开源会威胁 Anthropic 的业务吗？在 AI 世界里，毛利率重要吗 | Matt Murphy

I think the foundation models—let’s say specifically Anthropic—have such special, performant, intelligent models. It’s going to be hard for somebody to just say, “I’ve used open source with my data.” It’s going to be functional and positive for some amount of what you’re doing, but I just don’t think it can be powerful enough to really displace it.

Matt, I cannot believe it, dude. It’s been 6 or 7 years since we did our last show, which worries me because I was about 23. I look back now and think, “Harry, you knew nothing, my dear friend.” Matt was so wise and is so wise. Thank you for joining me once again. It’s so good to see you, man.

It’s great to be here. It’s taken me 7 years to earn my way back onto the show, now that you’ve become so famous.

That’s very kind of you, but how have you earned your way back? The last few years have just been incredible. I wanted to start with a relatively obvious one, which is Anthropic. I think it’s the cornerstone of Menlo and of the last few years for you investing. Can you tell me how it came to be? How did you get introduced? Was it obvious? How did the investment meetings go? Take me to it.

1. Anthropic's First Big Bet

He’ll be mad if I don’t give him a shout-out, but Anjney Midha was the one who introduced me. Anj worked with me at Kleiner Perkins when I was there as a young associate. He was so spiky at the time, so he’s always just been in the flow. We were talking about AI, and he said, “Hey, Matt, you’ve got to meet Dario and Tom. This is the one company.” I said, “Let’s do it.” I got on the phone with Dario and Tom the next day, and I personally thought, “All right, I’m in.”

I’ll give you the broader story, but there was a part of it that was really easy and a part that was hard, as you can imagine. At the time, you had a $600 million venture fund, and you tried to average $15 million into a company. All of a sudden, it was a company that was pre-revenue and wanted a $4 billion-plus valuation. It was too early for our growth vehicle, so where did it fit?

The easy part was that OpenAI was absolutely ripping, with ChatGPT taking off. Dario was the creator of that within OpenAI, as you know. The reason he left was that he basically thought, “OpenAI is doing too many things. This is the one. This is the one big opportunity.” So you had that unique insight, knowledge, and conviction around the opportunity.

You meet him, and he’s an amazing technical thinker and researcher. A lot of the best researchers want to work for someone like that because it mirrors them. That’s the leader they gravitate toward. Another easy part was that, although it was pre-revenue and the model hadn’t launched, all the benchmarks showed that they were at the same level of performance as ChatGPT at the time, or better, and they had spent about 1/50th of the capital. You saw these compute multipliers and thought, “All right, there’s something special under the hood technically.”

My partner, Tim Tully, who was the CTO of Splunk and, thankfully, is part of the team we built here, dove in with Tom. So that was all: This is a massive market, and these markets are never dominated by one player. There’s going to be an alternative. Who’s better positioned to be the number-two player than Anthropic?

The hard part was what I mentioned: Why were we doing this? It was a $4 billion valuation and a venture fund. That’s not where we should be investing. What were our LPs going to say?

Did Dario set the price? Did he come into meetings saying, “The round is $4 billion”?

I don’t remember exactly that part of it, but if there was a mistake—and it’s hard to look at this through the lens of having made any mistake—it was basically, “The opportunity is there for you to lead.” I thought, “We can’t really do this out of the growth vehicle. In the venture fund, we can only do so much.”

So we said, “We’re all in. We want to be part of the round.” I’m very grateful that I have a set of partners who said, “Let’s just do this. This is one of the biggest waves. We’ve pivoted the firm to be all-in on AI. Let’s jump on this thing and see what happens.”

That led to everything from there. If I’d had a partnership that was more rigid around, “That doesn’t fit,” then this never would have happened, and we never would have gotten to the point where we led the next round and all of that. That’s the quick story of it. It was very fortuitous.

How big a check did you write?

The first check was a little over $10 million. That was the starter check because, as I said, in a venture fund, you try to have this narrow window of what you invest. The next round was when we did the $500 million-plus SPV.

Let’s go back to that $10 million at a $4 billion valuation. I’d be sitting in your partnership meeting saying, “Let’s outcome-scenario-plan this. If it’s a $40 billion company or an $80 billion company—let’s say you do $80 billion—it’s a 20x return. With dilution, traditionally, say it’s 50%, it’s a 10x. We’re going to turn the $10 million into $100 million. Wow, thanks for returning 12% of the fund, Matt.” How did you escape that thinking and get to where you did?

First of all, I’m glad you weren’t in my partners meeting. But seriously, there was that perspective in the room. At the same time, I had a couple of other partners, and this is what you want: partners who debate things and who you listen to.

There’s never going to be a perfect entry point into this market. If we wanted to be in this market, this was the way in. If we said, “We’re priced out. We can’t be in foundation models or neo labs of any kind,” then you sit on the sidelines. But we thought, “We have to be in this market. We’re building the firm around AI, and this is absolutely the best company. Don’t overthink it and get in.”

Honestly, I think that’s been a hallmark of how we’ve operated. I think other firms can get into situations where they say, “We have to own 15% or 20%, or we don’t do this or that.” I have tremendous respect for everybody, but the new Menlo that I’m part of has shown extreme flexibility to just do what makes sense.

Let’s get into this great company, because once you’re in, if it takes off, there’s plenty of opportunity to put more capital in.

Do we think ownership today is less relevant than it’s ever been, given that outcome scenarios are so much larger than they used to be?

By far.

2. Ownership Matters Less Now

I mean, look, if you can get ownership, it's magical because if you own a lot and the company's worth a lot, that's going to be great. But, A, there's a lot more capital coming in, so it's hard to even maintain that kind of ownership. But we're in an outlier business right now, right?

I've been in the business for 25 years now. For a long time, great outcomes were $300 million, $500 million, or $1 billion. So you were like, “Hey, you have to own 20% to get $100 million,” or whatever. I know you talk about it a lot on your show with Rory and Jason. That's not how the game is being played anymore. You have to be in the big outliers to drive great returns, and you're better off being in them at a very small percentage than owning a large percentage of a company that exits for $300 million to $500 million. Those just aren't going to move the needle.

Is there a stage where price does matter for you?

Well, we announced our new fund, so we're pretty full-stack. We can take big, concentrated positions. Fortunately, we've got LPs who like to co-invest with us. But we don't have a $10 billion or $20 billion fund, nor do we aspire to have that. So there's some quantum of capital where you say, “Hey, that's for somebody else, the next, next round.”

But I don't know that it's as much of a valuation thing. I would rather be in the most amazing company. I would rather be in the knot.

Before we move to SPVs, new funds, you name it, I do have to ask: In terms of levels of dilution, with the increased outcome scenarios and increased outcome sizes, do you think we're just normalizing an entirely new level of dilution that's inherent within these companies? Or is that exclusively for the frontier-model companies?

I think it's pretty rare, as you know, to find companies these days that don't end up raising a lot of capital, even way outside the frontier companies. Look anywhere in the AI stack, even at the application companies. There's a part of it where companies are growing faster than ever, so they want the capital to really be able to play offense.

There's also a part of this dynamic in the market right now where there's a signaling effect that every X months or a year, you raise capital. Employees want to hear that to keep up with the labs, and there's some of the retention aspect. You have to do more secondary. The landscape is just very, very different from what I grew up with.

And what I grew up with. You're forgetting I've been doing this for 11 years now, my friend. I remember the days.

You're really 11 now?

I know. It's terrifying. On the second round that you mentioned, where you're like, “Okay, we really sized up,” how did you think about that one, and how did that come to be?

3. Scaling Into The Second Round

If there was a playbook that I would love to repeat, it was this. We basically built a relationship, got into the company, and said, “Look, we need to go all-in, Menlo style: our recruiting team, our BD team, and just get close to the founding team. Build relationships and see how we can add value.” There are a lot of examples of that that we probably don't have time to go into, but we got to know them, and we got to see them operate.

Let's say the round closed in something like March. The model was launched in April. So you start at zero, and then sometime through the year, you'd see them adding 10 that month and 8 the next. The revenue started to build. In parallel with that, you had Amazon and Google come in, both with big investments as well as technical partnerships around Bedrock and Vertex, and then distribution relationships.

So you're like, “Okay, let's take a look at it from when we invested to now. They've got a capital partner, a distribution partner, and a technical partner—two of the biggest in the world. Their alternative to OpenAI, which is kind of tied to one cloud with Azure. So it's like, ‘Hey, this is the multicloud provider.’” Then you saw this revenue drumbeat start.

But the seminal event was that we held our LP meeting in November, and we had an Anthropic executive named Nirav, who's kind of a jack-of-all-trades—a very valuable one—at Anthropic, come and present. He blew everyone away. After the meeting, our LPs were like, “This is crazy. This company is amazing.” Even my partners were like, “This is so amazing that we're in this company.”

It was just a description of the power of the models and how they were already impacting so many applications, human behavior, and all that. We'd had a bunch of inbound leading up to that. So we literally came out of that meeting and said, “All right, we've got to do this. We've got to figure out a way to lead the round.” Two weeks later, we signed a term sheet. We aggregated all the demand from our LPs and folks we knew, and the rest is history.

Are we in a new venture world of SPV usage? We do them for very late-stage opportunities, too. How do you think about that, and when do you go aggressive on the SPV strategy versus when it moves out of fund strategy?

Yeah, I think it's really about what guardrails or parameters you've set on your fund in terms of how much you want to put into a fund. If you've got a $1 billion fund, you might say, “Hey, we only want $100 million max in a company.” But maybe we did 50 in the first round, and we want to do 100 in the next round, so we can't put it all in the main vehicle. Let's do an SPV.

I don't think you have to do it. I think oftentimes it's valuable because you can play offense if you need to write more capital to win a round, and obviously it can be helpful to a company when you come with more strength. There's a side of it where you could say, “Well, look, it's kind of extra economics at times to go outside your fund mandate and be more full-stack and not let somebody else take it.”

But for the most part, for us, it's about keeping our fund size at a level that we think makes sense for the environment. If an amount of capital per company goes outside that, then let's bring in our LPs.

Along the way, how do you think about when it's the right time to take money off the table?

It's tough because, in this environment, the markups are happening so quickly. You're like, “Well, relative to when we invested, this multiple is amazing.” But it's complicated, right? I think, A, if you're a believer, more than ever we're in an environment where your outliers, your winners, will compound and drive fund returns. So those are certainly not the ones you want to sell from.

Now, you can argue that you might have some LPs—if it's an older fund, some dynamics like that—where you want to give liquidity. But that would be maybe taking 10% or 20% off the table. For the most part, if we're in a winner, we want it to run, and we want to put in more capital.

At some point, you feel like the company is maturing, or maybe they're waiting a super long time to go public and you'd like to take some chips off the table. But it's not something we spend a lot of time on.

When was the most nervous time along the last 18 months for you as an Anthropic shareholder? It looks amazing today. It's a great state of play today. When were you like, “Oof”?

Maybe I'll go back further and expand your window to 24 months. When we did the SPV, Anthropic wasn't a household name yet. We saw everything going on and how amazing this company was, but from the outside, it wasn't quite as obvious.

So even to get the whole syndicate that we pulled together, I had to give my friends Ravi and Byron a call to bring them into the round as well, which all worked out. It was just very nerve-wracking because Menlo had never done an SPV before.

This was your first SPV?

It just happened to be over $500 million. So you can imagine. By the way, it gives me great empathy for entrepreneurs, which I have anyway, because I understand how hard this is. Being on the front lines, having to be the person capital-raising, talking to these investors, getting an occasional turndown, and having to answer second- and third-order questions—sometimes annoying, no offense to anybody—that's tough, man. That's really tough.

So that was my most nerve-wracking experience, but at the same time, coming out the other side of it, the most exhilarating. Obviously, all that work was very worth it.

I'll run through a couple of others. The DeepSeek moment was like, “Oh, my God, what's happened?” And now you can't even remember that. Then there was the DALL-E moment. This environment is so dynamic, right? Everything's moving so quickly that there's a new challenge and opportunity—both crisis and opportunity—seemingly every 6 months or so.

It's a weird thing. Marc Andreessen says that venture is often about the VC firm lending its brand to legitimize the company. Then there's a strange moment when the company and founder lend their brand to legitimize the VC firm. It's that weird transition of power between them.

When there was the SPV stuff and then Dario constraining, was that a nerve-wracking time? I imagine Dario cranking the whip on SPVs and who can move what.

I'd slightly shit myself, if I'm honest, Matt.

Oh, you mean the thing that came out recently around people doing SPVs, not my SPV.

Yeah.

Yeah, because that was fully supported in partnership with the company, just to be clear. I think the problem is that secondary markets and SPVs have just become too annoying and aggravating in the market to founders. Someone else is basically like, “I don't want you marketing my stock. I want to be the one who's figuring out who's in the cap table, who's an investor.” I think there were a lot of people claiming they had access who would round up people to invest in their SPV, and then they would try to go get access. There's just a lot of bad actors out there. And so I think it needed a bit of a salvo across the bow to just be like, “Hey, settle down, everybody, because if you're not directly in partnership with us, you shouldn't believe this is real.”

Oh my God, dude. I saw SPVs for SpaceX on Instagram Reels, and at that point I knew it was a heated market. I normally say that when your cab driver in London starts talking about the price of Bitcoin, you know it's time to sell.

Anthropic has been incredible for Manlo and for you, and it's been a massive brand builder in AI, positioning you as one of the leading firms. Another investment that you've done is Lovable. We've spoken about it at length off-show. You did the round at 6.2. Can I ask, when you do a check like that, in this specific case, what do you underwrite Lovable to? How do you think about what it can be?

4. Underwriting Lovable's Outlier Growth

That was another wild story, where you see a company go from zero to something like 300 million in a year. I think we intercepted them around—well, we tried to get in when they were around 30 million of ARR, but the round we did was around 150 million. So you're looking at this and thinking, “This is a phenomenon.” There are the numbers, and then there's the market, and then there's the founder, right? The numbers were just ripping. You're like, “All right, so this company is going to go from zero to 300 million in a year.” Even if you assume it decelerates to whatever, a 3x growth rate, that's 300 million to 1 billion. And I'm talking about when we first made the investment. Then you compound out from there, and you're like, “Certainly, in the first, let's say, 23 years of my venture career, you never saw anything like that.” Now, there are a few more examples. But clearly, this was an outlier even among outliers.

I think what we also really gravitated to here, aside from Anton—he's very visionary—is that he's kind of the voice of the category. I think he's got some very unique and distinctive plans around this idea of the 99% of people, as he likes to call it—everybody who was never a coder or programmer—and making everyone become creators. So you had this massive vision with what felt like an iconic entrepreneur. And then you had crazy numbers that you could do whatever model you wanted with. And you're like, “Look, if this thing keeps compounding and this is really the company that we believe it is, this will be one of the most valuable companies of all time.”

Do margins matter anymore?

5. Gross Margins Still Matter

They do a lot. We're in this tricky period as investors where, right now, a lot of great companies have low margins—20% to 30% margins. They all probably have a path to get to 60% or 70%. A lot of companies, just because of the cost of compute and inference, make it harder to say you're going to be an 80% or 90% gross-margin company anymore.

Great companies are 60% to 70% gross margin. But the path to get there is like, “Hey, I'm going to do some optimizations. I'm not completely tied to inference around my cost structure. And I'm probably going to do something complementary to the leading labs with my own data and build a model that kind of gets my gross margin up.” So you're intercepting a lot of these hypergrowth companies with margins that are atypical for what we usually invest in, and you're trying to figure out which ones actually have a credible plan to get to a great margin structure. For what it's worth, I think Lovable's one of those.

The margin structure of Lovable will change greatly with the utilization of open source, which is obviously much cheaper. That goes against one of the other investments being Anthropic. Do you see them as hedges against each other? Do you worry about the progression of open source, given how much can be done now with open source? I'm intrigued by how you think about that.

Yeah, first of all, Anthropic is a fantastic partner to Lovable and vice versa. This market is so big. There are really 2 dimensions to that. Some people worry about Lovable and Anthropic tripping over each other. I think Anthropic always comes to things a little more from the technical user, and Lovable comes at it more from the lay user. Sure, there's probably some overlap in the middle, but I think there's plenty of big space for each one to do extremely well.

Cursor was about as in Anthropic's crosshairs as possible, and I think they still had a pretty darn good outcome. But the whole open-source topic is like any market. When you start off in a certain way, it's just like, “Look, I want to get something running. I want to get it out there and just prove I've got a cool product,” so you default to the simplest thing. Over time, you do more optimizations, right?

I'm also on the board of OpenRouter, a company that you all talk about quite a bit, and I love hearing you guys mention them. That's kind of the North Star there: you want to have some intelligent layer that intercepts an API call from any application and basically says, “What's the best model for me?” across whatever efficiency frontier you're trying to optimize for. Is it price? Is it reasoning? Or is it performance—latency and things like that? At scale, that's the kind of stuff you need as a company to manage and optimize your business. Wave 1 of AI is, “Let's just get it going.” Wave 2 is, “Let's get a lot more sophisticated about what we use and when and how.”

If you're getting sophisticated about what you use, when, and how, cost optimization comes into it. I do wonder: if open source can do 96% of enterprise workflows, does that not dramatically reduce the TAM of frontier model companies? Maybe we're so early that it's still a $10 trillion TAM, but maybe Anthropic and OpenAI solve cancer and climate change, and your email tagging is done by open source. Is that how you think about it?

No. I think the foundation models—let's say, specifically Anthropic—have such special, performant, intelligent models. It's going to be hard for somebody to just say, “I've used open source with my data.” It's going to be functional and positive for some amount of what you're doing, but I just don't think it can be powerful enough to really displace it.

My mindset generally would be: you're going to use multiple models. Let's say you're a company that uses 50% Anthropic and 50% open source in your own model. I don't think it goes to that. Well, you were talking more about cost, but I don't think it goes to that 96%, because what's happening is companies see this and say, “Yes, I can get lower cost, but if I use Anthropic, it actually increases my customer retention. I generate more revenue. I get users to engage with the platform more.” And that is what the data's suggesting now with a lot of application companies.

But there are certain API calls that just don't need that level of functionality, and frankly, it's good for everybody. It keeps Anthropic on its toes to keep innovating. It's the most innovative company around, so they'll keep innovating, not stay still, and then startups innovate in their own way with open source.

Do you think the costs have to come down for AI? Sam Altman said very clearly that they are doing cheaper and cheaper tokens and reducing the cost significantly. Does AI have to get significantly cheaper, and will we see this cost curve come down massively?

I think it's like any product: you can argue that the cheaper it is, the more it opens up the market because you can do more for less, and those economic curves always spark activity. But even within Anthropic's family, you've got Sonnet, Opus, and Fable, so even Anthropic itself is innovating around, “Hey, it's not one size fits all.”

I think you're going to have the combination of something like that—a family of models from Anthropic—then a set of open-source models and things that you train with your own data. You're going to look across that whole tapestry and say, “I'm using 50% this, 30% that, 20% this.” Those are the kinds of optimizations that happen at scale, and that's the stage of the market that I think we're just entering into. It makes it a lot more fascinating, frankly, because there are going to be so many second- and third-order companies that spike and take off versus the whole market being concentrated.

6. The Full Stack AI Race

I'm incredibly naive, and so I don't understand something. We see, obviously, OpenAI have Jalapeno, reportedly Anthropic working with Samsung to create their own chips, DeepSeek creating their own chips, and Meta creating their own chips.

Do you have to be full-stack today, do you think, and is that why we're seeing everyone move into the chip layer?

I think it goes back to what I said about optimizations. Google with their TPUs a long time ago, Amazon with their Trainiums. At some scale, you look at your bill and you're like, "I'm paying somebody way too much." And you say, "Well, I'm willing to pay that for some part of my COGS because that's just so much better and different, and I can't compete with that. But maybe there's some other types of activities they're doing that I can really leverage my own technology and bring my cost structure down."

The chip business is hard. Good luck wading into that, right? It takes a special team, especially if you're going to compete with Jensen and a lot of other options out there right now. But these companies are smart, and they're looking at it like, "Hey, look, there's some very specific thing that we do in our model that, if we had a chip that just behaved like this from a memory cache, it would make us so much better." I'm sure for some percentage of the workload, whether it's in training or inference, that could be a big deal. So it's probably worth the swing if you're a $100 billion revenue company.

When we think about full-stack versus not being full-stack, I've had the founders of Nebius on the show, and I just had Lin from Fireworks on the show today. Nebius said they were moving into the OpenRouter business and would actively take it, and then I asked Lin this morning, "Is there value in it?" She was like, "No."

In the routing business?

Yeah. Why do you think there is? What am I missing?

What OpenRouter has is this groundswell of organic activity with developers who come to them because they trust them. They know it's a great inference marketplace. They love their intelligence. I don't think a ton of developers flock to Nebius. If I'm a developer, I don't wake up and be like, "Hey." So they're in the wrong part of the conversation, but if you're on Nebius and they're your underlying provider and they provide routing, okay, fine.

If you're a company that's building and thinking about multiple cloud platforms and you want to even obfuscate that, then OpenRouter's a great solution.

How big is the routing business going to be, do you think? How big could OpenRouter be? Is that a $50 billion business?

Their trajectory is insane. I forget what they've publicly announced, so I better not say anything. This company is wildly profitable at a scale that would probably shock most people before this whole open-source model, alternative model, model-optimization market really takes off. I feel like we're just on the cusp of it, and this company is already a beast, so I have massive and very high hopes.

We mentioned Lovable earlier. In terms of other application-layer companies that you are in and are very meaningful, another one that we have together is Lagora.

Yeah.

I love Max; I think the world of him. What an absolute beast. Remind me, what round did you do for Legora?

The round that just happened, about 6 months ago.

Okay. And what size check did you do?

It was sub-50, but in that range.

Okay. So you're like, "Great, let's get a foothold in here, and we can put more in with time and partner more closely with this business."

Exactly.

Everyone tells me—and again, you can say, "Harry, for goodness' sake, it's Friday morning. I wanted a chilled interview. You can put me back down"—but everyone tells me, "Oh, Anthropic's the real threat." And I'm like, "Are you kidding me?" This is a heavy GTM business focused on building relationships with lawyers, doing legal deployments with G... I mean, it's completely different. How do you answer that statement when everyone's like, "Well, Anthropic Legal's going to beat them"?

Yeah. First of all, Max is special, as you know. Part of my diligence was watching your interview with him. But he's just an execution machine and a lovely person to be with.

For a long time, it felt cleaner: hey, there's a model and there's an API, and then there's application companies. Obviously, that's gotten blurrier and blurrier, and there was a period a couple of months ago when it was like SaaSpocalypse—everything's going away. I think a lot of that has faded, and now we're sorting out which applications really deserve to live and why.

Not speaking for Anthropic, but my view is they're like, "Look, if the model just does something, and your application isn't distinctive enough—the workflow, the value you've built on top of it—and the model takes that market away, then it probably wasn't that defensible anyway."

I think in the case of Max and Lagora, they have lawyers and FDEs getting in there and understanding these workflows. It crosses organizational boundaries. I think it's very hard for a model just to come in and be like, "Oh, there's multiple constituents here," because you've got corporate lawyers, law firms, and, when you're on a case, you've got a client and multiple law firms. So it's not quite an N-squared problem, but it's complicated. You need workflows that understand that. You need context even within your own law firm. I know there's a lot of value to build and create on top of all that, and I love the way they're executing.

Does Lagora have to succeed outside of legal for it to justify the valuations that it will want to raise at? You see Harvey talk about moving into compliance and tax. And then I think Legora will, too, but if you want to raise at $10 billion, cool. There's a price at which you need more than just legal.

Yeah, yeah. Max, I guess maybe he hasn't been as public about it, but absolutely, that's part of the strategy. When we got to know each other and we were thinking about the round and justifying not only the current round and, hopefully, participation in a future round and working with the company, the vision is much bigger than that.

It's not that they have to; it's just that you've built this base platform that happens to be really, really good at understanding complicated, sophisticated service teams—legal, tax, accounting, all this. Why wouldn't you expand into that? And then there's probably another leg of the stool out there yet that we haven't even seen, that we'll be talking about maybe the next time I'm on.

I think Series A is the worst place to be today, and my partners always hate me for this because all Series A founders are like, "Great, we won't go and see them." But it's the worst place to be. You have $1 million to $3 million in revenue, and you're at 200× ARR, at $200 million to $400 million, with little PMF. Do you agree that right now, insertion-point-wise, Series A is the hardest, and that's why we're seeing everyone flock to growth and pre-seed? And how do you think about that, having seen so many cycles?

7. The New Venture Barbell

It's tough. You nailed it. But what we're doing is a barbell strategy right now, right? It's like, hey, when does a certain company in a category establish itself as a leader? Because in that kind of 1 to 3, you may not even know who the competitors are yet, right? And you're going to pay as if they're going to be the winner because that's just the way the valuations are in that, let's say, 1 to 10 range.

We have a fund called Inflection Fund, and we always called it early growth. Early growth to us meant $3 million to $10 million of ARR. The reality is, for the good companies, that window used to last a year, a year and a half. Now it lasts a week, or, in the case of Max and Lagora, that's what they do in a day. So that was a hard strategy to keep pursuing.

That's the Menlo Inflection classic investment. But really, it's been more toward these outliers where they've completely broken out somewhere above $10 million. That's market-specific, where you feel like they've been anointed the winner or you believe they will be.

But to your specific question around Series A, that's the other side of the barbell. What we've done is gone much earlier, spending more time. We have a specific seed strategy where 3 partners can write up to an $8 million check on the spot. That number used to be 3, so we've expanded the aperture and the flexibility for the team to move quickly.

The hard part in A right now is that, from seed to A, the time between those 2 things has really compressed. If you look at the data points between those 2 rounds, it's like, okay, so they built more of the product, or they have 5 POCs, or maybe they had 5 POCs and now they have $1 million of ARR, and you're like, "I know anybody can do that." Not anybody. I don't want to oversimplify. But it's not really that much of a signal, and yet the valuation goes from $50 million to $200 million or something like that. So that's the hard part.

So we’ve really moved earlier to—I wouldn’t say pre-seed, but more like that seed motion has become much more prominent for us. Get in early, especially with a lot of these technical projects. We have a very specific strategy around Neo labs too. We’re in about 7 of them, but we’re not going in with $200 million. We’re going in where we can get ownership early or be part of something that we think ultimately could be a winner and pile in.

So we’ve adapted to the environment with a bunch of strategies that allow us to pursue this barbell: on the later stage, and getting in even earlier at the seed stage.

I think one of the worst-performing groups in terms of venture in this vintage will actually be the small boutique seed funds, which is what every single LP that you speak to today, Matt, wants. Every LP wants a San Francisco-specific seed fund, only under $100 million. And I think this will be the worst-performing category of venture in this vintage, because firms like you, Founders Fund, Benchmark, Sequoia, Accel, and the list goes on and on, are so effective with a very good seed product that if you’re a $50 million seed fund and you’re writing $2 million checks, dude, I’m too big to be friendly and I’m too small to lead.

Do you agree, or would you say I’m wrong?

Yeah, no. Look, I think the biggest thing that’s changed from the time of my early days in the business, and for a long time, is that people used to have their swim lanes. Now, more and more, everyone’s full-stack, including our good friends down at Benchmark adding a growth vehicle, right?

And then everyone used to make this argument in the seed world: “Oh, there’s negative signaling if you let an institution in there.” I think that’s kind of out the window as well, because for the right companies, everybody’s getting preempted and the rounds are bigger. Maybe we’re back to more collaborative rounds because they’re bigger. Everyone used to be like, “Well, I have to have the whole round,” and now you see a lot more syndication.

But this whole notion of swim lanes is gone, and that’s just the times we’re in.

The syndication element’s actually nicer, I find.

Yeah.

It’s nicer to be able to be more collaborative. I like that a lot more.

I mean, believe me, for the first 10 or 15 years of my career, every Series A you led, you would bring in another top-tier firm alongside you, and the view was, “Look, we’re going to work more effectively together. We’re going to be better at helping this entrepreneur grow and scale.”

Then for 10 years it became, “No, no, no. Everything has to be one investor.” Some of that’s obviously a function of ownership, but I like the syndication part.

When we talk about seed funds of that size being challenging, Series A being a difficult insertion point to stay in, and the barbell approach, the $3 billion fund size—we talked about it on the show with Rory and Jason, and we didn’t really get it in the nicest way. You’ve got Anthropic, Lovable, Lagora, OpenRadar, Fireworks. The list goes on and on and on of great companies. You could raise way more. Why did you raise $3 billion, and is the future of venture not much bigger platforms like General Catalyst, Lightspeed, and all the big names we know so well?

Well, when you take on more capital, there are implications in terms of how you run the firm, culture, and how many people you have. We love to be a relatively small and mighty machine with roughly, let’s say, 12 partners and a great set of principals, associates, and people like that who make us better and stronger.

But when you go full-stack and you have five different teams, you start doing sectors, and everybody’s kind of out for a pass. I’ve seen this in other places, where you feel like, “Well, I could do great things, but I can’t really index on this small group of people.” There are too many. If one group doesn’t do as well, then they kind of drag down how this other group does.

So it leads to a bit of less feeling of alignment, agency, and collaboration together, and that’s what we’ve really wanted to keep at Menlo. Despite having two funds and two ICs, we have a very fluid amount of work across those two groups, where partners from the venture fund can lead investments in our growth fund, et cetera.

So it’s really more about how we want Menlo to meet the market, how we want to run internally, and how we want to keep our team relatively small with great people and not feel like we’re more of a company, but still really are a firm.

Dude, I’m just a humble British podcaster. We don’t talk about scale here, okay? We’re just everyone’s friend.

Your fund’s not so tiny, my friend.

But my question there actually is: I know Josh at Thrive very well—he’s a dear friend—and he’s always said to me that people have a lot more plasticity investing across the stages than one thinks. Do you think people are like, “Oh, they’re a growth investor,” or do you think people do have that plasticity to move across stages, and a great seed investor can be a great growth investor?

I think you’re best off if people pick a—I’ll use the word swim lane again. It’s just hard to cover everything, right? Especially in seed. How am I supposed to be wandering around Stanford labs, meeting with researchers, and also chasing the 20 best growth-potential investments in the world? It’s just too much.

The pattern recognition and the density of the work that you apply to a certain area make you better. So that’s roughly how we’ve split our team: an early-stage team, an outlier-growth kind of team, and everybody really focused. But if something comes up that’s a great fit for somebody across the fund vehicles, then fine. There’s fluidity.

But I really do feel like you’re best off being super, super focused with, let’s say, 80% of your time. Think about it sector-wise, too. All of a sudden, processors, GPUs, and TPUs are hot, right? Then defense tech is hot, and everybody’s rushing in. You can’t go in there and just spear-fish one investment that you run into and feel like you’ve got the expertise.

You need to understand that landscape. You need to understand the entrepreneurs. You need to understand the buy side. And if you haven’t really worked in a semiconductor company before, which I did—that’s where I started my career, at a startup, before I joined Andreessen Perkins—it’s so hard.

It can take 2 or 3 years to get the right chip out. You think you’ve got a design win, and it evaporates. Very, very hard.

What about Eric Vishria and Steve Vassallo with Cerebras? I mean, they directly did a spear-fish on this one company.

Well, I’ve talked to Eric about this. And, by the way, you had Bruce Dunlevie, one of the epic semiconductor investors, and he’s like, “All my partners...” Maybe he even said this on your show, but all his partners told him not to do it.

But every once in a while, as a firm, you can do something that’s a little bit like, “There’s something really special here. We might get a zero, but if this works, wow.” I’ll take you back to our investment in Anthropic. Same thing. It’s like, “This doesn’t really fit. This isn’t what we normally do, but wow, if this works.”

You’ve got such a special founder in Dario, an amazing market, and if these guys become the two—and that was the goal at the time—this is going to be wildly successful. Now, did we ever realize they were going to be number one? That was a little twinkle in the eye, but that’s the upside you get by getting yourself into these companies.

Can I ask you just on geography? We’ve spoken about Lovable and Lagora, two companies based in Sweden, and then you have Anthropic and you sitting on the West Coast. How do you think about the centrality of power, with AI moving back to San Francisco—with all the brightest minds and best researchers being there—as the common theory, while also having a portfolio that’s very global in terms of winners?

Yeah. San Francisco was a weird place for a few years. All the cool kids wanted to be in New York, and San Francisco felt a little bit like a ghost town—very concentrated in SaaS, with not that much interesting stuff going on.

I love seeing it have its mojo back, right? When these waves come, the Bay Area usually leads, and so it’s just giving so much more energy. People who are lifetime New Yorkers, who would never think about leaving or living in the Bay, are now coming out here. I think more college grads are saying, “Yeah, New York’s cool, but I’ve got to get out there and be part of this AI thing.”

Yeah.

So I think it’s great for the Bay Area, and I think the concentration of that talent is what has always made the Bay special. You’re just constantly talking to and meeting entrepreneurs and understanding how everyone’s pushing themselves—not just in terms of their work ethic, but technically, what they’re working on.

The context that you have by living in the Bay Area is probably 10 or 100 times greater than if you’re just some really great company somewhere else. Now, kudos to you—and not just you personally, but to what’s going on in Europe right now.

That whole DeepMind diaspora—you mentioned a couple of companies like Lovable and Lagora that we're in, and Ryan, a couple more. That's new for us. We would always be like, "Oh, we can't go to Europe. It's more of a cottage industry there. Where does the talent really spike?"

But the one thing I've always thought about Europe is that, if you're an entrepreneur there, it was harder. There's more grit required to be a great entrepreneur in Europe than, let's say, in the Bay Area, where it's not incredibly hard to get into YC and become a founder. I think in Europe, it's always been a lot harder. So, if you have the grit to get off the ground in Europe and become a global company, that says a lot about you.

I wouldn't say we're putting boots on the ground there, but we're spending a lot more time and are definitely interested in doing more there.

Anton at Lovable always says building in Europe is hard mode. Can I ask you, when you lose a deal, is there a commonality as to why you lose?

The thing most often is that you were late to the party, right? You were not intentional enough that this was a company you wanted to be tracking and building a relationship with. So you're coming in a couple of weeks or a month before the round, and somebody else has a year-long relationship. That's usually a death knell.

The biggest death knell for me is always when it's like, "Oh, I worked with him at my previous—

Yeah.

I worked with Matt on my previous company for 7 years." And I'm like, "Okay, I'm done."

Yeah. Relationships mean so much in this business because high trust matters so much, both within a venture firm and with the companies we work with. It's hard to establish that in some shotgun wedding, some sprint, so we try to be very intentional about getting out ahead of things.

For the best companies, they're always going to be this kind of jump ball, and it's incredibly important to know someone who's associated with the company who can help guide you in and land the plane a little bit. If you don't have that and another investor does—this person has worked with this board member for 10 years, and they had a great experience and some big outcome—it's more things like that.

It's rarely just straight-up valuation or stuff like that. Yes, valuation can be painful, but for the right companies, you do what it takes to be in.

The single biggest mistake for me is always focused around ownership. There have been several companies where we've had 1% offered to us: Deal, Eleven Labs, StarCloud. We were like, "1%? We can't be doing that." Now I look back, and all of them would have returned huge amounts of money.

That's the way I was trained, and I learned that for most of my career, so it took me a lot to shed that.

Do you think LPs understand that? LPs are always like high ownership portfolio, constrained portfolio sizes, concentration, benchmark. Do you think they get that the game has changed?

I think they see the results, right? Maybe not up front, but we're pretty explicit with them. We say, "Here's a core position in a fund, and then here are what we call tracker checks or starter checks."

Frankly, look at our Anthology Fund. That's over 50 companies, somewhere between $100,000 and $1,000,000, where you get in at a seed round. The companies that have graduated out of that have been OpenRouter, Whisper, and Axiom Math.

There are a couple of things. One, that gives us a bit of proprietary, quote, "deal flow." But it gives you the opportunity to be on the cap table, get to know the entrepreneur, and then pounce when you see something's working.

I would say if you get even a wedge into a company, you're 10X more likely to be able to participate significantly in the next round or lead. I think LPs get that, or they are getting it.

I totally agree with you. You do those checks so you can concentrate capital more with the progression of the company.

I went viral on VC Brags. Matt, when you did our last show, I was the very amenable, sweet, and nice little Harry Potter venture capitalist. Now I'm quite binary, and apparently a lot of people don't always like what I say. VC Brags in particular took real issue with me because I said, basically, I turned down a company the other day because they were going from 1.5 to 5 to 15. There's an opportunity cost of capital today that's very real, and the growth expectations are just very different. In other words, triple, triple, double, double.

Yeah.

It's just not exciting enough anymore.

Yeah.

I got chastised for this. Are you with me that, fundamentally, if I bring you a company that goes from 1 to 5 and then 5 to 15, it's great—I'm not belittling it—but that's just not the venture game today?

It's not. It's not. It's hard to say, and it's hard to change the context—the 20-plus years of context around what good and great was—but that's the reality. The environment has changed.

If you look around and you're like, "Well, that used to be top 5%, and now it looks more like top 50%," we're not trying to be in the top 50%. That's just the reality.

It's not controllable by us as investors when we look around and see these companies doing 0 to 100 in a year. I've never seen anything like it, and there are more examples of that than I can probably count right now.

What company are you not in that you would most like to be in?

There are several. One company that I've really admired—and, as I think about the outlier entrepreneurs in my history, going back, you look at the companies that became great. In my early days at Kleiner, it was Jeff Bezos, and later on Daniel Ek and the Collison brothers.

Somehow or another, these amazing founders end up manifesting the company. I don't necessarily think it was that they chose the right market. Somewhat, they did, but it was really just the force of nature, the creativity, the vision, the execution, their ability to raise capital and hire the best talent—all that.

I think an example of that in Europe, just because it's close to home for you, would be someone like Matti at Eleven Labs. I have a lot of respect for him. I don't want to give everyone on the podcast my whole pipeline, but just because that's one you know well, I'll throw that out there.

What was the most controversial deal inside Menlo that you remember?

The obvious answer is Anthropic, in some ways. I'm trying to think about it. By the way, there were 2 controversial points around that. One was, "Is this really what a venture fund does?" The second was, "We've never done an SPV before. Are we really going to go down this path?"

I can't really remember anything that was that profound and felt like, "Wow, we're putting the reputation of the firm, especially with the bigger SPV, on the line to pull this off and break new ground."

The great thing about our partners is that we've got a very technical group. We're small enough to have high alignment, and we respect each other a lot. It's easy to listen to each other and make a decision, so I don't find things that controversial.

I don't really ascribe to the point of view where you need a bunch of nos and there's 1 person who's a yes, and that leads to an outlier. I know there are examples of that, but that's not really been my experience in the firms I've been part of or with our team.

Final one before we move into a quick fire. I'm not great at math, but if I do a little bit of back-of-the-napkin math on Anthropic and distributions, it'll distribute around $10 billion in carry. That's quite a lot of Monopoly money, Matt.

Not in carry, right? No, our position is north of that. You can do the math on what carry usually is. It's not quite that in carry, but our position is, yeah—

Totally understandable. $2 billion to $3 billion. It's a very big number.

Yeah.

How do you think about firm sustenance when there is such a big win? We have seen firms, candidly, struggle to maintain dominance when everyone makes so much money, bluntly. How do you think about sustenance after such success?

I think Menlo has always had a challenger mentality. That started when Venky and I came over a little over 10 years ago, and Sean Carolan came back, and Mark Siegel was the partner who was there who put the band together.

Ever since that moment, about 11 years ago, it's just been a grind, a fight, a build—exhilarating to get to this point. I feel like everyone we've brought along has felt Menlo move up that stack and become more and more successful.

What's driving us is what you would expect: less about the monetary outcome and more about, "Holy shit, we've put ourselves in a place to be one of the hopefully leading firms in AI. How do we really compound and double down on that advantage?"

That's the energy I feel every day, certainly from myself and all my partners. I just can't see that going away. It's like, "We arrived. We're here. What do we do with that?" The money's great, but that's not why we did all this.

I think richer investors make better investors because you do not worry about downside mitigation, but you focus on upside optimization.

How big can this be? What happens if this works? You're not worried about LPs not re-upping. You're not focused on risk mitigation. Do you agree with me in thinking that?

Of course I do. I think it's at a firm level and at an individual level. There have been times in my career where you feel some doubt, either from yourself or those around you, and it makes you dramatically worse. What we try to do is have a high-trust environment and build people up.

Everyone is going to fail in this business. It's just recognizing that sooner and landing the plane or doing the right thing. The worst thing in the world is to hold on and try to act like reality isn't reality. Oftentimes, you're doing a founder a favor by helping them land the plane. So, yes, I think it's an important point and an important thing to manage in this business.

8. The Quick Fire Round

I would love to move into a quick-fire round.

Sure.

I've pushed and prodded around many different areas, so I appreciate the patience.

This is where the really off-putting stuff comes. I'm ready.

Dude, you were born ready for this. What have you changed your mind on in the last 12 months?

Certainly, just how big companies can be and how bold Menlo should be in pursuing those opportunities. We need people who are free thinkers and willing to take those kinds of risks. That's more true than ever: just how big a company can be.

Biggest miss, and what was your lesson from it?

The things that I would have looked back on at the time as the biggest miss no longer feel that way. I'll give you one. We were at the one-inch line, winning Plaid back in the day, and I have the utmost respect for Zach and the company and what they've done. At the time, I felt like losing that was existential to my career and ability to win.

They're a great company, but I guess what that did was condition me more around the idea that one loss doesn't define anyone. If you didn't win Anthropic, that would have been extra painful. But the point is, you just have to keep going and finding that next big one. If you focus on the right big trends, like we did around AI, and get out ahead of them, these cycles come along. That's what I've been more focused on than worrying about a loss.

You can invest in 1 seed fund, 1 Series A fund, and 1 growth fund. Which fund do you invest in? They can't be your own.

All right. Seed fund: I'm less plugged into the seed-fund world for reasons that you and I have already discussed. I don't follow a lot of seed funds, but I've had a great relationship with Chad at Susque for a long time. Brook Byers was one of my quasi-mentors when I was at Kleiner, and we got to know each other. Seeing him grow and thrive, I really appreciate his perspective on things.

Series A: Benchmark. I've worked with Chathan and Eric a ton, and I have great respect for them. It's hard not to say Sequoia as well, but since you asked for 1, I'll go with Benchmark.

The growth fund is a little trickier. There are so many great full-stack firms. There used to be a very clear set of growth funds. When we were talking about swim lanes, it used to be, “Okay, well, there's IVP and Meritech,” and I have high respect for both of those firms. But now the reality is, when you look at the growth funds, it's Lightspeed, Thrive, firms like that that we partner with a lot, and even Sequoia and Andreessen.

It's harder to pinpoint 1 growth fund because it's like a blend of a dollar. There's no way to really index on that market anymore.

I'd probably say it's just the size of the firm. When you reach $5 billion-plus, you're probably a growth fund at that point, my friend. That might constitute it, but I get you. I think also, by the way, everyone who was a boutique growth fund is now just a growth fund. I think you will see all of your IVPs and Meritechs raise large funds.

Yeah.

You can't play growth with under $1 billion.

I agree. The growth market has changed dramatically.

Where is overheated right now, do you think?

Robotics and neo labs, maybe defense tech, just because there's so much going in. But I like all 3 of those sectors. My partner, Dee Dee, put out a tweet yesterday about how there are 60 neo labs. I told you we're in 7.

Some of them are very generic, like, “We're getting a band together. We're going to build something really cool and research-y, and we'll see what happens.” Others are like Chai, where it's, “We're going to be very focused on creating drugs and antibodies,” or Axiom, focused on math and things like that.

There are 60-plus of these, and when the dust settles, I don't know what's going to come of that. You can't expect all these companies to have great acqui-hires, and there's no way in hell we're going to have 60 independent model companies in addition to all the open-source companies and everything else. I think those are way too big of rounds for where they are—huge concentrated positions for some firms—so I think that's a challenge.

Where is under-invested?

I think there was a bit of a false negative on some of the infrastructure stack, whether it's observability, agent frameworks, or all this kind of stuff that started 3 or 4 years ago, when a lot of these companies didn't end up panning out.

The problem goes back to what you and I talked about earlier: people were very focused on single models, so you didn't need all this surrounding infrastructure. But now that the whole ecosystem has gotten so much bigger, and you're doing optimizations and want to manage your spend, you need to have much more robust observability solutions. You need something like OpenRouter.

We're in a company called Gimlet, which is a technology layer to obfuscate the underlying chips and technology stacks, like CUDA. There's so much more there. I think we started investing in that area 2 or 3 years ago, and nothing really came out of it. Now these companies are really taking off, so that's 1 we're excited about: the developer stack and all the tooling above the foundation model.

Final 1 for you, dude. What are you most excited about when you look forward 10 years? For me, my mother's got MS, so I'm incredibly excited to think about medical breakthroughs for diseases where we always just accepted that, “Oh, it's a chronic condition.” You're like, “Okay, I'll just live a much worse quality of life with that.” I'm excited for breakthroughs there. How do you think about where you're most excited?

I'll pick on that 1 and riff from there. We're totally excited about that. We have about 8 of these models. I mentioned Chai, but we have companies called Zaera and Villia. I can go down the list of companies building specific models to do drug discovery.

We also did something like Assort Health for better healthcare delivery. The whole medical system, which we all know is broken even though the US has great healthcare, has so much more that can happen and come to us, both from therapeutics and from workflows and how the medical system operates. Of course, that's a very near and dear mission to Anthropic and Dario.

Aside from that, the thing I'm most excited about probably goes back to where Menlo is now and watching how we really lean into and take advantage of this opportunity with the team we have now assembled. To me, that's probably the most rewarding thing in my career: where the firm is and the people we have to execute going forward.

From a trend perspective, AI and all that, these things only come around every 10 years, as you know, and this one feels like the biggest. I've been through 4 or 5 in my career, and I am completely fascinated to see what this looks like. We know what it looks like now, and we think we know what it's going to look like in 1 or 2 years. But given the pace of innovation, what in the world is this going to look like in 5 or 10 years? Nobody can tell.

How many things will be transformed over that period of time is going to be more mind-boggling than what we've seen in our society in my lifetime and in your shorter lifetime. I'm super excited to be investing in the middle of that and partnering with great partners and people like you, who I want to syndicate more with.

It is the greatest time to do venture. I do feel very lucky to be doing venture in this moment.

Me too.

What a privilege.

Totally. 100%.

Dude, you are a star. Thank you so much for doing this. I hope that I've improved as an interviewer in 6 years. Maybe not, but I will continue to try. You've been amazing, dude.

Thank you for having me on. You went from great to greater. I hope you'll invite me on before another 7 years, and I always love chatting with you.