Michael Burry 做空 NVIDIA 和 Palantir：AI 世界的护城河消失了吗？

Guest

Tools are great when the AI is part of your team for real, not VC talk. The amount of revenue that's addressable is so high.

Sell [__] to the people who are making AI, and if they grow, you'll sell more [__] too.

Guest

You just can't take that early first-month explosion as seriously as you used to. It's not as defensible. The pace of evolution is so fast. If you decide what I knew 6 months ago is still useful, you're probably going to be wrong very quickly, right? That's what I find the most stressful about right now.

Guys, it is so good to be back with you. I've just come back from my AGM, and it's a humbling thing for me because, for 10 years, I did this show solo. Then I go to my AGM, and do you know what everyone says? “Oh, we love Rory and Jason. We love Rory and Jason.” I suddenly realized that I wasn't the star of the show. It wasn't—wasn't that?

Guest

Just kick us off. End this now. [laughter]

1. Sequoia's Leadership Transition

Well, okay, fine. I'll kick us off with big, big venture news. We've said before about Sequoia being the kings of venture. We saw Roelof Botha moving out as steward after a 3-year tenure and being replaced by Pat Grady and Alfred Lin, which was, I think, quite surprising news to the venture ecosystem. I'd love to hear how you thought about it, and let's start there before I leave the room.

Guest 2

Sure. It just brings home how tough venture is right now. This is the best firm in the world, and they're feeling, with what's going on in AI, that they're behind, right? Let's be honest: I would say all of us are. I think everyone in venture, especially if you have built a large existing portfolio and you're trying to compete on these new deals in the last 3 years, is feeling stretched, tired, and that it's brutally competitive.

Sometimes—this is going to sound kind of... it's not Schadenfreude, but it's more reassuring in a way. I get up and go, “God, we need to do better. We need to sort this out.” Then you realize the best firm in the world is having exactly the same feelings.

Why do you think a leadership transition is showing that they're behind in AI?

Guest 2

Look, whenever you have a CEO change, it's because something is wrong, right? If you want to go down into the weeds of the interpersonal stuff and people's perceptions of other people, we can talk about that later. But my outside-in reading is, in part, this is dissatisfaction about how the firm is doing relative to the competition.

I'm not saying they are behind. I'm saying there's a perception internally that they could do better. They missed some rounds and some deals. They passed on some great companies. That can be frustrating. When you're top dog and you feel, for whatever reason, that you're not quite performing at your best, it can be frustrating.

Maybe 2 thoughts. One is, maybe in general more people should be stepping aside today. I think more people—VCs, executives, founders—and I'm not saying this is exactly what happened at Sequoia. That's what the articles say, right? It's about AI and missing Cursor and missing these deals. Maybe that's true, but I just think the folks from the last decade or 15 years are not the right people for the next decade.

I genuinely believe it across my ecosystem. I struggle to even recommend a lot of the CROs and executives I know for roles today. I just struggle to find them a job. They're not the right people anymore. I think we don't even need half the VCs we have today for the AI world.

Maybe they'll spend the money. Maybe they'll throw a few nickels into Cursor at $30 billion, get a few logos on the website, but the old playbook doesn't work and the pace is so fast. Take your coins, take your Nvidia shares, and buy a beach house. [laughter] Seriously, check out. Check out. It's a good time to check out, guys.

One of the things I admire most about Sequoia is their toughness and their willingness and ability to evolve, right? In this case, I'm not commenting on the merits of the case, because I don't know enough to say it was a rule of thumb. But if the internal group feels they need to make a change to continue to execute, what they did not do is make that fatal error—which we can talk about in politics in a second—of saying, “It's someone's turn,” and leaving him in.

They did the exact opposite. They ruthlessly said, “If we're going to compete, we need these people, not those people,” and they made a change, right? All they needed to do was call a vote and have a discussion, and sit down with the partners in question and have a discussion. I think that's healthy, right? I think some of these organizations where so-and-so can't be touched, you say to yourself, “Yeah, does that create a false sense of security when you just can't afford to have that in this market?”

Guest 2

To me, I think it's like a specialization in leadership that's kind of correlated to the winners and losers in venture in the next 10 years. I think the winners are Walmart, which is your mega-platforms. It's your Thrive, it's your Lightspeed, it's your General Catalyst, it's your walls of money, and it's your boutiques, which is your Chanels. Walmart versus Chanel.

The boutiques are your Benchmarks, your USVs, your specific products. When you see this splintering of leadership between Alfred Lin on early and Pat Grady on growth, I wonder if it's this kind of attempt to play into one of those, because right now I do see them—and I love Sequoia and respect them intensely—but actually in the middle, which I think is quite a hard place to be. They are more like a manager of managers. You have an early-stage team and a late-stage team.

What that means, by the way—and I want to talk about this for a second and then come back to the mega-platform comment—is the person on top is no longer even a manager of a venture firm. He's a manager of managers of venture firms. One of the big ahas is being on top of those organizations where you have these structures underneath. It's just a very hard and precarious place.

If you're not actually running one of the groups that's putting out the money, if you've allowed your job to become helping other people do things who, in turn, are managing money, you're more removed from being able to eat what you kill, and it just becomes a more precarious position.

Guest

Having watched venture firms and law firms and others, I really can't think of something more dysfunctional in many ways than partnerships. One of the reasons partnerships are dysfunctional—and maybe it does tie in, then maybe we could move on—is that it's almost impossible for performance to tie to economics, right?

If Harry and I are equal partners, if the 3 of us are equal partners, and I have all the winners, it's all fun the first year. But the second year, I've got the winners, and then Harry made that big bet and it blew up on us. We're friends, but our carry is equal. Then we're raising another fund, and we have to argue over carry in the next fund.

My limited experience is that in partnerships, the daggers are always out. I love your kumbaya view, Rory, but I haven't seen it in the real world.

Guest 2

I push back hard on that and say I didn't say the daggers weren't out. Again, respectfully—because seriously, let's talk about this in the end: economic performance drives change. One of the things about Sequoia you have to admire is they didn't do the, “We've made this decision; let's stick with it for 5 or 6 years.” They did the, “It's not working; let's make a change.” It's very Sequoia. It's very on-brand.

2. Michael Burry's Big Short on Nvidia and Palantir

Listen, I want to discuss Michael Burry, famed for The Big Short. He pulls another big short—a big short from Michael Burry. This time, a $1.1 billion short on Nvidia and Palantir had some pretty significant ramifications on the market. How did we think about Michael Burry and the subsequent fallout that it caused?

Guest

Zooming out, I think there's—look, you look at the AI capex spend and you go, at some point this is going to overshoot, and then there's going to be a downturn. Big, uncontroversial statement. Even Sam Altman would say it, right?

I did the numbers because it's not my normal, but I decided, in this case, I've been opining on AI capex, and I said to myself, “What would it look like to make Michael Burry's bet?” Let's make it real here, right? Actually look at the numbers.

Nvidia stock on Monday was $188. If you wanted to buy puts at $180, which means these things have no value unless your stock is below $180, right? You can bet—and let's just say you buy December of this year—so you've got 47 days for that stock to go down, right?

For every $9 you bet, you make 2x your money if the stock goes to $160. So you've got to call it—it's at $188 now—you've got to get it down, and you make 8x your money if the stock goes all the way down to $100. In other words, it almost halves, right?

So if you're buying puts, you're betting that in the next 47 days you've got to have that stock go from $188 to $160 just to make a 2x on your money. And remember, if it doesn't go down, you lose it all.

You don't even get a quarter.

Guest

Yeah, you lose it all. So that's—I look at that and I'm going, “I've got to get it right to make a 2x,” and that's pre-tax, right? I'm saying, “Would I have the guts to do this? I believe the capex is overinvested. I believe at some point it'll correct. Would I take that bet?”

Would I put $1 million in where I could get $2 million if Nvidia goes from $188 to $160 by December 20th or whatever it is, and I lose it all if it stays above $180?

Guest 2

No, right. One of the interesting things he did was release his filing early. In other words, he didn't have to disclose it until the last day. I think it's 45 days after the end of the quarter. He disclosed it early, and to me, that was probably him trying, because if you're taking a very tightly coupled time bet where you've only got 47 days to be proven right, you have every incentive to pile on the bad news and shit-talk the stock to try and move it down.

This is where Coop is right: you have every incentive to say, “Hey, everybody, look, this is a pile of shit. It's going to go down.” That's what he was doing in a very polite way by giving people the information earlier than he legally had to. As someone pointed out, he filed on the last day every other time, and this time he filed early. So this was someone saying, “Hey, everyone, look, this is my bet.” That's what it takes.

I just did the other interesting math. If instead you decided, “No, I don't think it's going to crash in 47 days, but I think it's going to crash over the next 2 years, so I'm going to buy these long-dated options—LEAPS. I'm going to buy puts. Same thing: I'm going to buy puts on stocks at 188. I want to buy puts at 180.” They're going to cost a lot more. They're going to cost like $50 or $55 per put, and now you lose money unless the stock in 2 years gets below $150. To get a 2x, to get that same 2x, it has to go below $100.

It brings home how hard a business it is to bet against AI capex. That was my big takeaway. I don't understand, as an asset allocator, how you can rationalize that as an economic decision to make. Just against other asset classes, what you have to believe for that 2x to be real, risk-adjusted—it's not a good decision to make.

Guest

Yes, it's a very hard decision to make. There will be one moment where, if you get the timing just right—and remember, we did see an 80% Nasdaq decline in 2000—you look like a genius, but it's so hard. I agree with you. On average, the return, especially to amateurs like me trying to do options, is just net negative because it's a zero-sum business. Unlike equity investing, where there's an intrinsic overall return, for every winner in options there's a loser.

For every idiot like Rory, there's a smart guy on the other side of the table who prices it better. So I agree. I struggle to think how most people can make money shorting, which is why, to your point, Harry, in some weird kind of way, it's kind of good that there are some guys like that out there. Was it—I was it Jason? You made the point: just keeping the whole system honest.

That's an expensive way to be a policeman. You have to bet your own money to police the system. That's bold. It's courage.

If you're great at it, Rory's point is that it's almost impossible to be great at this. If you are, you get leverage. You do get leverage on your investment. So it's a great way to get leverage, but, man, you better be really good at it, right?

Guest 2

You've got to be right, Jason. You have to. The thing that really impressed me when I did this analysis is that you not only have to be right, but you have to be right on timing. I think it's easy to be roughly right. I'm going to say it here: I think, Michael Mauboussin, it's very hard to imagine a company trading north of 110 or 120 times revenues, like Palantir, growing at 50% or 60% last quarter. Great, amazing quarter, kicking off cash.

It's very hard not to imagine that over the next 2 years it doesn't have a significant correction. It's very hard to imagine that the AI capex boom doesn't have a significant correction. But going from that kind of arm-wavy, shit-podcast statement to actually being able to make money on it, that's damn hard.

You said something about the excitement waning from AI and the air being let out of that kind of bubble and excitement. That's all predicated around, “Oh, well, will the revenue show up? Will the revenue show up?” The revenue is showing up. Altman says OpenAI is going to hit $20 billion ARR this year. Anthropic projects $70 billion in ARR by 2028. The revenue is showing up in the billions.

Guest

Agreed.

Are we not answering our own question? Do you think we're almost being overly negative in asking, “Where is it showing up? Where is it showing up?” when it's already showing?

Guest

Agreed. And they are upticking their estimates—not just a few of them. I don't care if you're changing your 2027 estimate up, but the real fact is, if you're changing your 2025 estimate up as the year goes on, that's an enormously positive signal. I think Anthropic in particular has been doing that.

So you're right: the revenue is showing up, and the growth rates are showing up. Even when you look at CoreWeave, we've had a little bump today. The problem is not lack of demand. The problem was, “Oh my God, we couldn't get the data center up and running.”

Right now, it's very hard to make an intellectual case for anything other than massive demand for compute and massive revenue traction. What you're left with is saying some version of, “I don't think it'll grow quite as quickly as other people think.” It's all hypothetical right now. The revenue has shown up.

3. Gamma Raises $100M at a $2BN Valuation

We look at Gamma, which announced last night. I was reading at midnight after my AGM: Gamma raised $100 million at a $2.1 billion valuation, having hit $100 million in revenue with 50 people—$2 million a head.

Guest 2

Yeah, we run on Gamma. It's great. Every day we use it. It rocks.

Guest

And so I guess I'm just asking: are we being overly British?

Are we looking for a problem that's not there?

Guest 2

First of all, I'm definitely not being overly British. If that's what's happening, it's time to end this show now. Sorry, Harry, but I think you're right. There's wisdom in what you're saying.

Look, it's the quote I've seen loads of people use, but cynics sound smart and optimists get rich. This is a great, enormous megatrend. It's the biggest megatrend maybe since the early days of the internet. Maybe it's even bigger. It's an enormous, ginormous megatrend, and leaning into it is the only sensible thing to do. Playing against it is dumb as rocks.

The only reason you have these discussions and have the second-order comments is to make your question useful, because on an overall trend basis, you're of course right: the demand is huge. It's some version of the question, “Are we going to sign $80 billion of capex for next year, or $40 billion?” Both of them are still huge. Both of them are still the trend exploding. Both of them are still everything being amazing, but one of them is $40 billion more than the other.

That's where you do have to start saying, “Things are enormously great, but are we over-extrapolating?” I don't think it's being negative to simply say, in a hyper-growth company, exactly how much should you lean in? How much risk should you take? That's all that's going on here.

Guest

Let's talk about Gamma. I actually did an all-company meeting for Replit last night. They want to end the year at $250 million. I can tell you what I learned from both, but we use Gamma at SaaStr. Folks may not have heard of Gamma. Folks talk about it as an AI-powered PowerPoint, but they missed the point. I'll tell you how we use it.

We have to close $8 million of sponsors at SaaStr a year to keep the lights on. Instead of sending them the same dated prospectus, which we did before Gamma—the same crappy thing—Gamma automatically pulls all of our data from Salesforce and our marketing automation system. If they've been before, it knows the exact number of leads and ROI from the calculation, knows who their competitors and similar companies are, and makes a fully dynamic piece of collateral for them in about 10 minutes.

We spend $100 a month for Gamma. It's a great deal. It isn't much for what I just described, is it? But it's $1,200 a year. How much do we spend for Google Slides? $0. It's built in. How much do we spend on PowerPoint? I don't even know where my key is to Microsoft Office.

It's a stealth TAM expansion. We're spending $1,200 a year on PowerPoint, but we are, because the AI is—Gamma, I'm the biggest superfan. It's all over SaaS because you can do epic things that we would have had to wait 3 weeks for a marketing ops team to do, if they ever did them, and they'd do a crappy job of them. Now we do it in 10 minutes.

I see why, if they keep going, it's a billion-dollar ARR business. 20x revenue doesn't sound expensive compared to some of the deals we've done, does it? It doesn't sound expensive. Going from $1 million to $100 million in 11 months at 20x revenue sounds cheap and profitable.

There are some meta issues. I think we're going to see a lot of these folks adding revenue teams, adding sales teams, adding marketers—never at the ratio of 2021. We'll never see those levels of staffing of humans, but more power to Gamma getting to a billion with no sales team. Canva got pretty far, right?

But knowing a few folks on the team, the B2B use case is pretty small today. What I'm describing, as that blows up, they're going to add a whole GTM team, right? So it ain't going to be no sales team. They're going to need 100 people to service it.

But yeah, I think we are underestimating it. For what it’s worth, I did this presentation. I’ve been vibe coding for 126 days, which feels like a lot of change, so I gave this presentation at an all-hands at Replit: 125 days and 10 apps. I launched 10 apps in 125 days without an engineer.

I shared the data, most of the things that went well, and a few areas for improvement, and I learned a lot of things, including that the engineering team there is really, really, really good. It occurred to me in the middle of this, while I was talking, that the agent—the Replit Agent—of all the agents we use—we use about 20 agents, 12 real ones—the Replit one, the V3.1, is the first one that is literally part of our team.

It’s not just making us more efficient, like our SDRs and BDRs. Replit is part of our team. It now has essentially an infinite context window. It remembers everything I’ve done for the last month with it. It remembers all of it.

We talk about it. We talk about our mistakes when I F up, and so I’m doing the presentation. I’m like, “Oh, I have this new idea. I want to build a page that spotlights all the AI apps we’ve spotted and spotlighted on SaaStr. I want to rank them.”

I want to do links and everything, so you can go discover all the ones we talk about. I fired up Replit, and I’m like, “Here’s my idea.” It remembers: “Yeah, that’s what we did on the other one. That’s how we’re going to do it this one.” In 15 minutes, we’re in production.

Like a copilot. The lame thing about copilots is they were just tools. Tools are great, but when the AI is part of your team for real—not VC talk—the amount of revenue that’s accessible is so high.

If you go to our office, we have little signs we make fun of. We have Reply for Replit. We have RD for Artisan, which is an SDR. We have Quali for Qualified. You can see how clever we are in our nicknames, right? Art, Reply, Quali.

They all have these little desks where there’s no human at them anymore. It’s kind of weird. But Replit V3.1, this latest agent, is the first one that jumped the line to not being one of the parts of our team, but literally being part of our team, just like a human being.

That is just going to unlock so much revenue. So much revenue. It’s just starting to be capable now, right? When Gamma is part of your marketing team rather than a marketing tool, there’s a lot of revenue expansion if they can pull it off.

A lot of revenue expansion, right?

Guest

So I think we’ve just—we’ve literally just gotten going. I know this is a VC truism, but I realize, being deep in the trenches, that these agents are so much better than they were 90 days ago. If you’re not doing it, it’s hard to see how much better it is.

I think people miss it. They’re not doing it, and so they’re missing when we cross the line—when AI is part of your team. That’s what’s coming in 2026. We’re missing this.

The agent was the story of 2025. The copilot was the 2024 story. It didn’t work. It was a rip-off: spend $30 more a month on Office. No one wanted the rip-off.

This year, OpenAI and Claude finally actually got good. That’s why Lovable, Replit, and Gamma exploded. Gamma was founded in 2020; it had no revenue before this year. Replit was founded in the 2010s; it had no revenue until this year. Vercel had no revenue until this year, right? And they exploded.

This year was “AI works,” right? Next year is “AI is part of your team.” It’s not replacing folks or layoffs. It is literally embedded in your team. I’ve talked about it, but now I see it. That’s where we should be investing.

That’s where we should be investing as VCs, as humans, as leaders: what happens when AI is good enough to be part of my team? Part of my team.

And you distinguish that from just having an individual agent? What’s the difference between Replit as an agent—or what RD is, an agent—and being part of your team?

Guest

It is sufficiently autonomous, knowledgeable, and powerful to complete material, high-value tasks on its own, with some daily discussions, just like on our team. You’ve got to check in. Some folks we can check in with just once a month; that’s enough, right? But it does need some oversight and some discussion, like a human does.

The level of autonomy and capability is what matters. “Gamma, go out. We’ve got 20 sales calls this week. Go into my Google Calendar, create prospectuses and sales collateral for all of them. Pull all the data on them from last year from Salesforce, HubSpot, and Marketo. Put them all together, review them once, and then distribute them to the team. And if you can, join the meeting,” right?

When Gamma can do that, Gamma’s part of our team. It’s not that far away. Not just, “Make me a PowerPoint.” Not just, “Gamma is the AI PowerPoint.” That’s not so interesting, right? Microsoft will figure that out.

Canva actually has a Gamma clone now. It’s not bad. A lot has changed. AI moves so fast. When Cliff was on the show, I accidentally was a little triggering on Gamma. I didn’t even really think of them as competitors, but that was the only time Cliff got a little thoughtful. I mean, he was always thoughtful, but that wasn’t even that long ago, was it? Now their version of Gamma is pretty good.

Guest

Yes, which is why Gamma’s got to keep swimming and add all that other functionality.

Which they are. That also goes back to the beginning of the cycle. That’s why investing is so stressful today.

Guest 2

I’m glad you said that, Jason, because we were talking last weekend in the partnership about how, technically, what you really need to understand is what the improvements in the last 12 months and the changes in the model in the next 12 months mean in terms of what can be done that wasn’t doable even 12 months ago.

That requires a quantum of time to just get your head around it, right? It is so stressful because, just finding that time, you’ve got to make the priority to find that time to know where it’s going, because the pace of evolution is so fast.

If you decide, “What I knew 6 months ago is still useful,” you’re probably going to be wrong very quickly, right? That’s what I find the most stressful about right now: making sure you actually know where the technology is right now versus your opinion 12 months ago.

Guest

You’re right. You look back at what people said 12 or 24 months ago, and they’re laughably wrong, right? The whole copilot thing—I mean, that was like, “Thank you for sharing, but no.” And that’s just so done.

Just trying to have clarity on the next 12 months to be able to play, because without it, you’re betting blind and you’re going to get it wrong. There’s that.

What I think is even more stressful for seed—maybe by Series B it’s a positive. Maybe Andreessen investing in Gamma at $100 million was the smartest play of all. Or Replit, right? Later, they did early too, but I think the quality of clones is only going up.

When we all started in this industry, you’d laugh. You’d be like, “Well, Salesforce—or forget HubSpot, pick whoever you want, whatever leader—it’ll take them a year and a half to decide if it’s worth cloning. Then they’ll launch something, and it’ll be okay because they have smart engineers, but it won’t actually do anything.”

For the first 6 months, it’ll be so feature-poor. Then, after 2 years, they’ll decide, “Well, should I put 100 people on this, or should I put 100 people on that?” You had 3 years until the big guys would really compete with you.

I’m not kidding. I can think of 1 investment I’ve made that has had 5 clones in the first 30 days, including 1 from a cloud leader. The same thing will be true: will they sustain it? Will it just be a feature?

But the ability of AI to enable us to clone better stuff faster—the fact that Canva is borderline competitive with Gamma and wasn’t when Cliff was on the show—just disrupts what the hell seed investing means. What the hell does seed investing mean when, even with progress, you might see 10 better versions in 30 days?

What does that mean you do then? I’m a student of this business.

Guest

Yeah. What do you do?

Proceed.

Guest

I think—I don’t know. We should ask the new Benchmark guy, who’s smarter than me. But for me, I think the answer is the old one. I’m just worried it won’t hold, which is that innovation plus the best founders get there.

You’ve still got to bet on the best founders. You just can’t take that early first-month explosion as seriously as you used to. It’s not as defensible, that innovation. But if you have the best founders, what else are you going to bet on?

The interesting question, to your point, is that you’re doing Gamma at $2 billion. Do you think that same statement is true? Fast-forward: you’re now Gamma, doing $100 million in ARR. Do you think the next clone, who starts at zero, can catch up?

Or do you think, over time, that the distribution moat, the market and brand-leader moat—do you think some kind of moat accrues over time with scale, or do you think everything’s up for grabs all the time?

Guest

No, no. What I think is that there is a plane of stability that is later than it used to be, and it is still fragile. I’ll give you an example. At Replit, whatever—I don’t have the exact numbers. Let’s say they go from 1 to 250 this year.

It’s going to be less than Lovable, Harry. We’ll stipulate it’s not as good as Lovable, okay? But here’s the thing: what I found—what has happened at Replit—is most of the competition can’t build the AI agent Replit can.

So, even Bolt, which was the early leader, is now just number 3. They don't even have an AI agent anymore; they've outsourced it to Claude. These products that are really, really good are building a deep layer of sophistication.

But if you don't get there fast enough—and we could argue whether Gamma is there or not, whether it's sophisticated enough—and if anybody on this hasn't used Gamma, I tell everyone to use it. What you do is go into a Google Doc, write 10 points about this show, and then just give it to Gamma and say, “Make me an amazing deck.” Your jaw will drop at what it does when it's coding this deck in real time.

Just give it 10 bullet points. It does so much, but you sure better be working that 996, right? Because Cliff's got a few good folks. It used to take Cliff 3 years. Now it takes Cliff 90 days. I don't have the answers.

4. Does Defensibility Exist Today When Copying is Easy

But that's why I think $100 million, $250 million—these Gammas start to build a moat. I do believe Replit has a moat. Maybe not versus Lovable, but versus all the rest. But, man, you used to get a moat earlier, didn't you?

Guest 2

But that's where I think vertical specialization does accrue benefits with scale. An example is, I did a deal in Solve Intelligence's AI for patent law. The more patents that go through their algorithms, the better they are at writing, editing, and predicting.

It's a very specific use case that gets better with more and more data ingested.

You don't get that with horizontal products. No. Data is going to be defensible in the age of AI. Data is going to be defensible. But those patents are public, right? They can still be ingested by other people, can't they?

Guest 2

Yeah. And just for the record, I don't know if it's—yes, they can. I don't know if it's true that you don't get it with horizontal. I think you probably do. I mean, take Cursor as a horizontal product. Would you fund another company now from scratch to do exactly the same thing? I think not.

I think there does come a point when you do pull away. I don't think it will remain unstable forever, but I don't think you'll have these $200 million, $300 million companies and then someone else doing roughly the same thing come and displace them. I think there's this uncertainty period at the start, but I could be wrong. I'm processing in real time here.

Guest

Well, I think Harry's point about the patent one—let's step away for a minute. That, I think, is interesting. The classic question in B2B, maybe all venture, but certainly B2B venture, since we all started, is how important is it for something to be defensible in the early days, right?

We've debated this for years, since the inception. We've all known deep down no product that can be built in 60 days can be all that defensible. But we told ourselves the team had domain expertise or this or that.

The question is, today, has the bar gone up? Should we either give up on defensibility for seed investing—just give up that that is a criterion—or should we radically raise the bar, forcing us to go into verticals, corners of the market, areas where there aren't 11 agents already, 100 agents?

Harry tweeted about support the other day. I can tell you, when I invested in support in the early days—Talkdesk, Gorgias, Front—no one wanted to do support in the early days. Everyone thought this was the dumbest category. So go find now it's trendy. Don't do that, right? Maybe go find something the cool kids aren't in.

I think it's simple. I don't think you can have major defensibility in any of these horizontal or verticals at the seed or even, frankly, the stage we're investing at, right? The defensibility theorem emerges at scale.

In other words, I do believe what's true in most enterprise businesses is, once you become the anointed winner, once a market coalesces and there's 2 or 3 people, at that point in time, it's yours to lose. You can still screw it up, but provided you have great engineering and stay on top of the trends, on top of the technology, you should be okay.

I think the idea that at the seed stage you're going to find a defensible way to do codegen or code testing or so is absurd, right? You just have to internalize the game you're in, which is that, for most of these deals, unlike deep tech, you're going to have to have an awesome team, run fast, be superlative on technology, get your distribution early, and then rely on that.

As you scale up, then you become the winner. You can't be anointed the winner up front. Get over it, everybody. It's a high-risk game.

Guest

But is that okay at $50 million post for a seed round or a pre-seed round? Do the outcomes justify it? That's the thing.

Sure, Rory. If the deals are at $3 million post or $5 million post and I can spread my $500k checks around, I get it. If I've got to spread $5 million checks around at $50 million post, it's tougher.

5. Should All Funds Be Way More Diversified

Guest 2

That's a much better question because now we've gone from the abstract of whether it's defensible to the actual nuts and bolts of money, right? We've recognized the game we're playing has more variance, we think, than the last time, and has to run fast, and there's probably also more competitors. Are you getting paid for the risk?

Yeah, we wrestle with the same thing around later at $100 million or $200 million pre, right? Am I getting paid? And we have this constant dialogue. If I look at it, we do A's and B's, and the early product-market-fit A, you probably still don't know who the winner is, and the B, when you know who the winner is, it's going to cost you a fortune. Which of those is the better bet, right?

Guest 2

We don't do C's. But do you think at the B you even know the winner?

We look at the B. You mentioned my customer-support tweet. Most of those companies had raised B's. I've got no idea who the winner is in that category, and I don't think anyone does, to be honest.

Guest 2

I think you can have—we don't know. We don't know.

No, I'm going to push on that, and I think somewhere between the A and B you can have a much better hypothesis. You can know a lot more than you know at the seed or the early A. When the B's are preemptive on $3 million to $4 million of ARR, which they are for hot companies today, do you know the winner?

Guest 2

It's interesting because this is absolutely what we have to know to do our business, right? At seed, Jason can't know; he can just believe, right? But somewhere between the A and the C, you have to know; otherwise, we're all ludicrously overpaying.

I think if you look at all these markets—for example, you mentioned your patent company—I think you know, without naming it, I think we have a rough sense of where all the companies are. I think your company's doing very well, Harry. You should be glad to know.

That doesn't mean I know where the market's going to end up 10 years from now, but once the horses are running, and once they round the first furlong, you can actually see the rank order of where they're running, right? In a way, you can't at the early A, right? At $2 million to $3 million in revenue, you're drawing on small pieces of information, but you can see rate of change, and differences emerge pretty quickly, right?

So, I disagree. I think you can have a pretty good idea.

Look, it's hard. But what I mean—I genuinely don't want to be rude—but can you give me an example of where you think at the B you have had a clear understanding of a winner?

Guest 2

Take codegen. There was a bunch of people doing it. There were 10 to 15 companies at the A or earlier. I think it emerged: Cursor, I think it emerged—Windsurf, and then, to a different extent, Cognition by the B, and it was obvious that those were the names.

I would push back on you there and say that I don't think we know at all. I think Codex is making incredible ground. I think Claude Code is making incredible ground. Cursor is very good.

But then, as you said, you've got Cognition, you've got the Replits and Lovables kind of coming from the more prosumer, less developer-centric side. I think that's still entirely up for grabs.

Guest

I think also, if we look back, because we've talked about this earlier in the show, I think looking back—and nothing but kudos to the team, right?—when Windsurf sold, whatever happened, it wasn't clear it had a sustainable moat of any sort. It wasn't clear it truly had it.

It was a darling of a slightly more enterprise version of Cursor. People did love it, but ultimately it wasn't clear it was a winner then. It wasn't clear that brand was enduring. Looking back on it, it wasn't. What would we know if it even survived as a standalone company?

Guest 2

That's true. But at the same time, what was clear over the prior 6 months was that, if anyone was going to be the perceived company worth acquiring, there were only 2 or 3 names in that space, and the other 7 or 8 names that had been around weren't right.

So, I understand what you're saying. It's not clear that the reason they took the deal—it wasn't clear they could go from where they were to $1 billion in revenue in an IPO. But my point is this: we're dealing with probabilities here.

At the seed, you know nothing. At the early A, when there's 5 or 6 of these companies doing $1 million, plus or minus, in revenue, all you know is you've got a 1-in-10 shot. Somewhere at the B, I think you get down to being able to say it's a 1-in-3 shot. It's still a 1-in-3 shot with a huge amount of variability, right? But the odds have narrowed.

Let's take it—I mean, you guys keep talking about Lovable and Replit, right? You would say implicitly what you're saying is those are the 2 names you implicitly said.

I don't know the space as well. Bolt has shot its bolt, as it were—pun intended. So, yeah, you know, that's a piece of information you have when you're making a bet at this stage. You can probably say something like, “There are 2 clear winners here,” probably less likely to be another raw startup. There is adjacent competition from Wix; you know, Wix has bought someone.

So, at least—I'm so sorry to interrupt you again—I would just say you need to expand it significantly. It's not 1 in 3 because you've got Vercel and you've got Claude Code, which are eating their lunch coming down. You've got, as we mentioned, Replit and Bolt, but then you've got Salesforce, who have their competitor; Atlassian have their competitor; Figma Make is doing very well.

You're right. So, the adjacent competitors, let's talk about them, because I always think there's a 2-step horse race in all these deals, right? And, by the way, I'm going to argue that what you just said is proof of success. Let me tell you what I mean by that. In any startup, you start off at day 1 and you're like, “There's 3 other startups doing just what we're doing, or maybe 10 other startups doing just what we're doing. I wonder which of us will win.”

And my experience is, when you go to the first board meeting where you suddenly realize you're scared of the big-company adjacent competition, it probably means you've graduated from the baby class. You're 1 of the 2 or 3 winners in startup land, and now you've got to worry about the adjacent guy next door. You might say you're not sure if your Lovable bet is going to be the winner yet, but do you believe that within the class of venture bets on this space, you've got 1 of the 1 or 2 winners?

Yes, but that doesn't generate anything. It doesn't matter if it's 1 of the venture bets. If 1 of the venture bets doesn't win and Salesforce or Atlassian or Canva does, I don't care.

Obviously, you're correct, but you've got to think about it just like incremental information updating your priors. When someone did the seed, they were like, “This is a good idea. It might not even work,” right? Then you do the, “Oh my God, vibe coding is a thing. There are 5 companies doing it. We're 1 of the 5.” And now you can say, “Vibe coding is a thing. We're 1 of the 5 doing it, and we're 1 of the 2 winners.” Right? A huge amount of risk reduction.

Now, you still have the other risk, which is that the big companies might do it. Something might disrupt you. There's a lot of risk still left because it turns out that startups are risky. But you've got to admit that there's been a massive amount of information gleaned and risk reduced, going back to what Jason said is the 5-on-50 bet, where you don't even know if it's a space and you don't even know if you're going to be a viable player in it.

Is that a better or worse risk than doing a $2 billion pre-money valuation when you know both those things? You are the winner. There is a space. You are the winner, and there's still a whole ton of competition to come, which is the Lovable bet you made. Which of those 2 bets are riskier?

I don't know. I think about this, which is—you know, I'm again butchering this—but at $4 million to $5 million in revenue, it was done at $200 million when we first did it, and then when it was about $80 million to $100 million in revenue, it was done at $2 billion. You can choose your entry price.

Totally. What that says to me is that consensus, rightly or wrongly, has said there has been a massive risk reduction. And now, unfortunately, what's happened—and always happens in a bull market—is valuation has expanded to fill the risk that was reduced operationally. In other words, at $4 million to $5 million, there's still a ton of risk, right? Fast-forward to when you're doing $50 million—I'm just going to say it—you can't deny there's been a huge amount of operational risk reduced.

Now, the problem is, at a $2 billion pre-money valuation, are you getting paid for the—you know, is there enough upside left in the deal? Separate question. But I think the point I'm making is, it's gone from, “Is this a category? Are they the winner?” to the third and last question, which is always, “Is the TAM big enough to support a $2 billion valuation?” which is a much more late-stage question.

It absolutely is. I just want to go back to the point that we kind of know the winner at the B. And if we don't, and if that has reduced or gotten less, are we overpaying? That was an interesting addition.

Yeah. My statement is, we dramatically know less, and that 1 in 3 has moved to 1 in 7 to 10 significantly across categories, in which case surely the suggestion is we are dramatically overpaying.

There's some level of truth in what you're saying. I think the variance in these companies is a lot more than in the 15 boring years of SaaS, where it's obvious and you know what to do for the next 10 or 15 years. Jason and I would both say we both had a play: Jason as a leader and a founder, and me just as a humble investor in an e-signature company. When we did those deals in 2008 and 2009, it was e-signature, and fast-forward 10 years, it's still e-signature. That was a simple world.

We would both agree, I think, that there's way more change in this market in a month than in some of those older markets in 5 years. So, we'd agree on that. You are right, Harry: all these investments, I think, are riskier than they were in SaaS land, and they're astonishingly priced higher, right? I would agree on that. But I still think there is some significant risk reduction in going from a 1-in-5, 1-in-10—will it even work?—to a 1-in-3. You know who the competitors are.

If that's the case, should our seed portfolios be more diversified? Jason posed a great question: Do the seed portfolios need to be diversified? How big a fund do you need, right? Or if seed checks are $5 million, how big a seed fund do you need just to make the minimum diversification work? How big does a seed fund need to be with a $5 million seed check?

Well, it depends. If you think outcome sizes are expanding with the movement from technology—

Guest

Does it matter? It's just some basic question: How many first checks do you want to make in that fund for it to work? If you traditionally needed 20 or 30 checks to work, but risk has gone up to Harry's point, maybe you need 40. And what reserves do you need? You might need a $500 million seed fund to have sufficient reserves, because I need to do 40 deals at $5 million. Now that's $200 million. $200 million for reserves, that's $400 million. $100 million for fees and times and backup. I need at least $500 million for my little seed fund to make the math work.

What you're missing on the math is, if you think that the outcomes are going to expand, you can have smaller ownership on entry, and so you don't need to increase check size if you assume—

Four million out of 50. Does it really matter? These are not massive ownerships. $4 million, who cares? $1 million on $50 million isn't going to work, Harry, in my seed fund, is it? It's not going to be enough ownership, is it?

Well, I think both work, really, in a lot of cases. I'm in 1 fund as an LP, and it has 100 to 150 positions with $100,000 to $150,000 checks. It's a 7x fund. It goes to my point of the outcome sizes being so much bigger. And so the ability to have lower ownership, Jason, to your point, $1 million on $50 million does work if it's a $100 billion company, not the $3 billion to $5 billion enterprise outcomes that we've been playing with for the last 10 years.

I'm just trying to disaggregate Harry's response because there was something there. First of all, I agree with Jason's framing, and then your response was interesting because you could have said 1 of 2 things. You could have said, “You don't need to go from 20 deals to 40 because the winners are so much bigger that even if you have fewer winners, you're fine.” That would have been 1. But you didn't say that. Interesting. You said, implicitly, “Go to 40, but just take less ownership.” Right? That's what you said.

So, the mere fact that you made that answer says you are embracing a more diversified story in the face of risk, which is Math 101. That's a super interesting concept, because we had it down in the agenda to talk about, and some folks are even pulling off these highly focused seed-stage bets, which I find awe-inspiring. All other things being equal, with the amount of variability you're seeing, I would have expected people's deal count to have to creep up slightly.

But we had Roger on, who was very much a concentrated bettor. You have the Hummingbird story in Europe, which is astonishing and impressive. So, everything in logic says to me, with the increase in time to exit and with the concomitant increase in risk, logically you should be increasing your diversification slightly—probably reasonably—which probably means either smaller checks and more deals or a bigger fund size to maintain the same ownership.

Guest

Yeah. Works even better if you own 10% of that company, though. You've got to have—listen, it's your call. The thing with the 100-to-200-position fund is, I'm not that human. I don't want to meet 500 founders a year, right? To do 200 deals between your team, you've got to meet 500, 600, 700 founders a year. Even with your AI agent helping you, I could barely tolerate doing a couple of meetings a week.

I can do stuff by email, but God, I've got to carve out an hour for a deal I might not do. I want to blow my brains out after that meeting. That's why I sold my companies, so I don't have to do those meetings anymore. I mean, I can tell you our partnership does 20 meetings per partner per week. And so now, with my 4 investing partners, we have 80 net-new companies that we meet in person per week.

80 in person.

Guest

Yeah, I would resign. I would give you all my carry back. Thank you for hiring me, Harry. I'm eternally part of the 20VC team. You make me do 20 in-person meetings. I sold my companies because I didn't want to spend my life in meetings. I'll do 1 a week. I'll do 2. I'll do—

Guest 2

You do the math. We'll do over 3500 company meetings a year.

I do think it's honestly great for the LPs and others. I think that is a great playbook. It's just not to get distracted. You've got to match the strategy to who you are as an investor: where you get your leads, where you get your deals, what your brand is. You can do that for a variety of reasons, but—

Guest 3

Oh, dude. I'd hate it. I didn't do it.

Guest 2

Oh, okay. [Laughter] Okay. But the team does, and they bring it to you, right?

Guest 3

Yeah, but it's a lot of meetings, man.

Guest 2

It's a lot of meetings.

100%. It's a lot of meetings.

Guest

No, I love taking meetings. That's how I learn. I'm a meeting junkie. My partners laugh at me. I'll take a meeting with anything, right? Because you can always learn something from it. So I have a bias to meet—in fact, probably an over-bias.

Do you think you can listen?

Guest 3

I think when I meet a truly great founder—truly great—I always learn a lot. Don't get me wrong: anyone below that, I don't think I learn enough to be worth the time. I do my homework. Rory, you're the best homeworker of the team, right? You could do so much homework. Harry's the most prepared and the most charismatic, but Rory's the best homeworker.

Are you really going to learn anything in that meeting if you spent an hour researching the company? I learned nothing. I read your deck, and then I said, "Send me more." Then I say, "Send me your last 5 investor updates, right? Send me your financials." And I'll research you on the internet. Now we have AI. Claude will help me. I'm going to know a lot of stuff unless you're really great. Now, if you're great, you're going to blow my mind, right? But if you're not, I'm going to start yawning about 15 minutes into this meeting.

I don't know. I find sometimes you get an insight. I think—and I could be wrong—you make me think, "Should I do things differently?" because you do it so differently. I do find, even on an okay deal, you learn nuances about a specific market from the one-on-one and the dialogue to and fro that you wouldn't get from the presentation.

Now, it does mean I have, as people who pitched me know, a horrible, interrupt-driven style whereby, if you have 20 slides, I'll be like, "We can skip 17 of them, and these 3 I care about," which can be annoying at times. But I do think there are insights when you—I think in any business, no matter how much you think you know from the outside, the person inside living it every day has a crucial kernel of knowledge that you just can't access any other way, and I believe most meetings I get something from. It's a little like your knowledge of AI agents versus anyone using those words: it's step-function different, and anyone who has to learn that—if you meet all the other ones, it's a waste of your time.

Guest 3

Yeah, agreed. But you have to meet them to get that experience. So I bias to meetings. We've come a long way from fund construction, but that's okay.

Yeah, yeah. Well, this is fantastic. This is what founders—again, the amount of founders that do not get to hear this, that actually wonder how VCs think, is in the hundreds of thousands.

Guest 3

And that is what—

You know, it's related to that. The question a lot of founders have is, how important is it to just get in the room? Just get my foot into the door? Just get the coffee meeting?

I think it varies. I think Rory's saying, listen, get in the room at scale. There's some value to that. I'm saying I have no interest. Don't get in the door with me. Just send me a great deck and a great email. I will read it. I will slow it down. I will spend time, and if it looks good, I'll take the meeting, but there's no need to get in the door with me. There's no value in getting to know me over a coffee meeting.

They're like, "Well, just take the meeting, Jason." I'm like, "Dude, I have so much respect for you, but there's a 0% chance I'm going to invest. Don't try to get the meeting. It's not going to help you. Don't waste your time."

Guest 2

I don't think so if someone's doing something I'm totally not going to do. But I do—yeah, I'm not a huge fan of coffee meetings. I'm like, you're here to get money, I'm here to give money. Can we just talk about the business rather than a bunch of getting-to-know-you? But I am always interested in hearing people talk about their business.

6. How to Run a Fundraising Process & What Not To Do

Guest 3

That's why you're enduring in the business. That's why you're enduring, because you enjoy the meetings.

Guest 2

Yes.

How do you feel when you hear people say, "No, no, no, no, no, no. I'm not going to meet. I'm waiting to run a process, and I'll run a process on the 19th of November, and I'll email you then"?

Because for me, I found this really abrasive. I'm just opening up here. I said to the founder, "Listen, if you're running a process, you're either optimizing for price or partner selection. I'm giving you a great price today, a price that you want, you said you wanted, which means that you're not optimizing for price with this process, because I've given you what you said you want. You're just saying that you think you can get better than me, which may be the case. In which case, just tell me straight you think you want to benchmark, in which case, no harm, no foul, but fine."

And they're like, "No, no, no. I just want to run the process." How do you react to "I want to run the process"?

Guest 2

I think from their side they're correct. I don't have to like it, but from their side, I think I see more failed financings because they didn't run a process than they did. You're basically saying, "Mr. Founder, you don't have to run a process because I'm going to give you a term sheet right now that's a good price and you like me. Let's do it." That's not an unreasonable offer.

But typically what happens when people say, "Don't run a process," is someone comes in and says, "I'm really interested," and they share and give information serially to someone who's not yet ready to commit on the investor side. So they've run an accidental process, right? That's a mistake. Do you understand me? So when I see, "Here's your term sheet," there's nothing to be done.

Guest 3

That's different. I mean, at that point, it's not crazy. If that happened, and I was on the board of a company that had that happen, I would take it seriously and I would think, "Should I allow—should I hit the bid?"

Conversely, if I was on the board of a company where the founder said, "Hey, I'm meeting with Joe at Mega Firm. They asked, 'Can we share some data?' They just want to get a sense of it," I would shut that down and I would say, "You share with everyone or you share with no one, because giving your data to 1 or 2 people when they're not in is just starting a process without meaning to start a process. And then if they don't move forward, you've kind of had a failed process already without ever doing a process." That's 100% certain—that's a mistake.

Even though on my side of the table, I get it, I don't love that. But you're raising something, which is why a lot of times we wrestle as investors with, "I want to be able to do what Harry just said. I want to be able to come in and commit because it's the only way to get them off their process," right? And that means they have to have a good enough relationship with you. They want to do business with you. And on top of that, you have to bid with probably sparse information.

And my big aha on that is the only way you can conceivably do that. No amount of pre-work can do it because you don't know the actual information. If you've seen the prior round, it's probably your best chance, because if you've seen the prior round, you have some sense of what's going on. You know what they underwrote. You had a mental model at the last round. You can probably, in a dialogue, get 1 or 2 pieces of information, calibrate how they're doing, and maybe do that process.

Guest 2

I have a slightly nuanced view in the middle, for what it's worth, just maybe for advice to folks that watch—not to Harry. When that happens, Harry, I think it's a slight founder fail, a slight own goal. Okay, not a total one, because obviously he's got a good company, right? Harry is, in essence, ready to do the deal now. The founder says, "I want to run the process."

I think what many of the best founders do—not all; there are all different types of founders, extroverts, introverts, great fundraisers—but what many of the best do is they are able to cultivate enough interest with enough good VCs that if they hit the number, they just send an email. They just send an email: "Harry, I'm thinking about raising a round before the end of the year." And Harry could say, "I'll give you a term sheet today."

The right answer is, "I love you, Harry. I especially love the one with Rory, but I'm not ready today. Honestly, I'm not ready today. I will be ready at the end of the year." That is the perfect way to handle this situation. You don't risk losing Harry's term sheet. You don't risk accidentally overplaying your hand. Few founders do overplay their hand.

Guest

Not as often as you might think, but they do overplay their hand. VCs can say the wrong things. And so the best founders, one way or another, build relationships over months. They copy them on their investor updates. They update them. Then 3 or 4 folks are just in when you’re ready. They’re just in. It’s so casual with so many founders: you’re just in. As long as the deal is reasonably fair, just tell me where to write the check and how much I can buy. And you don’t break any glass.

I think the reason this happens—the Harry scenario—is that so many seed investors and so many accelerators hammer into founders, “You have to run a process.” That is the classic top 3 bits of advice. But I think it misses some nuance on the optimal way to run it.

The optimal way to run it is for everyone already to want to invest for real, without games, before you open your data room. And the super-optimal way doesn’t even require a data room because they already want to invest. They need diligence, but you don’t. The best-run process—I know this might be slightly controversial out of context—but the best-run processes don’t require a data room. Not a traditional one. They only require one for diligence. They only require a file that says, “box-diligence-investment-12/21/25.” They don’t need any other data room. It’s just for diligence.

I think what you’re actually saying is the best-run processes don’t feel like a process, but they are. And I think you’re exactly right: if a founder is smartly nurturing relationships, keeping people broadly informed, but then tries to time the interest such that, when he or she is ready to put his or her hand up, there are 3 people who are primed and ready to go, that is the best outcome, as they say. So it is a process, but it doesn’t feel like one, and that is perfection itself. I agree with you.

Now, you have to have a very attractive and high-performing company to be able to do that.

Guest

Maybe, Harry, I think those are the only ones getting funded in this environment. We talk about all the gammas and the schmamas, but everyone below that ain't getting funded anyway. So you might as well run this version of the process [laughter].

Maybe, Harry, I think a lot of B2B folks are getting funded today, but I ain’t seeing it. It’s the most binary fundraising environment in our lifetimes.

Expand on that, Jason.

Guest

You’re either YC, Neo, or South Park Commons—you’ve got something, you get funded—or who the hell is going to find you in your pre-seed round, right? You either got—you better have—you better be whatever the hell AI-native is. I mean, we know what it means. You better be hot AI-native with top-quartile venture growth, or you ain’t getting funded. It’s pretty simple, right? There’s just not a lot of gray zone anymore.

But I do think even with that, you say YC and Neo, fine, but they have a huge amount of companies per batch in YC. If you want to stick to the religion—“We’re going to run a process”—that only works if you have stellar numbers, because if you have relationships—

Guest

Yeah, yeah. Don’t do the Harry. I’m assuming if you haven’t built relationships before and you start on Monday the 19th, you shouldn’t expect to come in, hit the ground running with first meetings on Monday the 19th, and get term sheets super-fast with average-to-no numbers.

No, of course. Of course, I was making an assumption in the story you told me—the anecdote of the term sheet—that it had top-decile venture numbers. The very fact that they were flippant assumed it. Now, if they didn’t, then they’re reading too many tweets: “Zero to $1 million ARR in 7 months.”

Guest

Yeah, I would take that offer. I would sign the term sheet and send it right back and ask if you wanted to meet at Selfridges over the holidays to see the Disney exhibit or something, like we’re doing with our team trip. I would say, “Thank you, Harry.”

Guys, I think you were saying the same thing, because Jason’s throwaway comment—but it’s worth pausing on it—was basically saying you should run this kind of, let’s call it, light process, which is very founder-driven, right? His comment was, “You should.” I had said, “Hey, you can only do that if you’re a good company,” and then his comment was, “Only the amazing ones are getting funded.”

So implicitly, what he’s saying is, if there are 100 companies and only 20 of them have these kinds of numbers, they should run that kind of process, and the other 80 are screwed no matter what. So 100% of successful deals will be this kind of formal-driven, non-process process. That was the implicit statement in what you’re saying, Jason. Right?

Guest

I mean, Harry’s right. There’s some non-truth to it, but I think there’s a lot of truth to it: we’re in the Captain Obvious era of investing. And it only takes 1 term sheet, so spend your time—going to Harry’s point—and don’t be careful.

But, man, Harry sees the most of any of us, and I’m just not seeing the non-obvious ones get funded. I just don’t see it. I’m just not seeing it. I’m not seeing it anywhere, right?

The most brutal one is, again, the classic SaaS company: triple-triple-double-double, which has been discussed ad nauseam on every 20VC channel, including 20VC Cricket and 20VC Sales. Those ones—you could always find someone to fund them if you met enough people back in the day. Now you can do better than that and no one wants to. Only 20% of people want to take a meeting, and they still might not do it. And I think every month that goes by, those deals are harder to do. Every podcast, everything makes them harder to carry. Harry is disagreeing with me.

No, I’m 100% with you. We have a company that went from $400K to $3 million. Classic enterprise SaaS business, bread-and-butter enterprise SaaS. That would have had 5 term sheets from 5 good firms. 120 meetings, 1 term sheet. It was a $10 million round on a $40 million post, so it was whatever, 12x revenue for a 10x grower.

Guest

But have you seen the market comps, Harry? Have you seen what the average public company’s trading for? That’s still a fine valuation.

7. Datadog Surges 20% and Duolingo Crashes: What Happened

Yeah, but they’re not growing 10x, as your point. But the real truth implicitly in that is, I think I’ve said this before, it’s a combination of some element of it’s just not fashionable. But also, the implicit statement is that growth rate is going to attenuate, because I might have 2 or 3 years further on that same investment. We might have a company doing $25 million in revenues—we invested when it was doing $5 million—but its growth is now down to 60%. It’s still only burning $10 million, but those are incredibly hard deals to get funded, right? There is economic value there, but they’re hard to fund.

We’re going to switch tactics slightly, but I want to discuss 2 kind of crazy stories of results in the last few days. One good, one bad. Datadog absolutely freaking crushed it: stock up 23%, 15 million-plus AI-native customers. Wow. How should we think about Datadog?

I think Jason covered this so well last time. His basic comment was, even if you’re not AI-first, co-attach to the AI trend and you’ll be fine. These guys co-attached to the AI trend, and they’re fine. Sell shit to the people who are making AI, and if they grow, you’ll sell more shit too. And they did it. Love that as a summary, Jason.

Guest

No, no, it’s the irony. As we go into next year, the AI leaders—the hyperscalers and the hyper-this and the hyper-that—they’re starting to buy like classic B2B companies. They’re recycling the same people in procurement and the same people in GTM, and they’re buying the same stuff.

So if you’re attached to the AI budget and you’re in the Datadog era, you’re actually going to have a great 2026, because these are normal B2B companies. OpenAI is buying like a normal Adobe or a Microsoft now. But if you’re not in that, man, you’re just dead, right?

The other one was Clio, which raised at a $5 billion valuation in legal tech. It attached to AI in a different way. This is a company founded in 2008 that found its way in the AI era. It added fintech payments, got up to $3 billion, and now $5 billion. So find your way, right? Datadog—it helps that Datadog, even though it got expensive, was the darling, right? It was the darling product. But, man, they captured that revenue. Go find it.

They did because I’m going to leave Clio out, because I think it’s so different. I think Datadog is a core piece of compute infrastructure, and these hyperscalers are the most compute-intensive companies that have ever been known. So if you’re selling compute stuff, you should be having, as Jason said, a great quarter.

If you’re selling routers, if you’re selling switches, if you’re selling little interconnects—whatever it is that’s associated with whatever it takes to stand up Stargate—

Guest

Yeah. And observability is a key part of that, right? You’re going to be golden because there’s more compute than you’ve ever seen, which I think is a very different dynamic than some of the others.

Fair. Fair enough. If you’re not attaching to that compute, something’s off, right? If you’re compute-adjacent, you better be growing quickly if you’re compute-adjacent.

Guest

Yes.

I mean, Broadcom’s crushing it.

Why aren’t you? [laughter]

Guest

I’m a Duolingo shareholder. That was a [bleeped] week. Rory, you know, the age-old thing, which I just love that you describe me with, is, “That’s great, but what about me?”

Duolingo plunges 25%. I’m going, “Why? What the fuck happened to make it plunge 25%?” I don’t think there’s a mega story here. I think Duolingo has just been—you know, they’ve had—I mean, they’re still 80% up on their IPO 4 or 5 years ago.

They had a period when it was, “Oh my God, AI is going to kill them.” Then the CEO very wisely got ahead of that and said, “We’re using AI.” So then the stock got way ahead of itself, and now it’s like, AI is not going to kill you, nor is it going to make you enormously rich. You just got it down for next quarter slightly, for fundamental business reasons, and the stock was overvalued and went down.

I don’t think there’s a big story here. It’s still—you know, the graph is still, as I say, up over the 5 years. It’s still significantly up on its lows. It just got ahead of itself. They had a good quarter. The revenue guidance was slightly less. Life goes on.

Rory O’Driscoll

Yes.

Guest

Duolingo plunges 25%. I’m going, “Why? What the fuck happened to make it plunge 25%?” I don’t think there’s a mega story here. I think Duolingo has just been—you know, they’ve had—I mean, they’re still 80% up on their IPO 4 or 5 years ago. They had a period when it was, “Oh my God, AI is going to kill them.” Then the CEO very wisely got ahead of that and said, “We’re using AI.” So then the stock got way ahead of itself, and now it’s like, AI is not going to kill you, nor is it going to make you enormously rich. You just got it down for next quarter slightly, for fundamental business reasons, and the stock was overvalued and went down. I don’t think there’s a big story here. It’s still, you know—the graph is still, as I say, up over the 5 years. It’s still significantly up on its lows. It just got ahead of itself. They had a good quarter. The revenue guidance was slightly less. Life goes on.

Oh, I’d say it has the wrong kind of AI. And what I mean is, Duolingo is using AI to make its product better, right? Hooray. Every single portfolio company at Scale, 20VC, or elsewhere had better be using AI by this point to make its product better. This is not 2023. You don’t get any kudos for sprinkling AI dust on your product.

Going to Rory’s point, what you get kudos for is attaching to that compute budget. That’s the only kudos you get. And Duolingo didn’t earn any.

Rory O’Driscoll

Well, it couldn’t, because, to be fair, I’m just going to, as an apps investor, step up and defend the portfolio companies, right? If you’re an infrastructure company, you can co-attach to compute. If you’re a new AI apps company, you are using that compute and using that AI.

If you are like Duolingo, and a lot of our companies—companies that have been around since pre-AI—the question is, I don’t think you’re going to co-attach the spend, but what you can do is co-adopt the technology. I’m going to give Duolingo credit. They’ve done a decent job of saying, “We’re going to be AI-forward. We’re going to be AI-leaning.”

But in the end, this is my zoom-out point: in the end, you’re still selling a subscription product to help people, at a very modest level, learn another language. There’s no AI compute to attach to there, Jason.

Guest

They have to find a way. Listen, I’m not a total Duolingo expert, okay? But Duolingo took money from—I mean, it does a lot of things, but in some sense, it took money from Berlitz and all these language schools and stuff online, right? Hooray, you did that. Now, where are you going to disrupt humans? This is your job. You already disrupted those humans. Unfortunately, they’re gone, right? Where’s the next level of human disruption?

Rory O’Driscoll

Zooming out, I will give you that. That is true. I do think the next generation of companies that are going to be, quote, teaching a foreign language will obviously be LLM-based, and there’s a lot you can do.

We’ve seen some of those companies do what I call more professional, more interactive teaching using LLMs. I do believe there’s a whole ton to be done in terms of one-on-one instruction in language and a whole bunch of other things. Duolingo should be getting on its skates to do more of that, versus just using AI—the thing that got the CEO into a little bit of trouble was using AI to obviate the need for humans.

The real question is, can you build a more compelling set of products using AI to do more immersive learning? I think it’s companies like Speak and companies we’ve talked to. There’s a whole bunch to be done in AI-enabled learning, and it’s actually a super interesting space, including language learning.

A really interesting question to ask for all investors is: if you are not removing humans from the equation, you are going to be heavily discounted. I think you should. That’s the other—either—I mean, to simplify, Jason’s got a good point. You’re either getting money from compute, this massive spend, or you’re getting money because you’re using AI to replace humans. Otherwise, you’re not going to grow. Otherwise, hooray, congratulations on your 14% growth. Where are you replacing humans for real? Whatever vertical, whatever industry, are you going to go in and reduce the headcount that vendor needs by half?

Guest

Most of the time, I’m in the “Yeah, replacing humans is a story.” Interestingly enough, in education, I actually think it’s doing it better. I think the stunning data shows, in a bunch of these education studies, that, in fact, if the human today is someone in a class with 20 people, there are a whole bunch of examples that say LLM learning is equivalent to one-on-one human learning, tutoring one-on-one.

What you should be doing with AI in education is allowing everyone to get something they haven’t had, which is one-on-one learning instead of group-based learning, because all the data says one-on-one-based learning, constructed specifically to your needs, is a far more efficient way of teaching anyone a foreign language and, frankly, most concepts.

Rory O’Driscoll

But where does the budget come from for that software? I admit I’m not a total expert in education, but if it’s not replacing humans, then you better steal it from a legacy incumbent, which is fine.

Guest

Which is fine, but Duolingo is a legacy platform now. You’ve got to steal it.

Rory O’Driscoll

You’ve got to steal it, or you end up chasing—

Guest

Yes.

Rory O’Driscoll

At least Harry didn’t do it. I didn’t drag.

No, what I mean is, listen, you can use—okay, so let’s say your AI does not replace humans or attach to compute. You have a third option, which is Captain Obvious. Your third option is to use AI to massively displace an incumbent and steal all the revenue. In fact, that’s the history of B2B software, mostly, right? It’s stealing the revenue.

I just don’t know how many of our public leaders are in a place to steal their own revenue, right? They’re in a tough spot with all their seats, right?

Rory O’Driscoll

Agreed.

We can fund those deals as investors, but I think the first 2 categories are much easier: attach to the compute or replace humans, rather than just steal. I mean, there are like 400 AI CRM startups out there, all saying they’re going to eat HubSpot’s and Salesforce’s lunch. That’s not exciting to me as an investment. I’m going to go disrupt—I mean, maybe you will, but that’s much less exciting than truly replacing 90% of your GTM team, right?

Guest

It’s almost like doing customer support to me.

Yeah. I think that was a really good, Jace. That was a really good framing. The fact that getting the new budget is just so much better than trying to slug it out with the existing provider and say, “Our new thing is better.” It’s not to say you can’t in those spaces, but, yeah. So, I’m trying to—

Guest

I would have to think education’s got to be—it is an interesting market, right? Large, but getting incremental budget has to be close to impossible. The public school district’s not going to come up with another $10 million for your software. It’s impossible.

Rory O’Driscoll

Sadly, this is not a public-school comment, right? But you’re right. I think the positive comment is—I think Duolingo is actually what I call light learning. You’re learning another language; you’re just learning a few words.

I think a really interesting space we’ve seen with LLMs is replacing the spend that an adult wanting to learn a second language, typically for business purposes, would have spent on a one-on-one coach, right? So, you’re replacing that human coach with a very intensive, immersive, LLM-enabled learning program. That’s actually quite a compelling market.

But you’re right, it’s education, but it’s not K–12. To your point, Jason, you have to find an existing spend, and the existing spend is pretty niche, which is people who can afford to spend money on a one-on-one tutor to learn a foreign language. So, yeah, there’s not a whole ton of budget, unfortunately, in K–12 to give every kid a one-on-one customized tutor.

I love the way Jason’s just getting better and better with every show. [laughter] Aren’t you, Rory? You’re like, “Geez, he was here for the entertainment, and now he’s become—”

Rory O’Driscoll

Hard and mean.

He’s so wise. What is going on?

Guest

I’m not mean. I just don’t want to live in the past. And here’s the thing: if you’re in software today—B2B software, whatever, wherever you are on the org chart, or an investor—honestly, if this isn’t the most exciting time of your lifetime, going back to the beginning of this conversation, you’re doing it wrong.

It should be one of the most stressful times of your lifetime. We’ve talked about this, but if you’re not truly excited—truly excited—I mean, this is the first time software has gotten better since the 3 of us met. It hasn’t gotten any better since all of us met. It’s the same crap.

So, if you’re not incredibly excited, again, going back to the beginning of this conversation, I would retire. Retire from your VC fund, retire from your company. No shame in that. You had a great run, right? Just put the rest into the NASDAQ, and you’re going to make more than most VC funds anyway, right?

I think it’s a great point because you, as I think you know, started in the ’90s with x86 servers, and the last 2 decades were effectively—I always say Salesforce was rebuildable in the cloud, and it was fun, and we made a lot of money, but you’re right, somewhat boring.

What is really exciting now is you're not just talking about rebuilding Salesforce exactly the same but with a slightly modern UI. You are talking about something much more fundamental here in terms of eating the work and doing a lot more with the app. So, yes, it is exciting. But, looping right back to the first conversation about Sequoia, it is also clearly stressful for even the best of firms. Right, boys, is there any other topic that we haven't covered that you think we should cover?

I think one thing that is not in the schedule that I just think is incredible is freaking Hummingbird. Hummingbird, the fund that does not get credit and is not talked about in the same way that many other great firms are, did their first biotech deal in BillionToOne. They have an $800 million position on the IPO. You want freaking great venture returns in whatever $150 million fund that is. Credit due. Amazing.

Agreed. Nothing to say. I mean, good for them.

It was obviously incredible to see all the success. What I would like to know, and maybe we're out of time and I should have done my research, is how did they collect the capital, as a traditionally seed manager, to deploy enough to maintain the ownership? I'm just obsessed with ownership now. It took me a long time to be obsessed with it, and now I've given up, but I don't see how I'll ever own 18% of something at IPO ever again. Right.

I think they were fairly capital efficient.

It could be that answer. It could be the Veeva of biotech, where they were one and done. I'm looking for that dream. They definitely did put in subsequent checks, but I think it was a combination of doing subsequent checks, concentrating cash, and being a capital-efficient business.

Yeah, I'm impressed with the deals they've gotten into and maintaining the ownership with nine figures of AUM. I don't know the exact numbers. That, to me, is just as S-tier, right? Figuring that out, and whether it's a bunch of side funds and SPVs, LPs, or VCs, just how you do that is, I think, the elite game today. It's hard enough to get into the deals, but with a nine-figure or eight-figure fund, maintaining ownership is god-tier, I think.

There's always the option of accepting, provided that the follow-on rounds are at a high enough price, just accepting some dilution and optimizing, as you do, for multiple rather than ownership. You can say, “Look, I've established 20% ownership as a seed fund. I mean, the early funds those guys had were sub-$100 million. Okay, I'll get diluted from 20% to maybe 12% by the time we exit. But I put in $4 million. I'm a hero, right?”

This was fun. I don't think they started with 20%, did they? But keep going.

Fundamentally, the way they've been able to produce 8x and 10x funds has been in part by keeping it at $40 million, $60 million, and $100 million funds. Obviously, if you want to, it's hard to simultaneously keep your ownership and keep your multiple. You can decide which one you want to do.

We talked last week about how, if you have Hummingbird, they've kept their multiple and gotten a 10x, 20x, whatever it is. If you talk about someone like Lightspeed, they've kept their ownership in Navan and gotten a 5x, but on $250 million. Both of them are great outcomes. They're just different ways to play the game.

Now, the interesting thing is both of our different outcomes have great outcomes for the GP, and this is the most important LP fact. If you only have $1 to play with, then obviously you want to do the one in the small fund that's going to give you the 10x because, you know, if you have to deploy $100, then obviously you have to do the big fund. But, to some extent, the high-return small fund—accepting the follow-on dilution but just making a marvelous return—is the compelling product for the marginal dollar.

I agree. I think also the outcome sizes are interesting there. Navan at $4.5 billion, now public, and BillionToOne at $5 billion—and just the power of capital efficiency and, bluntly, running lean and not raising huge, huge amounts of money. You see the difference as an investor, like the benefits of investing in capital-efficient businesses. Obvious statement.

Yes, we're Captain Obvious today.

All good, guys. I'm glad it's nice to finish on a positive note, huh? A venture outlier that actually returns a huge amount of money to investors. Yeah, how nice. Thank you so much for joining me. I'm glad that you both approve of my shirt.

He's struggling with it, but I approve of it. And listen, how long are the pants?

He's got pants on. He hasn't got shorts on. He actually—

Well, they are jeans. They are jeans.

But let's not push too hard. He's at least wearing jeans. I mean, at least he's covering his knees. We'll take it as a win. All right, guys. Fantastic. You guys are still all right. Talk to you soon.