2025年LP投向风险投资的方式将如何改变？捐赠基金模式陷入困境了吗？

Guys, thank you so much for joining me again. I was inundated with messages from my LPs, from LPs that I don't have, asking to invest in funds. Thank you so much for that, saying how much they loved our prior conversation. So, both of you, thank you for joining me again.

Guest

I'm not here to help you, dude. I might just crash out now, but okay, we'll go with it for now.

1. Breaking Down the $3BN Windsurf Acquisition

Guys, I'm going to kick off with the topics I think we have to discuss first. Windsurf's $3 billion acquisition broke the news and was incredibly top of funnel for everyone. How do we think about this? How did you guys read it?

2. Why If You Can Guarantee 5x, You Should Always Do the Deal

Guest

The first thing you do as a venture investor is go, "Bummed you're not in it." Let's be honest. It's like an IPO prospectus: the first thing you do is look at the ownership page and go, "Damn." That's the first response. You have to get over that. It takes a little therapy, and then you go, "What does it all mean?"

Stepping back, first of all, it hasn't happened yet, as I understand it. It's been rumored, but TBD. But it makes sense. If you're OpenAI and you're looking at what you're doing here, there are 2 or 3 huge use cases for your product, and you probably want to be relevant in those cases. One of them is obviously one of the most visible: coding, and picking up something in the space. For 1% of your market cap, it's probably a sensible bet. So, that was the big-picture response.

Now, you can get into: should they have bought Cursor? Did they try and buy Cursor? Are there a whole bunch of others? Then we can come back to the "Is it defensible?" argument, which I'll come back to in a second. But zooming out a million miles, it totally makes sense. When you're running a $300 billion market-cap thing that's predicated on a bunch of different end-use cases, getting closer ownership of one of those big use cases makes sense.

3. Why Sam Altman is Playing a Master Game

Guest 2

Jason, I'm not convinced this deal will happen. I think Windsurf is pretty epic. I think Varun's a great CEO, but we don't know, right? We don't know if it'll happen. Maybe, Harry, you're closer to the pulse of anything on planet Earth, so you may know, but I'm honestly not sure the deal will happen.

The learning is that 1% is really interesting. I'll tell you what I learned being a VP at a big tech company. There were different levels of deals, and 10% is bet-the-farm. That's like Adobe buying Figma. That wasn't the end of Adobe, but it's a big deal. Instagram was 10% of Facebook. WhatsApp—what's the magic number? 10% of Facebook's value.

This is not just an SVP deal. This is the CEO saying, "I'm betting the farm." At 10%, you don't lose your job, but it's betting the farm. 1% is like an SVP deal. This is an SVP saying, "I'm betting my BU."

So, my guess is, whoever is at OpenAI—and where is OpenAI slightly weak compared to Anthropic? It's in coding. I mean, OpenAI's ChatGPT has pulled away. You cannot catch it, no matter what anybody says. You will never catch that revenue. And Anthropic's even given up there, right? But they own this coding—not just the developer, but the coding.

And so, 1% of your market cap to catch up. You won't even notice 1%. The VP may get fired if it doesn't work out; it's possible. But you really have to see, when companies stall, M&A bets are very different. But when they're on the growth path, these 10% and 1% thresholds are the bets you have to make.

Guest

The clock's ticking, right? My analysis honestly was, you either had to cede the market entirely or make this acquisition. They had to catch up with Anthropic, who were so far ahead in terms of that developer community and advocacy. And so they had to. I think, bluntly, they couldn't buy Cursor. They just raised a new round. It was too expensive, and I don't think they would have sold.

Guest 2

Well, you can. Sam Altman doesn't have any shares. I don't know whether he's the founder or not. It's a little confusing, but he can spend 10%. He can spend $30 billion, right?

Guest

Interestingly, $30 billion is 10%, going to Rory's point. And it's 3x the last round. So, you can—I guarantee you the VCs at the $10 billion round will take a quick 3x. But would you buy it at $30 billion? As I'm saying, he can. I'm saying it could. I don't believe it was unbuyable. I do not believe that, for $30 billion, it was unpurchasable.

It's possible. We've all seen deals like—Rory can share a few crazy stories of folks that turned away $8 billion, the Wiz deals. But even Wiz, it was just a game in the end, wasn't it? It was just a game to hit the number and to avoid antitrust, and to avoid Biden antitrust.

I think the zoom-out thing here is this: we all operate on 1 order of magnitude, and it's very hard to imagine what life is like 2 orders of magnitude further up. But companies exist 2 orders of magnitude further up. I mean, $3 billion is a home-run venture deal, right? But these guys have a market cap of $300 billion. They're playing for 1 of the 3 or 4 companies on the planet that have a $2 trillion market cap. So, you do what it takes to make that happen, right?

There's a period in every market where it's exploding. You really don't know how things are going to end up, and it's actually very smart and savvy to make some bets just in case it turns out that way. No one even remembers, to the nearest basis point, how much dilution Microsoft took to buy the elements that became Microsoft Office. I remember they bought something that was like PowerPoint. I think they bought a word processor. I can barely remember. I was around then, but it was the early '80s—tens of millions, I think, for tens of millions. In the end, who cares? Got it.

Fast-forward

an example that didn't work was Excite@Home, a public search company. The big idea was, "Oh my God, you've got to combine search and literally the underlying piping. Let's combine with @Home, the cable infrastructure company." It turned out to be a deal as dumb as rocks. But what you recognize at the point in time when everything's happening so fast and nobody really knows is that you're probably better off making some bets.

If you think about this particular bet, and if you just look at the scope of the chatter—and I don't love chatter—the evolution of the story went from, "The models are everything. All these apps are just AI wrappers." That was conventional wisdom a year ago—an infinite amount of time, but just a year—to, "Oh my God, models are commodities, and AI apps are all it's going to be," to, "Oh my God, now the third iteration: the models have such market cap, they can buy the apps."

What you recognize here is something I said last week: no one knows nothing. The thing I admire about Altman from a distance—I don't know the guy—is a bias to action. You sit there and go: there are 2 or 3 massive use cases for AI. One of them is direct chat. Tick. Done. The second one is coding. Hmm. The third one is customer success. TBD later. You're just moving down the to-do list.

I think doing something makes sense here. And you can't unsee it now, right? Even if this—to your point on Wiz—even if this deal doesn't get done, the mighty corporate intent has been stated: we need to own 1 of those things. If they don't do Windsurf now, the line of other coding apps outside the OpenAI office is going to go around the freaking block, and at some point someone is going to buy something.

Will it work? Again, who knows? Will it be PowerPoint, or will it be Excite@Home? That's, as they say, why they play the game. But not making a move is akin to losing.

Another thing that maybe people miss a little bit on M&A is you don't have to—if OpenAI does buy Windsurf—you don't have to do the brutal Salesforce-Oracle strategy and say it's us or nothing. You can build a platform and let the customers decide. You really can.

You can say, "Listen, this is now Windsurf powered by OpenAI. If this is the best, we're going to put 1,000 engineers on this, but if you want to use Cursor, if you want to use Lovable, if you want to use any other system, we still love you." You don't have to overfavor your platform. You do not have to.

I think OpenAI—my guess is they'd handle it very well, right? They'd do both. A lot of companies that do this have different teams, right? They just let the market decide. It doesn't have to be ruthless. If you have a platform, you can actually seed them both. It does happen.

And the best example of that is obviously Microsoft, where they had the operating system, they had a dominant set of apps, but there were other apps out there.

Guest 2

Jason, one thing I would disagree with you on is what you say: you don't have to be ruthless. You don't have to be ruthless in the short term, but one of the things you see is, in the end, there is a grinding-you-down element to it, right? After 20 years of the PC wars, there were really only 2 or 3 companies at scale that were selling apps—personal productivity apps—independent of Microsoft. You had Adobe, you had Quicken, and maybe some of the security apps.

Guest

So, I agree with you. They can definitely, if they buy this and favor it, force everyone else to use their operating system because it’s one of the two things out there. But it’ll be a long, 10-year grind if you’re the independent, as they can make it better and better.

4. Why Multi-Stage Funds are Destroying Seed Managers

As a venture nerd, my takeaway was going through the cap table and seeing who did the first rounds. And what do you see? Sequoia, NEA, Greenoaks, and Neil Mehta. It brought me to something that I was just talking to a massive LP about today.

They said, “Harry, tell me a seed manager in San Francisco to back. Give me a seed manager.” And I said, “I wouldn’t touch it. I wouldn’t touch it.” The multi-stage fund product at seed is so good and so efficient, and their cost of capital is so low, that they’re just crushing everyone at seed.

And this, for me, is another example of it: Greenoaks leading the seed, doubling down on the A. I think all of the multi-stage firms are pushing out the seed firms more than ever, and I think this is a great example of it.

Guest 2

How big is that fund, Harry?

That Greenoaks fund is between $1.5 billion and $3 billion. I know it’s a big range, but they own 10% with dilution.

Guest 2

Going to your point last time of Insight and Wiz, even if they own 15%, how much of the fund does it return? It reportedly returned between $500 million and $600 million, which is less than a third, even on the smaller end. Man, venture is brutal.

Less than a third. So, you need to do a 5x fund. How many Windsurfs do you need? Help me do the math.

Just 15. Just 15. 15 per fund.

Guest 2

Yeah, but, you know, it’s still been my experience that you’ll still cash the check for the first $500 million and smile. I always say that to people when they say, “Oh, it’s only a 3x,” or, “It’s only a 5x.” I’ve been doing this for 30 years. Everyone cashes the check, right?

But going back to that, I’ve got to say, go back to the Greenoaks comment. I’m not sure it says something systemic about seed versus non-seed. I just think it says extraordinarily good picking from a very connected investor, most of whose stuff is working really well at a much higher level. To go from later-stage deals to reach down into the early stage and apparently pick a winner like that, all credit to him. I’ve just got to say: great success. Go team.

Yeah. The only thing that counts is winning, and no one gives a damn how you do it. Well done.

I do think your point about the squeezed white space for seed funds is a good one. If nothing else, it pushes ownership down right at a time when seed funds are larger. Going to Rory’s point last time about risk, I think it increases the risk for seed funds.

When this multi-stage thing starts to get perfected, like on a Windsurf, if you’re scraping for 2% to 3% as a seed manager instead of 12%, and your fund has doubled in size, the outcomes have to be double. It’s a compounding set of risk pressures on seed.

For seed managers, can a billion-dollar outcome even return the fund anymore? That’s the old line for seed, right? A billion-dollar outcome can return the fund. I don’t think it’s true of a lot of seed managers anymore. I don’t think 1 billion-dollar outcome, let alone doing 3x net, can return the fund. That’s a big challenge for seed if a unicorn can’t return the fund.

Guest 2

Yeah. No, funny, I was reflecting on our conversation last week and, Jason, your comments on seed. I was laughing about it. Your quote on seed for SaaStr is that one of the things I’ve internalized is: everyone is looking at everyone else’s spot and going, “My spot is hard. My God, theirs looks easy.” We all do it.

The dirty little secret is it’s hard everywhere. There’s a lot of capital and a small number of outcomes. It’s just really hard to make money because of the amount of capital in the business. I don’t know if structurally seed is risk-adjusted less attractive than A or B, which we play, or than late stage, where we normally would play, or whatever. I just think every stage is wrestling.

The proof of that is everyone is drifting into the other stages and saying, “Oh my God, I need to do that to do my thing.” It’s just a very messed-up world at the moment, and no one’s staying in their swim lanes. I think a lot of it is the super-big funds doing everything, which, as full-stack providers, kind of make everyone question what they’re doing. We’ll see over time.

The one thing that I really see, though, being at seed and A, is a lot more dilution sensitivity at seed. Very often today, the whole round is 10%, and we’re able to do 7.5%, with 2.5% for angels, whereas before it was 15%, with 12.5% and 2.5%. I’ve really seen that compression from 15% to 10% on the seed rounds.

Guest

You can afford to be dilution-sensitive as an entrepreneur if you can get cheap capital, right? You can only be as sensitive as the other side will let you. Dilution-sensitive is another way of saying, “Dude, I have 3 more people lining up down the street to give me a better term sheet. So, you’re only taking 10%, and if you don’t like it, shove it. I’ve got more money.”

It’s a lot easier to get better ownership when there’s just less capital, right? Barton Biggs used to have this saying: “There’s no business so good that excess capital can’t ruin it.” And here we are.

I mean, speaking of excess capital, I was with the team today. We literally just came out of an investment meeting, and one company that we were looking at has been doing $7 million in revenue, and it’s been valued at $700 million by some of the big funds. I said, “Wow, we’re back, huh? Return of the 100x?”

What’s the forward multiple, though? I think 100x was always a misnomer. I don’t know—maybe Rory would disagree—but I think when we look at forward multiples, it’s a better way to think about this, right?

Guest

Totally. The forward multiple is about 33x, which means it’s 3xing.

Let’s start with the very basic point, and I’m going to say something here: you’re a hypocrite. I’ll tell you why I say that. Me, not Harry—I’m the hypocrite. I’m calling Harry a hypocrite because you pay the highest investment multiple.

The truth is this: the entire venture business starts off with an infinite revenue multiple and gradually comes down. Multiples go down over time as growth rates decelerate. What you’re trying to do is hope to God that the growth rate stays higher long enough to de-risk the multiple before you intersect the public markets. In the end, everything trades at 5 or 6 times revenues if you’re growing at 20%.

You’ve done deals—I mean, your last seed deal, if it’s doing half a million bucks and you’re paying $30 million pre, $50 million, whatever it is, it’s 50x or 100x, right? So, the real question is, first of all, it’s stage-dependent. And then the second thing is, Jason asked the right question: it’s growth-dependent.

My partner Andy says, “We’ll refuse to have a conversation about revenue multiple unless you state the growth rate also.” He’s like, “It’s an incomplete equation, not worthy of discussion.”

When you say 100x, growing at 3 or 4 times, with high-growth persistence—which is a term we coined for being likely to stay growing at that rate in 2 years—you’re out of the risk zone, right? A 100x multiple, if that growth rate is sub-2x and starts to decline, you’re so screwed your head will hurt. It’s situation-dependent.

So, taking that and going back to 2021, I think what happened in 2021 is that a lot of people paid up for growth rates at 100x and then didn’t get the growth. That’s a fiasco, right?

This time, it boils down to people paying up for growth again. Will they get the growth? Will that $7 million become $20 million or $30 million? If so, and you get just 1 more good year of growth, you’re at 6x or 10x. It’s kind of a scary way to live 2 years of your life, but it’s not impossible, right? If it slows down, you’re screwed.

My challenge goes back to our point earlier, though, which is understanding the sustainability and the transience of product-market fit and the transience of revenue.

Guest

Yes, totally. No, you’re exactly right. If you lean in and it goes away, that’s why those 10 years of SaaS were such a good business. It was predictable because the input of sales and marketing to the output of revenue was predictable, because the revenue was sticky. In retrospect, it was the golden years of just applying capital and growing into the multiple, right?

And if it’s not like that, our younger partners—they don’t say it, but you can see it in their eyes. They’re saying to me, “You idiots, you made money when it was easy. Don’t give me shit now. It’s hard today, brother.” And to some extent, they’re right. I don’t like to admit it, but they’re right.

Today, predicting which of these companies can keep up that growth rate—there’s just much more variety there. When I look at Klaviyo, when I look at UiPath, when I look at ServiceTitan, the list goes on and on of companies that actually took a long time to get to $1 million in ARR. They really went through the idea maze and product maze to get to a good number, being at $1 million in ARR.

My question is: are we in an entirely new world where, today, from day 1, you’re at the start line and you don’t have the 5 years to weave and snake? Or are we still in the same world?

Guest

Well, weren’t they all—? We could go through a history. Weren’t Anysphere, Codeium, whatever Bolt was before—didn’t these all struggle for a year or 2 before they took off? I mean, I know Cursor almost died, right? Bolt almost died, right? And then, finally, it hit for Cursor.

I don't know the whole story of Windsurf. Even Windsurf was Codeium before it, right?

Right. It wasn't even the same. Everyone talks about Windsurf. 90 days ago, Windsurf barely existed. 90 days ago, it was a Chrome plugin called Codeium. Now it's taking down the market leader.

I think the revealed pattern in SaaS land was—I think of it as this: the walk in the woods period is indeterminate. It can be a year, it can be 6 months, it can be 5 years. It doesn't matter. It's up to them, right? You're financing that journey at seed, and as long as they don't run out of money and they want to keep doing it, fine.

Once you lock in, the interesting thing is the trajectories are now different. The SaaS trajectories lock in, and Jason knows it so well: triple, triple, double, double in that steady thing. The weird thing now is, once you lock in, as you say, in 90 days—you go from, maybe, to be fair, a year, 6 months, a year—you go from, “This company is not going to make it,” to, “Oh my God, I think I'm going to turn down $3 billion.” Right? That's what's different about today versus SaaS land.

When you get to product-market fit, the action and the odds at the craps table are pretty wild, right, in a way that just didn't happen in SaaS land? I mean, this is like, crack, instantly to $3 billion. Why? Just tell me, why is that? Is it because the distribution is different, the adoption is different, or the willingness from large enterprises to pay for AI tools is different? Why is it that when you get PMF, it's like crack, instantly to $3 billion in 90 days, in a world where it wasn't before?

Guest

I think it's all of the above, actually. It's a pretty good list. Stuff is working quickly, and people are adopting it quickly, so you have that raw take-up. There's a common consensus that the prize is worth taking, right?

The important thing about AI is that if you compare the PC hype, internet hype, and AI hype, AI hype is bigger than all the other hypes put together in terms of just raw belief that it's all going to matter, right? I mean, 4 years into the internet revolution, Krugman was still doing that. I'm picking on Krugman, which is not fair, because God knows we're going to need international trade economists in today's world. But there was still: Does it matter? Is it all just a bunch of kids? Is it all stupid?

2 years into AI, everyone on the planet and every company is saying, “Shit, I've got to do something here.” Right? So there's a common consensus across the entire knowledge-worker world and the entire corporate world that this shit matters. And when you have that, I don't think you turn up to your board and say, “Well, AI really matters, but I'm a bit nervous, so we're not going to make a big play.” Maybe we'll get someone else to run this operation, right? So I think there's just a willingness to bet big.

I think it's the one thing—you know, Harry, I caught up with Marc Benioff the other day, and about AI, his feedback was, “We have a group that's all in,” right? He had all his logos, Lennar Homes and Singapore Post, and he's like, “But I've got to tell you, it's so early for others. It's so early.”

I thought about that for a minute. What are we seeing happening? This is just my sense, okay? I think what's happening with AI is every early adopter in the world is looking to deploy. Every single person, whether it's an experimentation budget, whether it's a restaurant that actually cares about AI, whether it's the 3 of us—we're in. I'm running our SaaStr AI. I'm running on tools. I'm ready.

From 2021 to 2024, you couldn't get me to look at anything. My life was too busy. So I honestly just think this growth is crazy, but it's a moment in time where every early adopter is in market. 100% of the early adopters are in market.

And that's why I think it's early, because 90% of sales in the enterprise is not even there. They're just playing with ServiceNow, and they're just playing with things. But I just think this growth is happening because a lot of it is self-serve, product-led, easy to deploy, and cheap.

These products—if you don't use much Windsurf, it's $20 a month, dude. This is not high-risk. I mean, you have to put it into production, but this is not $400,000. It's $20. And, yeah, they have an enterprise sales team.

All these products are cheap, guys. These products—my jaw drops at how cheap these products are, and they make regular B2B look like a freaking rip-off. So every early adopter is like, “I can use Higgsfield for $5. I can use Windsurf. Why wouldn't I?” I'm in market, right?

If it was $20,000, which is what a traditional—like, you know what, just to get Atlassian to engage with you is probably $20,000 for the enterprise, right? For some 20-year-old tool. But, man, $20. $20, right?

So I just think every early adopter is in market, and that's why we're seeing growth at the levels we have. I don't think it's as crazy as it sounds. Just instead of 5% being in market, it's 95% of the early adopters.

One of the other investors in Windsurf was Kleiner Perkins. There was surprising news when I saw that Bucky Moore was leaving Kleiner Perkins. Bucky is heralded as one of the successes, and it's just another younger person in venture leaving one of the bigger brand-name firms. I'm intrigued to hear how you thought about it. Jason, why don't we start with you? How did you read this, and what are you seeing in terms of younger people leaving brand-name firms?

Guest

Well, first of all, honestly, I was accidentally an early version of this. If you have a hot hand in venture and you're not running the place, I would leave the next day. That's what I did.

I had the same conversation with Tomasz Tunguz, who just raised something like $700 million. Everyone loves Tomasz, right? I won't share all the conversation, but one of his things was, “I should have done it earlier,” right?

As great as Redpoint is, he's basically a solo GP managing close to $1 billion. Probably better economics than being paid $400,000 to $1 million a year, plus waiting 22 years for some carry. I mean, why? I'm not saying that's what happened with Bucky, but probably if he was going to run the place in the next 5 years, he would have stayed, right? Or whatever the dynamics are.

It's just, if you can raise your own fund today, you would be silly. And I know it's not true at scale. I'm not saying it's true at scale, Rory. But at 90% of VC funds, why would you stay? When I worked for someone else's venture fund, I was told what my salary was. I mean, fuck you. I did 10× in that fund, and you're going to tell me what my salary is? I don't even get to go to the management meetings in a tiny fund. Fuck you, right? I mean, it doesn't—why would anyone stay in those environments?

Rory, listen, you're on the other side of the table. Fascinating. You have amazing young people. Why do they stay, and what would you say to them?

Guest 2

Well, first of all, I'm laughing remembering meeting Jason for the first time. I'm going to say: you said, “If I had a hot hand and I wasn't running the place, I'd leave.” Knowing you as I do, Jason, you can delete the first part of the sentence: “If I'm not running the place, I'll leave.”

Some people just want to run the place. You know that's you, and I totally respect that, right? I'm giving you shit here.

Guest

No, no. Sometimes you just want to be a partner. As a founder, you don't need to run the place. You just want to be a partner, right? A true partner, not a general partner or whatever. You want to be a true partner, right?

Guest 2

That's actually a much more actionable comment. I agree. I think I like your distinction, because I don't think it's as easy as, “Hey, I just want to leave,” because it's nontrivial. There's a bunch of stuff required with raising a fund and all that, and, yes, if you pull it off, it's great.

I think people want to work in an environment where it's fair in the sense that the compensation they get is roughly commensurate with the value they put into it, right? That's hard to do, especially in a business like ours, which has such long lead times and such long proving-out times.

But if you don't build that kind of organization, then you don't have generational stability. You need to do that to have generational stability. So, starting with that comment, because there's a lot in this comment, right, you want to make sure that, in a rational world, everyone's incentivized to stay rather than leave.

Brutally put—and no one ever says this—but the implied statement in this is: the hotter your hand, the more incumbent it is on the leadership of the firm to make sure you're in the circle, not out. I think it's centripetal, where you're pushed in, right?

If you're sitting there as a leader and you've got a hot, talented younger partner and they're killing it, if you're not putting them inside the tent as quickly as humanly possible, you're an idiot, right? So there's a truth. The good thing about that is the system works.

It's polite because venture guys are politer than hedge-fund guys. But in the end, well-run firms make damn sure, in the main, that people who are doing well get promoted and cut in. That's our job. And if we're not doing that, you're right, you'll start to lose good people. Shame on you, right?

So that's the job of, quote, the established side of the table. The specifics are all over the map. I know Bucky, but not as well. I know Mamoon very well.

I remember when Mamoon was a young guy moving on from his first firm. We've all been on both sides of the table, right? I'm not going to comment on specifics, but there's a range of reasons people leave. Sometimes it can be that I'm doing great and I'm not getting the reward I need. Sometimes it can be, I'm doing great and there is no freaking reward because everyone else has lost all the money. So no matter how hard I work in the next 5 years, I'm just digging out of someone else's hole, right?

Do you think we will continue to see spinouts from A-grade firms from young, incredibly promising partners?

Guest 2

Well, I think it's the nature of the business for the last 30 or 40 years, so I see no reason it'll change now.

Well, it is, but the level of spinouts has increased significantly.

Guest 2

Well, that's only because your window of view is fairly limited, right? If you look across 30 years plus, it's exactly when it should happen. There are 2 reasons why it should happen now and 1 reason why it might slow down.

The reasons why it should happen are, 1, you've had 5 or 6 years of slowdown, of what looked like amazing performance, lots of promotions, and then a whole liquidity gap, markdowns, and everyone's looking at the last 2 funds and saying, “Oh my God, I crushed it. If I was here early enough, I did great in those early funds. The last 2 funds, maybe if I hang in another 5 years, we'll make a 1.7x. Maybe I'll make some money.”

If I'm a junior person and hot to trot on my career, and I think I'm good, I'm looking at that going, “You know, the expected value of this isn't great,” right? I'm a rational actor, and anyone who's running money should be a rational actor.

So the first thing that's causing it is big-ass firms where you're not sure you're going to get money. The second thing that's causing it is LPs still wanting to do the asset class, but also wanting to do new firms while simultaneously doing huge checks to the very same firms that people are leaving from, right? It's just quite a funny dynamic.

I think what's really happening here is—and this is perhaps too glib—that deep in their hearts, you're kind of looking at these mega platforms and going, “Hmm, I've got no choice because it's the only place to put a lot of money, but oh my God, I'm scared. I'd really like to feel good about myself in the morning. I should do some young up-and-comers, too.” So I put my $200 million into a mega fund and I give $20 million to Tomasz. I feel good, right? And I think there's quite a receptive market at the moment.

Do you think you suffer from the barbell, respectfully, which is exactly that you want to put money in a sub-$100 million young new firm or the platform play with multiple billions—General Catalyst, Lightspeed, Andreessen?

Guest 2

I think “suffer” is an interesting word. I mean, I think we're all only as good as our last game, right? I understand what you're saying: in a world where people say there are only 2 things I want to do—the mega funds and the designer new funds—yes, in that world I would suffer. But that's not the world that worries me, because there's something that worries me more.

The world you really suffer in is if you don't perform, right? If you do perform, no one gives a damn if you're small, medium, or large. You know, it's paying. It doesn't matter if a mouse is black, a cat is black or white, as long as it can catch a mouse, right?

That's why I say to my colleagues, I say, “Guys, we're competent. Our number 1 job is to be competent,” right? If you execute, I believe there'll be a market for venture returns. If you don't, then you're right. In the absence of success, people can impose their biases, and then, you know, it's different. You're right: at the margin, people love these new firms, the new stories, because it's the promise of the new, right?

The other wonderful thing about starting a new firm right now is that no one will ever say—not only do you ditch your colleagues' track record, you also ditch your own, right? You literally go there and go, “I was at a mega firm from 2016 to 2024. I did some deals. Some are great, some are shit. It's not obvious yet, but deep in my heart, I know. I'm just going to sever that thing like a stage of a rocket, move it behind, raise money now, and I will never be asked about my mega-fund return ever again as long as I make this new fund work.” It's beautiful.

Well, you still tell the stories of your winners from the prior fund, right? And you can just pick out your own returns and your own results from your winners, right?

Guest 2

Fred Wilson, who I think is by far one of the most talented investors of the last 30 years—I mean, Fred Wilson, Flatiron, was wildly unsuccessful in the dot-com crash, went on to do a new thing, and killed it from day 1, which is why it might also be a sensible bet. You sever your own track record, good, bad, or indifferent, which, frankly, was largely a function of the times, not you, right, which people don't ever want to say.

You learn those lessons. You're way more intentional as a startup about what you're doing, and therefore you kill it, right? That is the cycle of renewal that can happen, right? So it's not crazy forever. It's just one of those things that happens at this stage in the cycle.

Good for them.

Guest 2

The 1 thing I would say is I would not want to be going out fundraising at this time. LP appetite for new funds, I think, is lower than it's been in a long time. LPs are not jumping at the bit to commit to new managers, either existing re-ups or net new.

Jason Green

LPs are waiting. They don't want spinouts. You would know better than me, Harry. I'm shocked by the spinout play. Maybe it's for the reasons Rory said, but I think the spinout of the successful GP, right, it de-risks it on the 2-by-2.

5. Are Endowment Funds F

It's not the spinout. It's not the 2021 playbook of, “I'm getting 3 buddies together to do an $80 million seed fund.” This is cherry-picking a top manager from a known-brand fund. You would know better than me. I think there's still appetite for that. It depends who and where they're from.

You might be Vish from Index; all day, every day, you can raise 10 times whatever you want to raise, 100%. But the withdrawal from endowment funds is very real. The awareness that fines are coming, very likely for many of them, and tax-exempt status is at risk means that there's just a lot of uncertainty, and a lot of them are just waiting.

Guest 2

I agree. I think that, as is often the case, 2 things—especially when you have 3 people all busy talking past each other—can be true at the same time, right? I think Jason said it right: the large number of new funds that were happening in 2021 is way down. First statement.

Second statement: the funds that are getting done are talented mid-career GPs from top-tier firms with good track records. A much smaller number, but we all know them by name because they've been in our business for 20 years, in a way that I didn't know Joe XYZ, who raised in 2021. I'd never heard of him.

Every single one of these people, you go, “Yeah, that makes sense. We're in a deal with them. They're smart, they're good. You do references, they're great.”

But I do think, to your last point, that was last, that was then, and this is now. The interesting thing about the next couple of years will be whether the pressure on endowments—typically one of the best funders of new designer funds, high-intensity, high-conviction, smaller funds—is such that, even with the best will in the world, they're just not going to be able to do these deals.

I think that's a legitimate question, which is why I think it won't always be the case that every young person says, “Yay, I've been successful. I should leave.” You might see in the next 1 to 2 years a little bit of clinging to the lifeboats here, guys, because it's not going to be as easy as it was.

Jason Green

I think 2023 and 2024 were a unique time. It's never easy to raise a new fund; these are really talented people. But 2025 and 2026, you're right, Harry, could be tougher, because you can want to do something all you want. You can want to buy a Ferrari if you want, but if you haven't got the money to buy a Ferrari, you can't buy a Ferrari, right? And these guys are going to be really strapped for cash.

Rory, can I ask you? Do you think the endowment funds are as in crisis as people seem to make out?

Guest 2

I wouldn't be surprised. It's a terrifying set of circumstances. I mean, if you're an endowment, you have—I mean, we'll talk in a second about the illiquidity thing—you have down public markets, you have illiquidity, right? Those 2, and you have low venture returns for a long period of time. Those things alone would have put stress on the system.

What typically happens when you see stress is that an exogenous variable puts you over the top. In 1973, it's the oil crisis; in 2025, it's the Trump crisis. He has clearly taken it upon himself to decide to significantly change, with brute force, a significant slug of the very institutions that have large endowments and are providing a lot of capital to these startups.

6. What Would Rory Do If He Was CFO of an Ivy League Endowment Fund

So, deliberately not commenting on the merits of it for a second, at least, if I was the CFO of an Ivy League university, let's just say my cash planning for this year would be dramatically different than my cash planning normally. And if someone sauntered into my office and said, “We need more illiquid assets,” I would say, “Get the freak out of my office,” right?

We don't—you know, it'd be like, “No, I'm thinking bonds here, dude. I'm thinking index funds.”

I'm thinking accessible cash at a moment's notice when 30% or 40% of my revenue could disappear. Rory, I literally had, across channels, 50-plus LPs in my inbox after our last show. They will all be screaming, “Okay, but if I don't do these venture funds, I'm going to lose that trusted relationship with Mamoon at KP, with Danny at Index, with Brian at Founders—you name it. I can't just say, ‘No, I don't want more illiquid assets.’” So what would you advise them with that in mind?

Two things, going back to your point on the new funds. What they're saying is, “I don't want to lose what I have.” What you see then is the bias to, “I've got to start by protecting what I have—the relationships I have.”

Yeah. It would be a mistake to—if you've been in Sequoia for 30 years and you've left this year, and option A is to nuke Sequoia and commit to this new fund with 2 really smart people. They could be amazing, right? And option B is to keep a Sequoia relationship—and you know, because those guys are vindictive like no one else, that if you pull out, you're done forever—what are you going to do? You're probably going to stick with your existing relationship.

So first of all, you're right: they themselves have to make choices, right? And, as I think we mentioned last year, the second thing is that, at some level, some choices get made one level above you. They can say, “I want to keep rather than add a new one,” and that's one choice; then someone one level up says, “I want liquid assets rather than illiquid assets,” right?

Liquidity premium is one of those words that doesn't mean shit until it means everything, right? When you need money to fund your students, pay your professors, or fund your research, you're going to be saying to yourself, “I…” People do end up giving up on upside, either by not pursuing new deals or even by selling existing assets, because they just need money.

Guest 2

We are seeing that Yale is reportedly selling a reported $6 billion pool of different assets in a secondary sale. Are we going to see that? Is that the start of a new trend for endowment funds to get the liquidity they need for the outflows they have? And, Jason, chime in here, because I went on a rant there, so I don't want to hog the mic.

I was thinking about this because it's a really big deal. I was listening to your list of questions, and this question is a big deal because Yale has been the intellectual godfather of the endowment model. David Swensen's book—we've all read it. I read it 20 years ago, and I'm like, “That's the definitive book. I don't need to read any other. This guy nailed it cold,” right?

The Yale endowment alumni have gone all over the world. They've been hired. They've been at the court of the king. They know how to do it. It spread across many endowments. Intellectually, as I said, this would be like if Vanguard said, “We've been thinking active management is the way to go,” right? The question is, what's really going on here?

There are mitigating circumstances. I was mentally running through, first of all, the rumor might not be true. I think it is, but I don't know, right? There are 2 or 3 reasons why they could be doing it. How do you put this in ascending order of severity?

The least severe is, “Hey, we just think we're going to need money. It kind of sucks. We love these assets, but we just need capital.” It's not a knock on the model; it's just a knock on the fact that I didn't plan for the president of the United States to try and effectively take away our federal funding, right?

There's no collapse of the intellectual theory. It's just that you misjudged the amount of illiquidity you could afford because you misjudged the variability of your cash flows. That would be a conclusion that it's bad short term, right? It's bad and it speaks to other people having the same problem, but it's not saying the whole model falls to pieces.

Obviously, an even worse conclusion would be that they've been looking at it and thinking, and saying, “The entire private sector is overfunded. I want to pull back a little.” We just think, systemically and long term, that's not the case. But it is a big deal because they've been so damn good for so long.

Yeah. My only limited insight—you guys would know better than me—but in the few conversations I've had, everyone got their distribution planning wrong, their cash planning wrong. That's what happened in the industry. This is even pre-Trump, pre-everything. These are conversations I had late last year with LPs: we were cool with our paper returns, we were cool with our gross and our net IRR, but our cash plan was just wrong. We did not plan for this liquidity drawdown to last this long.

Okay, this is what I heard. The second thing I heard—and I know this is 20VC, not 20PE—is that venture, whatever, it's PE, is the big problem. They're really the same thing. Venture is a subset of PE, right? PE is so much bigger, and the fact that these deals did not go public in 2 or 3 years is the bigger stressor.

Venture—they don't love it, but they're modeling 20-year illiquidity with regular cash-outs, right? They don't sweat VC as much as PE. I think we're suffering for that, for the bigger cousin. What does that mean?

Sorry, we're suffering for the bigger cousin more because PE hasn't had the liquidity event. They're putting 5 times as much into PE, or 10 times as much as venture. Venture is a rounding error in most endowments, right? It's a subset, just like seed is a subset of venture. Venture is a subset of PE.

It's not that important. It's just juice—a way to juice your returns. PE is where you deploy more capital. If it's been 5 years and your cash-flow models are off there, right? They haven't brought cash back. It's great that we bought Zendesk and Anaplan and Schmoplan, but if none of them are returning cash, that's an order-of-magnitude bigger issue than these little, you know, little 8- or 9-figure checks into 20VC.

7. The Denominator Effect and It’s Impact on Venture Allocations

Those are rounding errors. Those are just juice, just to get some extra basis points on the overall endowment. There are exceptions, but mostly it's juice—mostly it's a little extra alpha on the endowment. Don't forget Coupa, Zuora, and Domo. That's the stress. This is pre-Trump, but that's the bigger stress than venture liquidity, right?

You know, we constantly go in and out of the denominator effect on their public books, according to how they're weighted relative to their privates. Every time we have a big swing in public markets, everyone's like, “Ah,” and they're feeling the denominator effect. I'm like, is that really a thing, given the increasing volatility of public markets today? Meaning, you're constantly in and out of denominator-effect danger.

It's a thing, but it's not the thing that we're wrestling with now. A lot of things in life can be problems, but the question is: how serious a problem, right? The denominator effect—just in case any of the readers don't know—is that you have a target allocation to private equity, say it's 10%. Everything's going great, but then the public markets take a bath, and you're at an allocation of 10% private and 90% public.

The public markets take a bath, so that 90% goes down. Your allocation—and the privates don't mark to market as aggressively on either side—goes from 10% to 12%. So you have, quote, a denominator effect. It's an issue, and I've definitely had conversations with people over the decades where that's a thing.

But I don't think that's the issue. If that's all that was happening, I think people would power through, right? I think Jason's exactly right: it's a combination of, at a minimum—maybe it's 3—but at a minimum, the cash models have been wrong, and it's all taking longer. That's what we know for sure, because it's true.

The second thing we don't know, but that's the scary thing, is: are our models wrong on timing, but our IRR is good? In other words, are we still going to get the return we want from this asset class, just over a longer period of time? Same IRR, but just compounding for 6 years rather than 4 in the case of PE, or 12 rather than 8 in the case of venture.

Am I still good for my 17%, which is 600 basis points above small-cap returns? Or, more concerning than just timing, has that 17% gone down to 15%, 14%, or 13%? Am I getting paid? Because now I'm not getting paid for the risk I'm taking. The risk is there, and I'm not getting paid.

The third issue, and most catastrophic, which I think is particular to endowments and not anyone else, is: I actually need the damn money. I think that's very pertinent to the endowments because they often have mandated outflows that they have to spend on upkeep of community facilities, scholarships, and so on, whereas a lot of other institutions do not have those mandated outflows.

When that happens, things just get harder. I would be nervous. I mean, look, just 6 months ago, I'm willing to bet that if you looked at the plans—because endowments run from June 30 to June 30—no one had, in their plan for FY 2024 to 2025, which is the current period, the president of the United States taking away two-thirds of their funding. They didn't have that in the plan, right? We're just dealing with such extraordinary circumstances, so off the norm, that I'm sure everyone got caught.

It’s like saying, “I didn’t have a COVID plan in January 2020,” right? Neither did you. Neither did anyone, right? I hope they’re happy, too.

I hope Harvard and everyone’s happy, because I know I’m not going to write a big check because they poked the bear. I’m not sure whether I have empathy or not, but all the emails saying, “Please give us more money”—it ain’t going to work on me. I ain’t going to write a huge check because they poked the bear. It’s not my problem.

Yeah. Well, the last thing my wife said to me, because we are paranoid former green card holders who are now, thank God, naturalized citizens, is, “Don’t say anything that will get you singled out to the president.” Literally the last thing she said before I walked upstairs.

On the other hand, I’m just not being political here. I’m not joining your bandwagon. I’m not joining in on that. I’m not joining in against it. I’m just a simple, humble, naturalized citizen who wants to stay in this country. I do feel a little empathy for some of these organizations despite their prior sins. It would be a longer conversation, and let’s not do it.

The one thing I will say is I was surprised when we raised the fund last year—whatever it was, 9 months ago. Obviously, I spoke to a lot of tier-1 endowment funds. The amount who had over 30% in privates was shocking to me, and over 30% even in venture was shocking to me. In my head, I didn’t know there were that many with 30% in venture. In my head, it was 6% to 10%. Honestly, Jason, when I heard 30% from 5-plus big names that you would know, I was like, “Whoa.” Again, reciting my David Swensen one.

It’s not shocking if you have the perspective—which you should have correctly—that the longest-lived institutions, political institutions in the world, or kind of corporate institutions in the world, other than the papacy, are the universities. They have decades- and centuries-long timelines. Bologna was in the 11th century; Oxford and Cambridge were 13th- and 14th-century; Harvard is, I think, 17th century. These guys have multicentury timelines, and the longer the timeline you have, the more you can take on illiquidity risk, provided you’re getting paid for it.

It’s not crazy for these guys to have done that in a world where your plan was to disburse 3% of your endowment at most every year to fund scholarship needs. You just didn’t plan for the situation where the world could change utterly. So, I get why they’re there.

I didn’t go to any of these, but I’m going to come back to it, Jason. I am mildly—I’m more than mildly—sympathetic despite their past sins. I think there’s pounding, there’s trying to drive change, and then there’s pounding too hard. I’m just looking here. My God, as a non-American university graduate, I never thought I’d be giving this commercial, but this is one of the best products we have in the country.

Can we get foreign students to come over here, plunk down $60,000 or $70,000 a year without blinking an eye, and pony up for our education, and we get them to feel good about us afterward, right? It’s not clear to me why killing this particular golden goose is a good idea, but that’s not my mandate. So, I’ve got that off my chest and I can move on now.

8. Why Revenue Multiple is BS & What You Need to Know

I think that was fantastic. I think your wife will be thrilled. We never know. Okay, another one that I saw this week, which I thought was really important, was actually—I think it was Bryce from OATV VC—but he was essentially saying, if we’re building single-person, billion-dollar companies and AI makes it so much cheaper to run companies, why are rounds bigger than ever? Traditional seed-company rounds are bigger than ever. Why, if everything is much more efficient?

Well, look, first, obviously, everyone wants to invest in the companies that don’t need their money. As valuations inflate, they’re just going to absorb more capital. So, that’s number 1: We all want to invest in things that don’t want us.

2, founders are utterly insensitive today to raising at astronomical valuations. There is no sensitivity to the risk of it. At $100 million, to me, is the last chance to not go for it. Okay? So, I tell every founder to stop at a $100 million valuation if you’re not sure you’re going to IPO. Now, you may get it wrong, right? But if your gut says, “I don’t IPO, man. 50% of $500 million—that’s not me,” don’t raise at north of $100 million.

$1 billion, $2 billion, $3 billion—the kids these days, Harry, the kids, the generation after you, they don’t care. They see no risk in raising at $1 billion, $3 billion, $10 billion. They just don’t see it. And so, the combination of that and wanting to get into the hot deals means they’ll absorb, up to a dilution threshold, lots of capital. They’ll just absorb it. I don’t think—there are other reasons, but I don’t think it’s any more complicated than that.

I don’t think the number of VCs who want to invest in companies that are capital-efficient and don’t need their money is small. They all want that. It’s, you know, Accel figuring out how to buy 30% of Atlassian back in the day was the genius move. When I started investing, I think I met with Rich Wong. I’m like, “Why don’t you do all these deals?” He’s like, “We just can’t find enough.” He’s like, “We don’t want to do anything except Atlassian. We want to be the only investor and own 20% to 30% of a bootstrapped company.” Right? VCs love companies that don’t need their money.

Frankly, I don’t have much to add to that. I think, Jason, I love it. Jason, the point is that we VCs want to invest in people who don’t want us, who don’t need us, and I love it. We want to invest in capital-efficient companies, and we want to do that in a capital-inefficient way. It’s a paradox, but it’s true, right?

9. The Rise of AI Rollup Plays & Are They Good Businesses

And do you know what I see more than ever? Insane amounts of AI roll-up plays, whether in legal, accounting, or professional services, and a lot of home-real-estate plays. Is this a venture model? Is this not a venture model? How do you guys feel about the AI-incentivized roll-up play?

I’m modestly skeptical, which means, ironically, I’m going to start by citing a success. We were investors in SpeechWorks, which became Nuance in 2005, and they were a generic speech-recognition company, AI from a prior generation. They did a lot of broad corporate stuff, and then they found this vein of gold in medical transcription, right?

The way they built that business over the decade from 2005 to 2015 is they bought crappy little mom-and-pop transcription companies, injected the AI, and made it work. Right? So, there’s an example of where it did work over an extended period of time.

But—and this is my but—I think it’s a crappy model. Right. Just for contrast, right? You weren’t expecting that, were you, Harry?

Why do you think it’s a crappy model?

Because I think the bet you’re taking is you buy a set of customers that weren’t picked by you because they are suited for your product. They were picked by some mom-and-pop founder as being the 10 best customers they could sell to, and then you come in. Maybe your AI is so good it can address all the needs of all 10 of the customers, but in my view, you may find—much more likely—that of the 10 customers, 3 or 4 of them are the perfect sweet spot. You get them across to being all software; it’s great.

The other 5 or 6, to a greater or lesser extent, have slightly different needs, because remember, they didn’t pick you because of your AI, because you didn’t have your AI out when they picked you. So, you’re going to have a lot of churn in people where you can’t make it work. It’s going to take longer to bring them across, and you’re not going to develop any new deal muscle, right? So, I would worry that you end up just piling in this sudden mass of services with a relatively low multiple, and I don’t know if it’ll be a compelling business, right?

I love that insight that they didn’t pick you. It’s obvious now, but I’m going to take that with me. This isn’t something new. It’s just, in some ways, been accelerated by AI, right? Since the first job I ever had, if you were overvalued, you always looked to buy a terrestrial asset on the cheap, right? And tack on 8 figures of revenue. This has been true since the dawn of the internet.

But they didn’t pick you. That’s the problem. They didn’t pick you, did they? It’s not durable revenue in any way, shape, or form, right? So, it’s financial engineering. In most cases, that’s all it is.

I would actually push back on both of you. One of my fastest-growing companies has gone from $0 to $30 million in revenue in 2 years with a pure roll-up play, which is helped by AI tooling. And to your point on the customers not picking you, the customers are all pretty much identical. It’s a real-estate management product. They are identical in the service that they require and the product that they engage with. There is zero ambiguity, and so the ability to roll out to a uniform customer base makes it a very efficient model, actually.

And so, the things that matter most then are just acquisition price. Can you acquire it at a good enough price? What’s your speed of turnaround in terms of your payback? And what’s your margin juicing? We go from 5% to 40% in 6 weeks. That’s a big increase in a short time.

Agreed. And the key sentence was the first one: all the customers are exactly the same, and it’s all tuned to your technology. And I buy that there will—look, there’ll be examples of this that work. There are examples of everything that works, right?

But the more broad-based it is, like people are just buying what’s called BPOs, you know, and everyone’s looking at buying BPOs, right? Everyone’s looking at that in the contact center, right? The more broad-based you go, the less likely it is to be efficient, right? I’m not saying it’s never going to work.

Guest 2

I’m just saying it’s probably a lot harder than you think. And it really does boil down to this very clearly defined use case where you can be certain that most of them will come across.

10. Competitive Markets: How to Make Money in Them?

Guys, where is no one going that more people should be going? If we’re seeing roll-up plays be massively overinvested—I see it more than ever—where do you think not enough people are?

Guest 2

This is the moment where your little heart inside says, “If I knew for sure, I’d be damned if I’m going to tell you, Harry Stebbings.”

You gave me a hard time today, Rory. You were like, “No, you’re a hypocrite.”

Guest 2

Yeah. Sorry. I just came off a board meeting. It’s been a tense day already, and it’s only 10:00.

I think we talked a little bit last time about how we still both—Jason and I—would do the triple-triple, double-double core SaaS company in enterprise. Normally, you try and throw out esoteric areas, but all the esoteric areas are full. There are people doing rockets, people doing defense, and people doing healthcare.

There’s a little part of me that says it’s not our focus area, but a partner said to me yesterday, “Guys, everyone’s running away from consumer. Maybe you should spend some time there.” And, yeah, it’s not our thing, but as a personal investor, whenever everyone’s running away, if there’s still a technology that’s animating progress rather than just being a trailing-edge tech thing, you do have to say to yourself, “Maybe.” But I don’t have a ton of amazing new-place insight, especially.

It’s so interesting you said that. I tweeted and thought this week that, 5 years ago, there were 2 to 3 competitors for everything that we looked at. Now there are 10 to 15.

I just got out of an IC where we were looking at an L&D tool—learning and development—or GenAI tool security. It came up with red flags, and then it came up with the market map, and I was like, “Wait, in the last 12 months, these are the competitors for learning and development in large enterprise or GenAI tool security?” Oh gosh.

Guest 2

I don’t have any great ideas for great businesses no one’s looking at, but if you just step back for a minute from that, the LMS space was already overcrowded before AI, right? The LMS was one of these classic spaces of too many vendors for a midsize TAM, right? That’s the worst area to invest in. I’ve done several investments like that, but you have to be intentional if it’s tons of vendors and a smaller TAM.

Just being very tactical, there’s not as much innovation in true enterprise—not B2B, not mid-market, but gnarly, big problems. It’s just not what all the kids in San Francisco know, right? And so there’s always going to be less investment in A- and S-tier teams solving gnarly enterprise problems, especially outside of security. There’s just not going to be that many. There aren’t going to be that hundred kids who want to build the next ServiceNow. There’s just not that many, and there are many other examples.

The other one that is obvious but I think people miss is there’s so much excitement around vertical agents, whatever these are, but no matter what, I still believe vertical SaaS is underinvested in because the AI wave is just coming to vertical SaaS. It’s just starting in a lot of these categories, and you’re going to see 5 competitors, but you’re not going to see 500 in a lot of categories. In legal, you are; in sales tools, too. But a lot of categories are not going to have 500 AI competitors. They’re just not going to know the markets well enough. So this deep market expertise in enterprise, I still think you’re going to have fewer competitors.

Do you guys speak to all the companies in the space? Will you really map it that effectively when there are 10 to 15? Will you do that work?

Rory O’Driscoll

You’ll try to. It’s true because everyone wants to say you do it all, right? And I do believe, at the stage we’re at, part of it is that everyone has their model on what works. If you’re doing seed, by definition, I think it’s really hard, right?

At the stage we invest, first of all, one observation is that when you look back at success, obviously, when you have this market and you can go in picking the winner—to state the obvious—you get disproportionately greater outcomes. And it’s the first stage at which it’s vaguely knowable. Maybe that’s a better comment: pre-seed, it’s all unknowable, right? But there’s this early proto-market. Everyone has $1 million to $3 million in revenues. You can at least try and figure out who the winner is, right?

Do you actually get in front of every company before you can pull the trigger? It’s hard to do that because, let’s get real, you talk to the first, think it’s interesting, and you’d want to talk to the others, but you might have to make a decision now. So I’m not going to lie and say I never pull the trigger until I’ve seen all the players.

But I’ll tell you what you’ve got to be damn sure of. You’ve got to try and figure out, when you’re pulling that trigger, do I know who the universe of competitors is? And have I a decent sense of how they’re doing through the jungle telegraph, customer references, third-party references, whatever you can? You should do that. You shouldn’t be blundering into deals like that.

Therefore, the fatal error by definition at our stage is this: you fast-forward 12 months, and it turns out the number-one competitor is someone you hadn’t heard of. At that point, you should be committing ritual suicide on the boardroom table because you screwed up. And so you do want to have a sense of the market map.

Maybe, to say the earlier comment more succinctly, you often go into deals and you don’t end up in the winner. Duh. That’s what losing looks like. But you really don’t want to go into a deal knowing upfront you haven’t got the number one. That’s like saying, “Let’s lose money here, and we have a good plan,” people, right? So, by definition, that is kind of one of the key things you’ve just got to do diligence on at this stage: is there some compelling reason why these guys are ahead?

When you look at the distributions that you’ve had, have they been markets where it is winner-take-all or much more distributed? Is it an Uber and a Lyft, or is it a Salesforce and a HubSpot, with lots of CRM plays, and a Veeva for a specialized industry, and much more fragmented?

Rory O’Driscoll

The data says consumer tends to be more winner-take-all, and enterprise tends to be more oligopolies, right? We were fortunate enough to be early investors in HubSpot, so, yes, we can speak to oligopoly, right? That’s just the nature of the beast.

Even within enterprise, I would argue infrastructure, where my colleagues invest, tends to be a little more winner-takes-all because you don’t need a separate router for healthcare versus banking. You just need a router. You just need a GPU, right?

At the apps level, the reason it tends to be more fragmented is there are markets and submarkets with real nuances between them. So there’s a lot more because you threw out HubSpot and Salesforce, and you’re right, they’re both winners in CRM, but very different—to the point where, actually, Salesforce was an investor in HubSpot early on, right? The markets were sufficiently fragmented that they could both build huge companies in markets that, at one sound-bite level, are the same, but one level down were very different. So, much more oligopolies and multiple winners in enterprise apps than either infrastructure or consumer.

Jason, does that kind of tie with you?

Jason Green

Yeah. When I look at the billion-dollar exits I’ve had, they’re all in brutally competitive markets that were oligopolistic or similar. I wish, I wish, I wish it was marketplaces, because you’d prefer that, right? I mean, you know.

Jason, can I be blunt? How many 10x deals have you had?

Jason Green

You can. I’ve had 4 or 5 above a 10x.

What does 10x mean? Sorry—you mean cash distribution?

Jason Green

I’ve only had 3 billion-dollar exits, I think. Maybe 4.

Right. So you mean 10x, just 10x deals?

Jason Green

No, 10x distributed cash back on deals. I think only 3, right? Maybe 4.

Rory O’Driscoll

It’s so damn hard to have 4. You’ve been doing it a decade less than me, which is depressing in itself. But it’s—I mean, you said it, and I remember—it’s so damn hard to get 1 of those, especially across a cycle, right? Enough with the “only.” So many people don’t get any. So many people get 1 or 2.

I had a decade where I had none, from 2000 to 2010. I am—and I said this, I think, last week—I am more proud of my 2x and 3x investments in 2004, 2005, and 2006 than any 10x that kind of sailed into the 2021 bubble and made me a fortune.

Rory, did you ever have a crisis of confidence as an investor? And what would you say to young people now who are looking at 2020 to 2023 and going, “Fuck, am I actually any good?”

Rory O’Driscoll

I have crises of confidence all the time. My most recent was today. Absolutely, totally. It’s actually an interesting question. This is such a hard business, and if you don’t have angst about your ability to do it right, you’re missing the point.

Because, in one sense, look, you can say, “Hey, I—” First of all, starting out, at one point, out of my first 5 deals, I thought I’d lose money on 4. I spent 3 years of my life pretty much not sleeping. Terrifying, right? I was dreadful at this business. It was 1995, early on.

So, yes, that was one crisis of confidence. Was there a crisis of confidence in 2010 when I was vaguely competent but no one was making any money? Yes. Were there 5 or 6 years when you felt amazing? Yes. Do I have more crises of confidence in the last 3 or 4 years when, despite having 25-plus years of doing this, you have deals that make it clear you got it wrong again?

Of course you do, right? I think anyone running money in venture or anything else does that. The question is: What can’t you do? You can’t say, “Hey, I was great then, so it’ll work out.” You have to say, “What am I doing wrong right now in today’s market? Am I playing the game correctly for where it is today? What did I miss?”

Just go back to basics and say, “I do believe if you do the right steps in the right order, you can’t stop mistakes, but you can minimize them and probably do okay across the cycle.” When I look back at recent mistakes, I think I skipped a step. Shame on me, right? And when you skip a step, it bites you in the ass and then you feel like an idiot.

Where do you think Scale is not playing the game correctly today? I’ll give you an example for me. I have access to amazing hot rounds, like some of the names you know. I don’t do them because I just think they’re crazy-priced. They seem completely detached from reality, and then I’m proved wrong consistently.

I see you’re turning on me in revenge for your hypocrite comment, which I respect.

Rory O’Driscoll

I wouldn’t say it’s revenge. I would say it’s more a tit-for-tat challenge.

Yeah, totally. Well, I’m Catholic. I’ve done confession. I can do this.

Rory O’Driscoll

I think one of the things you are wrestling with is that you have your strategy. You want to stick with it, and you’re right: We all get some version of a bright, shiny object, right? It’s like, “Oh my God, what are the returns?” You’re looking at other things, and you do try to keep it focused on the main chance: your A and B rounds with product-market fit, early revenue, looking to scale. So, broadly speaking, we have kept on mission.

But I’ll say there are times when you say to yourself, “I don’t want to drift off all the time, but I’d love to be able to do it.” One of the hardest things, I think, to do in an investment management firm is make the occasional exception without making it the rule, right? Which is really hard to do.

Can you reach for that $1 billion deal that you see, where you have good connections, you should do it, and it makes tons of sense, without doing the 5 other deals that are massively overpriced at $1 billion? The ability to move beyond your strike zone once in a while is a muscle that’s hard to develop. It would have an economic advantage if you do it, but it would be catastrophic if you did it wrong. That’s one area.

I’m sure you have the same thing—you imply it yourself, Harry. You see this later-stage deal and you go, “It’s not what I said I’d do. I shouldn’t do it.” But every once in a while, you say to yourself, “If I could do it…” I mean, dumb comment. Once in a while, should you? I wrestle with that.

We had ElevenLabs at $25 million. I could have had 1% of the company, and I was like, “1%? 1%? No way.” It was a $25 million fund. It’s a $3 billion company now. I would have been a fund-returner on one.

Guest 3

Look, for what it’s worth, there’s a lot of complexity here, right? But I think any deal where you have 100% conviction you’ll 5x—100% conviction you’ll 5x—you should do it, irrespective of ownership or valuation, just to do it.

If you’ve already met with the founders, you already believe in it, and you’re not thinking you can make money, but you’re like, “I am 100% sure I’ll 5x it,” you’ll always like to get an extra 5x out of X millions in your fund. It may not return the fund, but you’ll never look back when you’re in carry mode and say, “You know what? If that 5 had become 25, that’s an extra $5 million in my pocket.” You’ll never regret this sure-thing 5x.

I know it sounds silly, but this is where I started investing, and I lost track of it going into this. This is my rule, and this is my rule today. Again, if I’m 100% sure I’m going to make 5x, then I’ll do it, period. No matter what, I’ll just do it.

I have a $125 million seed fund. If someone on my team comes to me and goes, “I want to write a $3 or $4 million check. I’m going to 5x it. I know it,” I don’t know if that’s what you get to do running the place. They don’t. Your team isn’t allowed to use this heuristic. You’re allowed to use it.

Rory O’Driscoll

By the way, to join the dots, that’s why Jason should be in his own firm, right? There are a lot of comments here. I actually think Jason had the right answer because, if you play back what I said earlier, if you establish an exception strategy in a team organization where there’s a broadly equal team, then it’s really hard to rein it in.

That’s why I’m saying we’re a broadly equal team at Scale, where you have 7 people who can write checks. If you start breaking the rule once, then you’ve broken it for everyone. It’s no accident that the firms that have high position-betting variance, where they’re willing to go anywhere, are single-leader-dominated.

Jason, you’re exactly right. If you’re running your own shop, that’s the joy of running your own shop. You can range high, range low. You’re not trying to follow a model. You’re not trying to build a thing. So, Harry, he’s right. It might be corrosive to your entire culture and piss off your junior people, but the only person who can pull out the exception card is you. We’ve chosen not to do that.

Rory, Jason’s got no other investors. It’s just him.

Rory O’Driscoll

Well, that’s exactly right, and he can. There’s a reason why the guy in Omaha who doesn’t listen to anyone is the richest man on the planet, because he’s like, “Thank you all for your opinion. I don’t give a shit.”

This is the tension always between building a firm and having a consistent strategy versus, on the other hand, reaching. Going back to what Jason said, Jason is actually right about his comment on high conviction, again with the caveat that it’s not an institution-building strategy.

There’s a rule in engineering that you’re only as accurate as your least accurate variable, right? Everyone gets all caught up with the revenue multiple and the price. It actually is the conviction level you have. If it’s informed conviction, not just swinging from the gut, you’ve got to weight that extraordinarily highly, right? Because the future’s so damn uncertain.

Most things, you don’t know are going to happen. A lot of things don’t happen. So, if you get to that unique insight of “This is a thing, and it’s going to run and run,” then finding a way to monetize that bet is actually your job, right? There are very few things about the future you know.

I remember realizing, “Oh my God, every single app for the next 20 years is going to be rewritten as SaaS. I should monetize that bet.” In the same way, I give all credit to the people who said, going back to what I said, “These AI models are a thing, and you’ve just got to get me a piece of the 1 or 2 that are going to work.” When you have the high conviction and you’re not trying to build a consistent internal strategy for management reasons, make the bet.

So why aren’t you doing billion-dollar rounds if you can see 5x-plus in them with the core fund?

Rory O’Driscoll

Because I think when you’re trying, as a firm, to build a strategy, it’s very much an idiosyncratic leader’s game. That’s what Jason said: When the leader is a genius and makes all the decisions, you do that. When you’re trying to build a peer team that’s doing deals, broadly speaking, you stick to what you’re doing. You have a plan and a strategy, and you just accept the fact that there are going to be deals outside your core competence that work really well. But your job, which is hard enough, is to execute your core strategy really well.

I’m far more worried about missing a 5x or a 10x deal that was in the Scale sweet spot of $1 million to $10 million in revenue, Series A or B enterprise software. When you miss that, or even worse, when you turn it down, that’s when you have a bigger problem.

It’s not, “Oh my God, I missed the Hail Mary that was outside my sweet spot,” which might bother me personally. But in terms of building a team and a firm that’s functioning, if you’re not playing the system the way you want to and seeing the deals you want to see in your sweet spot—especially if you’ve defined that sweet spot so you can be successful—that’s where you should agonize a lot more. It’s the difference between personal investing, frankly, and building a firm.

Totally agree, Rory. I’m aware you’ve got to rock and roll. This has been a pleasure, my friend. Good to see you guys again.

Rory O’Driscoll

Fun to be back.

Good. And fun to defend Harvard, which I never thought I’d do.

Do you know what, Rory? You are fantastic. And I’m a hypocrite.

Rory O’Driscoll

We knew that already, Harry. No surprise there.

My favorite moment on the last show was when you were like, “You’ll just edit us all out and just make yourself sound disciplined.” I was like, “Yep.” This guy’s—

Rory O’Driscoll

Yes, yes, yes, yes. You did last time.

Yes. As they say in the civil service, why attend the meeting when you can just write the minutes?

11. Is SF The Only Place to Be Building Today

Okay, take care. Have fun. See you.

Rory O’Driscoll

See you.

Jason, I wanted to ask you one more question before we wrap.

Guest 3

Sure.

You mentioned it on this sheet, which is that the Bay now has 82 tech billionaires, per Henley & Partners, a firm, and the number is going up. Is there any point in being outside of the Valley? Is this the ultimate centralization of talent back toward Silicon Valley, unlike any other time?

Guest 3

I mean, man, Harry, I love living at the beach during that global pandemic. I have a beach house in Southern California. I know all the best brewpubs. It’s good living.

But, man, literally, I just got a DM yesterday from a new-generation tech billionaire. I’m going to go meet him tomorrow in downtown, and I’m going to walk to this meeting. It would never have happened if I wasn’t here. It’s just one example from this week.

The density here—I just keep coming back to it. You asked the question: How often do you meet all the companies in the space before investing? I only did it once, on my first investment in Pipedrive, and I gave up. I’ve never done it. I’ve never reached out to a competitor. I’ve never done any competitive diligence, not once.

The Bay Area is just perfect for the way I invest because I can get to know people and understand the space. I have some time, and I’m just not this Zoom guy. So, I’m just saying, San Francisco is so back.

Why would you not do comps?

My partner, Paul, would literally have a heart attack right now. Why don’t I do any? For 2 reasons. First, do you have outlier growth? Only so many can have outlier growth. If you’re an inception investor, if you invest pre-product-market fit, I get it. But if you’re saying, “Listen, I want to see someone growing, ideally, from $1 million to $10 million in 5 quarters or less,” here’s the thing, Harry: I only meet a handful of them.

When you do Algolia, when you do Talkdesk, when you do—you name it—Owner grew, grows, and is growing; it’s a rocket ship today.

Yeah, sure, but your Algolias, your Talkdesk, when you invested in your RevenueCat, they were not rocket ships. They were good and exciting, but they weren’t obvious rocket ships. They had top 0.1% growth.

No, I mean, Talkdesk went from $1 million to $15 million in 5 quarters.

Okay.

Algolia was growing 20% a month for the first 2 years.

Okay.

Pipedrive, as flawed as it was, was the fastest-growing one in the space. So, listen, I’m not saying this is the right way to invest. What I’m saying—I’ve got to be honest—is that I don’t meet every founder growing that quickly that I believe in. I have to believe in the founder, and they have to be growing at top 0.1% rates.

Maybe with your network, you’re meeting someone going from $1 million to $100 million in a week. But I find that, plus a founder you believe in, plus the fact that not every opportunity exists for a variety of reasons—you might not meet them, there might be ownership issues, fund-size issues. There are a million issues, too, because I have such a narrow sweet spot that I have to rule them out if they’re too late or too early.

I feel like I have to do every single deal where every box is checked. Here’s my point: I do every single deal where every box is checked, and I don’t have the luxury of deciding, “Is there really one that’s even better than top 0.1% growth?”

I’m not saying it’s not flawed, but it’s worked.

Is there any box that you’re less strict on being checked?

Yeah. Unfortunately, it’s that competition box. I’m super lean and super loose on that. As long as the founder has a large piece of white space in the space, I’ll do it, no matter how competitive the space is, even if I would prefer not to.

Everyone would prefer no competition. Peter Thiel, right? I just don’t feel like, in B2B, to Rory’s point, where we’re building oligopolies, we have this luxury so often to have no competition. Windsurf’s starting point—our competition doesn’t have any no-competition, right?

I would love to have no competition, but that’s the box I’ve completely given up on, despite wishing I could check it. No competition, if I could—that would be a gift. But it’s the one I give in on, and it’s harder than ever. Everything is more competitive today, going to your point earlier.

That’s the one I give in on. I won’t give in on growth. I no longer will give in on CTO—we’ve talked about that in the past. That’s one I will never give in on again. S-tier CTO or I’m off it. But competition? I don’t care about college. I don’t care if you went to high school. I’ll give in on all the educational crap.

If you have a super-competitive market, is the core skill set that you look for in a CEO different from a noncompetitive market?

No, because if you’re post-revenue and you’re growing at outlier rates, you figured something out. I’ll be honest, Harry: for every single investment I’ve made, I have not truly understood its competitive positioning until after I invested.

I’ll do a lot of internet diligence, don’t get me wrong. Anything you can do on Google or ChatGPT, I’ll do it. But to really understand the market—if you didn’t come out of that space—it could take you the better part of a year, or 6 months, to really understand that market. How are you going to figure that out for sure before you invest?

I’m sure.

I’ll tell you, the guys will do 30 references: 10 with the team, past and present, and 10 with customers.

Oh my God, I love it.

Yeah. I just did an investment with Meritech and saw their due diligence. I’ve never seen something this good in my life. A hundred customers they talked to. The notes were transcribed. I literally said to the founder, “You’ve got to share this with everyone in the cap table.” I’ve never seen such good diligence in my life.

I talked to 2 customers when I invested in this company. After the term sheet, I talked to 2.

Do you know what’s so shocking, though? Honestly, dude, this is just the entry ticket for growth firms to get a meeting. That’s why the diligence is so good. It’s so fucking difficult for them to get in the door with that founder going from $1 million to $7 million in a year. That is just the ticket: “Hey, it’s worth your time to meet me because look at all the work that I’ve done on your company.”

Well, look, for what it’s worth, I’ll tell you why I have this strategy. At this point, I really do love a lot of the founders I invested in. You talked about RevenueCat. You’re right, I invested crazy early. I love the founders, no matter what. I love them. I love a lot of the founders.

But I had a business model: I’m only in it for 1 big, massive win. That’s it. Everything I’m going to do for the next X years is just for 1 big bet. I don’t care about anything else from a business-model perspective. I don’t care. So, I’m going to do the best I can to find 1 big bet going forward.

Anything else, these are just means to an end. I’ve got to check all those boxes. I think if you invest in enough folks in that top 0.1%, and you’re lucky enough to do them, 1 of them will hit. 1 of them will be worth another true $8 billion outcome—not fake $8 billion on paper, but a real $8 billion outcome.

How able do you think you are to know whether you’ll invest before even meeting the founder? I know that seems strange, but if you know the market, the traction, the competition, where they sit, the background, revenue, and revenue growth, how able are you?

90%—every single time, I’ve known I wanted to invest before the first meeting. 100%.

Dude, if you get everything you need and you meet the founder, and they’re just boring, uninspiring, and dry, do you do the deal? Just dry. You’re just like, “They don’t excite you.”

Never met one. I’ve never met a founder who could write an incredible email, express incredible excitement about a boring industry, and get me excited by email, only for me to meet them and think, “This guy’s just dull.”

They’re already so passionate about their business. Anyone who is that passionate about their business—it’s like, you could meet whoever makes the best mugs in the world, and they’re going to be fascinating. Whoever makes them, I would love to talk to them.

Let’s bring the CEO of Sure on 20VC. It’s going to be fascinating, right?

I’ve never met a CEO with outlier growth that was crazy and didn’t go to college, dropped out after a month to do a podcast, whatever—I’ve never met this person who wasn’t interesting. I’ve gone to other people’s meetings. I’ve gone to other VCs’ meetings where I literally wanted to cry from boredom and bang my head, but I’ve never once had a founder who legitimately passed the bar pre-meeting where I didn’t meet them and think, “This guy’s pretty interesting.”

Owner is going to be a huge success.

Okay, but I don’t think I’ve actually invested in a company with more competition than Owner. Not a single one. They have direct competitors, adjacent competitors, and virtually identical competitors. I’ve never—

Well, I don’t know why.

Dean, the CTO, is so good, and that’s why I invested.

But why is that? Just because you can play with the app doesn’t make it fun to invest in, does it?

In a fucked-up market, every investor does this. They always go, “Look at who’s the winner.”

Now, dude, Olo—Noah is great. Love Noah, great founder. It’s $1 billion, just $1 billion, and it’s been 15 years. Fucking brutal slog.

Yeah, but listen, and I’m only an expert in Olo from afar, right? Olo is a story of doing the wrong end of the tail, right? Olo is trying to do basically an enterprise play in an SMB market. That’s really brutal, right?

It’s the same problem in anything in B2B e-commerce. If you’re not doing some SMB in e-commerce, there are a few niche players, but it doesn’t make sense to fund it. Even with Shopify, only 25% of the revenue is from big brands, right?

So, if you’re only big in restaurants—in anything that’s like the consumer end of B2B—you’re going to be niche. You’re going to be niche, right? The niche competitors to Shopify are dead or dying, like Salesforce.

Olo is great, but it’s high-end, right? It’s chains and stuff. It’s hard.

There’s just not enough TAM.

Do you know what I love? The amount of amazing SaaS founders—and I don’t think I’ve told you this, and I didn’t mean to rub it in—but the amount of amazing SaaS founders who tell me, “You’re friends with Jason. I emailed him and he never responded.” And now I’m a billion-dollar company. And I’m like, “Ah, yeah. I would love to have invested in everyone Jason didn’t respond to.”

Well, that’s why. That’s why, really, I just want to do it. All I want to do is one more Wiz. One Wiz, right? That’s all I want to do for the next 1 year, 10 years, or 15. That’s the math, right? None of the rest matters, right?

But, yeah, I’ve got to do better. Honestly, Harry, the AI is already going to solve half that problem for me.

Yeah. Yeah. Yeah.

It has a rule, and I’m still tweaking the rule, but if the metrics are good enough, it forwards an alert to me to look at the deal. So now it’s better than an associate. Honestly, it’s better than an associate. It will review your deck and provide you feedback. You can iterate. There’s no pressure, right? You’re not being judged. The AI does not judge you.

But the AI is better. It will provide you feedback on your TAM and your growth. It’ll tell you how good your growth is. It will compare it to other investments. It will tell you whether you’re in the sweet spot. It’ll tell you the check size we do and the ownership size we do. Then you just set up a trigger: if it hits these numbers, just send it to me.

Dude, I love talking to you. You’ve been amazing. Thank you for doing this, and I so appreciate it, man.

All right. Let me know what else you need, man.