20VC: Chime IPO: The Breakdown | Why Fund Returners Are Not Enough & Seed is for Suckers | Are IPOs Dead & The Future of the Late Stage Private Market | Rippling vs. Deel Lawsuit: WTF Happens Now?

Rory O'Driscoll

Suddenly, we've drifted into some kind of theft of trade properties, and suddenly someone opens an investigation, then you're fucked. If my ass was on the line and I was the CEO of Deal, I'd be like, “How much money does it take to settle this thing by Friday?”

Jason Lampkin

A fund returner isn't enough, man. We don't get out of bed for a fund returner. A fund returner just returns the fund. Everyone talks in venture about fund returners like they're so great. I don't think they're so great.

Rory O'Driscoll

One of the pressing facts about venture is that we make an embarrassingly large percentage of our money once every 7 years, when you're in the white heat of must-acquire, must-own high-growth venture assets.

Chaps, it is the highlight of my week. Everyone knows my mother listens to this show, and she's like, “I can visibly tell your tone is more excited. You should change that.” And I was like, “I think we're past that after this amount of time, Jules.”

This is good news, guys. IPOs, baby. This is liquidity. Thank the Lord. Chime dropped its S-1. I thought it was super interesting: 8.6 million active users. This one astounded me: two-thirds of users have Chime as a primary account. Two-thirds. That's amazing in my eyes. 1.67 billion in 2024 revenue.

1. Chime Tests The IPO Window

Jason Lampkin

Why are they IPOing now? Unless you have inside information, that's, to me, the number one question.

Rory O'Driscoll

That's an easy discussion.

David Sacks

Yeah.

Rory O'Driscoll

Despite the craziness of the last month and a half, we're only 3% off our all-time high. This has been the weirdest market ever. We were doing great, then we plummeted a little bit in March—really in April—but we've had the fastest bounce-back in the last 20 or 30 years. So we're up 17% or 18% in a matter of 2 or 3 weeks.

We're within spitting distance of our all-time high and up on the year. So what it says is, a month ago, everything was doomed; now everything's back. What it just shows is that when policy changes that quickly, you really can't triangulate on that.

I think they were smart. They had their S-1 on file. What they said is, “Somewhere between when we filed privately and today, weird shit happened, but it appears to be over. Proceed as normal.”

I think they're exactly right. In today's market, you'll clearly get this done. In February's market, you'll clearly get this done. Oh, and in between, for about a month, things went to hell in a handbasket, but moving right along—nothing to see here now.

So that's why they dropped it. I think they get points for being shrewd, keeping it on file, keeping it updated, and now, in this market, they're ready to roll. I think it's a great company. Look, it's clearly going to get done. It's a $1.7 billion trailing-revenue company growing 30%. We'll talk about valuation in a second.

2. Chime Banking Economics

It basically comes off 2 big ideas. The first is that, in the world of the internet, you can give people a bank account so cost-effectively that you can offer a very different product than the large US banks. You don't have to ding them on overdraft fees. You don't have to nickel-and-dime them on monthly fees. You can make all your money on transactions—pretty much 75% of your money on debit card fees—which is a relatively small part of most banking revenue streams.

It's a great idea, and the reason it works is, duh, the internet. No branches, no people in branches. They make $250 per client per year, and they can build a profitable business on that. I don't think JPMorgan or Chase would be able to do so if all they were selling was just debit card transactions.

So that's the positive part of it. Over the next few years, they're going to add loans, which they don't really do a lot of today, and all the other cross-sell stuff that every financial services company does at scale. You can look at it one way and say there's a whole bunch of upside from here, because if you're making $250 off a customer today, even if that's a middle-income customer with sub-$100K revenue, they're going to have other financial needs, and you're going to be able to sell to them. That's the upside story.

It is worth pointing out the minor negative on the story: a huge amount of this is Durbin Amendment arbitrage, which is a very arcane rule that really matters. In 2009, after the Great Financial Crisis, they were putting through a re-regulation package, and there's a rule that says if you are a bank with more than $10 billion in assets, you can only charge approximately—the devil's in the details—but approximately 50 bps on a debit card. If you are a sub-$10 billion bank, you can charge more, and the effective rate is typically about 1.2%.

When 2 people go into the same shop and buy something on a debit card, if one card is from JPMorgan, the shop has to pay 50 bps, and if the other is from littlebank.co, they'll have to pay 1.2%. The economics of a debit-card business to a small bank are much more compelling.

Chime itself is not a bank, but they cleverly team with a lot of these small, sub-$10 billion deposit banks. As a result, their revenue stream, which is 75% of their total money, comes from a product where they have this umbrella effect from that legislation. Obviously, if that were to change, that would impact the economics. There's no sign of it happening right now.

But I have to believe that if you're Jamie Dimon, you wake up every morning spitting mad that these dudes are able to take your customers because you're not allowed to charge what they can charge for exactly the same product. That's the only minor negative in the thing. Otherwise, it's a great company. It's growing nicely, 30% plus. They've executed on a very consistent plan for 10 or 12 years. Go team.

We can talk valuation in a second, but I like the company a lot. I wish we'd done the round we looked at, and all congrats to them.

What round did you look at?

Jason Lemkin

Oh, way back. Way back. I can't even remember.

I heard that you wanted to do it, but your partners didn't.

You were all in, and they were like, “No,” but you were yes.

Rory O'Driscoll

Partnerships stick together, Harry.

Jason Lampkin

I love those tweets: “I would be a billionaire, but I couldn’t get it past my investment committee. But I was all in. I was all in on the deal. And the founders wanted me.” Right? We already had a handshake deal.

Rory O'Driscoll

Let’s move on from that. It’s not that interesting. Let’s talk about valuation, which is the more interesting thing.

Jason Lemkin

Yeah.

Yeah, I agree. The last valuation—

Jason Lampkin

Well, hold on. Not to interrupt, Harry—it’s your show—but if it’s not interesting, I think it’s interesting. If it’s not interesting that Chime is IPO-ing, shouldn’t everyone—everyone at Chime or better—IPO now? Because we’ve talked about the incentives not to IPO, right? For founders to do infinite secondaries, but if the markets are wide open, Figma’s out, Chime’s out. Is it time for folks to grow up? Should everybody IPO now? And will they? Because—

David Sacks

Well, let—

Jason Lemkin

I’ll tell you—

Rory O'Driscoll

I’m going to override you because I didn’t say that deals weren’t interesting. I said talking about the internal decisions on deals wasn’t interesting.

Jason Lemkin

Yeah.

David Sacks

I actually think I’m going to hold your question because I think the natural order is that we should talk a little bit about the valuation, which will segue us perfectly to talking about how other people should respond here. Obviously, the big question is valuation. The last private round these guys did was at $25 billion. The Information estimates a valuation of $7 billion or $8 billion. I think that’s low.

But if you end up plus or minus $10 billion—rough order of magnitude here—you’re looking at a deal going public 50% or 55% below the last-round price. That’s just a fact, and you have to talk about what that means for the specific company, and then what it means, Jason, to your point, for other companies going public.

Jason Lemkin

Can I ask a question here? I’m just ignorant. If Sequoia Capital Global Equities—which I don’t think is the early-stage fund at Sequoia, based on the title, right?—did the round at $25 billion, is this a huge loss for Sequoia? Is it like an SPV or separate entity? Is it a small piece of the fund? Or if it goes out at $10 billion, which is epic in absolute terms, right, but Sequoia did it at $25 billion, what does that mean? Maybe Harry knows too, but I honestly don’t know. What does that mean at the fund level?

Yeah.

Jason Lemkin

Besides not being a win, right?

Well, just to be clear, I actually—

Jason Lemkin

He left?

Well, he left a while ago.

Jason Lemkin

Because it’s such a great job?

David Sacks

Yeah, no doubt.

Jason Lemkin

If it was such a great job, he’d be there today.

David Sacks

Okay, keep it professional, people.

I love Jeff. But essentially, they’re super late-stage, borderline pre-IPO or post-IPO. Generally speaking, honestly, they’ve done phenomenally well, but it’s a completely separate vehicle run by a separate team.

Rory O'Driscoll

This is the question that I was interested in, so I have more detail. It boils down to only one issue: What are the terms of the mandatory conversion of the certificate of incorporation? In other words, we sometimes reference the fact that in an M&A, even if you “overpay,” if this company sold in an M&A situation, even if you paid $25 billion pre, if you have a liquidation preference, you would get 1× your money back.

The question is, what’s the equivalent term to that in an IPO? There is an equivalent term: the mandatory conversion term. It boils down to the following question. In a “qualifying IPO,” which is an IPO above a certain size and scale—which, of course, this will be—is there price protection for the $25 billion round such that the price adjusts down, either fully or partially, to the IPO price or not? Is that term in there or not?

I went to the S-1. It wasn’t clear, but you can actually get the certificate of incorporation, which is where it will be. I ran out of time. I’m actually very interested in that. If you think about this late-stage business, probably 99% of them won’t blow up. The only risk you’re running is the risk that you overpay.

And if you can negotiate a term that effectively says, “Hey, if I overpay, you’ve got to give me more shares such that I didn’t overpay,” then it’s the world’s best business. There’s only one thing that can go wrong, and now it can’t go wrong anymore. So it would be really interesting to see, did these guys, on this deal—and just in general, Jason, to your wider point on all these deals—what are the terms of the late-stage company, later-stage rounds in terms of IPO protections and blocking rights?

The one thing I do know is that I know the General Atlantic team very well, and they were also part of this round. They also took part in the Shein round and led it at $100 billion. I know that they are incredibly diligent about putting those protections in place in the case of mispricing, like with Shein, which is not hitting the $100 billion price that they paid.

David Sacks

And, yes, we’ll find out, because before you file the final S-1, it’ll be very clear. Let’s say it starts to be priced in the $10 billion to $12 billion range. Then, as part of the S-1, they’re going to have to disclose the adjustment and quantify the adjustment. It’ll all be there at the end.

The great thing about S-1s and going public is that all the facts come out, because otherwise the CFO goes to prison. We’ll know exactly how many shares get issued. If these guys have full protection, then that’s a win.

An interesting lesson for the founder is that you didn’t raise money at $25 billion. You thought you raised money at $25 billion, but in fact, if you go public at $12 billion, you raised money at $12 billion and you just didn’t know it.

The more I listen, the more I think Jason’s right that seed is for suckers. You can overpay by double and still get your 1× protected, with a shortened time to liquidity and more money at work. Seed is for suckers.

Jason Lampkin

Well, not only is it for suckers, but I know a lot of seed folks who have all these great opinions on how SAFEs are terrible and everything’s terrible. I don’t think ratchets for a late-stage deal are such a bad deal. I don’t think it’s a big deal.

Obviously, if you’re an early-stage investor, you’d prefer there not to be a ratchet or an adjustment. We can’t argue with that. But if you need the money, you’re splitting the difference. People get too emotional. Sequoia, SoftBank, Tiger and Dragoneer are coming in at $25 billion. If you’re worth north of $25 billion, you win. You won the bet.

If Chime ends up at $10 billion, and let’s say it’s a full ratchet and they’re ratcheted down to $10 billion, they probably only bought 3% of the company. So you have 3% dilution because you lost the bet, but you still won the bet because you got the money.

I don’t know why people get so emotional about these ratchets. I understand why they’re toxic at the early stage, but these are just seed investors who are grumpy that seed is a sucker bet, including me. But I’m not grumpy about it anymore. I just sign the documents. I don’t even read them anymore because it doesn’t matter what’s in them. I just sign them, and it doesn’t matter what I think.

Rory O'Driscoll

I have to say, I find myself astonished at agreeing with you again, but you’re exactly right. I’ve been through the drama of one of these: we gave a late-stage ratchet, and then you’re pricing the IPO, and then everyone gets bent out of shape. There was one recent IPO that had one where people were writing, “Oh my God, they have to go public because of the ratchet.”

ServiceTitan.

David Sacks

ServiceTitan. I ran the numbers. The truth is, Jason’s exactly right. You gave away 3% of the company in a round. Let’s say you were wrong by 50%, so you gave away 6%, not 3%. It sucks. I’d prefer to have 100% of my position, not 97% of my position, but it’s not the end of the world.

It’s an economic term. It’s not an emotional thing. Provided it’s not out of control, it’s survivable. Now, as I say, it does mean that on the other side of the table, they have a wildly attractive business. We’ve just agreed that they get a liquidation preference in M&A and full price protection in an IPO.

And, by the way, it’s priced at the IPO price, so the IPO pop puts them back up 30% the same day. That’s the little bit that’ll rub you as the CEO. “Let me get this straight. They paid $25 billion. It’s been marked down to $10 billion, so I’m giving them an extra 3%. And then when my share opens in 2 hours’ time and it pops 30%, they’re going to be up 30% on that re-corrected price.” That sucks.

Jason Lampkin

For sure. But they made this investment in 2021. What’s the IRR on this deal? Not so great, right?

Rory O'Driscoll

Yes, agreed. That’s the point.

Jason Lemkin

Even if they have a full ratchet. We get so religious. Even if they get a 30% pop and they distribute by 2027, that’s 6 years to having a modest return, right?

David Sacks

Yeah, no, you’re exactly right. Totally agreed. The risk you’re running on these kinds of transactions is primarily IRR risk, not lose-your-capital risk.

Jason Lemkin

Yeah.

David Sacks

In the business you’re in, you have a substantial risk of loss of capital.

Jason Lemkin

My guess is 60% plus. At our stage, 30% to 35% of our deals don't work out. At the stage these guys are at, most of their deals—90%-plus of their deals, when you're writing those kinds of checks—should be a 1×-plus IPO pop. They're not running the risk of getting it all wrong. What they are running, to your point, Jason, is the, “Oh my God, we were 4 years too early and our IRR is going to be pitiful.”

When do you think you transition to an IRR risk game? For us, we don't really play the IRR risk game, so to speak, I don't think. When does that become crucial?

Jason Lemkin

It's hard to answer that question. I remember realizing, when you watch the late-stage hedge fund guys come in, that they fundamentally run their entire life on IRR. They have yearly high-water marks and compensation schemes, so they're competing for a deal, and they're not saying to themselves, “I need a 2× or a 3×.” They literally use different language. They say, “I want a return of 30% a year.”

You definitely see that in the late stage with the hedge fund guys crossing over. So it's probably at those kinds of 3 or 4 years before the IPO, when it's that kind of money and the alternative use of your capital is public stocks, maybe.

3. The IPO Window Reopens

When we look at this price that it could go out at being significantly lower than we all said, going to Jason's question, does this mean that everyone should IPO? Now's the time, if markets are receptive, to bite the bullet and go.

Rory O'Driscoll

I think more people should. It's worth pointing out that this is still a $1.7 billion revenue company. It'll probably be larger than 80%—maybe 90%—of the companies that have been talked about for IPO. So it's not like this is a mid-tier, marginal play. This is a top-of-the-line revenue-scale company.

I'm not going back to this and saying, “I have a company doing $200 million in revenues. Chime went public. The window's open, guys, let's get ready.” These things happen incrementally over time. I think there's a bunch of other later-stage companies that now clearly have, at the very minimum, a choice: “I could easily go public. Do I want to or not?”

That set of decisions is, let's call them, the billion-plus revenue guys. Interestingly, some of them, even if the window's open, are choosing not to. There are SpaceX and Stripe; they're literally saying, “Not what we're doing right now, thank you very much.” Then there are others. Klarna is another example at that scale, where I think they're saying, “Let's push for the line and get the capital and go for it.”

Oddly enough, both decisions make sense. If you're Klarna, if you're a financial player where access to capital is really important—you are fundamentally a lender—I think being public and having access to money in all its different ways makes sense. If you're a high-growth AI company or something like Stripe, you have infinite private capital at dirt-cheap rates. Why would you bother?

Is that not fundamentally it, respectfully? Your Klarnas and your Chimes of the world, respectfully, cannot raise infinite amounts of capital at good terms from the private markets. Stripe, Databricks, Anthropic and OpenAI can, and that's why those go public and the others don't.

Jason Lampkin

Klarna just said their growth substantially decelerated. They just published their numbers, right?

No, my partner Paul did an analysis on it. It's 13%. He's a phenomenal analyst. At 13% growth, the cost of borrowing is way up.

Rory O'Driscoll

If Klarna was doing well—and, broadly speaking, I think it is doing well—they should go public much sooner than OpenAI or Stripe because I just think they need to have access to continuous capital. They're a lender at scale. They're not a cash-flow machine. They probably have more financing alternatives as a public company.

I think it's more appropriate for a financial services company like that to be public than, say, an OpenAI or Anthropic. And you're right, there is more cheap private capital available to companies with the sex appeal of OpenAI than if you don't have the sex appeal of, you know, what is buy now, pay later.

Even if Klarna were, let's say, growing at 20% like Chime or 26% like Chime, there are more options for cheap private capital if you've got the sex appeal of OpenAI than if you don't have the sex appeal of buy now, pay later. One of them just has more intrinsic ability to raise cheap private capital.

I think the interesting thing, to Jason's point, is most companies are more like Klarna than OpenAI. No surprise. Most companies aren't singularities. And I do think as the window opens, you will see the people doing a billion in revenue, then a half or three-quarters of a billion in revenue, and half a billion in revenue thinking, “Maybe I should do this.”

Jason Lampkin

Listen, you've said this a million times, Harry. I was at EF's demo day a couple of weeks back in the U.S., and I saw one of my LPs there who had retired. This guy's legendary in the industry, and he had no axe to grind or game to play, right?

He went through all my portfolio and others and said, “These guys just gotta sell or go IPO. It's just time.” This is someone who pioneered a lot of this going long. So when I get that vibe check, I think it's got to water down or cascade down to the GPs, which has got to cascade down to the portfolio companies: “Should I keep rolling the dice on anything sub-OpenAI or not?”

If the LPs are saying that for a variety of reasons, then the GPs won't keep tripling down, right? They will suggest IPO-ing. It may be subtle, but when I hear that from one of the top 10 LPs of all time, that may push the pressure to IPO too. It may trickle down to the CEOs.

I mean, he's about to tell me that my question's stupid, Jason, so he's going to reshape it in a minute. But you said, “Sell or IPO.” Thoma Bravo are saying, or Orlando Bravo is saying, a cold, quiet year for M&A. And then we're looking at Convergence, a company that's less than a year old in London, selling for 9 figures to Salesforce and seeing more and more M&A. I'm just confused. How do you guys think about those 2 opposing truths?

4. M&A Needs Real Leverage

Jason Lemkin

People's prognostications of what's going to happen in the future are pretty worthless, including mine, to be clear, right? All you can say is what is happening right now. What's happening right now is Salesforce bought a small, interesting AI company because they want to be in AI. Duh. No surprise.

There'll be a whole ton of these over the next 2 to 3 years as these large software companies listen to Jason telling them they're screwed on this podcast and decide, “I don't want to be screwed. I want to be a contender,” right? The best way to be a contender is to pick up some of these small acquisitions and fit them into your product. So that's clearly a trend that is happening, a fact-based statement. A much bigger one is Moveworks, and it'll probably continue to happen.

A totally separate trend is what Thoma Bravo and people like that are making of software roll-ups, and whether they're going to buy a whole bunch of venture-backed portfolio companies. As you know, we've talked about this before, I don't think they are. I think they've got a fair amount of indigestion from the stuff they already have, and I don't think the companies that venture makes are naturally great candidates for PE purchase as much as people think. So his statement could be correct too.

Jason Lampkin

Yeah, I'll say that the PE bummer still hangs over all of this. This cloud that he doesn't want to buy all of our portfolio companies is a big bummer.

Jason Lemkin

It is a big bummer.

Jason Lampkin

On this Convergence thing, I'll tell you my view of what he said. This is from my tiny lens, right? I've had 2 portfolio companies recently that got offers to buy them at $500 million.

In isolation, that sounds great, but these are very good companies. This is not OpenAI. These are very good companies. One was just a smidge above the last round, and one was a smidge below the last round.

And what I mean from the Orlando thing is, listen, this sounds good, but these are tech leaders who want to make AI-adjacent deals. They're not willing to go all in. Maybe in 6 months those deals would be a billion, and they both would have cleared at a billion.

But they both said no, and the companies just walked. One of them bought a company instead for just under $100 million because it was just easier. Instead, they bought someone at $2 million for $100 million. Great deal for the founders, right? They raised a seed round.

But they walked from buying a leader because $500 million was the limit, right? And they all could afford infinity, for all intents and purposes, in this case. So I wasn't shocked, but I was just watching the sign of the times. Usually that accelerates, right? We're in typical phase transitions, but—

Jason Lemkin

Were these acquirers PE-backed platform companies—

Rory O'Driscoll

No, big tech leaders—

Jason Lemkin

Big tech.

Rory O'Driscoll

They offered to buy 2 different companies for $500 million—

Jason Lemkin

Oh, interesting.

Rory O'Driscoll

Convergent evolution here, same number.

Jason Lemkin

But one was just above the last round, right? A little profit. The other, they didn't care about the last round. It was walk or, you know, hell or high water—we don't care—and then they bought a much smaller competitor and will lose years due to it, right? But they didn't step up in the way I would expect. Not that they have to. It was just a sign for us all: to make money in M&A, you need folks who are really stepping up in these deals, right?

They're like, “Ah, Rory did the last deal at 700. I'm gonna pay 2.1.” That's the way venture works. If that doesn't happen, like the Yammer and other deals, we don't make any money if they don't pay 3x the last round, guys. Otherwise, venture kind of collapses a little bit, I think.

Rory O'Driscoll

The truth is this. There are times in the market when the euphoria takes off and people are willing to lean in, and then there are times when the other side feels it has leverage and doesn't want to do it as much. And look, right now... Look, in a few cases like Wiz, I think they created all the leverage. They played it perfectly, and then the other side did what they needed to do. They paid the big step-up from the last round.

I think in a lot of cases, all these people read the same press we read. They're saying, “Venture guys, it's a little bit tough. No one's had liquidity.” And they're probably in the mode of, “I don't need to overpay.” The only thing that changes that is if some of the companies that buy and buy successfully have success with those acquisitions. If you wake up 2 years from now, you're competing with ServiceNow, and the Moveworks acquisition is killing it, and you're now second or third in the space—I don't know who that would be, whether it be Zendesk or whomever—then by God, you're gonna do what you have to do, right?

You're exactly right. One of the depressing facts about venture is we make an embarrassingly large percentage of our money once every 7 years, when you're in the white heat of “must acquire, must own” high-growth venture assets. And the trick in the other 6 years is surviving and keeping all the little companies alive and growing nicely so that when that moment comes, you have inventory to sell. That's probably not this year.

Jason Lemkin

Yeah, that's my sense. It's not. It's getting there, right? Because these offers happen. $500 million is not... I mean, we have a little bit of fun here, right? In any absolute sense, it's an insane amount of money, right? But it's not enough in venture, right?

Jason, what ownership do you have in those 2 companies?

Jason Lemkin

Let's just average them to 10.

Rory O'Driscoll

Nice.

Wow.

Rory O'Driscoll

Good for you, Jason.

Nice. No, dude, that in your fund is what, 70?

Jason Lampkin

Yeah, but that—but I... Dude, a 1x in a fund return is not enough, man. We don't get out of bed for a fund returner. A fund returner just returns the fund. Everyone talks in venture about fund returners like they're so great. I don't think they're so great.

Rory O'Driscoll

But it depends. Look, you're in that business, though. I mean, obviously, that's not the perspective of someone who has an $8 billion fund, where they are humble enough to recognize that the poor guys are just gonna have to chip away $2 billion at a time.

Jason Lemkin

Yeah, poor guys. Yeah, I'm not into that vibe. It's just not worth it. But really, I don't think a fund returner for seed is enough. I mean, it's the classic 1x, and then 2 deals do 0.05x, right. And you drib and drab to the 3x, right? You drib and drab, but I don't want to be in a walk-up. I need a nice place in Marylebone. Is that where 20VC is, in Marylebone?

Marylebone, yeah.

Jason Lemkin

Yeah, I want one of those carriage houses, and I want a nice one. You know, that's gonna be my fourth house in Marylebone. I'm down those cobbled streets with those carriage houses.

Oh, my God.

Jason Lemkin

You know what I'm talking about.

Well, then you should start a podcast, buddy.

Jason Lemkin

That's one way to do it.

Rory O'Driscoll

Rory.

5. The Power Law Gets Bigger

Can I ask what I thought when thinking about exit values? There was something fascinating. It was VenCap and LPs, interestingly, and they basically did this analysis of exit values, and they found that in the 99th-percentile exit, the top 1%, the price or the value grew from $1.4 billion in 2005–2009 to $10.2 billion in the most recent 5-year period. Almost like a 5x or 6x increase in the top 1%'s exit value. I wanted to hear your take on this first, and Rory, please slam the question in whatever way you feel relevant.

Rory O'Driscoll

First of all, I thought it was great analysis, to the point where I actually emailed David and said, “Send me the underlying data,” which now gives me the advantage over you because I have it in front of me here, so I can keep you honest.

Dude, I put this down as mine, and you knew I didn't do it.

Rory O'Driscoll

Absolutely. And it was mathematically correct, so I knew it wasn't Harry. Look, I think it was great analysis—profoundly great. The question is—and what it's being used to do is—try and hypothesize, if this trend continues, how big exits will be in 2, 3, 4, or 5 years, and thus what's the ability of venture to raise ever and ever larger aggregate amounts and still make the math work? That's the embedded question in this.

Unfortunately, the answer is one of degree, right? In the sense that it definitely points to a small number of exits getting larger, though the trend is not as pronounced as you think. The first period of time was 2000 to 2004, where the 90th-percentile exit was as high as $3.3 billion. So, in other words, they went down. You had a cyclical downer for 10 years before they started going up in the 2015–2019 period, and then exploding up to $10 billion in 2020–2024.

So it's not like this linear growth for all time. It's like a dip and then a growth back. So that's the first comment. It's not as clear a trend as you think, but I do believe at some macro level it's correct, and it's simple. It's not that things are getting better; it's just that the longer you hold the company, the more compounding takes place, the more dispersion takes place. The big get bigger, and the shittier ones are crap. It's just math.

And therefore, by definition, if the window to stay private stays longer, the size of the largest exit will be higher. I've no doubt. The largest single exit in this database in 2020–2024—the largest single outcome—was actually 2 at $65 billion or above. If there are not 4 exits above $65 billion in the next 5 or 7 years, then the people who bought Stripe, SpaceX, Databricks, OpenAI, and Anthropic are screwed.

I don't think they're screwed, so I think this trend is going to continue in the next 4 to 5 years. There's no doubt in my mind. And it's not for magical reasons. It's just because you're holding longer. Let me give you another example of that. It's really interesting. I looked at the historical data.

Mm.

Rory O'Driscoll

The biggest single exit in the period 2000 to 2004—you called it the 99th percentile, which I don't think is a useful term—was a $23 billion exit. The more useful point is that it was the largest single exit, because there was only 1 in that group. It was Google in 2004.

If Google had stayed private 1 year longer, Google's market cap at the end of 2005 was about $140 billion. If they had just stayed private another year, the entire data would be swamped by the fact that, oh my God, the biggest venture exit ever was $140 billion in 2005. If the Google CFO had had a heart attack in 2004 and they'd postponed their IPO for a year and a half, then the largest exit would've been in 2005, and it would've been Google.

The point here is that all this is a derivative of small numbers and of how long the very best companies stay private. That's all that's going on here. And it's true, and it's a thing. What it means is that the bigger your fund, the more imperative it is that you have to be in those 6 deals, which explains why capital is so easy to raise for those companies. It all makes sense.

It was great analysis. I'm not sure it points to everybody being able to do great in venture because everything's going great. I think it points to the top end of a power law, where it really matters to be in probably 5 or 6 companies at almost any price.

But if the top end of the power law is so much larger than it was previously, which I think we'll all agree will be that way in 10 years' time, 2035, are we wrongly negative on the size of Lightspeed, General Catalyst, you name your mega-funds, because we're considering today's exit size on something that we should consider as 10-years-out exit size?

Rory O'Driscoll

I'm not negative. I think they have a great business. If you get the capital into those companies, then you're gonna do great. I don't know if it supports everyone being able to do that, and the scale of late-stage money relative to the opportunity, I think, is much more nuanced.

Maybe the way to say this, Harry, is this: the direction of travel is clear. As long as companies stay private longer, there are more opportunities, not just at the 99th percentile, but at the 99.9th percentile, at the very tippy top—1 or 2 deals per decade—to be in them and compound for a long period of time.

Mm.

Rory O'Driscoll

That's definitely true. Does that translate into all the funds making enough return on all the deals to kind of make the late-stage math work? Not as clear.

My concern is just that there are so few companies in that 99.9th percentile.

It's like a world of concentration unlike any that I think we've seen.

Rory O'Driscoll

You're exactly right. So, Jason—

Jason Lampkin

So how do you know, in a unicorn, whether you should keep in or sell? How do you know? Where's the line?

Rory O'Driscoll

That's actually a great question. Obviously, it always looks so clear in retrospect. You obviously shouldn't have sold any SpaceX ever. So the question is, how do you know at the time? I think it really is a function of market-size momentum.

The classic problem is, if you're presented with an exit opportunity at $5 billion—framing it clearly, let's just say all your unicorns get to $5 billion, and the great secondary guys come and say, “You can cash out anything you want now”—but statistically—

Jason Lemkin

Yeah. Let's say I could cash it all out at the last Cursor round at $9 billion.

Rory O'Driscoll

Mary Meeker used to do this analysis of IPOs, which was excellent. Because I believe private late-stage companies in 2025 are just the same asset class as IPOs from 1995 to 2005, the same analysis applies. Most of the companies barely beat their IPO price a year later, if ever again, and a small number of companies compound and do amazing things.

So how does that become actionable? If you're sitting there and you can sell all your private companies at $5 billion or the last-round price, statistically, 80% of the time you should sell, because that's what the stats say. But 20% of the time will cover everything else. The interesting thing is that the 20% will not just make money themselves; they'll cover everything else.

The wonderful thing about this business is that compounding is a very forgiving thing. Obviously, if you're smart enough to be able to tell the 1 good one from the 4 bad ones, sell the shit ones, keep the good one, and you'll be rich. But if you can't do that, it is a matter of mathematical truth that the second-best alternative is holding them all, provided you have 1 of the good ones in there.

What's going on with all these late-stage funds is some version of holding them all. If I do enough, and I'm in the good ones, and I double down on the good one, the long-term trend to a massive tail in the power law is going to make me money.

Jason Lemkin

My new rule is—and listen, you're lucky to be there, right? When I was looking at this on a spreadsheet, my new rule is: as a seed manager, at $2 billion, sell unless you're 100% sure you shouldn't. I know it sounds goofy, but it sort of ties to doing better than returning the fund.

The risk is, unless you're sure it's a SpaceX, being in that 80% is not so great, is it?

Rory O'Driscoll

The truth is this. It's a hard comment, but they've made it harder for most investors and most funds, because you're exactly right: now you have to make these choices, whereas before you got liquidity on them all. Now you're still in private land, and you've got to try and figure it out. You're having to make those decisions with a smaller portfolio count.

The truth is, if you need 20 deals, when you're starting at $1 billion, to compound to $100 billion, at your stage, Jason, the portfolio count you need is much higher. If you constructed your portfolio 10 years ago assuming you got your exits at $100 million to $200 million, the risky thing is that now you still have to double down 1, 2, or 3 more years from here.

As you say, the bad outcome is that you have the 80% but not the 20%, and you don't have the compounder that forgives all sins. I think it's pretty smart. That's why the whole push toward taking money off the table as a secondary is just smart. I don't think you can take the risk of doubling down ad nauseam when you're 10 or 12 years in. It sucks, but there you are.

Jason Lemkin

Yeah, I remember back in the day—I'm dating myself—but I was an emerging CEO with Peter Gassner at Veeva, right? I saw a little bit of it happening, and their LPs were very mad when they held because they owned 30%—they were the only real investor in Veeva, right? They owned 30% at IPO, and I was just looking it up: it was worth $2.4 billion at IPO, which was a lot of money back then.

Let the partners hold, but distribute to the LPs. They're going to get $750 million, and it was probably a $250 million fund. We can look it up, right? It's a multiple fund-returner on that one, right? When I was just starting, we had some LPs come in, and they were kind of mad at what you guys held, but today it's worth—even with some volatility—$40 billion.

Rory O'Driscoll

Agreed. $25 billion to $40 billion.

Jason Lemkin

Right? And it created billionaires out of GPs by holding. But how do you know? I knew Peter was the best one out of our class—our batch, by the way—so maybe you can know. David Sacks was 10 times better than me, and there was René Lacerte and others, but Peter was fucking off the planet in terms of quality as a CEO.

But I didn't have the numbers, right? They made the bet, didn't they?

Rory O'Driscoll

Yes, they did. The thing they had to their advantage—well, advantage or disadvantage—was that when you're public, you can make that decision. You can distribute and allow different people to make different decisions. That's the beauty of the public markets.

If Veeva had compounded as a private company, the company would still have been the same, but those choices would have been harder to make and would have been different. There's no distribution as a concept. Interestingly enough, I hadn't processed this until real time.

6. Public Markets Enable Choice

The incentive—and this is where I go back to my monothematic theme of the death of IPOs—is just bad news all around for capital allocation. Now, as a GP, you're sitting there going, “I want to hold this thing forever. My LP would probably like to get some liquidity. If it was public, I'd distribute and I'd keep mine. They'd sell theirs. Everybody would be happy because everyone can make a choice, and choice leads to optimal outcomes.”

Because we can't go public, I either have to sell now, which maybe is not what I want, or I have to ride it out for the next 5 years, which is maybe not what my LP wants. I think that's inducing some tension in the system, which would go away if these things were public.

Jason Lemkin

Taxes alone can be an incentive for a GP to hold. Most of our LPs don't pay any taxes, right? I mean, there are many other reasons, but taxes alone—especially if you don't have QSBS—you're like, “I have to pay 50% in San Francisco? Maybe I'll hold for another year and see what happens.”

You have 50% capital gains tax—

Jason Lemkin

Well, if it's short-term capital gains, right? It's still going to be— Even with long-term, you're going to pay 15% in California, 22%. You're still going to pay 40% in California long-term capital gains.

Well, this is what I find nuts: we have half your cap gains. I mean—

Rory O'Driscoll

Yeah, but Harry, very true statement. You have half our cap gains. In fact, you have less than 10% of our cap gains. I don't know if you saw the Wall Street Journal today dissing on Europe. You don't have any cap gains, so the taxation rate is purely notional.

What was that Wall Street Journal piece, Rory? What was that one?

Jason Lemkin

That was the chart I put—the ratio of Europe to the U.S.

What did it show, Jason?

Jason Lemkin

U.S. companies: 90 companies worth over $1 billion, worth $2.5 trillion, and the EU only $333 billion, right? So, $333 billion versus $2.53 trillion. A big chunk of the EU was Stripe, which, you know, we can debate whether that's a European startup or not.

Harry's got 100 of the best founders addressing this problem, so I'm not worried in 5 years. Sometimes I'm surprised there isn't more capital flight from at least the U.S. The U.S. makes it pretty hard to leave the country, and it's a pretty tough country to leave. I'm surprised there aren't more people in Miami. I'm really surprised there aren't more, because, Harry, you save 15% just moving over to Miami. There are some asterisks and daggers with it, but—

Rory O'Driscoll

Yeah, I've clarified my internal situation. If I were to reduce my income tax by 25% by moving to a no-tax state, I would also reduce my net worth by 50% because my wife would be staying behind. So it's just not an option for me.

I'm at peace with paying whatever Gavin Newsom needs to keep this kind of bloated, overpaid show on the road. It's a great place to live. Genuine comment: I wish it were lower, but tax is not the reason to leave California. We should all be so lucky to have cap gains.

The serious comment you made, Jason, is that the beauty of public markets is that it allows everyone to make their own choices about their own economic decisions. They can hold if they want to build wealth. They can sell and pay taxes if they want to sell. It's a lot harder to do that in the private markets.

I do believe we will look back and say, “There are reasons why the very best companies choose not to go public, but it's a darn shame that the public markets haven't addressed those concerns such that all this stuff could be done in the public markets.”

Number one thing that you'd change if you ran the public markets to make it more appetizing for companies to go public?

Rory O'Driscoll

I love the idea of time-based voting that they floated in. Don't quote me on this, but there's a Texas group trying to get together an exchange with some of the leading companies, startups, and some other folks.

I don't remember the people. But the idea that your share weighting is, in part, a function of how long you've been an investor in the company. It's an extended version of founder voting, because what happens in a public company is sometimes all the arbitrageurs, all the short-term investors, pile in, and they really push the company to make short-term decisions. But if your vote was partly predicated on how long you'd been an owner of the company, I think that could lead to very different results.

That's one random comment. I don't know how to get away from the randomness, the noise level around quarterly calls, and all that process. Google, for a long while, did that by simply not doing them, which may be one approach. I wish you could reduce just the anxiety and tension of that part of being public and always being on display. I don't know how to do that part of it. I do think forcing longer-term holders is part of it.

Jason Lemkin

Sometimes I wonder if it's really so broken, right? Some of our favorite CEOs from your portfolio—Aaron Levie, for instance—he's all in, right? But he's certainly spoken of the headaches of activist shareholders and all that at Box, right? A huge headache for him. Then I was interviewing Brian Halligan a little while ago. He has some perspective on this now that he's chairman. He's like, “Honestly, it's not much more work being a public company doing this than it was being late stage. It's not that much more work. But HubSpot's a $30 billion company, so maybe the bar should just be high so you don't have to deal with these issues. If you hit your numbers, if you grow 50% at $500 million and you grow, it's not really much of a huge deal. You have a huge finance team. It's not the end of the world to go public, is it?”

Rory O'Driscoll

So, a couple of comments. One is the odd thing you have is the companies that do precisely the best are precisely the ones who are in a position not to do it at all. You have the Stripe situation. So it's the companies who want access to the capital at the $200 million, $300 million, or $400 million level for whom it's still a relatively big burden.

But I do agree. Your point is actually the right one, not mine, frankly, which is, even though it's a bit of a pain in the ass, I do wish you could deal with things like activism, silly regulations around boards and board composition, and all that. The real point is people respond to economic stimuli. If the capital were more expensive in the private markets than the public markets, then most CEOs would go to the public markets. The core reason it works is because there's a lot of capital available in private markets for companies doing $200 million or $300 million in revenues, with a lot less hassle than getting that same capital on the public side, and that's the reason they do it. People respond to price signals. CEOs respond to cost-of-capital signals. And there's no doubt that, bizarrely enough, the cost of capital in the private markets remains cheaper than the public markets.

Now, it's interesting when you look back on the Chime $25 billion raise. An objective fact is this: the cost of that capital was twice as high as you thought at the time because you didn't give away 4%; you gave away 8%. So it may well be that we're in this little bubble where we actually don't know the cost of capital for some of these late-stage rounds. And if you get high-priced rounds with lots of price protection and you ultimately go public, you may in fact discover that the last couple of rounds were way more expensive than you thought. I don't think it'll ever go back to $100 million IPOs, but I think there'll be more of a normalization in your choices between public and private.

I want to finish today, if that's okay, with 1 final segment, which is my team love [likely Kalshi], like a prediction marketplace where you place bets in the real world. They love it. I chose 3 that I liked. Number 1: will OpenAI stop being a nonprofit? Yes or no?

7. OpenAI Leaves Nonprofit Status

Jason Lemkin

The news cycle's so fast, as you point out, Harry. What a loss for Sam versus Elon Musk in the short term. What a loss, man. We already forgot about it. It's a total capitulation to it ever being a traditional for-profit company, right?

Rory O'Driscoll

I'm going to go with yes, because the question is weakly phrased enough that I can answer yes. Will it stop being a nonprofit? It doesn't give a time. At some point, this company's going to go public. It's going to have a PBC-type structure. It will get there. It will take a lot of lawyers, but it will get there. So I bet yes on that one, because there's no timing.

Jason?

Jason Lemkin

I've never seen a dysfunctional company that's more successful than OpenAI. I mean, all the founders left. They fired the CEO, brought him back. Nonprofit, for-profit. For-benefit, non-benefit. The momentum's crazy, but, man, the motivations are really weird in a nonprofit. And giving that up? The folks I've seen on nonprofit boards are not going to give up this power. They're not going to give it up. No one I've seen on a nonprofit board wants to give up the power, because there's no money in it, so it's all about the power.

Rory O'Driscoll

I'm going to disagree a little bit on that, because I think that the motivations in terms of being a nonprofit were much more important for the engineering staff and the early employees who really had a profound belief that they were doing something important for mankind. I might not share that belief in the slightest, to be clear, but I think that was an animating factor in attracting the very best intelligence into this business early on. The “not-for-profit” halo mattered. And it's no accident, in my view, that the 2 companies that have been most successful, OpenAI and Anthropic, embraced that because they recognized that their most important audience for both of them was talented AI engineers, and all of them shared the religion that said this thing could change the world and be dangerous. So therefore, they embraced the religion, too.

I don't think it's a question of the board of OpenAI not wanting to give it up. I think Brett Taylor is just such a smart dude. I think it's a question of untangling the mess when you've got litigation on every side, Elon busting your chops, a bunch of state attorneys general, and you kind of know where you want to go. It's going to be hard to get there, but in the end, the value of the asset is so high that there'll be some half-assed cobbled compromise whereby the entity will be a PBC, the nonprofit will be 1 level up, and the only question is how much do they get, how much does Microsoft get, and how much do the investors get. Somehow they'll figure it out. So I think they'll get there. It'll just be a wild and wacky journey.

The second one, and we're going to cap it at a 1-minute response max. ChatGPT-5 revealed this year: yes or no?

Jason Lemkin

The engineering talent at OpenAI is so much better than you realize. It's so next-level. The talent that OpenAI, Anthropic, Cursor, and Windsurf attract is epic. So if they want to merge all their models into 1 model, which would make my life easier because I can't even tell them apart, that would be great, right? This makes no sense at a consumer level, right?

Rory O'Driscoll

Jason's working his feature requests into the blog.

Jason Lemkin

Yeah.

Rory O'Driscoll

Okay.

Jason Lemkin

Merging all of these, I mean, is it core enough to happen, right? Maybe there's a reason it hasn't been announced, right? It will happen, but given all the activity, it wouldn't be a surprise to me if it pushes a year or longer, right? But they have the best in the world. I'm saying I think no, but it would be great.

Okay. You're no. I'll take you on that one. I'll say yes.

Jason Lemkin

Yeah.

I absolutely think they will. The velocity is insane.

Rory O'Driscoll

So we have a no, a yes, and a don't know.

Jason, baby, you want O2 Minis and Maxis, I'll give you Deel and Rippling as the final one.

Jason Lemkin

Deel and Rippling, yeah.

Deel and Rippling. Will Rippling beat Deal in the lawsuit?

Jason Lemkin

100%.

Rory O'Driscoll

Yes. Agreed.

8. Rippling Holds The Advantage

Jason Lemkin

There's no chance they'll lose. It could get settled, right? That's always the right outcome, even when there's a motion. There's no way they lose, 100%. The facts are too bad. There's no way they lose, 100%. They stole trade secrets. This is a classic case. They're going to lose.

So, Jason, you're gonna lose. Rory, you gonna lose?

Rory O'Driscoll

I do agree, Jason. I think Rippling prevails in this lawsuit if it goes to court. I think it probably should settle, because most civil litigation does settle.

Did you think the counterclaim was weak?

Rory O'Driscoll

It was some version of, “You guys did it, too.” I mean, the first filing Deel made was pretty blah and weird. It was about 4 or 5 weeks ago, and it was full of a lot of kind of weird, “You went to Harvard. Are you angry about something?” I didn't quite understand it. This is a counterclaim that said, “The guy that we hired, I think you guys hired, too.” It was all very “You did it, too,” but I just think I'm with Jason.

I think the facts, and you have the person who made his affidavit, and, by the way, you've chosen to run to another country and hide. I just think the fact pattern looks crap, and at some point sense prevails, and you say, “Whoopsie, sorry,” and settle. So, yes, I would buy the yes on this one.

Yes.

Jason Lemkin

The other thing, for what it's worth, I don't know how it works in the UK, but in the US, counterclaims are not what they look like. Just as an FYI, that's why they do it. And listen, I'm not a litigator, but I've been on the other side. You do tech long enough, you're gonna be on both sides of these, right?

Counterclaims can offset any claims, even if they're outside of the statute of limitations, even if they couldn't be brought on their own. So let's say Rippling wins—let's say Rippling wins $1 billion against Deal and a lot of damages. Even if they couldn't bring their own lawsuit, they might get an offset for $900 million. There are so many incentives to bring counterclaims that you would not bring as a claim.

So there's always a lot of drama, and some of them won't even make sense. Some of the counterclaims don't make sense, right? And they're doing it not because they think they're gonna win. They're doing it because they know they're gonna lose. And so you put everything in a counterclaim because everything counts as an offset, right?

It's a sign of losing, these counterclaims. It's not a sign of winning, and it's really stressful when you're on the other side and you get 10,000 counterclaims back because there's always some truth in it, right? There's always some truth in it, but it's a litigation game to get offsets. It's a sign, Harry, that they're gonna lose. All those counterclaims are, ironically, a sign they're gonna lose.

If you're 100% in the clear, you just say not guilty. You ignore it and, as the CEO, you go back to work. You don't flee to other countries. You go back to work and you say, "Parker, you do what Elon and Sam are doing with each other. Sorry we misunderstood each other, Parker. Happy to have a beer and talk it out." That's what an innocent CEO says. "Let's talk about it wherever."

Rory O'Driscoll

Harry's dying to come in. Let's hear it, Harry. Let's hear it.

As Alex is a dear friend, and I'm also a Deel shareholder, I would just like to add that Alex has actually been abroad for many years. The media amplified him being somewhere where he's been for years.

Rory O'Driscoll

Yes.

Jason Lemkin

Fair point. But my point is right. What you do say, Harry—

Rory O'Driscoll

I'm sure if he purchased—

Jason Lemkin

I know you're a shareholder.

Rory O'Driscoll

—a plane ticket to Dublin, he probably wouldn't take it, even if it was first fucking class. Okay, dude? He ain't coming to Dublin to testify on this puppy. So thank you.

That's 'cause no one's going to Dublin, Rory. Okay?

Jason Lemkin

No, but if you're gonna win, in all seriousness, if Deal's gonna win, okay, you do what Sam did to Elon. You say to Parker, "I know we disagree. Sorry. As friends, let's get together. We used to be partners."

They used to be integrated. They used to be partners. "We'll work together again. Sorry we disagree. Sorry things happened that shouldn't have happened. Let's talk about it." And you don't say anything else, but that's what you say if there's really nothing there. That's the power play.

Rory O'Driscoll

I'd go further. It's what you say if there's nothing there, and it's what you say if it's there also, because you settle this thing. Nothing good is gonna come from this kind of litigation. I checked it—not now, but a few weeks ago when we thought we were gonna talk about this.

All of this is just civil litigation, but the scary thing is some of the allegations could be interpreted in a criminal fashion. If I was the CEO of Deal, I would wanna get this behind me so fast my head would hurt. I'd wanna settle and bury it deep and say, "Whoopsie, sorry, donation to the charity of your choice," whatever.

I would want this done because I don't know if this is gonna escalate to criminal. 'Cause one of the things that's very funny when you see the difference between civil and criminal is, in civil, people yell at each other, and I think the criminal—FBI, et cetera—are way more jaundiced and hard-nosed. They're just like, "We're not gonna get involved just 'cause you kiddies are fighting with each other."

They're only gonna get involved if they see malfeasance. But the more noise you make and the more yelling you do, the more risk you have that someone looks at the file and says, "Let me think again. Yeah, it's in Ireland, but both of these are US companies. There was an allegation here. That would be an espionage issue."

Suddenly we've drifted into some kind of theft of trade secrets, and suddenly someone opens an investigation, then you're fucked. If my ass was on the line and I was the CEO of Deel, I'd be like, "How much money does it take to settle this thing by Friday? Get it done."

Jason Lemkin

I know, Alex, this is not gonna happen, so—

Rory O'Driscoll

That's fine. Hey, look, it's a free country. People do what they gotta do.

Jason Lemkin

But you shouldn't be emotional—

Rory O'Driscoll

But—

Jason Lemkin

To all founders out there: settle everything. Especially when you're not in the wrong. When you're not in the wrong, settle it, right? Because it's so hard if you're not in the wrong to settle it, right? It feels so wrong. That's the number one reason to settle it when you're not in the wrong.

Rory O'Driscoll

I don't know if I'd go with "settle everything," but I will say this. I would make 2 observations. One is everyone gets really emotional about litigation and starts—I'd agree with you—starts getting personally invested in it. That's the first thing.

But then the second thing is even more important. The lawyer that you engage will tell you you've got a great case when you start out. As you get closer to the courtroom door, and as you've spent more and more money, they start changing the tune slightly, just because suddenly—and maybe you're just not hearing what they're saying on day 1.

The day before court, they'll be saying, "Remember, I told you it was a 50/50 bet." And you're like, "I've just spent $2 million and 6 months preparing for this trial, and you're telling me it's a 50/50 bet." And you'll sit there and go, "If I knew then what I know now, I'd have settled at the start." Right? I just—

Jason Lemkin

That's the best advice for this. People don't get it. I'm gonna put this clipping in a post I did on it. Rory's right.

Every single time you've been through it, you meet with the lawyers and they tell you, "Your case is super strong," right? They tell you in the meeting. $2 million later, it gets close to trial and they're like, "Well, those counterclaims, they are silly, but a jury might not see it that way," right? The judge might.

And all of a sudden, it always gets closer to 50/50 when you get to trial. The stress goes up. It's never worth it for either. It's almost never worth it.

But that story—every time you get your dander up and a lawyer tells you you've got a super-strong case, I literally just went through this with a CEO. I said, "Hire someone great and have them play the other side." I literally just went through this with a CEO. Have them play the other side, because they're gonna tell you Rory's story and you're not gonna want to do it anymore.

100% of the time they change their tune. It's about $2 million in, they change their tune, isn't it? It's right around $2 million of legal expenses.

Rory O'Driscoll

That's so true. It's funny, my wife was a criminal defense attorney, and she would always say the worst defendants are defendants who start talking about principles.

Jason Lemkin

Yeah.

Rory O'Driscoll

I don't want to hear about your principles. I wanna just hear what it takes to settle this thing, right? Don't get on your dignity.

You guys said before about the amount of kids being put through college because of OpenAI's legal bills and everything around its legal bills. I think the same applies here. In any case, invest in Wilson Sonsini and Cooley.

Actually, before we go, how could I forget? This was one of the biggest weeks for Jason with SaaStr. So Jason, before we leave today, I wanna talk about SaaStr. You had the biggest and the best there. What are your big takeaways from seeing the world of SaaS come together in one place?

9. SaaS Enters The AI Race

The biggest takeaway, I think, what Yamini from HubSpot and Aaron Levie both said is, "I'm super excited, but I'm anxious." There was literally 50 times more energy at SaaStr this year than last year.

In 2024, I didn't realize it till I was there: it was the end of the Debbie Downer era. It was the end of folks saying, "Woe is me. I was growing 70% in 2021 selling my fungible sales automation tool, and now I'm growing 2%."

Last year they were still—these people did not show up. And, yeah, this was your idea, Harry. We had 300 sessions. I didn't allow one single session to talk about the past. It was banned. The past was banned.

You were only allowed to talk about AI, and you were allowed to talk about AI today and tomorrow, and that was it. From the CEO of Snowflake to HubSpot, we banned the past this year. You were right, right? And it created incredible energy and anxiety, but good anxiety, right? You gotta work twice as hard and twice as fast.

Rory O'Driscoll

I think that's great positioning, because it was either after '08 or '09, or I think it might have been after the dot-com crash. What you saw 2 or 3 years later is that even the survivors were scarred. There was just no ability to talk upside.

And you're like, "Oh my God, I got from 10 to 15 to 18, but I'm just so shattered from the pain of the last 3 years that I lack the capacity to think big again." And many of those companies, as a result, didn't make it. And I think that's really good positioning. It's coming out hopefully into a picking-up time.

I think that's what it takes to win this year, because this whole “SaaS is dying” thing is bullshit. It's changing, and you better be AI-forward or dead. But if you are, I'm very certain that if you make the right moves, you can grab hold of this thing and not just grow but reaccelerate growth. I think that's what ’25 has to be all about.

Jason, can I ask? You mentioned last week about buying Clay out of fear and said, “Hey, Rory, come to the CMO event. Come to the CMO event.” I'm sure Rory was there cheering from the front row. I was there in spirit. But what were the takeaways from the CMO event? Are budgets open again? Are they buying Clay out of fear? What was the takeaway?

Jason Lampkin

The basic vibe was everyone recognized 20% to 30% of their team's going to be replaced with AI, and they're glad for it. Whether they're ready, whether the tools are ready today or whether it's going to be 6 months, no one wants to wait. Everyone is ready and, behind closed doors, borderline excited for the bottom 20% or 30% of their teams to be replaced by AI. No one's regretting it. No one's wondering, “My God, my culture's going to be impacted at my company if the sales rep that takes a week to get back to somebody loses their job to AI.” No one was regretting the impact on culture. Seriously, no one was regretting it. They were embracing it. How soon can I deploy tools to migrate out the bottom 30% of my company? I don't want them.

Rory O'Driscoll

Well—

Jason Lemkin

No one wants them anymore.

Rory O'Driscoll

What I like about Jason is it's not just that he's the Grim Reaper, but he's the happy Grim Reaper. He's like, “I love my work. Let's do some reaping here,” right? Maybe the positive spin on that is you can grow 30% next year and not add any headcount. But it's the same story, just perhaps a little bit more benignly placed, and we all know it won't actually happen that way. There will be some churn. But yes, it's all versions of the same story, which is AI is a productivity lift at some level.

10. AI Moats Are Weakening

Jason Lemkin

They're stressed about the change, though, because almost everybody also recognized moats are weaker. Whether you're Windsurf or HubSpot, the moats are weaker.

Rory O'Driscoll

I buy that. Now, I think over time moats will emerge, but you're exactly right. We often refer to some deals as “run fast” deals. A good portion of the value that will be created over the next 3 years is just by running fast.

You talk about running fast. To be fair, Windsurf ran faster than anyone in terms of what they built as quickly as they did and then got to the sale position they did. Then last night—or yesterday, whenever it was—Microsoft announced they're open-sourcing VS Code, really putting a dent, I think some would say, in the hopes, enthusiasms, and valuations of Windsurf and Cursor. How did you guys analyze that one when you saw the announcement about open-sourcing VS Code?

Rory O'Driscoll

It's interesting because, yes, it amps up the competitive tension, but it is also worth stepping back. If you were the developer behemoth, which was Microsoft, the fact that you have to do this now to remain relevant, at a zoomed-out level, is a sign of relative weakness, not absolute weakness. If you had dominance already, you wouldn't feel the need to, right? They're not going to open-source Windows OS. That's been talked about over the years, right? When you have a dominant position, you don't have to be nice.

This is a manifestation of them feeling competitive heat, always recognizing, as they have for 30 or 40 years now, “Developers, developers.” So they're doing something to stay competitive. It might dent your perceived valuation if you're one of the competitors, but you have to give yourself an attaboy. You punched hard enough on a $2 trillion or $3 trillion market-cap company that they felt the need to make this move.

Did anyone have an AI SDR that actually worked?

Rory O'Driscoll

Do they work and does value accrue are 2 different questions, and they occur in roughly that sequence. In other words, if you don't have clarity on whether they work or not, then you shouldn't be thinking about where value accrues, because no one's going to make any value anywhere.

First, you have to say to yourself, what parts of the sales process can be automated? I'm 100% with Jason. There are parts that work well today, there are parts that will work well in 6 to 9 months as the technology progresses, and there are parts that don't work well. You probably don't do your marquee email to your very best prospect, but you all have, coming back from a trade show or something like that, masses and masses of leads that just don't get followed up on, right?

There's a whole bucketization of it's not so much the marquee work you're already doing as all the work you should be doing but never get around to. That alone is a significant lift. It's a 50% idea. If you make the reps 50% more productive, if you get them to focus on their key tasks, you're giving yourself a 50% lift, and that's not nothing.

But I do agree, Harry, you have to be very granular in what works and what doesn't. We've seen that in all our AI companies, which is why, going back to the investing thing, step 1 in all these deals—in every AI deal—is: do you, the vendor, and you, the customer, have a mutually agreed figure of merit on what success looks like that you can both track? If not, at some point you're going to churn, because one side or the other is either going to underperform, or they're going to think you're going to underperform. You have to be aligned around that.

Then you have to be really honest: are you delivering it? And time everything—your pacing, your aggression—to when you are in fact delivering enough value to be able to keep them happy and keep them moving forward.

Jason Lemkin

I do think, to Harry's point, though, I'm not smart enough to know which 100 to invest in, right? On the other hand, how many note-taking apps are there, right? I believe, based on CB Insights, there's over 18,000 note-taking apps. But on the other hand, it has a privileged position at Zoom, and Otter.ai just announced it crossed $100 million in revenue, right? There are several over $10 million. So I'm like, this crap's bundled in, and I can't tell the difference.

Note-taking is becoming like voice, like Gong. For a while, Gong was disruptive, and it still is, but now that functionality is built into everything, right?

Rory O'Driscoll

But go back, because I think Gong is interesting, actually, because you made the comment. I think that's an example of someone who took voice as an entry point and built a compelling, multi-hundred-million-dollar ARR business. But if you look at what they do today, voice recording—or let's call it sales-specific note-taking, which was core to what they did 5 years ago—is only a part of what they do today.

What they've done is used that entry point, built a stack, added forecasting, added CRM updating, added a whole bunch of related functionality, and now I believe they're reaccelerating. Now they have a defendable business where AI was the wedge product, and then you had to hustle your way and add the other stuff.

I think that's going to be the dominant mode for a lot of these companies. That's why I call them run-fast deals. You have to pick your wedge AI entry point for that 2- or 3-year period where there's kind of a magic AI premium, but you have to operate on the assumption that 3 to 5 years from now, the core thing you do is going to be commodified. What you have to do is use the magic moment to get the distribution and then build on top of that defensibility. I think Gong has done a very good job of that.

Amazon, Apple, Google. We named the most defining companies of our time, and the list can go on and on and on. You can even choose big consumer brands. The point is, Fireflies, Otter, Granola—every subvertical. For me as an investor, they bring them to the IC with me, and I'm like, “Oh, this is not a deal that I want to be in—one of 100.”

Rory O'Driscoll

I can remember being a snarky little 30-year-old VC making snide comments that Amazon was just a bookseller, okay? I remember in 1996 when Kleiner did the round, and I think they went public in 1997. That was when companies actually went public quickly. You could've got your head around the teeny-tiny TAM. It was a wedge.

The thing is, sometimes you have to see the wedge and then where you can go from there. So I do hear you. Note-taking is a crowded vertical. It's a crowded space. It's one I actually love and would like to find a play in, and could talk about for a while later. But sometimes don't make the mistake of looking just at the market today. Look at where you can go with that product, and can you articulate a longer vision?

Jason Lemkin

But Rory, going to Harry's point, when you're looking at deals at scale today, has defensibility and a unique selling proposition gone down? When you score a deal, has it gone down? That's kind of the question Harry's asking, because he's brought these deals—the revenue's there, he likes the founder, but defensibility appears to approach zero in some of these deals.

Rory O'Driscoll

We just actually had a polite version of an argument on this in our partners meeting just yesterday, right? I'm looking at a deal, I won't say which one, that was in a very commodified market with lots of revenue and lots of good growth, but they can name 10 competitors.

One of my other partners, whom I've worked with for 20-plus years, is looking at a high-risk, high-intellectual-property deal with no revenue right now but, clearly, if you pull it off, there's massive defensibility.

And we're sitting here going, how do we trade off these 2 things? I will say, we've definitely skewed more toward the run-fast deals, but you've got to go in with your eyes open and know that you have the team that will run fast.

From a portfolio-construction perspective, I really like the fact that we're trying to add some more singular, different companies where it's an N of 1, ideally with some more product-market fit, but where you go, "This has defensibility and a much longer run." I don't want to wake up with every deal being exactly, you know, GPT Plus and 27 competitors in 3 years. So it's a tough and competitive investing environment from those perspectives.

Listen, behind it all are the model providers, the ones that are the shit businesses, right? We go through the peaks and troughs of, "Oh, they're great, they're commodities," and now we're in the realization that OpenAI and Anthropic are actually phenomenal businesses. Anthropic's run-rate revenue grew from $1 billion in Q4 2024 to $2 billion in Q1 2025. Its 100,000-plus customers grew 8X. How did we analyze this? Is this way better than we thought? Was this what you thought? Does it change your perspective on Anthropic?

Jason Lemkin

I mean, listen, you can segment the market, but it's also true that Anthropic's a distant number 2 in some ways, right? The growth is jaw-dropping. On the other hand, you guys have chatted about this. OpenAI also said they're going to burn at least another $44 billion until they're profitable in 2029. At least another $44 billion. It is jaw-dropping. It's the old Amazon thing from the old days that Rory said, on 18 doses of steroids. Everyone's all in. It's another $44 billion, but it's clearly a multi-trillion-dollar company, so the math ties. Is it a new world, or will it collapse on itself?

I interviewed a growth investor this morning—sorry to interrupt you, Rory—and he's already a holder in Anthropic. He said, "I'm trying to buy every employee's options. I'm trying to buy everything around Anthropic that I can. I'll get $1 billion worth. I've got supply from my LPs for $5 billion."

Rory O'Driscoll

I believe it, because they're great businesses. I haven't cycled through what you described, the up and down. They always have to be great businesses because they're the most defensible part of the stack. I don't buy the commodification argument. There are going to be 2 or 3 of them; I don't think there are going to be 10.

People are going to build around that, and they're going to make technical choices. You're going to fast-forward 5 years, and just like lots of people could do Amazon Web Services in 2007 or 2008, once you're 10 years in and you have the scale, the development environments, and all the rest, those are going to be great businesses. They're going to be great businesses at scale. Will they be worth $300 billion or $1 trillion? I don't have a developed opinion, but no, they're the anchor tenants of the AI economy, just as Amazon, Azure, and Google Cloud were kind of the anchors of the cloud economy. They're great businesses.

With the rise of great companies comes the fall of others. Chegg went from $12 billion to $95 million, with a third round of layoffs. Is this just exactly what we said, that most are smaller than ever and companies can be changed overnight?

Rory O'Driscoll

Yes, short answer. Why would I pay Chegg for X when I can literally type it into ChatGPT? That was a business that was dead, roadkill in front of us.

Jason, what's the most obvious next Chegg?

Jason Lemkin

The tough one is if MCP really works. It's very interesting seeing HubSpot, Box, and Dropbox be excited about MCP. If it really works, we won't even really need these applications.

If I can use MCP to grab my content from Box and do more powerful things with it by combining it with my own model, I'll barely even know Box exists. HubSpot is great, but if my own AI can pull out all the structured information out of HubSpot and run my own AI the way I want to do it, what is HubSpot going to be worth to me?

If I can put my own AI and my own agents on top of these apps—all these ones that we think are so great because they're databases—I think they instantly become vulnerable because they just become databases. They just become databases, I think, and I think they know it. I think that's why everyone's stressed.

Rory O'Driscoll

The only pushback I'd give is the word "instantly." I do believe AI will exert pressure on some of these apps in terms of newer solutions to do it, but I do think we should assume that the replacement cycle plays out over 10-plus years. I think the existing dominant vendors have a chance to ride it out. Look at what ServiceNow is doing very aggressively.

But I think you're right: if you are asleep, or if your app doesn't deliver a ton of value, then you will get ground down slowly and painfully.

You mentioned they're turning very quickly into a database. People say that about Salesforce.

Rory O'Driscoll

Yes.

If you were to look forward, would you be a buy or a sell on Salesforce, with the potential for it to be a database overnight?

Rory O'Driscoll

I hold Salesforce stock. I'm not a seller. I don't think they're going to be an explosive grower from here, to say the least. But I think one thing we underestimate is the power of incumbency—not to be a venture-type IRR performer, where you're hypergrowth and tracking an IPO, but just the ability of these big tech companies to extract massive profits and massive cash flow at scale.

If Salesforce is, quote, "just a database" in 10 or 15 years, it doesn't mean they can't still kick off gobs and gobs of cash. All you have to do is look at Oracle. It's not only just a database; it is a fricking database. And Larry Ellison, depending on the day, is somewhere between the 1st- and 4th-richest man on the planet.

He's not sitting there going, "Oh, I wish I was cool in AI." He's going, "I know how to optimize every damn dime from these corporate customers. We'll ship just enough new stuff to keep them on board, and we will build a wildly profitable, I think, 43% operating-margin business."

So I'm not looking to Salesforce to provide the oomph in my portfolio, but I wouldn't want to offload that stock with those cash flows, because I just don't think it's going away. We use Salesforce in our shop here. I think I'll be dead before we rip it out.