. Never at the ratio of 2021. We'll never see those, those levels of staffing of humans. But more power to gamma getting to a billion with no sales team. But knowing a few folks on the team, the B2B use case is pretty small today when I'm describing as that blows up, they're going to add a whole GTM team. They're going to need 100 people to service it. But yeah, I think, I think we are, we are underestimated. And for what it's worth, the other thing I did, I did this present. So I've been vibe coding for 126 days. Feels like a lot of change. So I did this presentation all hands at Replit 125 days and 10 apps. I launched 10 apps in 125 days without an engineer. I shared the data and most of the stuff that went well and a few areas to improvement and I learned a lot of things, including the engineering team. There's really, really, really good. But it occurred to me in the middle of this while I was talking that the agent now the replit agen, all the agents we use, we use about 20 agents, 12 real ones. The Replit one, the V3 one is the first one that is literally part of our team, not making us more efficient like our SDRs and BDRs. Reply is part of our team. It now has essentially infinite context window. It remembers everything I've done for the last month with it. We talk about it, we talk about our mistakes. And so I'm doing the presentation. I'm like, oh, I have this new idea. I want to build a page that spotlights all the AI apps we've. We've spotlighted on Saster. I want to rank them and I want to do links and everything so you can go discover these all the ones we talk about. So I fired up reply. I'm like, here's my idea. And he remembers, yeah, that's what we did on the other one. That's how we're going to do it. This one in 15 minutes we're in production like Copilot. The lame thing about Copilots is they were just tools. I Mean tools are great when the AI is part of your team for real. Not VC talk. The amount of revenue that it's accessible is so high.
- [21:02]
Harry
We.
- [21:02]
Jason
If you go to our office, we have little signs. We make fun of them. We have Repli for Replit. We have Arty for Artisan, which is an sdr. We have Quality for Qualified. You can see how clever we regarding our nicknames right Already Repl Equality. And they all have these little desks where there's no human at it anymore. It's kind of weird, but Replit V3, this latest agent is the first one that jumped the line to not being one of the parts of our team, but literally being part of our team just like a human being. And so that is just going to unlock so much revenue. So much revenue. It's just. That's just starting to be capable now. When Gamma is part of your marketing team rather than a marketing tool, there's a lot of revenue expansion if they can pull it off. We literally have just gotten going because these agents are so much better than 90 days ago. If you're not doing it, it's hard to see how much better it is. I think people miss they're not doing it and so they're missing when we cross the line. When AI is part of your team, that's what's coming in 2026. We're missing this. The agent was the story of 2020. The copilot was a 2024 story. It didn't work. It was a ripoff. Spend $30 more a month on office. Like no one wanted the rip off this year. OpenAI and Cloud finally actually got good. That's why lovable Replit Gamma exploded these. Gamma was founded in 2020. It had no revenue before this year. Replit was founded like in the 1800s. It had no revenue until this year. Vercel had no revenue until this year and they exploded. That was this year was the AI works right next year is AI as part of your team not replacing folks or layoffs. It is literally embedded in your team. I talked about it, but now I see it. And that's where we should be investing as VCs, as humans, as leaders. Is what happens when AI is good enough to be part of my team.
- [22:39]
Harry
And you distinguish that I want to go down because I'm actually here to learn too is that you distinguish that from just having an individual agent. What's the difference between Replit as an agent or Artie as an agent versus being part of your team?
- [22:53]
Jason
How do you it is sufficiently autonomous, knowledgeable and powerful to complete material high value tasks on its own. With some daily discussions just like on our team. You got to check in like some folks. We can check in just once a month. Like that's enough. Right. But we. It does need some oversight and some discussion like a human does. But the level of autonomy and capability. Gamma go out. We've got 20 sales calls this week. Gamma go into my Google Calendar, create prospectuses and sales collateral for all of them. Pull all the data on the last year from Salesforce and HubSpot and Marketo. Put them all apart, review them once and then distribute them to the team. And if you can join the meeting right when Gamma can do that. Gamma's part of our team. It's not that far away. Not just make me PowerPoint not just, you know, oh, Gamma's the PowerPoint for AI, that's not so interesting. Microsoft will figure that out. Canva actually has a Gamma clone now. That's not bad. I mean a lot's changed Steve. AI so fast. When Cliff was on the show, I accidentally was a little triggering on Gamma. I didn't even really think of them as competitors but. But that was the only time Cliff got a little thoughtful. I mean he was always thoughtful. But now that wasn't even that long ago, was it? Now their version of Gamma is pretty good.
- [24:02]
Harry
Yes. Which is why Gamma's got to keep swimming and add all that other functionality.
- [24:06]
Jason
That also goes back to the beginning of the Sequoia. That's why investing so stressful today.
- [24:10]
Harry
I think that's the real answer. I'm glad you said that Jason, because I'm sitting. We were talking last weekend in the partnership about technically what you really need to understand is what the improvements in the last 12 months. I think it's what you're saying and the changes in the model in the next 12 months means in terms of what can be done, that wasn't doable even 12 months ago. And that requires a quantum of time to just get your head around it. Right. And it is so stressful because just finding that time, you got to make the priority to find that time to know where it's going. Because the pace of evolution is so fast. If you decide, well what I knew six months ago is still useful, you're probably going to be wrong very quickly. That's what I find the most stressful about right now. Making sure you actually know where the technology is right now versus your opinion. Twelve months ago, you look back at what things people said 12, 24 months ago and they're laughably wrong. The whole copilot thing, I mean that was like thank you for sharing. But no, that's just so done and just trying to have clarity on the next 12 months just to be able to play. Because without it you're just betting, you're betting blind and you're gonna get it wrong.
- [25:14]
Jason
There's that. What I think is even more stressful for seed. Maybe by B it's a positive. Maybe Andreessen investing at Gamma 100 was the smartest play of all or replit right at later stage. Well, they did early too. But is like I think the quality of clones is only going up. When we all started in this industry, you'd laugh. You'd be like, well salesforce or forget a HubSpot. Pick whoever you want, whatever leader. Yeah, it'll take them like a year and a half to decide if it's worth cloning. Then they'll launch something and like it'll be okay because they have smart engineers. But it won't actually do anything. The first six months it'll be so feature poor. Then after two years they'll decide, well, should I put 100 people on this or should I put 100 people on the. So you had like three years into the big guys would really compete with you. I'm not kidding. I can think of one investment I've made that has had five clones like in the first 30 days, including one from a cloud leader. Now the same thing will be true. Will they sustain it? Will it just be a feature? But the ability of AI to enable us to clone better stuff faster, the fact that Canva is borderline competitive with Gamma and wasn't when Cliff was on the show, it just disrupts. What the hell does seed investing mean when anything, even with progress, you might see 10 better versions in 30 days.
- [26:22]
Rory
What does that mean you do then? I'm a student of this business. Yeah.
- [26:25]
Jason
What do you do Proceed? I think, I don't know. We should ask the new benchmark guy who's smarter than me. But for me I think the answer is is the old one. I just, I'm worried it won't hold. Innovation plus the best founders get there. You've got to still bet on the best founders. You just can't take that early first month explosion as seriously as you used to. It's not as defensible that innovation. But if you have the best founders, what else are you going to bet on?
- [26:51]
Harry
The interesting question is to your point on doing Gamma at 2 billion, do you think that same statement is true. So fast forward now, Gamma, you're doing 100 million in ARR. Do you think the next clone who starts at zero can catch up? Or do you think over time the distribution moat, the market brand leader moat, do you think some kind of moats accrue over time with scale? Or do you think everything's up for grabs all the time?
- [27:18]
Jason
No, what I think is there is a plane of stability that is leaner than it used to be, that is still fragile. I'll give you an example. So at Replit, whatever, I don't have the ACT numbers. Let's say they go 1 to 250 this year. It's going to be less than lovable, Harry. We'll stipulate it's not as good as lovable. Okay, here's the thing. What I found. What has happened in repl. It is most of the competition can't build the AI agent. They can. So even Bolt, which was the early leader, they're now distant number three. They don't even have any agent anymore. They've outsourced it to Claude. And so these products that are really, really good are building a deep layer of sophistic. But if you don't get there fast enough and we can argue whether Gamma is there or not, if it's sophisticated enough. And if you guys, if anybody on this hasn't used Gamma, I tell everyone to use it. What you do is go into a Google Doc, write 10 points about this show and then just give it to Gamma and say, make me an amazing deck and your jaw will drop. What it does when it's coding this deck in real time, just give it 10 bullet points. It does so much. But you sure better be working. You sure better be working that996, right? Because Cliff's got a few good folks, folks. It used to take cliff three years. Now it takes cliff 90 days. That's why I think 100 million, 250 million, these gammas start to build the moat. I do believe Replit has a moat. Maybe not versus lovable, but versus all the rest. But man, you used to get a mode earlier, didn't you?
- [28:30]
Rory
But that's where I think vertical specialization does accrue benefits with scale. An example is, you know, I did a deal in Solve Intelligence's AI for patent law. The more patents that go through through their algorithms, the better they are at writing, editing, predicting. And it's a very specific use case that gets better with more and more data ingested. You don't get that with horizontal products, no.
- [28:54]
Jason
And data is going to be defensible. In the age of AI, data is going to be defensible. But those patents are public, right? They can still be ingested by other people, can't they?
- [29:01]
Harry
Yes, they can. I don't know if it's true that you don't get it with horizontal products. I'm thinking aloud. I think you probably do. I mean, I think that, you know, would you do. Take a. Take cursor as a horizontal product, Would you fund another company now from scratch to do exactly the same thing? I think not. I think there does come a point when you do pull away. I don't think it will remain unstable forever in the sense of I don't think you'll have these 200, $300 million companies and then someone else doing roughly the same thing come and displace them. I think there's this uncertainty period at the start, but I could be wrong. I'm processing in real time here.
- [29:35]
Jason
Well, I think Kerry's point about the patent one, let's step away from it. That I think is interesting is the classic question in B2B. Maybe all venture, but certainly B2B venture, since we all started, is how important is it for something to be defensible in the early days, right? We've debated this for years, right? Since the, since the inception. And we've all known deep down no product that can be built in 60 days can be all that defensible. But we told ourselves the team had domain expertise or this or that. The question is today, has the bar gone up? Should we either give up on defensibility for seed investing, just give up that that is a criterion, or should we radically raise the bar, forcing us to go into verticals, corners of the market areas where there aren't 11 agents already 100 agents. Harry tweeted about support the other day. I can tell you when I invested in support in the early days, Talk desk, gorgeous front. No one wanted to do support in the early days. Everyone thought this was the dumbest category. So go find now it's trendy. Don't do that. Right. Maybe go find something the cool kids aren't in.
- [30:32]
Harry
I think it's simple. I don't think you can have a major defensibility team in any of these horizontal or verticals at the seat or even finding the stage where investing at the defensibility theorem emerges at scale. In other words, I do believe what's true in most enterprise businesses once you become the anointed winner. Once a market coalesces and there's two or three people at that point in time, it's yours to lose. You can still screw it up, but provided you have great engineering and stay on top of the trends, on top of the technology, you should be okay. I think the idea that at the seed stage you're going to find a defensible way to do cogen or code testing is absurd. You just have to internalize the game you're in, which is for most of these deals, unlike deep tech, you're just going to have to awesome team, run fast, be superlative on technology, get your distribution early, and then as you scale up, then you become the winner. You can't be anointed the winner up front. Get over it, everybody. It's a high risk game.
- [31:33]
Jason
But is that okay at 50 post for a seed round or a pre seed round? Do the outcomes justify it? That's the thing. Sure, Rory. If the deal's at 3 post or 5 posts and I can spread my 500k checks around, I get it. If I have got to spread $5 million checks around at 50 posts, it's tougher.
- [31:48]
Harry
That's a much better question because now we've gone from the abstract of is defensible to the actual nuts and bolts of money. We've recognized the game we're playing has more variance, we think, than the last time and has to run fast. And there's probably also more competitors. Are you getting paid for the risk? Yeah, I wrestle with the same thing around later at 100 or 200 million pre and we have this constant dialogue. If I look at we do A's and B's, the early product market fit A, you probably still don't know who the winner is. And the B, when you know who the winner is, it's going to cost you a fortune. And which of those is the better bet?
- [32:18]
Sara
But do you think at the B.
- [32:19]
Rory
You even do know the winner?
- [32:20]
Sara
We look at the B.
- [32:21]
Rory
You mentioned my customer support tweet. Most of those companies had raised Bs. I got no idea who the winner is in that category and I don't think anyone does.
- [32:28]
Harry
No, I'm going to push on that. I think you can have somewhere to the A and B, you can have a much better hypothesis. Put it this way, you can know a lot more than you know at the seat of the earliest.
- [32:39]
Sara
Do you when the Bs are preemptive on 3 to 4 million of ARR, which they are for hot companies today, do you?
- [32:45]
Harry
It's interesting because this is Absolutely. What we have to know to do our business. Because at C, Jason can't know. He can just believe. But somewhere between the A and the C, you have to know, otherwise we're all ludicrously overpaying. And I think if you look at all these markets, I think, for example, you mentioned your patent company. I think without naming it, I think we have a rough sense of where all the companies are. I think your company's doing very well. Howie should be glad to know. And that doesn't mean I know where the market's going to end up 10 years from now. Once the horses are running and once they round the first furlong, you can actually see the rank order of where they're running in a way you can't at the early a, 2, $3 million in revenue, you're drawing on small pieces of information, but you can see rate of change and differences emerge pretty quickly. So I disagree. I think you can have a pretty good idea. Look, it's hard.
- [33:35]
Rory
I mean, I genuinely. I don't want to be rude, but can you give me an example of where you think at the be you have had a clear understanding of a winner.
- [33:44]
Harry
Take Cogen. There was a bunch of people doing. There was 10 to 15 companies at the A or earlier. I think it emerged cursor, I think it emerged kind of Windsurf and then to a different extent, Cognition by the B. And it was obvious that those were the names.
- [34:01]
Rory
But I would push back on you there and say that I don't think we know at all. I think Kodaks is making incredible ground. I think Claude Code's making incredible ground. Curse is very good. But then, as you said, you've got cognition, you've got the ratlets and love balls kind of coming from the kind of prosumer, less developer centric, I think that's still an entirely up for grabs.
- [34:19]
Jason
I think also we didn't. If we look back, because we've talked about this earlier in the show, I think looking back and no, nothing but kudos to the team. Right. But I think when Windsurf sold, whatever happened, it did, it wasn't clear it had a sustainable mode of any sort. It wasn't clear it truly had. It was a darling of a slightly more enterprise version of Cursor. People did love it, but ultimately it wasn't clear it was a winner then it wasn't clear that brand was enduring. Looking back on it, it wasn't. What would. We don't know if it would have even survived as a standalone company.
- [34:48]
Harry
True. But at the same time what was clear is over the prior six months it was that if anyone is going to be the perceived company worth acquiring, there was only two or three names in that space and the other seven or eight names that had been around weren't. So I understand what you're saying. The reason they took the deal it wasn't clear they could go from where they were to a billion in revenue and an ipo. But what my point is this going back. We're dealing with probabilities here at the seed. You know nothing but the people at the early A when there's five or six of these companies doing a million plus or minus in revenue, all you know is you got a 1 in 10 shot somewhere at the B I think you get down to being able to say it's a one in three shot. It's still a one in three shot with a huge amount of variability but the odds have narrowed. Let's take. I mean you guys keep talking about Lovable and replit, right. You would say implicitly what you're saying is those are the two names you implicitly said I don't know the space as well. Bolt is not as has shot its Bolt as it were. Pun intended. That's a piece of information you have when you're making a bet at this stage you can probably say something like there's two clear winners here probably less likely to be another RAW star. That up there is adjacent competition from the WIX has bought someone so you at least.
- [35:59]
Rory
I'm so sorry to interrupt again. I would just say you need to expand it significantly. It's not one in three. You've got Vercel and you've got Claude Code who are eating their lunch coming down you've got as we mentioned Rat, Plid and Bolt. But then you've got Salesforce who have their competitor Atlassian have their competitor Figma. Make is doing very well. It's one.
- [36:17]
Harry
You're right. So the adjacent competitors. Let's talk about the cause I always think the horse. There's a two step horse race in all these deals, right. And by the way, I'm going to argue what you just said is proof of success. Let me tell you what I mean by that. In any startup, you start off on day one and you're like there's three other startups doing just or maybe 10 other startups doing just what we're doing. I wonder which of us will win. And my experience is when you go to the first board meeting where you suddenly Realize you're scared of the big company adjacent competition. It probably means you've graduated from the baby class. You're one of the two or three winners in the startup land, and now you got to worry about the adjacent guy next door. You might say you're not sure if your lovable bet's going to be the winner yet, but do you believe you've within the class of venture bets on this space you've got? You're in one or two winners, yes.
- [37:02]
Rory
But that doesn't generate enterprise.
- [37:06]
Sara
But that means shit.
- [37:07]
Rory
It doesn't matter if it's one of the venture bets. If one of the venture bets doesn't win and Salesforce or Atlassian or Canva does, I don't care.
- [37:14]
Harry
Obviously you're correct, but you got to think about it. Just like incremental information, updating your priors. When someone did the seed there, they were like, this is a good idea, it might not even work. Then you do the oh my God. Vibe coding is a thing. There's five companies doing it, we're one of the five. And now you can say, vibe coding is a thing. We're one of the five doing it and we're one of the two winners. Huge amount of risk reduction. Now you still have the other risk, which is the big companies might do it. Something might disrupt you. There's a lot of risk still left because it turns out that startups are risky. But you got to admit that there's been, you know, there's been a massive amount of information gleaned, risk reduced from going back to what Jason said is the 5 on 50 bet, where you don't even know if it's a space and you don't even know if you're going to be a viable player in that. Is that a better or worse risk than doing 2 billion pre when you know both those things, you are the winner. There is a space, you are the winner and there's still a whole ton of competition to come. Which is the lovable bet you made. Which of those two bets are riskier?
- [38:15]
Rory
I don't know. I think about this, which is at about. I'm again butchering, but 4 to 5 million in revenue, it was done at 200 when we first did it. And then when it was about 80 to 100 in revenue, it was done at 2 billion. You can choose your entry price.
- [38:32]
Harry
Totally. What that says to me is consensus, rightly or wrongly has said there has been a massive risk reduction. And now unfortunately, what's happened and always happens in the bull Market is valuation has expanded to fill the risk that was reduced operationally. In other words, at $45 million, there's still a ton of risk. Fast forward when you're doing 50, 150 million, I'm just going to say it. You can't deny there's been a huge amount of operational risk reduced. Now the problem is at 2 billion pre. Is there enough upside left in the deal? Separate question. The point I'm making is it's gone from being a. Is this a category? Are they the winner? It's gone to the third and last question, which is always, is the TAM big enough to support a $2 billion valuation?
- [39:15]
Rory
Which I think in this case it absolutely is. I just want to go back to the like, we kind of know the winner at the B and if we don't and if that has reduced or got less, are we overpaying? Was an interesting addition. My statement is we dramatically know less and that 1 in 3 has moved to 1 in 7 to 10 significantly across categories, in which case surely the suggestion is we are dramatically overpowered.
- [39:40]
Harry
There's some level of truth in what you're saying, but I think the variance in these companies is a lot more than the 15 boring years of SaaS is obvious. And you know what to do for the next 10 or 15 years. Jason and I would both say we both had a play. Jason is a leader and a founder. I just as a humble investor in an E Signature company. When we did Those deals in 0809, it was E signature and fast forward 10 years, it's still our E Signature. That was a simple world. We would both agree, I think that there's way more change in this market in a year than in some of those older markets in five years. So we'd agreed it. So you are right, there's more risk, Harry. But I still do believe all these investments I think are riskier than they were in saasland and they're astonishingly priced higher. But I still think there is some significant risk reduction in going from a 1 in 5, 1 in 10, will it even work to a 1 in 3? I know who the competitors are.
- [40:31]
Sara
If that's the case, should our B.
- [40:33]
Rory
Portfolios be more diverse than diversified? Jason, put a great question. Do seeds need to be diversified?
- [40:38]
Jason
Well, how big a fund you do, right? Or if seed checks are 5 million, how big a seed fund do you need just to make the minimum diversification work? How big does a seed fund work with $5 million seed check?
- [40:49]
Rory
Well, it depends if you think outcome Sizes are expanding with the movement from technology.
- [40:53]
Jason
Does it matter? It's just some basic math. How many first checks do you want to make? Do you need to make in that fund for it to work? So if you traditionally needed 20 or 30 checks to work, work, but risk has gone up to Harry's point, Maybe you need 40 and what reserves. You mean you might need a $500 million seed fund to have sufficient reserves? Because I need to do 40 deals at 5 million now, that's 200 million. 200 million for reserves, that's 400 million, 100 million for fees and times and backup. I need at least 500 million for my little seed fund to make the math work.
- [41:24]
Rory
What you're missing on the maths is if you think that the outcomes are going to expand, you can have a smaller ownership on entry and so you don't need to increase check size.
- [41:32]
Sara
If you assume 4 million out of.
- [41:34]
Jason
50, does it really matter? These are not massive owners. 4 million, who cares? 1 million on 50 isn't going to work, Harry, in my seed fund, is it? It's not going to be enough ownership, is it?
- [41:42]
Harry
I'm just trying to disaggregate Harry's response because there was something. First of all, I agree with Jason's framing. And then your response was interesting because you could have said one of two things. You could have said, you don't need to go from 20 deals to 40 because the winners are so much bigger that even if you have less winners, you're fine, that would have been one. But you didn't say that. Interestingly, you said implicitly. You said, go to 40, but just take less ownership. The mere fact that you made that answer says you are embracing a more diversification story in the face of risk, which is math 101, which is a super interesting concept because we had it down on the agenda to talk about and some folks are even pulling it off these highly focused seed stage bets, which I find awe inspiring because all other things being equal, with the amount of variability you're seeing, I would have expected people to. People's deal count have to creep up slightly. But we had Roger on, who was very much a concentrated bettor. You have the hummingbird story in Europe, which is astonishing and impressive. Everything in logic says to me, with the increase in time to exit and with the concomitant increase in risk, logically you should be increasing your diversification slightly, probably reasonably. Which probably means either smaller checks and more deals are a bit bigger fund size to maintain the same ownership.
- [42:57]
Rory
Well, I Think both work. I mean, one fund is an LP and it has 100, 150 positions with 100 to 150k checks. It's a 7x fund. And it goes to my point of the outcome sizes being so much bigger and so the ability to have lower ownership. Jason, to your point, 1 million on 50 does work if it's $100 billion company, not the 3 to $5 billion enterprise outcomes that we've been playing with for the last 10. 10 years.
- [43:22]
Jason
Yeah. Works even better. If you own 10% of that company.
- [43:24]
Harry
Though, would you want that? Yes.
- [43:28]
Jason
The thing, the 100 to 200 fund. Here's. I mean, I'm not that human. I don't want to meet 500 founders a year. To do 200 deals. Between your team, you got to meet 500, 600, 700 founders a year. Even with your AI agent helping you, I could barely tolerate doing a couple meetings a week. I can do stuff by email, but God, I got to carve out an hour for a deal I might not do. I want to blow my brains out after that meeting. That's. I didn't. I sold my companies to not do those meetings anymore. Right.
- [43:52]
Rory
I mean, so I can tell you our partnership does 20 meetings per partner per week. And so now with my four investing partners, we have 80 net new companies that we meet in person per week.
- [44:02]
Jason
80 in person.
- [44:04]
Rory
Yeah.
- [44:04]
Jason
Yeah. I would resign. I would give you all my carry back. Thank you for hiring me, Harry. I'm eternally part of the 20 VC team. You make me do 20 in person. Like I sold my companies because I didn't want to spend my life in meetings. I'll do one a week.
- [44:18]
Rory
You do the math. We'll do over three and a half thousand company meetings a year.
- [44:22]
Jason
Honestly, I think it's great. Right? For the LPs and others, I think that is a great playbook, is just not to get distracted. You got to match the strategy to who you are as an investor. Where you get your leads, where you get your deals, how you. What your brand is. You can do that, right? For a variety of reasons. But. But it's a lot of meetings, man.
- [44:39]
Rory
It's a lot of meetings. 100%.
- [44:41]
Jason
It's a lot of meetings. Can I get you guys a coffee or a drink? You want sparkling or still? Which one would you like? Do you have DVI on the Mac? Here, sit here. Harry's running late. Harry's doing the 20 VC of sports. He's running a little late. He'll be here soon.
- [44:55]
Harry
No I love taking meetings. That's how I learn. I'm a meeting junkie. My partners laugh at me. I'll take a meeting with anything. Right, because you can always learn something from it. So I have a bias to meet. In fact, probably an overbias.
- [45:08]
Jason
Listen, I think when I meet a truly great founder, like truly great, I always learn a lot. Don't get me wrong. Anyone below that. I don't think I learn enough to be worth a time. I do my homework. Rory, you're the best homeworker of the team. You could do so much homework on an. Harry's the most prepared and the most charismatic. But Rory's the best homeworker. Okay, you really going to if they're not great? You really learn anything in that meeting. If you spend an hour researching the company. I learned nothing. I read. Listen, I read your deck and then I said, send me more. Then I say, send me your last five investor updates, right? Send me your financials and I'll research you on the Internet. Now we have AI. Claude will help me. Me, I'm gonna know like a lot of stuff. Unless you're really great. Now, if you're great, you're gonna blow my mind, right? But if you're not, I'm gonna start yawning about 15 minutes into this meeting.
- [45:53]
Harry
I don't know, I find sometimes you get an insight, I think, and I could be wrong again. The beauty of doing this is you make me think, should I do things differently? Cause you do it so differently. I do find even on an okay deal, you learn nuances about a specific market from the one and one and the dialogue to and fro that you wouldn't get from the presentation. Now, it does mean I have, as people who've pitched me know, a horrible interrupt driven style whereby if you have 20 slides, I'll be like, we can skip 17 of them. And these three I care about can be annoying at times. I think in any business, no matter how much you think you know from the outside, the person inside living it every day has a crucial kernel of knowledge that you just can't access any other way. And I believe most meanings I get something from. It's a little like your knowledge living AI agents versus anyone using those words. Is step function different?
- [46:47]
Jason
It is, but you got to meet me to learn that. If you meet all the other ones, it's a waste of your time.
- [46:51]
Harry
Yeah, agreed. But you have to meet them to get that experience. So I bias to meanings. We've come a long way from fun construction, but that's okay, well, this is fantastic.
- [47:03]
Sara
This is what founders like.
- [47:03]
Rory
Again, the amount of founders that do not get to hear this, this, that actually wonder how VCs think is in the hundreds of thousands.
- [47:10]
Jason
Yeah, well, you know, it's related to it. It is. The question a lot of founders have is how important is it to just get in the room, Just get my foot into the door. Just get the coffee meeting. And I think it varies. I think Rory's saying, listen, get in the room at scale. There's some value to that. I'm saying, I have no interest. Don't get in the door with me. Just send me a great deck and a great email. I will read it, I will slow down, I will spend time. If it looks good, I'll take the meeting. But don't. There's no need to get in the door with me. There's no value in getting to know me. Coffee meeting. They're like, well, just take the meeting, Jason. I'm like, dude, I have so much respect for you, but there's zero percent chance I'm going to invest. Don't try to get the meeting. It's not going to help you.
- [47:46]
Harry
I think that's a fair comment. Is that, yeah, you do want to. Yes. I don't think someone who's doing something I totally not going to do. Yes. But I'm not a huge fan of coffee meetings. I'm like, you're here to get money, I'm here to give money. Can we just talk about the business rather than a bunch of getting to know you? But I am always interested in hearing people talk about the business.
- [48:04]
Jason
That's why you're enduring in the business. That's why you're enduring because you enjoy the meetings.
- [48:09]
Sara
Right?
- [48:10]
Rory
How do you feel when you hear people say, no, no, no, no, I'm not going to meet. I'm waiting to run a process. And I'll run a process on the 19th of November. I'll email you then. Because for me, I found this really abrasive. I'm just opening up here. I said to the founder, listen, if you're running a process, you're either optimizing for price or partner selection. I'm giving you a great price today.
- [48:32]
Sara
A price that you want, you said.
- [48:33]
Rory
You wanted, which means that you're not optimizing for price with this process, because I've given you what you said you want, which is just saying that you think you can get better than me.
- [48:40]
Sara
Which may be the case.
- [48:41]
Rory
In which case, just tell me straight. You think you want Sequoia or Benchmark, in which case, no harm, no foul, but fine. And they're like, no, no, no, I just want to run the process. How do you react to I want to run the process?
- [48:52]
Harry
I think from their side, they're correct. I don't have to like it, but I think from their side, because I think I see more failed financings because they didn't run a process than they did. You're basically saying, Mr. Founder, you don't have to run a process because I'm going to give you a term sheet right now. That's a good price and you like me, let's do it right. That's not an unreasonable offer. But typically what happens when people, quote, don't run a process is someone comes in and says, I'm really interested, and they share and they give information serially to someone who's not yet ready to commit on an investor side. So they've run an accidental process. That's a mistake.
- [49:30]
Sara
But If I'm saying, Mr.
- [49:32]
Rory
Founder, here's your term sheet, there's nothing.
- [49:34]
Harry
To be done that's different. I mean, at that point, it's not crazy. If I was on the board of a company that had that happen, I would take it seriously and I would think, should I hit the bid? Conversely, if I was on the board of a company where the founder said, hey, I'm meeting with Joe at mega firm, they ask, can we share some data? They just want to get a sense of it. I would shut that down. And I would say, you share with everyone and you share with no one. Because giving your data to one or two people where they're not in is just starting a process without meaning to start a process. And then if they don't move forward, you've kind of had a failed process already without ever doing a process. I'm 100% certain that that's a mistake. Even though on my side of the table, you know, I get it, I don't love that. Right. But you're raising something, which is why a lot of times we, you know, you wrestle as invest. This is my aha. You wrestle as investors with, I want to be able to do what Harry just said. I want to be able to come in and commit. Because it's the only way to get them off that process. They have to have a good enough relationship with them, they want to do business with you, and on top of that, you have to bid with probably sparse information. And my big aha on that is the only way you can conceivably do that. No amount of preorder work can do it because you don't know the actual information. If you've seen the prior round, it's probably your best chance because if you've seen the prior round, you have some sense of what's going on. You know what they underwrote. You had a mental model at the last round. You can probably, in a dialogue, get one or two pieces of information, calibrate how they're doing and maybe do that process.
- [51:04]
Jason
I have a slightly nuanced view in the middle, for what it's worth, just for maybe for advice to folks that watch, not to Harry, but when that happens, that Harry said, I think it's a slight, slight founder fail, a slight own goal, not a total one, because obviously he's got a good company. Right. Harry is in essence ready to do the deal.
- [51:19]
Harry
Now.
- [51:19]
Jason
The founder says, I want to run the process. I think what many of the best founders do, not all. There's all different types of founders, extroverts, introverts, great fundraisers. But what many of the best do is they're able to cultivate enough interest with enough good VCs that if they hit the number, they just send an email. Email. They just send an email and they don't have to play games. Harry, I'm thinking about raising around before the end of the year. And Harry can say, I'll give you a term sheet today. And the right answer is, I love you, Harry. Especially love the one with Rory, but I'm not ready today. Honestly, I'm not ready today. I will be ready at the end of the year. That is the perfect way to handle this situation. You don't risk losing Harry's term sheet. You don't risk accidentally. Founders do overplay their hand, not as often as you might think, but they do overplay their hand. They can say the wrong things. And so the best founders, one way or another, build relationships over months. They copy them on their investor updates, they update it, and then three or four folks are just in when you're ready. It's so casual with so many founders. They're just in as long as the deal is reasonably fair. Just tell me, tell me where to write the check and how much I can buy. And I think the reason this happens, the Harry scenario, is so many seed investors and so many accelerators hammer into founders. You have to run a process that is classic top three bits of advice. I think it misses some nuance on the optimal way to run it. The optimal way to run it is for everyone already to want to invest for real, without games before you open your data room. And the super optimal way doesn't even require a data room. You don't even need a data room because they already want to invest. They need diligence. The best run process. I know this might be be slightly controversial out of context, but the best run processes don't require our data room. Not a traditional one, not a traditional, only one for diligence. They only require a file that says box diligence investment 12, 21, 25. They don't need any other data room. It's just for diligence.
- [53:14]
Harry
I'm going to rephrase that. I think what you're actually saying is the best one processes don't feel like a process, but they are, and I think you're exactly right is that if a founder is smartly nurturing relationships, keeping people broadly informed, but then tries to time the interest such that when he's ready to put his or her hand up, there's three people who are primed and ready to go, that is the best outcome, as I say. So it is a process, but it doesn't feel like one. And that is perfection itself. I agree with you. Now you have to have a very attractive and high performing company to be able to do that.
- [53:47]
Jason
Maybe. But I also think those are the only ones getting funded in this environment. We talk about all the Gammas and the shmamas is, but everyone below that ain't getting funded anyway. So you might as well run this version of the process. Yes, maybe. Harry thinks a lot of B B folks are getting funded today, but I ain't seeing it. It's the most binary fundraising environment in our lifetimes, isn't it?
- [54:06]
Rory
Expand on that. Jason.
- [54:08]
Jason
You're either, you know, you're either YC Neo, South Park Commons, got something get funded or who the hell is going to find you in your pre seed round, right? You better be whatever the hell AI native is. I mean we know what it means. You better be hot AI native with top quartile venture growth or you know, getting funded. It's pretty simple, it's just not. There's not a lot of gray zone anymore.
- [54:27]
Rory
But I do think even with that, you know, you say YC neo, fine, but they have a huge amount of companies per batch in yc. If you want to stick to the religious, we're going to run a process that does work. Only if you have stellar numbers. Because if you haven't built relationships before and you start on Monday the 19th to expect that you're going to come in, hit the ground running with first meetings on Monday, the 19 and get term sheets super fricking fast with average to net. No numbers.
- [54:53]
Jason
No, of course, of course I was making an assumption in the story you told me the anecdote of the term sheet that it had top top decile venture numbers, the very fact that they were flippant assumed it. Now if they didn't zero to a.
- [55:05]
Sara
Millionaire or in seven months, I would take that offer.
- [55:09]
Jason
I would sign the term sheet and send it right back and, and ask if you wanted to meet itself over on the holidays to see the Disney exhibit or something like we're doing with our team trip. I would say thank you Harry guys.
- [55:21]
Harry
Because I think you were saying the same thing because Jason's throwaway comment, but it's worth pausing on. He was basically saying you should run this kind of, let's call it this light process, which is very kind of FOMO driven. His comment, you should. And I had said, hey, you can only do that if you're a good company. And then his comment was only the amazing ones are getting funded. So implicitly what he's saying is if there's 100 companies and only 20 of them have these kind of numbers, they should run that kind of process and the other 80 are screwed no matter what. So he's not even vest. So 100% of successful deals will be this kind of FOMO driven, non process process. That was the implicit statement of what you're saying, Jason. Right?
- [55:59]
Jason
I mean Harry's right. There's some non truth to it, but I think there's a lot of truth to it that we're in the Captain Obvious era of investing. It only takes one term sheet and spend your time going to Harry's point of don't be careful. But man, I'm just, just Harry sees the most of any of us, but I'm just not seeing the non obvious ones get funded. I just don't see it.
- [56:18]
Rory
Right.
- [56:18]
Jason
And the most brutal one is again the classic SaaS company, triple triple Double Double, which has been discussed ad nauseam on every 20 VC channel, right, including 20 VC cricket and 20 VC sales. Those ones you could always find someone to fund if you met enough people back in the day. Now you can do better than that. And only 20% of people want to take a meeting and they still might not do it it. And I think every month that goes by those deals are harder to do. Every, every podcast, everything makes them harder. Terry's disagreeing with me?
- [56:48]
Rory
No, I'm 100% with you. We have a. And I like tangible examples because people don't actually take it away. We had a company that went from 400k to 3 million naira classic enterprise SaaS business bread and butter enterprise SAS that would have had 5 term sheets from 5 good firms, 120 meetings, 1 term sheet and it was 10 million round on a 40 post 12x revenue for a 10x grower.
- [57:12]
Jason
But have you seen the market comps, Harry? Have you seen what the average public company is trading for? That's still a fine valuation.
- [57:18]
Harry
Yeah, but they're not growing 10x as Harry's point. But the real truth implicitly in that is. I think I've said this before, it's a combination of some element of it's just not fashionable. But also the implicit statement is that growth rate is going to attenuate because I might have have two or three years further on that same investment. We might have a company doing 25 million in revenues. We investor was doing 5 but its growth rate is now down to 60%. It's still only burning $10 million. But those are incredibly hard deals to get funded. There is economic value there, but they're hard to fund.
- [57:51]
Rory
We're going to switch tax slightly but I want to discuss two kind of crazy results in the last few days. One good, one bad.
- [57:58]
Sara
Datadog absolutely fricking crushed. Stock up 23%. $15 million plus AI native customers.
- [58:07]
Rory
Wow. How did we think about Datadog?
- [58:09]
Harry
Jason has covered this so well. Last time his basic comment was even if you're not AI, first co attach to the AI trend and you'll be fine. These guys co attach to the AI trend and they're fine. Sell shit to the people who are making AI and if they grow, you'll sell more shit too. And they did it.
- [58:26]
Jason
No, no, it's true. The irony as we go into next year, the AI leaders, the hyperscalers and the hyper this and the hyper that, they're starting to buy like classic B2B companies and in fact they're recycling the same people in procurement and the same people in GDM and they're buying the same stuff. If you have attached to AI budget and you're a data dog era and you're in that, you're actually going to have a great 2026 because these are normal B2B companies like OpenAI is buying like a normal buying like an Adobe or a Microsoft now. But if you're not in that man, you're just. You're just dead right? And the other one was Clio, which raised it 5 billion in legal tech. It attached to AI in a different way. This is a company founded in 2008 that found its way in the air, right? It added fintech payments, got up to 3 billion. Now at 5 billion. So find your way, right? Datadog. It helps a Datadog, even though it got expensive. It was the darling, right? It was the darling product. But man, they captured that revenue. Go find it.
- [59:19]
Harry
It is because, you know, I. I'm going to leave Cleo Art because I think it's so different. I think Datadog is a core piece of compute infrastructure and these hyperscalers are the most compute intensive companies that have ever been known. So if you're selling compute stuff, you should be having, as Jason said, a great quarter. If you're selling routers, if you're selling switches, if you're selling little interconnects, whatever it takes to stand up Stargate and observability is a key part of that. You're going to be golden because there's more compute than you've ever seen, which I think is a very different dynamic than some of the others.
- [59:51]
Jason
Fair enough. If you're not attaching to that compute, something's off. If you're a compute adjacent, you better be growing quickly. Compute adjacent, yes.
- [59:57]
Rory
I'm a duo shareholder down 25%. Rory, you know the age old thing, which I just love that you describe me with is that's great, but what about me?
- [60:08]
Harry
Yes, Howie, Howie, that's you.
- [60:10]
Sara
Duo plunges 25%.
- [60:12]
Rory
I'm going, why?
- [60:13]
Sara
What the fuck happened to make it plunge 25?
- [60:16]
Harry
I think you're over. I think, I don't think there's a mega story here. I think that, I mean, there's still 80% up on the YPO. Four or five years ago they had a period when it was, oh my God, AI is going to kill them. Then the CEO very wisely got ahead of that and said, we're using AI. So then the stock got way ahead of itself and now it's like, AI is not going to kill you, nor is it going to make you enormously great. You just guided down for next quarter slightly for business fundamentals reasons and the stock was overvalued and went down. I don't think there's a big story here. It's like the graph is. It's still, as I say, up in the five years. It's still significantly up on its lows. It just got ahead of itself. They had a Good quarter, quarter. The revenue guidance was slightly less. Life goes on.
- [60:53]
Jason
I'd say it has the wrong kind of AI. And what I mean is Duolingo is using AI to make its product better, right? Hooray. Every single portfolio company better be using AI by this point to make your product better. This is not 2023. You don't get any kudos for sprinkling AI dust on your product. Going to Roar's point. What you get kudos is, is attaching to that compute budget. That's the only kudos you get. And Duolingo didn't earn it.
- [61:17]
Harry
Well, I couldn't because to be fair, I mean I'm just going to as an apps investor, I'm going to step up and defend the political apps companies. Right? If you're an infrastructure company you can co attach to compute. If you're a new AI apps companies, you are using that compute and using that AI. If you are like Duolingo and a lot of our companies companies have been around since pre AI. The question is I don't think you're going to co attach to the spend but what you can do is co adopt the technology. And I'm going to give Duolingo credit. They've done a decent job of saying we're going to be AI forward, you're going to be AI leaning. But in the end, this is my zoom out point. In the end you're still selling a subscription product to help people, you know, at a very modest level learn another language. There's no AI compute to attach to there, Jason.
- [61:57]
Jason
Well, there is. They have to find a way. I mean, listen, I'm not a total Duolingo expert, okay? But Duolingo took money from, I mean it does a lot of things, but in some sense it took money from Berlitz and all these language schools and stuff online, right? Hooray, you did that. Now where are you going to disrupt humans? This is your job. You already disrupted those humans. Unfortunately they're gone. Right. Where is the next level of human disruption?
- [62:19]
Harry
Zooming out. I will give you that. That is true. I do think the next generation of companies that are going to be quote, teaching a foreign language will obviously be LLM based and there's a lot you can do. We've seen some of those companies, what I call more professional, more interactive teaching using LLMs and I do believe there's a whole ton to be done in terms of one on one instruction in language and a whole bunch of other things. And Duolingo should be getting on its Skates to do more of that versus just using the thing that got into a little bit of trouble for the CEO using AI to obviate the need for humans. The real question is, can you build a more compelling set of products using AI to do more immersive learning? I think it's companies like Speak and companies we've talked to. I think there's a whole bunch to be done in AI enabled learning and it's actually a super interesting space space including language learning.
- [63:07]
Rory
Really interesting question to ask for all investors, which is like if you are not removing humans from the equation, you are going to be heavily discounted.
- [63:15]
Jason
Rory's got a good point. You're either getting money from Compute right this massive spend or you're getting money because you're using AI to replace humans. Otherwise you're not going to grow. Otherwise, hooray, Congratulations on your 14% growth. Where are you replacing humans for real? Whatever vertical, whatever industry were you going to go in and reduce the headcount that vendor needs by?
- [63:36]
Harry
Most of the time I'm in the. Yeah, replacing humans as a story. Interestingly enough, in education I actually think it's actually doing it better. I think the data, the stunning data shows that a bunch of these education that in fact if the human today is someone in a class with 20 people, there's a whole bunch of examples that says LLM learning is equivalent to one on one human learning, tutoring one on one. Let me say it more positive. What you should be doing with AI and education is allowing everyone to get something they haven't had, which is one on one learning instead of group based learning. Because all the data says one on one based learning constructed specifically to your needs is far more efficient way of teaching anyone a foreign language and frankly, most concepts.
- [64:15]
Jason
I admit I'm not a total expert in education, but where does the budget come from for that software? If it's not, if it's not replacing humans, then you better steal it from a legacy, which is fine, but Duolingo is a legacy platform now. Like you got to steal it. You got to steal it or you end up checking Chegg. At least Harry didn't do Chegg.
- [64:32]
Rory
I didn't do Chegg.
- [64:33]
Jason
No, what I mean is, listen, you can use. Okay, so let's say your AI does not replace humans or attach to compute. You have a third option. It's Captain Obvious. Your third option is to use AI to massively displace an incumbent and steal all their revenue. In fact, that's the history of B2B software mostly right. Is stealing the revenue. I just don't know how many of our public leaders are in a place to steal their own revenue. Right. They're, they're, they're in a tough stage spot with it, with all their seats. Right. And we can fund those deals as investors. But I think the first two categories are much, are much easier. Attach to the compute or replace humans rather than just steal. I mean there's like 400 AI CRM startups out there all saying they're going to eat Hubspots and Salesforce Lunch. That's not exciting to me as an investment. I'm going to go disrupt. I mean maybe you will, but that's much less exciting than truly replacing 90% of your GTM team.
- [65:25]
Harry
Right.
- [65:25]
Rory
It's almost like doing customer support to me.
- [65:27]
Harry
Jason, really good framing. You know, the fact that you know, getting the new budget just so much better than trying to slug it out with the existing provider and say our new thing is better. It's not to say you can't in those spaces. But yeah.
- [65:39]
Jason
So I'm trying to, I would think education's got to be. It is an interesting market. Right. It's large but getting incremental budget has to be close to impossible that you know the public school district's not going to come up with another 10 million for your software. It's impossible.
- [65:52]
Harry
Sadly this is not a public school comment. But you're right. I think the positive sum comment is I think duolingo is actually what I call light learning. You're learning another language but you're just learning a few words. I think a really interesting space we've seen with LLMs is replacing the spend that an adult wanting to learn a second language typically for business purposes where hitherto forward they would do it with a one on one coach. You're replacing that human coach with a very intensive immersive LLM enabled learning program is actually quite a compelling market. But you're right, it's education but it's not. You have to find an existing spend and the existing spend is pretty niche which is people who can afford to spend money on a one on one tutor to learn a foreign language. There's not a whole ton of budget unfortunately in K12 to give every kid a one on one customized tutor.
- [66:44]
Rory
I love the way Jason just getting better and better with every show.
- [66:48]
Harry
Just get him out.
- [66:49]
Rory
Aren't you Roy?
- [66:50]
Sara
You're like jeez, he was here for the entertainment and now he's become hard and mean. He's so wise what's going on?
- [66:58]
Jason
I'm not mean. I just don't want to live in the past. Here's the thing. If you're in software today, B2B software wherever you are in an org chart or investor. Honestly, if this isn't the most exciting time of your lifetime, going back to Sara's conversation, you're doing it wrong. It should be one of the most stressful times of your lifetime and we've talked about this. But if you're not truly excited, like truly excited. I mean, this is the first time software has gotten better since the three of us met. It hasn't gotten any better since all of us met. It's the same crap. So if you're not, if you're not incredibly excited again, going to the beginning of the Sequoia, I would retire. Retire from your VC fund, retire from your company. No shame in that. You had a great run, right? And just put the rest into NASDAQ and you're going to make more than most VC funds. Anyway.
- [67:45]
Harry
I think it's a great point because as I think starting the 90s were X and client server and the last two decades were effectively. I always say Salesforce was rebuild Siebel in the cloud. It was fun and we made a lot of money. But you're right, somewhat boring. What is really exciting now is you're not just talking about rebuild Salesforce. Exactly the same, but with a slightly modern ui. You are talking about something much more fundamental here in terms of eating the work and doing a lot more with the app. So yes, it is exciting, but looping right back to the first conversation about Sequoia. It is also clearly stressful for even the best of firms.
- [68:21]
Rory
Boys, is there any other topic that we haven't covered that you think we should cover? I think one thing that is not in schedule that I just think is incredible is fricking Hummingbird. Hummingbird, the fund that does not get credit is not talked about in the same way that many other great firms are does their first bio deal in billion to one. They have an $800 million position on the IPO. You want fricking great venture returns in whatever $150 million fund that is credit due. Amazing.
- [68:53]
Harry
Agreed. Good for them.
- [68:54]
Jason
What I didn't know, what I haven't. It was obviously incredible to see all the success. What I would like to know and maybe we're out of time and I should have done my research. Research. How did they collect the capital As a. As traditionally a seed manager, right. To deploy enough to maintain the ownership, that's. I'm just obsessed with ownership now. It took me a long time to be obsessed with it and now I've given up. But I don't see how I'll ever own 18% of something at IPO ever again.
- [69:20]
Rory
Right.
- [69:20]
Harry
I think they were fairly capital efficient.
- [69:22]
Jason
It could be that answer. It could be the viva of biotech where they were one and done. I'm looking for that dream.
- [69:27]
Rory
They definitely did put in subsequent checks, but I think it was a combination of doing subsequent checks and concentrating cash and being a capital efficient business.
- [69:35]
Jason
Yeah, I'm impressed with the deals they've gotten into maintaining the ownership with if 9 figures of AUM. I don't know the exact numbers. That to me is. Is just as S tier. Right. Figuring that out and whether it's. Whether it's a bunch of side funds and SPV and VPS IS or VPNs, just how you do that is. Is I think the elite game today. It's hard enough to get into the deals, but with a nine figure or eight figure fund maintaining ownership is. Is. Is goddamn tier.
- [70:03]
Harry
I think there's always the option of accepting provided the follow on rounds are at a high enough price. Just accepting some dilution and optimizing as you do for multiple rather than ownership. You can say look, I've established a 20% ownership as a seed fund. I mean those early funds those guys had were sub $100 million. Okay, I'll get diluted from 20% to maybe 12% by the time we exit. But I put in $4 million. I'm a hero.
- [70:28]
Jason
Yes, but this was a YC fund. I don't think they started with 20, did they? But keep going.
- [70:32]
Harry
But fundamentally the way they've been able to produce 8 and 10x funds has been in part by keeping it at 40, 60, $100 million funds. It's hard to simultaneously keep your ownership and keep your multiple. You can decide which one you want to do. We talked last week is that if you have Hummingbird, they've kept their multiple and gotten a 10, 20x whatever it is. If you talk about someone like Lightspeed, they've kept their ownership in the van and gotten a but on $250 million. Both of them are great outcomes. They're just different ways to play the game. The interesting thing is both of our different outcomes have great outcomes for the GP. The most important LP fact, if you only have $1 to play with, then obviously you want to do the one in the small fund that's going to give you the 10x because if you have to deploy $100 then obviously you have to do the big fund but to some extent the high MOIC small fund fund. Accept the follow on dilution but just make a marvelous return is the compelling product for the marginal dollar.
- [71:30]
Rory
I think also the outcome sizes are interesting that Navan at four and a half now public and billion to one at five the power of capital efficiency and bluntly running lean and not raising huge, huge amounts of money. And you see the difference as an investor the benefits of investing in capital efficient businesses. Obvious statement.
- [71:48]
Harry
Yes. We're captain obvious today.
- [71:50]
Rory
Yeah. Yeah guys, I'm glad. It's nice to finish on a positive note, huh? And like a venture outlier that actually returns a huge amount of money to investors.
- [71:58]
Harry
Yeah.
- [71:58]
Rory
How nice. Thank you so much for joining me. I'm glad that you both approve of my shirt. This is not going to be.
- [72:04]
Jason
I am struggling with it but I approve of it. And listen, how long are the pants?
- [72:08]
Harry
He's got pants on. He hasn't got shorts on.
- [72:11]
Jason
Well, they are jeans. They are jeans.
- [72:13]
Harry
Let's not push too hard. I mean at least he's covering his knees.
- [72:16]
Rory
We'll take it a as fantastic. You guys are stars.
- [72:21]
Sara
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