20VC：35亿美元——扎克伯格为 Thinking Machines 联合创始人支付的代价｜Goldman Sachs 以6.65亿美元收购 Industry Ventures｜Softbank 以 Arm 持股抵押借入50亿美元，继续投资 OpenAI

Roger Ehrenberg

Everything in life, you can price as an option.

Rory O'Driscoll

In the face of unprecedented wealth, I'm shocked to discover that most people behave badly.

Roger Ehrenberg

I don't know, man. Something's broken, I think, in the way that we're evolving as humans if everything ultimately reduces to what's in it for me.

Rory O'Driscoll

Would you prefer $2 billion in Thinking Machines unlisted stock with the chance to be amazing or the chance to go bust, or $3.5 billion of liquid Facebook stock over the next 5 years?

Roger Ehrenberg

What I'm hearing Rory say is essentially, “Reduce it all to fuck the big VCs.” They're playing the momentum game. If shit happens, shit happens. They can handle it. This is life.

Rory, what was it like co-investing with Arthur Rock?

Rory O'Driscoll

I actually invested with Arthur Rock, and I'm totally willing to talk about it. That shut you up, you little punk, right? Let me tell you what it was like investing with Arthur Rock. He was the scariest dude I ever saw. He was old at that time and just as grumpy as when he was young, and when he said things, you just trembled in fear.

It was pretty awesome investing with Arthur Rock, actually. You just heard a guy speak who was literally the first VC on the West Coast who did Intel, and he was pretty direct. It was great, is the answer.

Well, there we go. There we go.

Rory O'Driscoll

And you thought it was just a rhetorical bullshit question.

I did, I did. I mean, Arthur Rock's like 1960s, 1970s. I mean—

Rory O'Driscoll

He was still doing deals in—

I knew you were old, but—

Rory O'Driscoll

He was still doing deals in 2004. Yes, Arthur Rock wrote checks in 2004 and 2005. I was in only 1 or 2 board meetings with him. He was pretty damn impressive.

Roger Ehrenberg

Yeah, Jason.

Rory O'Driscoll

And as I say—

Roger Ehrenberg

You were just scared.

No one's going to argue with him, are they? It's like, are you really—

Rory O'Driscoll

Nah. The sentence “Mr. Rock, I think you're wrong,” when you said that, just did not come out of my mouth. I'm pretty punky, and I was even punkier then, but nope. I'm going with this is received wisdom down from the mountain. This is carved in tablets. I'm taking it this way.

By the way, we made money on that deal. Yeah, we did.

Roger Ehrenberg

And Rory, when did you start in venture?

Rory O'Driscoll

1993.

I was born in 1996.

Roger Ehrenberg

Oh, that killed the conversation. Just fucking dead.

Jason Lemkin

But I say, when you come out here and go to YC Demo Day, you're going to feel old now.

I do. I already feel old. I was in Stockholm for 4 days.

Jason Lemkin

Yeah, you're not young. You're not—I mean, when the 3 of us met you, you were young. You're not young anymore.

Rory O'Driscoll

I hope we're just taping all this. This is great content. But my partner Andy has this great line. He says, “The real problem with this industry,” he says, “there's a huge period of time where everyone says you're a little too young, and then there's this brief shining moment where you're good, and then there is the ‘When is he going to retire?’ moment.”

It seems to me it's like 10 years each and 3 years in the middle. What the fuck?

Jason Lemkin

What about the moment when someone comes out of it and decides to do another institutional fund after being wildly successful? That's the craziest one of all, isn't it? Who would do that?

Why would anyone cash out at the top of the game, go out and manage their own capital, and then have to deal with LPs? What a headache, man. That's like a sucker bet, isn't it?

Dude, my favorite thing with that is LPs. For the first 3 funds, there's no DPI, there's no DPI, there's no DPI. And then you return a shitload of DPI, and then LPs go, “Mm, but are they really hungry anymore?” Because they've made a lot of money.

Roger Ehrenberg

That's so true. That's so true.

Jason Lemkin

Absolutely.

Roger Ehrenberg

You can't win, Harry.

Jason Lemkin

No.

Roger Ehrenberg

You can't win.

I had LPs, Roger—I don't know if you know this—who were like, “Ah, but is Roger still hungry?” I'm like, “Have you met Roger?”

Rory O'Driscoll

I just dial the shit in, man. It's all for the ego.

Guys, before we dive in, there's one bit from a previous show with Roger, and he said, “I plant both feet on the ground every morning, and I say, ‘Let's fucking go.’”

Rory O'Driscoll

Go.

And I just love that. It's so good.

Rory O'Driscoll

That is so Roger.

Jason Lemkin

I say that to my AI agents now, too. The problem is they've been working all night. I'm already exhausted by the time I say it to them.

Roger Ehrenberg

No, that's fair.

Jason Lemkin

They think I'm kidding, but I'm not. They've been working all night.

Rory O'Driscoll

The strength of your relationship with your AI agents is just beginning to worry me ever so slightly. I just want to put that out there.

Jason Lemkin

It's the future.

Roger Ehrenberg

What a world we're living in.

Can you believe when we all started in venture, obviously at different times, and here the 4 of us are?

Rory O'Driscoll

Totally.

Roger Ehrenberg

It’s just like, what is going on, man?

Rory O'Driscoll

It’s a good time in a bad kind of way.

Guys, I’m so excited for this. We have a very special guest in Roger, one of my favorite people from the industry, and we’re going to start with very fresh news: Industry Ventures has been acquired by Goldman Sachs—$665 million as the starting price, with, I think, a $300 million increase depending on performance over the next 5 years, up to 2030. They have $7 billion under management as an asset manager. I wanted to start with this: How did we analyze and how did we think about this when the news broke last night?

1. Industry Ventures Sells to Goldman

Rory O'Driscoll

Good for Hans. Good for the founder. He grafted for 25 years. It felt like—I think it was just after the crash in 2000. He built that secondary business, and it was a great entrepreneurial act. Well done to the guy. I mean, let’s start with that: Just well done to the guy.

2. Fund Economics Explain the Deal

Jason Lemkin

Can I ask an ignorant question to Roger and Rory, maybe? I should know this, but I don’t know how fund-of-funds economics really work. At first I read it and thought, one, congratulations for not pushing it to a billion. It’s like $970 million with the earn-out. Congratulations on letting the ego walk it back and not putting your fist on the table and saying—

Rory O'Driscoll

That’s cute.

Jason Lemkin

In 2025 founder language, it has to be over the top. That was one thing. But then I stepped back and thought for a minute: Hold on, they’ve got $7 billion under management, right? Here’s where the math—I should know this. I don’t. I know it’s a fund of funds, but imagine you’re taking home a minimum of 20% of that. You could do more. That’s $1.4 billion. What am I missing?

Rory O'Driscoll

No. No.

Jason Lemkin

What am I missing in the math?

Rory O'Driscoll

You’re missing the math. Yeah. Because you don’t get quite that much. You’re implicitly asking 2 questions, maybe. One is, how are asset managers valued? And then separately, if you’re the owner of a business, when should you sell versus keep it and just keep the income stream?

On the first, look, this thing traded at roughly 10% of AUM, right? I actually went and looked it up because the mental model for assets under management to enterprise value is very varied, which makes sense because there are different models. Carlyle and KKR, where they own all the economics, roughly trade at a market cap of 20% of AUM. In other words, if you manage $100 billion, the entity is worth $20 billion, right?

Here, which makes sense for a secondary because the economics aren’t typically quite as good as those of primary investors, it’s at 10%. Then you can go all the way down from there to public asset managers trading at 1% or 2% of AUM. So at 10%, it felt about right for this kind of thing. It’s, I think, a little bit in line with StepStone and Hamilton Lane, which are publicly traded funds of funds as well. So it felt around the right price.

Roger Ehrenberg

Much as I hate to agree with Rory, because I have so much joy disagreeing with Rory, I actually used to be in this business. I was in financial institutions M&A at the very beginning of my career and sold asset managers. His analysis is spot on.

This is kind of a hybrid, and if you look at it as a multiple of revenue, if you think, Jason, your numbers—the 20%—if you were to say the expected earnings of that pool is 20%, as a fund of funds I get 10% of that, right? So it’s 2%, so call it $140 million, and then you get some management fees on top. Of course, if you were to say 20%, it’s probably not 20%; it’s probably 13% or 14%. You adjust it, then you’re saying it’s probably like 10 times revenue for a very, very solid business with a great brand.

I honestly do think that they had started out early in the primary business. Actually, Industry was one of the first institutional LPs at IA, so they were in IA Ventures 1 and 2. But obviously, their secondary business now dwarfs their initial investing business and funds. So kudos to Hans. It’s been a grind, but they have really ridden the wave beautifully. But I think it is a straight-on-market deal.

3. Goldman Expands Private Assets

And for Goldman Sachs, the rationale behind it is that they can push a huge amount of their private clients into Industry moving forward?

Rory O'Driscoll

Yes. I mean, it’s a platform for them. All the public asset managers are desperately trying to get into private assets because, at the most basic level, you can get your S&P exposure for less than 10 basis points versus 2,000 basis points for running private capital. So if you were an asset manager in public stocks, your business is eroding away super fast. Active management is going away.

If you want to be an asset manager—and Goldman is a big, big asset manager—getting a platform like this that you can expand just makes a ton of sense. So you’re right, Rog. They’re probably paying 10 times sales, which on a 50% margin business is 20 times earnings. It’s a very healthy price, but they’re sitting there going, “We can jam this through our channel, expand this 10X, and keep our asset business going with some high-expense, high-fee assets when your public assets aren’t nearly as profitable.”

Roger Ehrenberg

There’s also one other point I’d like to raise. You’re 100% right, but just a little insight on Goldman. Goldman has this platform called Apex, and Apex is a platform for their high-net-worth individuals, where they bring these kinds of deals, primary and secondary, to their ultra-high-net-worth clients. This is something now where they can actually institutionalize it, create much more product, and it’s just something else to give to their ultra-high-net-worth clients. Plus, Industry itself has institutional clients that can now become GS clients. So it’s kind of a win-win, both from a product perspective and from a distribution perspective.

Jason Lemkin

I’ll tell you what I like about it. Maybe I’m in the wrong platform, but I get these calls from Morgan Stanley to invest in private equity. And first I’m like, “Have you looked at my exposure? Don’t you have access to my account?” The ideas are so dumb. They’re so dumb. They’re so dumb.

And I’m like, as long as Hans and team stay, I think they said they had an 18% IRR over history. If that’s every day in and out, that’s a good baseline for folks to get into, right? If they can productize that, I would take that 100 times out of 100 versus the crazy calls I get from Morgan Stanley. “We’d like to get you a little more private equity exposure.” Well, I’m 90% as it is, guys. But maybe 95% is the right—

Roger Ehrenberg

Stop telling the truth, Jason.

Jason Lemkin

The right diversification.

Rory O'Driscoll

And I think the other thing to note that’s interesting is what kind of GP-led businesses can, in fact, be 100% sold? I think the interesting insight is probably not a pure venture firm. You can’t sell 100% of Benchmark, because then you don’t have Benchmark; you don’t have the 5 great guys who are doing Benchmark.

Whereas this is a more productizable business. It’s got a lot of secondaries. It’s a lot of fund of funds. Just like Greenspring, which was a large LP in Scale, got sold to StepStone. Same kind of thing. These are the kinds of businesses that can be sold 100% into a larger institution, and it can work for both sides. Obviously, the seller gets a great capital gain, and the buyer gets something that they can blend in.

You couldn’t do that with a venture firm, I would argue, right? Especially a small venture firm. Because in the end, all you have is the 3 people, and if you cash them out 100%, then you don’t have anything.

So I will admit, at times over the last 25 years, you kind of look at the secondary business and you go, “That’s not nearly as interesting as the business we’re in. I love being a primary investor. I love doing my deals.” But one thing you recognize is you can’t sell this business. You can’t—and Hans could sell his, and he did. So well done, Hans. Who’s laughing now?

Roger Ehrenberg

It’s the fee stream. You’re 100% right. You had mentioned the Blackstones and the Carlisles and folks like that—asset gatherers. Ultimately, Hans is an asset gatherer. Most of the revenue from it comes from fees. He’s built a machine. I mean, kudos. He built an asset management business.

Rory O'Driscoll

Agreed.

Roger Ehrenberg

The rest of us here do not run asset management businesses.

Jason Lemkin

We’ll give Harry time, but point taken. Give Harry a couple of years.

Rory O'Driscoll

The more your business is predicated on either a brand or some institutional thing, the more it’s like a business and the less it’s like just 3 to 5 partners picking great investments, the more monetizable it is. I could totally believe that your media company with a venture fund attached could be monetizable in a way that Roger’s fund or my fund will never be, right? Scale will never be, right?

Obviously, Andreessen, who has clearly embarked on the AUM and great investing journey to bigness and maybe an IPO, believes the same thing, right? There are some businesses that are—

Roger Ehrenberg

General Catalyst, same thing.

Rory O'Driscoll

Agreed. General Catalyst stated the same thing. And yeah, I would argue even—I would argue Y Combinator, for example. I’m not saying it’s getting sold, but it is the definition of a business. It’s independent of the greatness or not of the current operators. It kind of has heft over and above that, right? Those kinds of things can be sold.

But if your only asset is... We're going to talk about Roger's new fund in a second, but let's be clear: the only asset in Roger's new fund is Roger's IQ as a stock picker—God help us, right? So, without Roger, there's nothing, right? I thought that was good, Roger. I thought it was—

That was good.

Rory O'Driscoll

Impressive, right? And that's just not a non-monetizable asset. It's a continuum, but maybe you can sneak out as a media company. Roger and I are just destined to stay here and be simple, humble stock pickers.

This is so nice. With Roger here, you give him shit, not me—and you defend me. This is great. This is like deflection. Roger, nice. I—

Roger Ehrenberg

Anything for you, Harry.

I do. You're too kind. Now, Jason, this next topic, I felt that you might have a perspective on, given our prior chats. Andrew Tulloch leaves Thinking Machines, the company he co-founded and raised $2 billion for, to join Meta for a reported $3.5 billion. Well done, Andrew Tulloch.

Jason Lemkin

Yeah. Screw you, Hans. Better luck next time.

Rory O'Driscoll

I'm triggered.

Should've done computer science.

Rory O'Driscoll

I'm triggered.

Jason, what did you think, dude? I know you have perspective.

Jason Lemkin

Well, not only that, literally, I was on LinkedIn just yesterday, and a founder I've known from a distance for a while—I didn't realize he'd left his unicorn and just raised $20 million from Accel to do his next company. I'm like, “I guess it's totally cool today to do that. I guess it's totally cool to leave Thinking Machines.” Didn't it happen with Elias, co-founder, too, right? I get it all confused—who went to Meta.

Good God. And so people are checking out of $10 billion seed companies now. I feel like a fuddy-duddy because when I was a founder, good God, there was no way I would leave, no matter how tough it was at my startup. I would just never consider it. And now it seems it's cool. And even your accelerator will take you right back after you quit.

And this next sentence is genuinely not meant to be snarky, Jason, even though it's going to come across as it.

Jason Lemkin

It's okay.

Rory O'Driscoll

Yeah, you absolutely would never quit. You would hang in there. But you also probably never faced the existential dilemma of being offered $3 billion to quit. Because most of the time, most people independent of their startup aren't worth a multiple of their startup valuation. If they're lucky, they're worth a $500,000-a-year salary.

In the face of unprecedented wealth, I'm shocked to discover that most people behave badly. The loyalty conversation erodes pretty quickly when you enter the third comma on the check.

Jason Lemkin

That's all fair. I understand the words, and again, you said fuddy-duddy; I didn't. But the fact that these are people who backed you and believed in you and supported you, and you just peace out and do something else, I do have a bit of an issue with that.

There's levels to this shit where, yes, the person sitting at the helm of a $10 billion post-money company, whose share is $2 billion, then goes for $3.5 billion, I look at that and I'm like, “Are you fucking kidding me?” If my kid did that, I would not be happy with my kid. I would be like, “You leave the people that brought you to the dance because you see a prettier girl over here?”

I don't know, man. Something's broken, I think, in the way that we're evolving as humans if everything ultimately reduces to what's in it for me, and there's not another vector involved. I'm a wildly competitive guy.

We know that.

Jason Lemkin

I want to win, but it's not at any cost. And let me say one more thing, and then I'll create some oxygen for others. But some of these deals, like Scale AI, where, basically, I saw that and it reminded me of the old-style asset purchase versus a stock purchase, right? Where I don't want the liabilities, I don't want all that other stuff, I just want this asset—or in this case, I just want these people.

And that has now become de rigueur. I mean, it's hard to call it an acqui-hire when you're talking about many billions of dollars, but essentially, it's an asset purchase, and I think that's something we'll continue to see more and more of. But I feel less badly about that than I do what we're talking about right now.

4. Founder Vesting Gets Serious

Rory O'Driscoll

Leaving aside the morality question, which I reserve the right to come back to and take a different perspective, the interesting question Jason asked is: How should investors handle this information, and what should they do differently going forward? And what should other founders do?

I mean, to state the obvious, you see this interesting thread where founders are realizing extended founder vesting and cliff vesting and stuff like that, and protections for them versus a co-founder leaving are a legitimate part of the discussion here, right? Now, it may not even have mattered. He may not even have made his cliff. But it does point to being very sure that you and your founders have extended vesting.

I mean, if, for example, these shares weren't subject to vesting, then you feel even stupider as both a co-founder and an investor. And I mention the co-founder to make it clear this is not just a VC-taking-care-of-itself perspective, though we'll come to that in a second.

Rory O’Driscoll

Purely from a—if you're a bunch of founders, if you're 7 people leaving a safe job to go do this startup—you've got to run the game theory of how will I feel if one of my 7 co-conspirators bails on me, and what should the economic penalty be to them? So if I'm a founder looking at this, I would be thinking about: Is there cliff vesting? Is there 6-year, not 4-year, vesting? Are there repurchase rights? Are there ways to make sure that this doesn't happen, and if you leave for a competitor, something really bad happens?

Well, I'm just saying, Rory, is this not just symbolic of the conversation we had before recording, which is the increasingly transactional nature that we're seeing in rounds, which I moaned to you about? I'm a romantic. I like to fall in love with a partner, whether it's an investment or a romantic partner. It's super important to have the relationship, and now it's like, “Hey, highest price, auction process, zero relationship.” And this is just the embodiment of that in a post—

Jason Lemkin

Well, I think that's just been true since we met, Harry. I think it's just become institutionalized with AI, with deals being done on a Saturday for 9-figure, 10-figure amounts.

What I worry about—this is just me—we're mostly early-stage investors here. We're all relatively early stage. I don't believe liquidation preferences matter. I don't believe they're a big deal, despite what they say. But my liquidation preference has always been—and I put it in quotes, not true—knowing the founder would never quit. That's my protection as a seed investor.

Forget the preference stack, or $1 million raised, or $1 trillion. If I know Roger's never going to quit, that's the best protection I can get as a seed investor. The regular stuff is at the margin, right? But if I am investing and he might quit—no matter how good I think he is, he might quit in 6 months for something better—I guess you can adjust it on a spreadsheet, but it's a risk I've never taken in my history. This has been my downside protection: He won't quit. She won't quit.

Rory O'Driscoll

The interesting thing here is that the core asset in these investments is a group of 7 engineers, which is pretty unusual compared to most deals you do. I mean, let's be honest, most of the time—and you correct me if you're wrong—at the seed stage, the stage we're investing at, you spend a lot of time with the CEO, you meet the VP of engineering once, you just assume it's a good team, you look at the product, you try and do your due diligence, but you're not leaning in and saying, “The seventh—the seventh of 7 co-founders on a list is pivotal to my investment thesis.”

So it's different here because we're talking not about the motivations of a founder person, but the motivations of an engineering person who was, like, an engineer, an academic, then might have spent 14 years or something like that at Meta, went to OpenAI for less than a year, and was at Thinking Machines for less than a year, and then went back to Meta. As a career trajectory for an engineer, that's not crazy.

I was this longtime engineer at place A. I bounced out to this other place, left them, and then decided I just want to go back to the original place I was. It's kind of not an unusual pattern of behavior. What is unusual in this case is, because of the technical nature of these bets, how much reliance we're putting on the behavior of an engineering/academic talent pool, which probably responds fairly differently than the person who says, “I'm a founder; I want to be the CEO.”

Roger Ehrenberg

But Rory, that last thing to me is the bit. This isn't just job-hopping and then, oh, eventually going back to the place where you kind of earned your stripes. It's founder responsibility, and I think that's what's lacking here: that notion that if I am taking on this mission with a group of people, with a set of capital partners, that conveys a measure of responsibility that I'm discharging.

And the minute that I say, “You know what? Screw that. My responsibility is to me”—I wouldn’t even say it’s the optimal outcome, the maximal outcome, the near-term max. Who knows whether or not this is better? It may well not be better, but the fact is, the people that they left behind are kind of screwed.

Rory O'Driscoll

Agreed, but I’m going to go back and, first of all, do the money because I’ve known you for years and you’re a financially astute person. Question, Roger: would you prefer $2 billion in Thinking Machines unlisted stock, with the chance to be amazing and a chance to go bust, or $3.5 billion of liquid Facebook stock over the next 5 years? Just as a pure financial call.

Roger Ehrenberg

Obviously.

Tom Loverro

Yes, thank you. So let’s not pretend that they’re equivalent.

Roger Ehrenberg

No, I’m not saying they’re equivalent at all.

Tom Loverro

Great. 10 to 1? 10 to 1 better?

Roger Ehrenberg

Maybe. But there’s obviously way more option value in Thinking Machines Lab. That could be a $500 billion company.

Tom Loverro

No, you’re exactly right. You have embedded option value versus probably highly fixed $3.5 billion, plus or minus 50%, versus $2 billion; it could be 0, it could be $10 billion.

Jason Lemkin

I do also think, Rory, the context of who gets it and when they get it matters. The dude was at Facebook for 14 years before. I don’t think he was exactly desperate for cash.

Tom Loverro

Agreed, and I said 14 from memory, but it was circa 10, at least, right?

Jason Lemkin

But it makes a difference. The dude has got $100 million already.

Rory O'Driscoll

True again. But, again, I wonder—and I could be wrong on this next sentence. I don’t love the behavior, but I’m just advocating both sides. Jason, you made a comment and Roger made a comment: “This person made a commitment,” right?

I wonder, when I look at the due diligence process for that deal, where you have a very charismatic CEO, likely Mira Murati, how many of the VCs met her? Was there any emotional connection? I’m just wondering here: did any of them even meet her in person? She made an emotional commitment to her colleagues, to her co-founders, yes. But as a VC, I’m not going to lie and say, if you’re diligencing that deal, obviously you’ve got to spend your hour with the founder. You didn’t get to know what the product is because they’re not telling you that. Did you spend an hour with this person or not? I don’t know.

Jason Lemkin

As a VC, you should be fired if you write a $100 million-plus check and you don’t meet the co-founders.

But Rory’s point is: how deep do you go on the org chart?

Rory O'Driscoll

Yeah, and, positing this in the context of a transaction that came together where you didn’t even get to know what the product is, I wouldn’t assume a whole bunch of emotional connections on either side. I’m just pushing on the bullshit.

The big-picture thing is, you thrust a bunch of money at people, some of whom you met once or twice, some of whom you maybe didn’t meet at all, and less than 12 months later, one of those folks—you went back. You know, oh well.

Roger Ehrenberg

So what I’m hearing Rory say is essentially, “Fuck the big VCs. They’re playing the momentum game. If shit happens, shit happens. They can handle it. This is life.”

Rory O'Driscoll

Exactly. Big-boy rules.

Roger Ehrenberg

Yeah.

Rory O'Driscoll

People who have a billion dollars shouldn’t give it out to other people who decide to grab it. You might think it’s bad behavior, you might think you wouldn’t back him again, but let me give you a clue: it’s the prisoner’s dilemma.

Once you’re not playing a multi-period game—and when someone offers you $3.5 billion, you’re no longer playing a multi-period game—you’re playing a one-and-done. You’re going to get bad human behavior. Frankly, the real thing is, you as a person managing money should be thinking about how to deal with those corner cases, and I don’t know how you can; that’s the hard thing.

If you’re paying $10 billion pre for a raw startup where there’s proven evidence that the asset—which is those 7 minds—will be pursued by someone who’s willing to offer them $1 billion, it makes it real how risky those investments are, and I’m not sure what the answer to that is. It’s quite terrifying, really.

The answer is a bigger fund. That way you can have a few of these.

Rory O'Driscoll

Diversification. Got it.

You don’t want to be too concentrated with these deals.

Roger Ehrenberg

But Rory, the way you said that was a really astute way of putting it. You’re right. It’s like what used to be a series of multi-turn games, when one looked at their career: if somebody acted badly and burned bridges, that might be their last company; they might not found another company. Here, if you reduce everything, because of the scale, to a single-turn game, then that wildly increases the volatility of potential outcomes.

Rory O'Driscoll

You are exactly right. Roger and I lost money together on a deal, and I would say everyone on the management team in that deal behaved well. Every one of them is referenceable by us, we would give them money again depending on the deal, and we’ve talked to them about other deals. It felt like a multi-period game. Everyone would stand up and did the right thing. I think you’re right, Roger. These kinds of sums just change the calculus, and you can’t over-rely then on people doing the right thing.

Roger, rule number 1: we don’t admit that Rory’s right, even when he is, okay? This is rule number 1. To be fair, that was very astute. No, no, no, no, no, no. We don’t say this. No.

Roger Ehrenberg

Yeah, okay.

Rory’s cheating on you with Arthur Rock. Don’t worry, it’s okay.

Tom Loverro

Yeah, yeah, yeah.

Okay. Well, he said he left OpenAI. SoftBank reportedly secured a $5 billion margin loan backed by Arm shares to invest in OpenAI. How did we analyze this? If they’re getting loans to invest in OpenAI backed by Arm securities, what did you think of it?

Roger Ehrenberg

Masa rules. Nothing new to see here. This is what he does, for better or for worse. When he has a feeling, he goes all in: all chips, max risk, personal, financial, everything. This is Masa being Masa.

Rory O'Driscoll

100%. This man is full risk-on all the time, just wants to get the bet on the table, and has been spectacularly right at times and spectacularly wrong at times, but spectacularly willing to play. On behalf of the audience, we should be eternally grateful.

He’s not even that levered. I checked, actually. He still owns 90% of Arm through SoftBank, and Arm is trading at $90-odd billion. So he’s got $80 billion of equity there. He can lever up some more. If he can, he will.

And I think it does tie into the story of where the hell we’re going to get all this money to fund the tokens that I burn every day as a vibe coder. We still don’t have the answer. But reflecting on it, when I thought more about it, it’s actually a smart use of leverage.

If you have a $90 billion or $100 billion position, if you’re an individual, you certainly don’t want to pay capital gains on it. A $5 billion margin loan at an acceptable interest rate is probably a smart position, right? That loan’s not going to get called under any scenario, probably, right? But it is kind of weird. It still feels like part of this whole “we’re all believing in Sam” thing—which I do believe now—but we’re all believing in Sam, that trillion in revenue’s coming.

Rory O'Driscoll

For the record, let us remind ourselves that in 2002, you did see individual stocks on the Nasdaq go down 90% from the peak. So it is possible the loan will get called; it’s just unlikely.

Roger Ehrenberg

Yeah, the question is, again, if—for ease of analysis—let’s say that Arm is $100 billion. That’s leverable pretty much to $50 billion.

Tom Loverro

Yep.

Roger Ehrenberg

But it very easily could see him back in the news with an incremental $20 billion. He could lever this. He could take $25 billion against the Arm position easily.

And then, to Rory’s point—and we’ve seen this—the thing about Masa, I’m old enough to have seen the Nasdaq run-up, the Nasdaq crash, Masa being Masa. He has had so many existential moments where he’s waking up in the middle of the night, sweat pouring down his face, wondering if this is it, but he’s held tight, and he didn’t go over the line. He went right to the line, and he’s come out, and then his macro theses have been proven out. This is a relatively low-octane Masa move.

Rory O'Driscoll

Exactly. Exactly my words, yes.

That’s a great visual for the show: Masa surrounded by fires, with low octane just around him.

Tom Loverro

Right. That’s exactly right, Tom.

5. Compute Demand Drives AI Spending

And the thing that I find hard is, when we talk about where the money comes from and the speed of what we’re seeing, we’re now building more data centers than office buildings. We’re seeing demand for compute be the single biggest constraint, and I’m looking at this going, “Really?” The bubble that everyone’s talking about—in comparison to the fact that we’re building more data centers than office buildings and demand for compute is just off the charts—is this not fundamentally different?

Rory O'Driscoll

Well, there’s a lot in that. The counterpoint between building data centers and building offices sounds clever, but it’s, to some extent, trivial, because who the hell is going to be building offices? There’s no one in them, right? The reason we’re building data centers is because we want to put computers in out of the rain, and the reason we’re not building office buildings is people are staying at home.

So it's pretty obvious what you'd build. But I think, stepping back, the wider comment is that we go around this question of whether AI CapEx spending is a bubble over and over again.

I was reading over the weekend that Stripe Press has this new book, Dwarkesh Patel's Scaling AI: An Oral History of Scaling, and I read it over the weekend. Really good. The thing that impressed me was the matter-of-fact way that a number of the people reiterated, first, that the scaling law has been proven to hold for 6 or 7 years now at a high degree of accuracy. A couple of them blithely said it wasn't a question of when; they were literally saying, "How long did it take?" It was, "Of course we'll need 1% of GDP to invest in computers, but then we'll be fine because we'll have AGI."

My point is, what I find fantastical is that, although that's a shit ton of investment, they were like, "Well, that's just what it's going to take, and of course we're going to get to that." It was the matter-of-fact way in which the smartest people of our generation thinking about scaling AI accepted that this was the to-do list.

That's a long-winded way of saying it's not just, frankly, Sam Altman spouting off out of his butt. A whole bunch of these folks are like, "Yep, this is the task we've embarked on ourselves for the next 5 years, and it's going to take around 1% of GDP to build a compute cluster big enough to get the FLOPs to get the outcome we want." They're going for it, right? The only question is how the capital gets found and whether it can earn a return. But if the capital is provided, this is going down. These data centers are going to be built.

You could see these guys going, "This has held for 6 or 7 years. It's totally predictable. The loss function is predictable." It was kind of like, 10,000 computers worked, so we're going to buy 100,000. Then we're going to buy 1 million, and somewhere along the line we'll get AGI. What's your point, and why are you even questioning it?

Jason Lemkin

I can tell you just one thing, for what it's worth. Forget the macro stuff. As Mr. Vibe Coder in the group, I vibe-coded 8 apps. I haven't built a piece of software or been part of building a piece of software since 2012. I vibe-coded 8 apps in 100 days, and we have 12 AI agents working at Sastre now. They've replaced almost all of our sales team and our whole content team.

What I can tell you from that—and folks have been saying this—I wouldn't have believed this 90 days ago, but folks like Amjad or Replit are saying, "You've got it backwards. Everyone will consume every available token." What I know is that, today, just with what we're doing with 12 agents and 8 apps, I could use 100× the tokens. Even now, I have to wait around 20 minutes to build one feature. Vibe coding is cool, but it doesn't work at Google speed. Our agents could all do more.

So if everyone today could use 100× the tokens, and think how early we are on the journey. As we record this, it's Dreamforce week, right? Harry's going to be there this week, I think. As Mark points out, only 0.1% of Salesforce customers are really using AI yet, so it's like 100 times 100 times something. I can see it myself: we're not remotely servicing the demand that exists today. How it gets paid for is a different question, but I think this is so different from the prior waves, where we just can't even service this demand.

Rory O'Driscoll

The only thing I would actually question you on, because I'd love to hear your thoughts on it, is my mental model of this. From a technical and demand perspective, it's all going to happen because the people who are building it want to build it, and Jason, at the margin, wants to use it.

So if anything is going to constrain this, it's going to be economics. My big-picture model here is that you've got the technical trends, and then you've got the economic trends. The real question is, if it's slowed down, if it's wrong, it won't be because the technology direction is incorrect. It won't be because the demand isn't insatiable. It will be purely and simply at the margin: the marginal capital provider says, "Oh my God, people, even though the scaling law is holding, the economic return from that investment isn't holding."

The scaling law might be log-linear, but every economic phenomenon tends to have diminishing marginal utility. At some point, capitalism is going to say, "I don't know how to tell you this, guys, but you can't have your $1 trillion dream because we just can't afford it, and we're going to have to slow down a little here." That's what I'm trying to figure out: are we going to get the economic return quickly enough to warrant the investment? Back in the day, you were a financially astute investor. What do you think? Put on your trading and thinking hat here.

Roger Ehrenberg

No, I think you've nailed the dynamics. Yes, economics will dictate that not everything people want to build will be built, because the capacity won't exist once diminishing marginal returns reach a point at which the value of the capital isn't met.

I guess one vector that I'm not clear on is whether there are step-change advances in processing efficiency or simplification of code such that the amount of processing required per unit declines in a way that people don't expect. Is that going to relieve some of the pressure on the magnitude of infrastructure that's being built?

Jason Lemkin

I don't think so. I think we burn more tokens. Every company is saying, "30% or 50% of my company's built with AI by our engineers," right? Or, "Hooray, our engineers came back. 50% is built with Cursor." Does that mean they take the rest of the day off? No. What it should mean is that they're shipping more features.

Instead of spending an hour on Stack Overflow trying to find a library that was stale or pseudo-open-source, I can do it in 60 seconds, so I just go build another feature. The better that gets, the more tokens you'll consume. I don't think there's this great efficiency coming. We'll just build more and more stuff faster and faster.

That's why it's so stressful at seed today, because so many of these companies are born almost instantly. It's tough doing the A, B, C, D, and E, but seed is really hard today because that company probably didn't exist 7 days ago—or, being less facetious, 30 days ago.

When we all started, even when Harry started, startups were never good 30 days in. They were terrible. Once in a while, an off-the-chart CTO would build demoware in 30 days that would make your jaw drop, but if you picked at it, it didn't work. It's just crazy what you can build so quickly today. It makes it so competitive. It's complicated.

6. AI Shrinks the Seed Window

Lovable had its first-year anniversary the other day. I thought that was insane: first-year anniversary, over $170 million in ARR. Wow.

Jason Calacanis

It's great, but it also makes that pre-seed inception phase harder, I think, because you can't intuit differentiation in the way you used to be able to with a little bit of software. "Oh my God, Aaron and Dylan built a folder you could put a file in. I'm in."

Roger Ehrenberg

Yes, it's hard.

Jason Lemkin

Those days are long gone. I mean, how did they do that? You mean it stores on the internet? Get me Rory.

Rory O'Driscoll

It's moving a lot quicker. You make a comment here: it makes it hard to be seed. You're right, because you don't know. It also makes it harder to be A and B because you have to pay up.

Let's be frank: we're all looking for that wonderful period. It's pathetic when you say it from the entrepreneur's perspective. What we're really looking for is that wonderful period where you know, but it's not obvious, and you can invest.

It turns out that period may have declined to half an hour. You have pre-seed Lovable. Then, on day 3, it's exploding in revenue, and suddenly you're at $2 billion pre. It's an exaggeration, but not by a lot. 6 months ago, they were raising at a couple of billion.

The time period from "We haven't launched yet" to "Oh my God, it's so obvious" has, as Jason said, compressed. That sweet spot is vanishingly small, and therefore you're left with the choice: do you invest into acute uncertainty, or do you invest at $2 billion pre?

Roger Ehrenberg

Acute uncertainty, or businesses that aren't specifically disrupted by this phenomenon, which generally have legal and regulatory challenges that make it not simply a question of whether I have better, faster, or cleaner code. There are a bunch of these other issues to address.

Rory O'Driscoll

And is that your thinking? What we didn't say at the start is that Roger's getting back on the field, proving that his timing is, as always, brilliant. Is that your thinking when you're back on the field, or as a seed investor?

Roger Ehrenberg

Yeah, it's part of it. The stuff that we're doing is definitely more resistant to the phenomena that we're talking about on this call. As you well know, acute uncertainty does not trouble me in the least when that acute uncertainty expresses a deeply held, well-researched thesis that I have. That's just the nature of very early-stage venture.

But I do think that the issues of legal and regulatory complexity—whether it's financial infrastructure, media rights, copyright, patent, or IP—make it more nuanced than simply asking whether I'm able to develop the next base model or a great platform for developing applications at warp speed.

Rory O'Driscoll

I think that's fair. Actually, we had Aaron Levie talking to some of our LPs. I'll maybe come back to that later. But one of the concepts he introduced was something I've been thinking about at the apps layer. Aaron from Box is always so crisp, and he talked about the diffusion rate of this technology across enterprise as a whole.

There are going to be different diffusion rates. The diffusion rate for Lovable will be very different from the diffusion rate of AI for complex medical prognostication. Setting your expectations accordingly, your investing thesis accordingly, and varying it by virtue of the diffusion rate, I think, will be one of the key skills here. Recognizing that some markets are going to be done and dusted in 6 months, and you're right, Roger, other markets where there are regulatory constraints, you might be 2 years in before you get your first big lighthouse, vertically focused enterprise customers, but then it's bowling-pin and you get the other 5 in 6 months. There are going to be very different adoption patterns by industry.

Roger Ehrenberg

Harry, I'm not going to say it. Somebody might have said some relatively smart things right there.

Rory O'Driscoll

I was paraphrasing someone else.

Roger Ehrenberg

That Aaron Levie—he's a smart guy.

Rory O'Driscoll

Yeah. In fact, Roger—

Jason Calacanis

What you don't know is that I prep Rory before the show: I sit down, share my thoughts, and really we come to—

Roger Ehrenberg

Yeah, we just—I'm just prepping—

Rory O'Driscoll

He's parroting you.

Roger Ehrenberg

Yes. Yes.

You said something about value in regulated markets, maybe where it's more difficult to be disrupted. Rory—and Jason—we had this great chat last week on the ability to king-make and how capital can be used as a moat. We discussed it, Jason. You very well and eloquently discussed Polymarket raising $2 billion at $9 billion. And then this week, Kalshi, the direct comp, raises from Andreessen and Accel at $5 billion, right after Polymarket's raising at $9 billion. How did you think about this? Is king-making not possible? What were your thoughts?

7. Prediction Markets Exploit Regulation

Roger Ehrenberg

Let's be honest about what's going on here. This is the purest regulatory-arbitrage play of all time. You can look at the cumulative market cap of regulated sports betting and look at how it has dropped in response to the rise of Polymarket and Calshi, which are not subject to the same rules and regulations that they are. Literally, it's, "We're going to take value here, and we're going to place it over here."

The combination of, at least in the United States, the current administration being extremely predisposed toward the prediction-market companies—and now Calshi has announced that it's going to India as part of its 140-country coverage—means that, if there were a level regulatory playing field, this would not be happening. But for now, this is one of those circuits. So you talk about king-making, and I think, to an extent, they are trying to run as quickly as they can to get so big and so powerful that they will not face the parallel regulatory scrutiny that the legacy companies have suffered through since PASPA.

Jason Calacanis

That was in my FTX investment memo: just get to that scale where we could push through some of these issues. I feel like we just came up a little short. If we could have just waited for our buddy David Sacks to get in, then I think we would have really had a fun return on that one.

It's a good point. Listen, you're obsessed with king-makers, and I think it's a good topic, Harry. I think it's right. The only thing that fascinates me on this king-making topic was that literally Polymarket was founded by a solo founder in his toilet during lockdown—a solo founder pictured on Twitter in his bathroom. That was the only place he had to work during the worst lockdown of March 2020; he founded this.

It gives me inspiration that founders will come out of everywhere, right? And so king-making works. It is a real issue to talk about. But if you can solo-found Polymarket out of your toilet in March 2020, who knows where the next one is going to come from?

Rory O'Driscoll

A couple of things. One is, I actually think this is an example of king-making not mattering, right? I think Roger nailed it correctly on what's going on here. This is 2 non-sports-betting companies that are doing prediction markets, where all we talk about is the 10% of the revenue that's political, and 90% of their business is sports betting, but we're not calling it that, and they're just killing it because we all love to sports bet.

The number of people who give a shit about who's going to win the Nobel Prize or whatever else they're betting on that's not sports betting is low, but everyone in America wants to bet on the NFL, and they're cleaning up. Good luck to them, and Godspeed. That's just what's happening.

Separate comment on the king-making, tracking back to last week, because my short-term retention for memory is actually longer than a week, Harry. We were basically saying that money can pick a king, and I've been thinking about it since we talked last week, and I think this is an example of where it can't. There are 2 good companies. They're both getting a ton of money. They're going to slug it out. They're going to get relative market share. They both need capital, but I don't think there's king-making going on here.

There are 2 reasons king-making works. One is if you give one company so much money that they can overwhelm the other, then maybe that's king-making. And the other is where getting money from brand-name, perceived VC makes the customers default to you. That actually happens in enterprise software. If you're an awesome CEO and then you get 3 awesome VCs and you're selling mainly to tech companies in the Valley, you probably have a herding effect.

I mean, I think Brett Taylor's an example of someone at the high end. There's a perceived, "Oh, Sierra's amazing. We do want to take them on," kind of vibe. I don't think that's true for a second. I don't think anyone betting on Polymarket or Calshi gives a damn how much money they have, provided they can pay their bet, and gives a damn who that money came from. So I think this is an example of non-king-making, to be very clear. I think it's just making the bet.

Roger Ehrenberg

I think it's definitional. What does king-making really mean? To me, king-making means something different. To me, king-making doesn't need to be one company. Call it an oligopoly, where a small group of companies receive an exceptional amount of funding relative to everybody else.

Here, what I would refer to as the king-making is more money to spend on marketing, distribution, and team. Because at the end of the day, bonusing—that's what makes these companies go around—is the ability to—

Jason Calacanis

Spend money on marketing.

Roger Ehrenberg

Exactly. As long as LTV-to-CAC makes sense, and that's exactly what they're doing. So to me, that's the money. But you're right: customers don't give a shit. They don't care how much money Calshi's raised or Polymarket's raised.

I'm probably allowed to say this because I'm outside the borders, and we're not going to go into a political discussion, but am I the only one who's also realized that Eric Trump is on the board of one, and another Trump is investing in the other? Howard Lutnick's son happens to run the fastest-growing investment bank. My word, that seems like an awful lot of coincidences in one go. I wish I was as good at picking as the Lutnicks and the Trumps. What a great deal, huh, for a regulatory-arbitrage play, Roger.

Jason Calacanis

It was like the old days when you could work at YC and have your own fund on the side. You didn't have to invest through YC. It's a great deal.

100%.

Roger Ehrenberg

If you're in crypto, energy, gaming, or prediction markets, right, there are those handful of things to which this administration has very tight connectivity. And if you want help and support and you're in one of those industries, it's extremely clear what the playbook is.

Rory O'Driscoll

Which is why an intellectually coherent political philosophy is to say: regulate as few things as possible, because the more things you regulate, the more of this kind of behavior you see. And that kind of behavior you tend to see from every party, because the minute something is regulated, people have an economic incentive to incentivize the regulators, right?

I think the only real objection people have is the current generation appears to know how to do it at scale. We're not going to do trivial little jobs where, "Oh, I get a nice job when I leave my regulatory position and I get a nice $500,000-a-year job." No, we're just going to go wholesale here: just give me 5% of the company. It's just so much quicker, right? So the efficiency of the regulatory arbitrage has definitely gone up.

But I think the zoom-out comment is, whenever you have regulation, there are economic incentives to get close to the regulators. And I think that's why, as I say, you should have a bias to regulating as little as possible, especially on economics, if at all possible.

Roger Ehrenberg

I think this space is particularly interesting because you also have this issue of structural budget deficits in a lot of states—states that regulate gaming. And there are differential tax rates depending on the jurisdiction.

Then you have these massive offshore operations of things like Bovada, Crypto.com, and Stake, and these companies make billions and billions and billions and billions of dollars. And the more that Illinois jacks up rates in the state, the regulated sportsbooks that are subject to these rates reduce investment in the state, handle goes down, tax revenue goes down, and those customers that are now getting poorer service are going to trade offshore in unregulated markets.

So, Rory’s right. Again, Harry, sorry. But in this case, this is such a clear example: you can see how, as levers move, it has these effects in other parts of the market, and generally where it’s heading is the unregulated part of the market.

8. AI Bets Split on Concentration

Something that you said—“Don’t piss off”—I always think, “Don’t piss off Peter Thiel.” Peter Thiel’s made a very concerted concentration play in terms of AI bets. It struck me because there was a piece announced this week where they shift from caution to concentrated AI bets. They were out of the market, and now they’re obviously very in the market, but with few players.

What struck me, though, was that I’ve interviewed Hemant of GC, I’ve interviewed the team at Lightspeed, and I know the team at DST. They’ve taken the completely opposite approach: “We don’t really know the winners, so let’s be in Mistral, let’s be in Anthropic, let’s be in OpenAI, and let’s just index this wave of the best companies.”

Given the venture brains and Rory’s phenomenal wisdom, may I add, that we have—thanks to experience with Arthur Rock, if you didn’t know; guys, Rory does—I wanted to hear your thoughts. How do you think about these 2 opposing plays in this new world, and where would you sit?

Jason Calacanis

I’ll tell you my guess. I want to hear what Rory has to say. My guess is that being too diversified from investing in AI today is biding time. It’s not knowing, not having the conviction, not knowing. I think it’s better to bide time than to completely stay out.

There are plenty of reasons to do a check-in with leaders, even if it’s not going to 10X the fund, rather than to be grouchy, sit it out, or criticize these rounds. But I think if you’re Peter Thiel, sitting on what he has, you want to go concentrate. He’s like 40% of the capital in Founders Fund, plus his own capital. Making little teeny bets, little checks, doesn’t get you there, does it?

But if you don’t know, I would do 100. You might as well do it if you don’t know. This world is so different than 9 months ago. I think Plan B is to make a lot of bets.

Rory O'Driscoll

Oh, for God’s sake.

Roger Ehrenberg

Poke, poke, poke, poke, poke, poke, poke.

I wanted to hear your thoughts. How do you think about these 2 opposing plays in this new world, and where would you sit?

Jason Calacanis

I’ll tell you my guess. I want to hear what Rory has to say. My guess is that being too diversified from investing in AI today is biding time. It’s not knowing, not having the conviction, not knowing. I think it’s better to bide time than to completely stay out.

There are plenty of reasons to do a check-in with leaders, even if it’s not going to 10X the fund, rather than to be grouchy, sit it out, or criticize these rounds. But I think if you’re Peter Thiel, sitting on what he has, you want to go concentrate. He’s like 40% of the capital in Founders Fund, plus his own capital. Making little teeny bets, little checks, doesn’t get you there, does it?

But if you don’t know, I would do 100. You might as well do it if you don’t know. This world is so different than 9 months ago. I think Plan B is to make a lot of bets.

Rory O'Driscoll

I think that’s actually right. There’s a lot to unpack in this, so we’ll take a little while, right? One is, look, diversification reduces your upside. That’s the nature of it. It also reduces your downside, right? It just is. It’s the central limit theorem. It’s not a great insight here, people.

You’ll have a wider variance of returns, positively and negatively, if you have 10 deals in your fund than 30. Literally, the math is clear. So logically, the more certain you are that you can call the shots, the more focused you should be. Founders Fund both has the evidence that they can call the shots because they’ve done so and, frankly, the confidence to call the shots because they’ve got it. I totally understand why they’re going to try to be more focused.

I actually looked at the article, and I was honestly surprised at how diversified they actually are, based on the information shared. Founders Fund One, the growth fund, had 31 investments; Founders Fund Two had mid-to-high teens, and Founders Fund Three is aiming to have 10. To me, I was actually surprised at how diversified Founders Fund One was. It just didn’t feel in sync with what we’ve seen from these guys in general.

If you look at their SpaceX non-diversification, these guys strike me as the most likely to be most concentrated. So there was nothing surprising to me in that announcement. The only surprising thing was that they weren’t there already.

Jason Lemkin

Roger, how are you thinking about concentration with your new fund? You’re back in the game. Do you want to do 100 investments out of your new fund, or do you want to just do 5 big ones and go big and go home?

Roger Ehrenberg

To me, over a 3- to 4-year initial investment period, fund ones obviously tend to go a little bit faster—more like 2 to 2.5 years. I tend to have 20 to 25 portfolio constituents to create the farm team, but with significant ownership from each of those checks.

Where I’ve tended to get very concentrated is on the 2nd and 3rd checks, when we’ve gotten deep, deep conviction in a team, their execution in the market, and the fact that if they continue to execute with that skill and at that speed, the market opportunity is massive. So historically, and I’m following a similar playbook, we end up with 3 to 5 companies out of the 20 to 25 companies constituting 75% of the capital deployed.

Is your fund big enough, then, if we run through that—20, averaging $3 million checks today—

Roger Ehrenberg

But they’re not $3 million on average.

Are you going to get ownership if it’s going to be a smaller check size for that given seed round?

Roger Ehrenberg

It is in the spaces I’m investing in.

And they still exist?

Roger Ehrenberg

We just wrote a $1.5 million check at a $10 million post-money valuation, so 15% ownership in a really cool analytics company that is disrupting a seriously stodgy and screwed-up sector, and that I think has generalizability outside of that space.

So, yes, I do think it’s possible to write those kinds of checks. Assuming they do a great job, we’d love to write a $3 million to $5 million second check into that company, maybe more.

Jason Lemkin

I’m switching to Roger’s fund. I want to find these deals. It’s been a few years since I’ve gotten enough of those. I’m switching over.

Rory O'Driscoll

If you’re listening to this podcast and you can see people’s eyes, what you’re seeing in Harry’s eyes is the wide-eyed look, as if, “Can such things even exist? A $10 million post for a company with a product? Can such things exist?” And yes, they can.

Roger Ehrenberg

And multiple six-figure ACV clients.

Jason Calacanis

5 on 50. I’ll do it. 5 on 50. I’ll do it.

Rory O'Driscoll

And Roger, therein lies the danger to your model for that follow-on check, which is the existence of people like Harry, who’ll just snatch it away from you at a high price.

Coming back to concentration, I actually think, Roger, again, at the risk of being nice, that that’s exactly the right strategy. It would be easy to say, “We’re going to be concentrated,” but I think what you’re saying is correct: you have to start off with a significant element of diversification and then concentrate down.

This is top of mind for me. We just had our LP meeting, and we would typically be at least a turn later than you, Roger. My big-picture comment was that we’ve moved from a world where an exit is $200 million in ARR to a world where an exit is $400 million in ARR at an IPO. You’re just doing your thing here, but way over there at the finish line, the finish line has receded another 2 or 3 years, which means, logically, you’ve got more risk and more upside. You’ve just got to hold these things longer.

Arthur Patterson

For us, we’d typically been at our stage under 20 deals per fund, and we said you probably need to aim closer to 25, just given this dynamic. Nothing’s changing at the stage we’re at, but success is further away.

Then, like you say, you’re trying to concentrate back down, because in the end—this is no insight, but just to say it again—diversification is the enemy of upside. Concentration gives you more potential and more variance. You have to do that by being aggressive on your follow-ons, right?

That’s a very different strategy, just to call it out, Harry, I think, than what Founders Fund articulated for a growth fund. The big aha here is how bifurcated and different the different stages of this business are.

When you’re still at the “Will this thing even work?” stage, which is Roger, or the “Will it scale?” stage, which is where we are, or maybe Jason somewhere in the middle, you probably need some significant diversification and then to concentrate. When you’re effectively investing in what should be public companies but are just private, then the growth fund strategy should be 10-, 11-, or 12-deal concentration.

So it doesn’t lend itself to a 1-dimensional answer, and I think this question of how to handle portfolio concentration and what you should be aiming for is just going to be a key part of making the math work.

9. Early Winners Are Hard to Spot

My challenge here is that I’ve done the portfolio reviews, and when I look back on Fund One, where there’s a meaningful timeline to actually look back on—the 6 years now—the best performers, your Linea's of the world, were not obvious early, and the early outperformers did not signify enterprise value in the long term: Clubhouse, Hopin, BeReal. If you think you can pick your winners early, I think you are wrong. Am I wrong?

Roger Ehrenberg

Yes and no.

But more yes than no.

Roger Ehrenberg

I think one of the aspects of the strategy articulated is this temporal dynamic: many turns in order to be able to see progress. It may affect your ownership if, in fact, you don’t have that high degree of confidence in the earliest days and you’re leading or writing massive checks into every round.

I’ve got these very, very different ways of getting to multiple fund returners. They did not all look the same. TTD had multiple near-death experiences, multiple exit opportunities, and multiple bridge rounds. It didn’t have product-market fit for more than a year and a half.

So that’s one all the way over here, and then once it hit, it hit. Then you had something like Wise, which was chugging along, chugging along, chugging along, chugging along. Not that they didn’t have hiccups along the way, but fundamentally, that was as close to an up-and-to-the-right company as I’ve ever been involved with.

My first check into Wise was $750,000 at a $5.5 million post-money valuation. Then Valar came in, and we piled in with Valar to $20 million, and then we piled in with Valar to $160 million. We just kept going. We were 17% at TTD at IPO, and we were 13% of Wise at IPO out of a little shitty seed fund.

But then Datadog is a great example of one that ended up being a fund returner, but we had 2.2% at IPO because we were in there at pre-seed, then RTP led the seed, and then Index led the Series A. We were not comfortable in that, just being honest, to back up the truck at either the seed or the A. We wanted to at the A, but with sharp elbows, we couldn’t get what we wanted in there. We were able to write a check, but not as much as we wanted, and we ended up having 2.2% at IPO.

But that still was incredibly valuable because that was a $40 billion company. I’m just saying there are multiple paths, but the thing is, you want—you’re playing a multi-turn game, going all the way back to the beginning of this, because this is a multi-turn game.

Yeah.

Rory O'Driscoll

And just bringing it back to this point, I think what Roger’s doing is rejecting the absolutism of your statement: you just don’t know early on. He’s giving something more nuanced, which is that you don’t always know, but you know more than someone coming in from the outside. So, at the margin, you can tilt it your way, and that’s all you can do.

They’re not going to put up a big sign saying, “I swear to God, I promise you this one’s going to be a $10 billion outcome.” But as long as you have a differential information advantage and the willingness to use it, what you’re saying, I think, Roger, is that you can tilt the thing slightly in your favor, which is all you can do, which is all concentration is.

I do think, by the way, after you get into revenue, it’s much more knowable. At the stage we’re invested, I do this with about a 70% confidence level once you have a year or 2 of revenue, right? In fact, I can say that exactly because we did the math.

If you get the first 2 years that we underwrote in terms of revenue from the moment of our investment correctly, your probability of getting greater than 5x goes from 30% to the mid-70s. In other words, once you’re in revenue and you have product-market fit, you do have a lot of information, and you owe it to yourself to use that. So, at the seed stage, by definition, there’s less information, but it’s not zero. It’s not a flip of a coin, is my point, and I think that’s Roger’s point.

So if you think back on yours, there probably was signal there if you’re close enough to it to be able to tilt the allocation slightly, and it can make a huge difference.

Roger Ehrenberg

A hundred percent. Yeah.

Rory O'Driscoll

I’ve realized, as a comment on that, Roger, it’s interesting you talked about it because I’ve realized even at our stage, you have to be trying to do that more and more, because the journey from our stage is still 10 years now, whereas before it was 6 or 7.

Jason, what do you think at seed?

Jason Lemkin

You can get a relatively high degree of certainty at seed. Not the certainty you get at late stage, but you can get it. What it means is you’ve got to have a—you’re going to end up with a pretty small box.

You’re going to have to hunt strange things outside there. You’re going to have to be a founder-attractor magnet. You’re going to have to do something, because you’re going to turn away a lot of the deals. You’re going to do the Wises, but you’re not going to do the other one that Roger said. Maybe you won’t do The Trade Desk or something. You’re just going to turn away some of them, and you’re not going to do the Clubhouses because it’s wacky, but it might be great, right?

But you can still do Wise. That’s my error, because I’m concentrated from the first check, right? So I have to turn away something where I don’t have certainty, even if it’s cool, because the risk is too high.

I’m doing 8% of my fund into almost every deal. So I have to have such a high hit rate at seed. Now, there are exceptions. I’ll do some small checks, but that’s really where it ends up being. A check and a half is 8%. But half of them have to work, right?

So it’s a stupid model, because you have to turn away Clubhouse and Hopin and maybe even Datadog, but you’ve got to just find the Wises and go all in. But there’s a big trade-off. I do believe that you could just cut those ones out of Fund 1 and still have a decent fund.

Roger Ehrenberg

That’s so interesting. Yeah, for me, the 1% to 2% of the fund at entry, that’s what we do. Then it’s that next check that could be for 5% of the fund or 7% of the fund.

When we did DigitalOcean, our first check was $3 million, and then when Andreessen came in and led the $37 million Series A, we wrote a $7 million check. So we had $10 million in 2 checks in DigitalOcean. We ended up having $9 million over 4 checks in Wise, but that was a much smoother function.

In the case with DigitalOcean, we could just see it taking off, and then, as reflected in Andreessen’s leadership, we were like, “You know what? This is going to be one of our best companies.”

Jason Lemkin

But what are you going to do today when you got in at an $8 million post, like the one you talked about, but the next round’s at $300 million because the AI kids come in, or $500 million? This happens all the time today. How much of your fund can you really put in? Is it even worth writing that second check?

Roger Ehrenberg

It depends. We are hyper, hyper, hyper-disciplined. We look at every check independently of the prior check, period. That’s the rubric.

So if I look at that and say, “The information I’ve got about this being a $300 million or a $3 billion company is, I think, this could be a $100 billion company,” then I will write a very meaningful check into that company, up to about 10% of the fund.

That is exactly what we did with TTD. By the time we had written 4 checks—pre-seed, bridge, bridge, and then a check into the Series A, which was barely a Series A—it was at a $16 million post. We just crawled to that point. Then it was whoosh.

Then there was an air gap, and there was nothing until the $20 million Series A, which was $15 million primary and $5 million secondary, at a $280 million post. We wrote a $3 million check out of a $50 million fund into that at a $280 million post, after having cumulatively written a little over $2 million over those first 4 checks. But that $3 million ended up turning into $40 million, and that was a great investment.

Jason Lemkin

Sometimes I wonder today if that math works as well, right? Let’s say you did the seed at the one you did at $8 million, and you own 15%. How big is your fund today, $150 million or something like that?

Roger Ehrenberg

$100 million.

Jason Lemkin

I think it was just close.

Roger Ehrenberg

$100 million.

Jason Lemkin

$100 million. Okay. The next round’s at $400 million. Now listen, you could go to 10% of the fund, but the impact on your ownership is irrelevant. You’re going from 15%—

Roger Ehrenberg

Who cares about ownership? It’s a cash-on-cash business.

Jason Lemkin

Fair enough, but it won’t change your carry or your personal economics all that much to go from 15% to 15.1%. It’s just not—

Roger Ehrenberg

That’s not the issue.

Jason Lemkin

—going to change it too much.

Roger Ehrenberg

The issue is if it goes from $300 million to $10 billion and that check’s at 30x, that certainly impacts my personal economics.

Arthur Patterson

I think—can I try here? I think there’s an embedded concern in what Jason’s saying that he’s not articulating. But when you articulate it, I think it’s okay.

What you’re saying is: if all the follow-on rounds are priced incorrectly relative to the ultimate exit value, does your strategy work? It’s a fair question, and it’s the question you would ask if you’re living in Silicon Valley in 2025.

Roger Ehrenberg

Then I don’t invest in those rounds.

Rory O'Driscoll

I was going to say, to save Roger the trouble of making the point, I’ll say that the worst thing that happens is my initial check gets marked up, and on the follow-on I don’t need to chase the money. Then I’m money good on the check I’ve written. Every check I’ve written is money good.

Provided every check you write is money good, in the end you’ll die rich. It’s just one of those things, right?

I actually feel the need at this stage to remember that I was on a board with Roger for years. For the longest time, because he’d worked in finance before this—and this is a compliment, really, Roger—I actually thought he’d been an options trader, because no one I know understands option value better than Roger.

I think halfway through, you explained to me that you’d actually worked in risk management, core IT, and IT in, I think, Bloomberg or Goldman or somewhere like that. But I do think you’ve got a very good understanding of option value here, and it’s just showing true, right?

What Jason is saying is a fair comment, which is that sometimes all those options expire useless because other people are paying too high a price. But over time, it’s a good model, and all that happens is you don’t write checks at silly prices, right? And you don’t get quite as much ownership.

Yeah. If the rounds trade up to the point where the follow-on round doesn't have the return, so be it. Is that your point, Roger? Correct?

Roger Ehrenberg

100%.

Rory O'Driscoll

The odd thing, and the reason I'm so focused on this, is my big concern: as the exit bar has gone from 200 to 400 to 900, or whatever it is, more of those dynamics are going to pervade the business we're in. Because if you back into it from the exit, this is what you're dealing with.

Jason Lemkin

For me, I think of the next check as the opportunity cost of cash. That cash can be deployed elsewhere in a new option, so to speak. And as you see the price inflate, I get what you're saying: the exit potential inflates, too. But as you see the price inflate, the multiple does compress to some extent. To me, I'm always like, “Shit, I think the opportunity cost is back up.”

Roger Ehrenberg

But, Harry, what is the risk-adjusted value of that capital? That's the question every time, whether you're writing a check at $10 million or $1 billion. That's it. So you need to take into account all of those variables in order to make a decision.

Everything in life you can price as an option. Rory's heard this spiel. I walk through life and everything looks like the Greeks. Everything looks like options theory because that's life.

Rory O'Driscoll

And what he's saying is you have information there.

Arthur Patterson

Yeah.

Rory O'Driscoll

It's also worth mentioning the Peter Thiel quote at this point. His big learning was—and it is true—that when you do a deal and then a big, reputable outside investor does a follow-on round at what feels like a high price, do everything you can to get in it, because there's a lot of signal in that. It's not always true, and I could cite examples where it's not true.

But risk-adjusted and information-adjusted, that next round in a deal that you've been in that's performing well, provided the follow-on price is contemplatable, the advice would be: adjust your scales upward. Don't be guilty of anchoring on what you did. You've got to find a way to take into account the information since then, both operational and from the outside round.

Jason Lemkin

One nerdy thought, and maybe, Roger, you can educate me offline sometime. When I started investing, I learned from Founders Fund. I came up with that 10% threshold to put 10% of the fund into your winners. I've done it since I was able to do it myself.

The mathematical problem I've had is, imagine you have 3 or 4 potential winners in your fund. You exhaust a lot of your capital relatively early. Listen, I'm not as good an investor as you, and I never will be, but I have come to regret some of my third checks because I just wish I had more flexibility in the midlife.

But you can get up to that 10% limit pretty damn fast if you have more than 1 breakout. You can be super disciplined and say it has to be OpenAI or better. But if your fund is $100 million, you could exhaust $30 million or $40 million of it if you have 4 breakouts in today's world. You could even do it in a year, potentially, right? Maybe it's okay, but you run out of reserves. You run out of capital.

Rory O'Driscoll

You're right, and I think what Roger is saying is he wants that to happen.

Jason Lemkin

No, I know. I just think if you're on the board and you're going to be on the board for 10 years, you have to be there. Even though the founders are now allowed to quit whenever they want, they can check out any day they want today, I think if you're going to own double digits, my view ethically is you have to be there till the end. Otherwise, you're dead weight on the cap table.

You don't get to check out after 24 months and say, “Great job, guys,” and show up once a year as an observer. You've got to show up, and sometimes that means writing more checks, right?

Arthur Patterson

No. Sure, but that's one of your core investments. The other thing is, you can always write small support checks after that, just like I'm participating in the round, but I'm obviously not driving it because I've already invested $10 million out of my $100 million fund. That's one thing.

But obviously, in terms of stewardship, it's one of your core investments, and you will be with it until the day you're done. The second thing—and this is a whole other set of conversations that we could potentially have another time—is one of the ways that I very intentionally structured IA as we moved through time: parallel LPs to be able to do cross-fund investing.

That's a very hard thing to do. But if you can do it, do it, because it creates that tight line—

For people who don't understand that, you're saying to have the same LPs across funds, so you're able to have cross-fund investing without conflicts.

Arthur Patterson

That's exactly right. So it does not become this existential issue. By the way, we dealt with this with a portfolio company in IA 1, where IA 1 and IA 2 did not exactly have matching LPs. It was a conversation with the LPAC. They were like, “Yes.” I would show them the analysis, whatever. “If you want to do it, go do it. Just understand, if this doesn't work, you've got some explaining to do.”

The risk of that check was not simply financial; it was reputational. Ultimately, we ended up deciding not to write that check. In the case with later companies, Funds 2 and 3, when we had parallel LPs, all of a sudden we weren't investing out of a $100 million fund; we were investing out of a $260 million fund.

Rory O'Driscoll

I think that's true, and we do cross-funds, too. The only comment I'll make is it doesn't directly address Jason's comment. It can be really direct. Any cross-fund you do is going to be a good deal; otherwise, you're an idiot, and you're not an idiot, right?

So I think good deals that you can find a follow-on check for, you can cross-fund, even if the LPs aren't fully aligned between funds, provided you run a process, because it's a good deal. What I think the separate comment Jason was making is, bluntly put, how much do you keep back for your marginal deals if you're stuck in them for 10 years and you want to be supportive, versus playing early in your best deals at the risk of not being able to make follow-on checks later, right?

I heard your answer, Roger. You're basically cold-bloodedly allocating to the very best deals, and you're willing to have $100,000: “Hey, I'll try my best with $100,000. I don't have $1 million left in my pocket.”

Roger Ehrenberg

Correct. Obviously, at some point, we also try to get to between 110% and 120% invested through recycling.

Rory O'Driscoll

Yeah.

Roger Ehrenberg

Recycling dollars can be used for those purposes, but I'm not going to optimize my asset allocation because of the potential for uncomfortable conversations down the road.

Rory O'Driscoll

Yes, I remember one of those uncomfortable conversations, and you didn't optimize your allocation for it. He said, “Just keeping score, Roger. Not that I forget.” “It's only been 10 years.” Yes.

I remember what our other larger investor said to you at that point in time.

Roger Ehrenberg

Vividly.

Rory O'Driscoll

I might remember that as well.

Roger Ehrenberg

This is great. This is fun, Harry. Thank you for inviting me.

I do. Listen, Arthur was busy doing the board work—

Arthur Patterson

Okay.

—that Rory should have done. Guys, this has been so much fun to do. Thank you so much for joining me. I've loved having you all.

Roger Ehrenberg

Thanks so much, guys.

All right.

Roger Ehrenberg

Peace, everybody.