20VC：为什么种子期投资是给傻瓜玩的｜a16z的200亿美元基金与Founders Fund的46亿美元基金：它们为何如此出色｜为什么Josh Kushner是风险投资策略大师｜为什么延长私募市场正在坑害美国公民——Jason Lemkin与Rory O'Driscoll

Rory O’Driscoll

The Thrive strategy was brilliant: buy the best property on every block. It’s like Monopoly. The fintech block, Stripe, tick. The OpenAI block, tick. The infrastructure block, Databricks, tick. Then you just go home when you’re done and wait for the checks to roll in. It’s genius.

Why struggle to pretend you can do 8x over 20 years on a seed fund when you can just write one big check into a winner and call it a day, and achieve liquidity in a quarter of the time? The multiple will be lower, but the absolute return will be higher. It’s so stupid. Seed is for suckers.

Jason, Rory, I’m so excited to have you here. I was thinking, who are the most insightful venture investors that I can bring together to discuss today’s news? Sadly, Bill Gurley turned me down. Thank you so much for joining me today, guys.

What was Chamath doing, by the way? He turned you down, too?

He was teaching Larry Summers about economics.

Rory O’Driscoll

I see. I see. It’s going to be vicious. I love it.

Rory, since we have you. Harry, go on. But I want to know why these billionaires are so bitter on Twitter. I think Rory will have an answer for us here.

Rory O’Driscoll

Well, first of all, you must be bitter if you bought this product four months ago and said they’re really smart and really intelligent, and they’re going to run the country really well. You must feel like a bit of a buffoon. When you feel like a buffoon, you’ve only got 2 choices: double down and bluster your way out, or fold away quietly. Billionaires tend not to fold away quietly, so they’re just going to bluff their way out and say this was all part of the plan.

It’s a tough look, by the way. It’s a tough look, right? But whatever. I think what it shows is that just because you really understand one domain—investing or technology—it doesn’t automatically make you understand a totally different domain, politics. I think you’re just seeing that raw IQ is not transferable, and you can’t walk into a different game where people have been playing it for 20 or 30 years and think you’re good just because, hey, you’re smart.

1. Spreadsheet Investing Is Dead

It’s so interesting you say that because I actually just wanted this to be a very free-flowing conversation. We just released a show the other day with Victor Lazarte from Benchmark, a GP at Benchmark, and he said the generation of SaaS investing before is dead. Spreadsheet SaaS investing, where you look at NRR and growth rates and can reasonably predict good-quality companies, is dead. Nabeel at Spark said the same. Is the way that we’ve invested now dead, and do we fundamentally have to change all of our rubrics?

Rory, you’ve been thinking about this. When you and I first met, Harry—when Rory and I first met—you were the first guy who really opened my eyes to this question of SaaS metrics.

I met Rory, I think, for the first time at the first Upfront Summit in 2013. I might be wrong, but I think so. I asked him what a good SaaS startup was because I didn’t know at the time. I’d done Pipedrive and Algolia, but I didn’t know. I made this up when I worked at another VC firm. We didn’t have a consensus on what good growth was. And he said, “1 to 10 in 5 quarters or less is S-tier. 1 to 10 in 5 quarters or less.”

I copied that with attribution. I used that as my investing yardstick for years. And then he came up with the Mendoza line, right? But I’ll say 1 thing and then I’ll shut up. In late 2020 and 2021, it seemed like every startup met that. I had 2 startups in my portfolio that a VC all 3 of us know really well—one of the best cloud VCs—offered term sheets at high 9-figure valuations without talking to the founders. Just immediately, in late 2020. You only needed a spreadsheet in late 2020 and early 2021, did you? If you were growing 20% a month and had doubled $10 million in ARR, you didn’t actually need to know what the company did in SaaS for a while. I think that is dead.

Rory O’Driscoll

Sure. The answer is yes, it’s done. But the question is why, and what’s actually done.

I think spreadsheet investing is 1 comment, and SaaS is another comment. There were 2 proper nouns in that sentence. It’s true that first-generation SaaS investing has—I don’t know if I’d say it’s done—but you’ve hit a plateau in terms of that. There was a 20-year period where it was pretty obvious what to build, and you built it. Because the broad direction was obvious, all that was left to analyze was the math.

It was pretty clear: the direction of travel was to take X, move it to the cloud, compound for a long period of time, and get a great outcome. Pretty straightforward. The only thing you had to do was evaluate the relative growth rates of different things and pick the thing that had grown the most at the most efficient level. There was a 10-year period where these companies didn’t change. I invested in Box in 2010.

It didn’t change.

Rory O’Driscoll

And here’s the thing: Jason and I competed in the e-signature market, DocuSign and EchoSign. The thing that we invested in in 2010 was exactly the same in 2024. It’s stunning. So there was no conceptual thinking about what we should build next. It was just, build this thing and sell as much of it as you can. And that’s done now.

2 things happened at the same time. The existing market saturated, so all the growth rates flattened out. Anyone who needed a Zoom account or a DocuSign account has a DocuSign account because they all got it during COVID. We’re done.

At the same time, these new AI startups took off. Jason and I were just chatting about this. Unlike the SaaS thing, where stuff was the same for 20 years, this shit changes every…

I can say shit, right?

Yeah. This shit changes every 6 months. I've literally had companies acquire and lose product-market fit 2 or 3 times in a 2-year period. It's terrifying. So it's way harder now. I mean, when it works, it's way better, but oh my God.

2. AI Accelerates Product Failure

That's the hard part. It used to take you 5 years to fall out of product-market fit. Now it can be 5 weeks. When all 3 of us started—I mean, Harry, you were dropping out of school—but literally, you could count on, if you hit product-market fit and you had a decent team—

Rory O’Driscoll

You were—

Like, there were exceptions, but you had 5 years to run. You had to reinvent yourself around year 4 or 5, and you can't count on any of that today, can you?

Rory O’Driscoll

Probably 2 things. One is model progress probably has something to do with it at a very deep level. As the models get better, what you can do gets better. The second thing is we're still at the figuring-out stage of what you can do.

Even absent model progress, there's a lot of, “Oh, we thought they would do it this way,” and you fast-forward 6 months and it turns out, well, they do it this way for a few months, but then they want to do it a slightly different way. In fact, if you don't add more value, the customers say, “No, I can do something better somewhere else.” So we're in this exploratory phase, which makes sense because it's changing. We're not yet locked in.

I remember there was a period from about '99 to maybe 2002 or 2003 when what a SaaS company was was changing. You had Salesforce nail it, but before that there was this MSP weirdness, and it wasn't quite clear what a SaaS company should be. I think it's the same thing here. It's not clear how—

It's much harder here because instead of just automating some back-office shit, you're really trying to automate the head of the worker. You're trying to get in the head of the sales rep or the SDR or whoever you're augmenting and assisting, and just figuring that out is really hard. Then it changes as the AI can do more. So, go ahead, Jason.

I also think we were talking before we went on about a hot AI SaaS company where literally the team was all on Adderall. It was a joke, right? It was true, but a joke. But I actually think in San Francisco today, most of the startups we work with are on Adderall. Not literally, necessarily—I mean, I don't know.

All the best startups I've invested in are working 7 days a week, 12 hours a day in the office. In the office, 7 days a week, 12 hours a day. It is true that, as they hit super-scale, they're being more flexible for folks with families and more heterogeneous teams, but the vibe is that everyone is working 7/12.

You can make fun of vibe coding and vibe moding, but when your competition in 2021—I mean, people were working 10 hours a week from home, guys. Literally, they were working 10 hours a week. Now your competition's working 100 hours a week for real, not for fake. If you haven't evolved, you're going to die, right? Especially when you can add AI on top of it, you're going to die.

3. Underwriting Gets More Dangerous

I just want to try and go back to product-market fit being so transient.

Yeah.

If product-market fit is transient and revenues are highly unreliable or unsustainable, as we're seeing with your generative AI companies that scale to $20 million, $30 million, $40 million, or $50 million very quickly, but with a lot of potential for a sugar high, what are we underwriting?

Yeah, I want to know what Rory says, because I don't know right now.

Rory O’Driscoll

First, if you're not understanding that you're underwriting more risk, you're missing the movie. You're taking on more risk. What you're underwriting is the upside, right? You know less. At every stage, on every check you're writing today, you know less than you would've known 10 years ago at a similar-stage SaaS company. A lot less. A lot more things can go wrong.

On the other hand, the upside is there, and it's huge. You're just taking on more risk for a dollar of revenue.

Is the upside there, and is it huge? Because the prices are inflated much higher than they were 10 years ago. It doesn't feel like you're getting paid for the risks that you're taking.

Rory O’Driscoll

Well, disaggregating that—because, again, you inject a price into the equation, at the risk of channeling Monty Python, as a reference to the Holy Grail—but leaving aside price, do I think the outcomes of these companies can be huge, and arguably even bigger than some of the SaaS companies? Yes. So, quote, “The upside is there.”

The worst of all worlds, as you say, is if you've got high product-market-fit variability, high risk, still good odds, big upside, but then you pay up so much that even that upside has been competed away. Then it's a sucker bet. And yes, that would be bad.

It's a very scary time to play the game today. We all do it because we enjoy it, but every time you're writing a check today, you're going, “I know a lot less than I did on some of these other things. I'm paying a bit more. The upside is amazing. Oh my God, look at that growth.” But we've seen companies fall off the growth track in 6 months. So it's pretty scary. Turns out making a lot of money is hard.

In venture, do you think we'll have more bimodal results, where a lot of funds will just be massive underperformers because it's hard to assess the risk properly?

Rory O’Driscoll

Yes, for 2 reasons, which we'll talk about. One is each individual deal has more risk in it. On top of that, the totally separate thing is that the holding periods have elongated, right?

Every year a holding period elongates, one of 2 things happens. If you roll the dice and win, you go up 30%, and if you lose, you go down 50%. If you roll the dice 3 more times, by definition, one company will go up 2X and the others will go down.

Portfolio construction really matters here because you're in a riskier game for a longer period of time. Some of you are going to make it, but a lot of you are not. It's scary.

I had Victor from Benchmark on the show, and he said that portfolio construction doesn't matter. His first check was 8% of the fund, with $55 million into HeyGen, which I thought was a lot. Jason, we've spoken before about the percentage of a check as a percentage of the fund.

Yeah.

2% or 3% is standard. 8% is a lot. He said, bluntly, that they can raise whenever they want to, at will. So a $500 million fund can be deployed in a year. We saw KP deploy a fund in 12 months. I guess my question to you is, if you're a brand-name firm that can raise on demand, does it matter?

Rory O’Driscoll

It always matters some. When people actually lose money, as distinct from thinking about losing money, or in particular when they lose money 2 funds in a row, even a brand-name firm can hit a bump, right?

I never take it for granted that you can raise money. I'm sure Jason's had the same experience, too. My partner Kate and I raised our first independent fund in 2009. We were in the Lehman and AIG offices the day Lehman went bankrupt, and it turns out they didn't need to add to their exposure to private, illiquid assets that week.

I ended up taking it for granted. It was damn hard. It took a year to raise that money. So probably true for Benchmark and KP, probably not true for the other 898 funds out there.

We were talking about the growth, and the question is, are we getting paid for it? What about the normal SaaS companies? There are thousands and thousands of SaaS companies that will listen to this and be going from $1 million to $3 million in ARR, maybe $1 million to $4 million, and that was good in 12 months. It was decent—4X year on year.

In any normal world, it's great. It's great, right? It is great. You're still elite.

But can they still raise? The companies that are doing triple, triple, double, double—it's not Lovable, it's not Bolt, it's not Macaw.

Rory O’Driscoll

I think they can, but I don't think that's the issue, Harry. I don't think the issue is whether the companies doing triple, triple, double, double can raise.

If you hear the story and you go, “Yeah, that makes sense. SaaS hasn't been made illegal. It's a totally good solution. It doesn't have AI magic pixie dust, but it solves the customer's problem. And the proof that it solves the customer's problem is that it's growing 3X, 3X, 2X, 2X.” I would do that deal all day, every day.

So let me put that out there. If you've got one of those, call me. I'm mentally thinking of a deal I turned down 2 or 3 rounds ago that has done just that, and I'm an idiot.

The real problem with SaaS isn't what you just said. The real problem is that there are tons and tons of SaaS companies that have slowed down from exceptional growth rates—and 3X year on year is exceptional. They're doing $50 million growing at 10% or 20%, or $100 million growing at 8% or 9%. There are myriads of those, and that's where the real question is what those companies end up as.

For me, the triple, triple, double, double, I'm totally into it if the CEO is amazing, right? Because that solves for everything, right?

Rory O’Driscoll

Yeah.

But I will say, I remember it was almost a chilling moment to me. Maybe 15 months ago, I got together with another top cloud SaaS VC. I've known him since inception, and all 3 of us know him, okay? I got together with him, and he said—big fund—he said, “I'm only doing AI investing.”

Then I started asking other folks. Listen, I don't have a survey. Rory, you're better at this than me and everything. I would say 70% to 80% of the folks I grew up with who were SaaS investors are not going to do those normal triple, triple, double, doubles. You would. You are a top-tier performer.

But they're momentum investors, and they want to put $200 million into the latest AI deal and triple it in 8 months. Eighty percent, I would say, won't take these meetings.

What about this?

Rory O’Driscoll

I've often found that when smart people are using a heuristic, there's sometimes logic behind it. Maybe a more refined version of the sentence they're giving you is, “I just don't believe I'm going to kiss all those SaaS frogs and find my prince.” So mentally, I'm not even going to bother.

For me, most of the stuff I'm looking at is AI. A priori and without data, I would assume anything that could have been done 20 years ago in SaaS probably has been done, so I'm not rooting around in SaaS land looking for a good deal. But if one was to crop up, you'd have to look at it, right?

As I say, a modified version of that is: don't despair if you're in SaaS land and you don't have an AI pixie-dust story. But if you don't have the growth as well, then you're right—it's compellingly hard.

You say “compellingly hard.”

Rory O’Driscoll

Yeah.

We all have LPs. I have a lot of LPs call me up and go, “Harry, what happens to this company? Where am I getting my liquidity? I've got exposure from Jason. I've got it direct.”

Rory O’Driscoll

Yeah.

When you look at a generation of your Dataikus, your Calixas, your Algolias, the growth rates aren't quite what they used to be. The profitability isn't quite there, and it's a question of what happens to this generation of companies and where liquidity comes from.

4. The Private Liquidity Crisis

Rory O’Driscoll

Look, it is the $3 trillion question. The reason it's a $3 trillion question is because that's the rough fair market value of privately held venture assets. Maybe $500 billion to $1 trillion of that is high-growth new stuff, and the other $2 trillion is mature, slower-growth SaaS and cloud companies that don't have the trajectory anymore for an IPO but, as yet, have meaningful value.

I think that's the interesting thing: I was around in 1999 and 2000. All the good deals went public, and all the bad deals were so shit that by 2002, we closed them down, said whoopsie, and moved on. You can move on from a $200 million company; you can't move on from $2 trillion, right?

There's a huge amount of really grim industrial work that's going to have to be done on everyone's portfolio to manage these companies through to a meaningful exit. As I say, you can't walk away from $2 trillion that are not only your LPs' economics but your economics too. They're significant, big companies, and they're so big that you're not going to walk away. But it's going to be a lot of hard work.

One option is that you just grind your way to profitability. You look at a PE exit. You look at consolidations. You're going to see some private-to-private transactions, where you put 2 or 3 companies in the same space together and try to change the economics of the trajectory.

Maybe you'll see some smaller IPOs where people go, “I know it's not a great market, but God, give me some liquidity. Price clears all markets.” All of the above. It's going to be real case-specific, long, and tiring work. But on the other hand, $2 trillion is real money, even in America.

Rory, one thing I wonder about: I wanted to write this up, but I don't have the data to support it because you have a much broader portfolio. I'm worried that the PE firms aren't trying to buy these companies. That's what I'm worried about. It's not the valuation; at least you have an option.

The private-to-private transaction, I think, is a great idea. Take 2 companies at $200 million, growing 20%. Take it public at 20% at $500 million. You've got a game. Everyone should look at that deal.

But I'm just stunned. I used to see PE hunting everything in the portfolio. I would come to SaaStr Annual, and every year I'd talk to some founder who'd be like, “Has a PE firm talked to you?” “Yes, 20,” right? Folks at this sort of mediocre growth level are getting no tire-kicking. Are you seeing lots of tire-kicking? Because I ain't seeing it.

Rory O’Driscoll

We're not seeing a huge amount, and you're exactly right. It's quite a shrewd comment, Jason. I think the reason is this: PE guys, ironically, love the things that we don't love. Let me tell you what I mean by that.

They love a boring-ass software company in a teeny-tiny vertical with 40% market share, where they can screw the customers for the next 5 years by raising prices because there's nowhere else to go.

Yes.

Venture deals—SaaS deals—love broad horizontal markets where you can compete and maybe get a billion-dollar outcome. So those are the companies that are industrially funded.

The problem is, when you fail to get the billion-dollar outcome, when you discover your market is tinier, or when you discover that an adjacent company is competitive, you're left with this subscale company that doesn't have the same pricing power. You're in a perfectly good, big market, but there's a bigger company out there that can grind you down—

Yeah, there's no pricing power.

—with no pricing power. PE guys just hate that because they can look at it and go, “I get it. You're doing $100 million now. You can grind it, but you can't take 30% of the cost out, raise the prices, and get the same thing.”

So I agree. I think that not every deal at $100 million would be interesting to PE. If they have an adjacency in the same space, they might buy it because they can load it on. But when you look at the things they love and you look at the things we make in venture, they're not the same deal.

It's very clear when you list the kind of companies they do. It's like: obscure vertical, accounting software for an obscure vertical, massive market dominance, and no one's ever going to fund a competitor. They just run that math. They cut, fire all the salespeople, double the prices, cut the engineering down, and kick off 40% cash flow.

In some of the broad horizontal stuff, in a CRM company, or let's just say a first-generation customer support company from 2016, if you cut off the R&D and the sales and marketing, your gross dollar retention will be 80%. You won't be selling any new shit. You'll be declining, and your product will become irrelevant in 2 years. But other than that, have a great day.

And Jason, where do you put those companies? You have to—one of the things you said earlier is that you probably have to find a way to fund new growth while, at the same time, building a new product. It's a much harder play than just selling it to PE. As I say, it's all the other things we talked about.

5. Megafunds Need Mega Winners

You said there's a difference between what venture likes and what PE likes. If we do this and this, we can see the billion-dollar outcome in venture.

Relating it to the news, Andreessen Horowitz announced a $20 billion fund and the plans around it. General Catalyst has $8 billion. Lightspeed—I don't know how many billions of dollars they have. It's so confusing with all their different vehicles, but it's billions and billions.

A billion-dollar exit? Thanks for paying for the Christmas party. I'm being serious. If you have 8%, that's $80 million back.

To state the banal, they're obviously not focused on billion-dollar exits. They're focused on a much smaller number of much larger exits, right? That's the bet in a nutshell.

If you're going to make those kinds of numbers work, you have to get vast numbers of $1 billion to $5 billion exits. You're playing for the $10 billion or the $100 billion exit. The question is how many of those there are.

Typically, anyone who raises one of these funds has proven they can already find at least one. Andreessen Horowitz found Databricks, and they've done amazingly well. They own a huge slug of that. It could be not just a fund returner but a multi-fund returner, right?

No one gets given $10 billion or $20 billion because they're idiots. They got given $20 billion because they earned it through 10 or 15 years of track record with no bad funds, by the way. That goes back to the comment you made about another partner earlier.

Typically, in finance, when things go wrong, it's when people lean into a trend just a bit too far. The judgment here is: is this that point? That's really what you're asking, and I don't know.

I think the biggest thing they have in their favor is the fact that so many companies are staying private for longer, which by definition means more need for capital, which by definition means if you have that capital, you should be able to make an acceptable return.

The venture market that I knew 20 years ago couldn't digest $20 billion. It wouldn't even be close. There would be no possibility of return because, typically, IPOs were $1 billion to maybe $5 billion, and there was one bigger than that every year at most.

You know, in a world where things are staying private for 15-plus years, where there are massive secondaries to deal with employee issues, it may well be that there's a place to put all that money. The returns might not be 3× venture returns, but the competition is the small-cap return of 11%. If you're delivering high, mid-to-high teens, it may be that the LPs think that's great, and that's the bet they're taking.

Jason, how did you analyze it?

There's an LP on Twitter that made this tweet literally this last week. I'm a little slow, like when Rory made the old 1 to 10 and 5 quarters less. This one opened my eyes, too. These funds seem crazy, and they are crazy, but the size of the fund should be tied to the amount of winners you can deploy X amount of capital into.

So if you're Andreessen, the beauty for Andreessen at this point—and it's certainly been true of Sequoia since we started—is that they see every deal. Andreessen sees every deal, okay? They can put this on a spreadsheet, and they're like, “You know, Databricks was $27 billion in 2021. What if we'd done the whole round? Forget that they were in the A, right? What if they had just put in $3 billion in 2021?” They would have already 2.5×ed their money, right?

Oh.

They put it on a spreadsheet, and they add it up, and they're like, “Yeah, we can deploy $20 billion in 24 months,” right? I think that's the way it works, and I think it's that simple. And there's so much capital, to Rory's point, especially in these later-stage deals and AI deals, they could easily deploy the $20 billion on that spreadsheet if you see every deal.

I do think there's a sensitivity analysis, and the model supports it. That's what you want to do in venturing. When you raise too much for the fees or whatever, you run out of deals. Most folks run out of great deals to see.

If you see every S-tier deal, here would be my Andreessen math: What if we see every S-tier deal there is in venture? We see 100% of all the best deals. We've seen them all, and we passed on 90%. Then you could go back in time and just do an analysis, right? This is what we should have done when we passed on all the decacorns, because you're in every one, and it maybe solves to $20 billion. I think it probably does. That's what they should have done.

I would push back hard that they see every deal. Hard pushback.

But even if you don't see every deal, you can stipulate they see most, right? I don't think, actually—Harry, genuine comment. Of all the things that could go wrong with a $20 billion fund strategy, not seeing every deal is not a top-three issue.

The 2 issues with deploying $20 billion are, first of all, yes, you see every good deal. But remember the next sentence: You see every deal, which means you see every bad deal, and there are 99 shit deals for every 1 good deal. The more deal flow you see, the more important picking is.

Now, relative picking is easier than absolute picking. In other words, if we are comparison shoppers at heart, sometimes in the abstract, when I look at a deal, I get caught up in it. Maybe it's good, maybe it's not. But most of the time, if I see a good deal and 5 bad deals, my little IQ can go, “I think that one's better than the other 5. I should do that one.”

So seeing all the deals is a huge advantage, but you still have to pick through them. You're gonna see every good deal if you're gonna do every good deal, but you're also gonna see every bad deal, so picking still matters. I think they can figure that out, because they're wildly smart dudes.

I think the real question in the end comes down to whether there's just room in the private markets for all that money. And if there is, this will continue. And if there's not, then at some point it won't stop because the venture guys will be mature. It won't stop because the founders will be more careful with capital. It won't even stop because the LPs will stop. It will stop because the LPs' bosses, the overall CIOs, will stop allocating capital to venture.

Until that happens, this game goes on. And by the way, if it happens the day after they close $20 billion, they win the bet, because they have $20 billion and no one else has any. So this whole little ecosystem in venture is going to keep going as long as there are enough new LPs to fund it and keep it fueled up, almost clearly independent of the wider market. It's been stunning that the 2022 crash didn't cause much more than a pause for breath.

It was just a pause for breath.

But when—

It was crazy.

6. Late Stage Beats Seed

When you look at OpenAI raising $30 billion, and when you look at Anthropic's multibillion-dollar fundraise, I don't think there's any question whether this ecosystem can actually absorb it. I think the subsequent question is, is it fundamentally a venture game?

I know, and we both know, many investors in some of the model providers who came in at $4 billion. It's now $16 billion, and they're 3.5× up because employee stock dilution was so heavy, and the funding rounds coming in were so heavy. The multiples are shit, even with great returns.

My observation and my own thinking is I'm sometimes too conservative, so I push against myself. I think one of the big advantages some of these newer entrants had was that they weren't in the business a long time. Because when you've been in it a long time, I remember 1999 to 2002. I remember the crash after dot-com and all the capital getting withdrawn, so it made me naturally cautious.

And you're right, the idea of writing a check at $4 billion, I did this instinctively: “Well, that's not really venture.” But the truth is this: We're paid to make money, and some of those rounds have made decent money. Perhaps not as much money as they thought because of the dilution.

If you look at one of the common characteristics of the folks who've entered this market and have been successful, it's been newer entrants, like Andreessen, like Founders Fund, unencumbered by, quote, “Is it venture?” They have just said to themselves, “How do I make the most amount of money and hack the system?” And they've made the most amount of the capital.

Yeah. Thrive, Thrive, Thrive—I think they're a great example.

But no. Proof, by the way, and I'll tell you why Thrive worked: A real estate investor knows only 1 thing—buy the best damn house on every block. So he bought the best damn house on the FinTech block: Stripe, tick. He bought the best damn house on the OpenAI block, tick, and then he bought the best damn house on the infrastructure block: Databricks, tick.

Then you just go home when you're done, and you wait for the checks to roll in. It's genius. And you're right, every little fiber of my being would've said, “Don't do that. That's not venture.” But I'm not living in 3 houses in Miami. He wins.

I've learned to say to myself, “Don't just say it's not venture. Just say to yourself, ‘Is that the right strategy for this game?’” And it clearly is the right strategy for this market at this point in time.

Will it be the right strategy across the cycle when there's an equity downturn? Maybe not, because the only risk you're taking is price risk. But that's typically a correlated risk. So if it does go wrong, maybe it's only a 1-in-3 chance it will go wrong on everything, because your equity values will tumble.

Absent that, the Thrive strategy was brilliant. Buy the best property on every block. It's like Monopoly. You got all the little blue ones. People are gonna land on it, and you're gonna make a lot of money. I'm profoundly jealous of that insight. If someone had given me $5 billion, I probably hope I'd have been smart enough to do that myself.

The criterion is not, “Is it venture or not venture?” There's only 1 criterion: Is it gonna make you money, and is it gonna make you money across the cycle? The answer to the first part of that question looks like it's yes, and the answer to the second part of the question across the cycle is, call me in a year or 10 years.

Why struggle to pretend you can do 8× over 20 years on a seed fund when you can just write 1 big check into a winner and call it a day, and achieve liquidity in a quarter of the time? The multiple will be lower, but the absolute return will be higher. The carry will be higher.

Why would you do the stupid seed investing and wait 20 years so that everyone on Twitter can say you had an 8× or 10× fund? Hooray. Split with 4 partners on your tiny little fund after 20 years, making nothing. Just write the big fucking check and call it a day. It's so stupid.

When outcomes are $1 billion, seed is great. When outcomes are north of $20 billion, $100 billion, seed is for suckers, Rory. Seed is for suckers, I think.

I love that. I'm going to steal that, and I'm not even going to give you credit. I love it.

No need.

Right? All joking aside, you're exactly right, Jason. We're saying the same thing, which is—and this was a compellingly great way to make a lot of money, provided someone was willing to give you that kind of capital for that amount of risk.

And what I don't know is, part of me sometimes thinks it's a really good risk, and you should...

It makes sense to do it, and part of me thinks it's a very risky strategy in terms of correlations, and if it goes wrong, it'll be horrible. It's not what we do, so I don't spend a lot of time thinking about it, but right now it looks pretty good.

Can I just ask, Rory, what could go wrong? When you say there's correlated risk—

No.

They feel relatively uncorrelated to a certain extent.

No, no, you're exactly right. They're uncorrelated in terms of individual financial performance or picking—anything to do with picking. You've picked the best asset in 3 diverse markets. You're right, they're not correlated that way. What is correlated is fundamentally equity values.

We live in a world where high-growth tech companies get 30–35 PEs. If hypothetically a president were to destroy the economy, like in the '70s, just saying, and PEs went to 9, 10 or 11, and even growth stocks went to 12 or 13—look what happened to Nifty 50 between '68 and '82. In a world where the growth-stock premium goes away, if you start valuing all those assets at 6 or 7 times revenues, which is still pretty healthy, you're just in a very different place. So that's the only risk.

You've bought the best assets. The only risk is that the world decides that equity isn't worth as much. And in that case, to be clear, a strategy that would get a 3X will get a 1.5X, because you haven't taken a ton of valuation risk if you're doing the kind of things we do. A strategy that's entirely predicated on buying marquee assets at high prices could get a 0.5X or a 0.7X.

And so what you're saying there is time-sensitive: you don't want to have to liquidate at a time when you have that compression of multiples. Which is why, if you have $20 billion, ka-ching, I can pay that price, buy the best house on the block, and if I want to sell that house and there's a market crash, kaboom, I can put in even more money at a reduced price and wait for the multiples to expand again.

Again, there's one implicit assumption in that, which is that the company will continue to compound. And the problem here we're dealing with is ex post facto vision. There are 5 or 6 technology companies worth a trillion dollars, so it's clearly doable. You can clearly compound from $300 billion, which is where OpenAI is today, to a trillion, because 5 other companies did it. What you forget is most tech companies don't.

Every time you hold for longer, think of it as a process of distillation. Your best ones get better, and your worst ones go down. So, provided you've got the right ones, you can tough it out forever. But it'd be a bit of a bummer to discover you'd invested in BlackBerry and it was still private, and Apple just launched the iPhone, and you decide, “Screw it. We can take these guys. I'll put in another billion,” and then you just march the thing down.

The hard truth is most tech companies in the end get acquired, rolled up, or aren't successful. So the longer you push, the more premium there is on being absolutely right, and on picking and having a winner. It's not a crazy bet. I'm just saying, typically, any financial bet has an embedded risk somewhere in it. There's no such thing as free money, and when stuff looks like there's free money, it just typically means that the risk isn't fully recognized.

This ultra-late-stage business has been great. You sent a tweet, Jason, and I saw it there. It looks like the easiest way to make money imaginable, which makes you go, “A, I wish I could do that,” but then B, what's the buried risk?

And, Harry, I don't want to discuss the company, okay? Don't push—you can push me on anything except this one thing.

But I just have a company that's just become a unicorn. A late-stage fund just put in almost 9 figures, okay? And they own as much as me. Now listen, I'm lucky to be a part of the company, but if the company is only sold for the basis, they make nothing, right? But they're underwriting a $10 billion outcome, right? They, for all intents and purposes, will make just as much money as me, right? In fact, they can support the company more. They skip years of work and stress.

And, yeah, it has to be a big outcome, but if it does, why would you do the seed stuff? It's the same ownership—skip all the years, right? And you've got your 1X worst case, your wonderful 1X.

But—

If it's really good money, you make the same.

Yes. Agreed.

If this is an outlier game, who cares about those little $800 million outcomes? Who cares?

Rory, can you talk about one way you've made money that others haven't, and just what you learned? You don't have to name it, but just to put it in—

Well, it could be that the higher the price you pay going in, the higher the price you have to get on the exit to make money. It's just as simple as that. We've been on both sides of that. We had a sale recently where we got a 1X, and the early investors got a 3X, right?

And look, it all comes back to this idea of access to capital. If you have access to capital that's large and forgiving, which is what these megafunds have, then you should play the big-balls game, because you're exactly right. You don't have to do as much work. If it works, great, you make out the same as Jason, who did the seed for suckers, and Rory, who did the A.

And if it doesn't work out, you're going to get a 1X, but you get forgiven and you start again. If you have access to that kind of money, that's the game you should play. Remember—

Yeah.

The reason you and I don't play a different game is that I was wandering around in 2009, and no one offered me a billion dollars and said, “Hey, have a go, and if it doesn't work, we'll give you another billion in 2030.”

When you have a smaller fund, you want to have a higher probability of the upside, and logically, even though you don't want to hear this, the higher your going-in price is, the less likely it is that you're in that 1 deal that can transcend price and be not the billion-dollar outcome, but the $10 billion outcome. You're just upping the bar on getting it just right.

So that's the argument for it: if I have $1 billion and I could get $20 billion, I play, but Mark and Jason do too.

I get that, Rory, but you have a pretty great track record. You've proven yourself to be a phenomenal investor across cycles. With respect, you could probably get a lot more now. Why do you not?

I think, actually, we're all products of our experience. I think I'm a somewhat conservative investor. I think I'm scarred a little bit by remembering surviving 1999 to 2010. I don't want to take a lot of money at the end of my career, manage it badly, and then fail. I don't want to make that bet twice, because I've seen what it looks like when it goes wrong.

I remember what 1999 to 2005 was like, and it was miserable. And it's kind of you to say that about my track record, but I'd say it's solidly good rather than spectacularly amazing, right? I'm a solid, good investor. And I would say this: I'm more proud of the fact that I made small amounts of money from 2000 to 2010 than I am of much larger returns from 2010 on.

I've lived through a downturn and survived when 70% of the people I knew in 1999 and 2000 were out of the business 4 years later. That's probably why, in the way we run our business and our investing strategies, I've always wanted to survive that downturn. And that probably constrains your upside a little bit, but it increases the probability of not going horribly wrong—I mean, I remember how horribly wrong things can go.

The 2 biggest momentum players of the last decade, Tiger and SoftBank, are already out of the game. Huge credit to someone like Insight, who were putting out a lot of money but managed to survive because of savvy. But the bigger the dollars you're playing with, the more risk there is of just getting crunched when the tide goes out.

What did Insight do to survive more than Tiger and—

I think they had a much broader strategy. They were doing deals at much earlier, lower prices. I named them only because, logically, if you just rank the dollars raised, they were 3rd on the list. SoftBank is gone; Tiger is effectively gone. I think they were just better investors. I think they had a better—

Well, Teddy doing a few Wiz deals is going to help, isn't it, Harry?

Absolutely. That's my point. They sound—

And he didn't even do the last round.

Yeah, yes and no, Jason.

Yeah.

If you actually looked at the returns, yes—

I know.

100% amazing. But it was a $2.6 billion reported return to them in an $8.5 billion fund, which is like—

Well, yeah, that math is still hard, yeah. I mean, Teddy did one of the best investments of all time, and it returns a third of the fund. A third of the fund. That would drive me nuts. I would probably quit venture if I did Wiz and it was only a third of the fund. I would probably tell him to go talk to Harry and Rory.

If you are pulling down the fees on an $8 billion fund, I don't think you'd quit.

I might quit because the game wouldn't be fun enough. The game wouldn't be fun enough, right?

But I do think the bigger you are—and a genuine comment on that, the whole $2.6 billion only returns—but the bigger you are, the more you're undertaking to be competent and find not just one of those, but multiple of those. It's the same point over and over again. You've embarked on a strategy that only works if you have a really strong level of execution and you get in large, significant numbers of the very best deals.

Mm-hmm.

And all credit to Insight, it looks like they've done that.

Mm-hmm.

Less credit to Vision Fund than Tiger. They kind of went over the top of the curve and just kept going a little too long. Your degrees of freedom are tight. And you know, Andreessen will wrestle with the same thing. I think they're wily, savvy investors. But when you've got $20 billion, the impetus on being disciplined just... Your degrees of freedom are tight.

For the old school, Emergence just raised a billion, okay? They were one of my investors. I didn't ask them.

Right.

But I think I know—there are probably 2 reasons they raised a billion, right? One is because there's a new generation who's maybe less risk-averse and doesn't have those scars. But I think the second reason is because the checks are bigger. Emergence just did, like, $50 million or $60 million into Bolt or something like that, right? Back in the day, that'd be a $15 million check. What about having to have a certain fund size to play the game today?

I agree, because I know and respect those guys enormously. We've done roughly the same thing. We've put probably over 5 or 6 funds out; you've gone from 300 to 600 and then 900.

900, yeah.

And the number of deals in the fund hasn't changed all that much because the average check size has gone up. Let's talk about that for a second. I just checked it: nominal GDP growth—in other words, the paper value of money—is 3X from '99. In other words, GDP in '99 was $10 trillion, and it's $30 trillion today. If your fund size was 100 in '99, you've got to be 300 or 400 today just to be the same thing.

And especially in the last 4 or 5 years, nominal GDP growth in the COVID period has been huge. If you're not up 50%, you're falling behind. Some element of fund expansion is almost inevitable because the check size has gone up.

And as the check size has gone up appropriately, on top of that, there's probably some extra increase in the check size that maybe isn't appropriate. Appropriate might not be the right word, but it's less driven by the pure economics of just inflation and more driven by people playing to win.

We wrestle with this. If we don't grow the fund size, we're finding that at deals we would have thought were the scale sweet spot, we just weren't relevant. You'd come into a deal with your little $20 million check and they'd laugh at you. You'd go up to 25, you'd call an LP, and they'd give you 5, and then you'd be up to $30 million. You've got to size the fund for the strategy, because fund size is the strategy.

And I think for the kind of A, B stage where those guys play—we play A to G—you probably are writing $20 million initial checks. You're probably writing $30 million total checks, including reserves, without even accounting for those late-stage rounds. You probably want more than 20 deals per fund because, as we discussed half an hour ago, with product-market-fit variance, to replicate the same overall fund return—and this is where I do disagree with the concept of a benchmark—I want to make sure I have enough deals in every fund that the fund has a good probability of success. So you're closer to 25 deals per fund. You're at 700 or 800 before you blink.

But this is why $50 million seed funds drive me nuts. When you take away fees, you've got $40 million of investable capital, and when you think about the average seed round today being $3 million to $5 million, if you want to lead it and take real ownership like they say they do, there's no way that you're getting even 20 companies.

You're not. You're taking concentration. That's what I always tell them.

You're taking high—

Take high-concentration risk.

Pre-seed or seed? I mean, Jason, this is nuts.

Well, if you don't want to—if you want to play that game and you don't want to raise a massive fund, you have to take concentration risk, right?

Okay.

Or pretend.

7. Founders Fund Takes Massive Bets

So Founders Fund raised $4.6 billion, with $1.6 billion oversubscribed. I have so many LPs call me asking which funds I like, which references well from the show. I've never had such institutional demand for any single fund asset as I have for Founders Fund. Every single LP wanted Founders Fund and wanted Founders Fund Growth, which is even rarer.

Will we have more and more money going into the asset class? Will we have more and more money concentrating into just the top players, and will it be terrible for everyone else? How do we think about that?

I'm trying to relate the facts to the question because it wasn't obvious how you got to the question from the facts. The correct response to the facts you outlined about Founders Fund is that they may be, to a rounding error, the best fund, so there's no surprise they get the most money. It was great to see the leak. They're astonishingly good.

I don't like this conclusion, but I've realized that my Bayesian prior on financial matters in venture should be checking in on what Peter Thiel does, because he's been right on a lot of things. They have a very clever, high-IQ strategy that they've made work, and you can see it in what they've done and how they've done it. We can come back to that in a second, right?

It's kind of like we're all playing this game, and they're just playing it really well and cleverly. So they should get the most money. Just because you give the money to the smart guy doesn't mean, from an LP perspective, that you should do it with 10 other people.

You could argue that this is an idiosyncratically brilliant performance track record, because it obviously leaked, and what you saw is exactly what they advertised: long holding periods, strong IRRs, though not amazingly, stupidly stellar, but holding periods of 10 or 15 years. They bought SpaceX, I think, in '07 or '08. So they have compounding after compounding.

It turns out that if you compound at 30% to 40% gross, not for 8 years but for 15 years, because you don't give a damn about giving the LPs money back early, you're just going to compound the thing to make money, then you end up with an 8X or 10X fund. They did exactly what they said they'd do.

But they did 2 things. They held for long periods of time in highly differentiated companies, and the second thing they did, to an earlier point, was that they were absolutely willing to take on massive concentration in their winners. Again, armed by the one fact that you can overcome it, they didn't have to give a damn about anyone being afraid of the risk, because their perspective was, if you don't like the risk, take your money and go home.

They were able to push. So you take those 2 facts and add the fact that they're very good pickers, and you have the best deal ever, right? It's a money-making machine, and definitely the best.

Brian Singerman said to me on a show once, “The enemy of great venture returns is capital concentration limits on a per-fund basis. We have 30% of a fund in certain assets. We know what great companies look like.”

Yes, and he's exactly right. But, again, to take both sides of that, it is the enemy of greatness, and it is the protector of massive wipeouts. It boils down to the personal choice of where in that dimension you want to be.

For example, I've heard Brian speak once. I thought he was very articulate and very clear on the strategy. They had that big win. They had the stones to put $300 million in a biotech company. I can't remember the name, but I should. It got a—

Stemcentrx.

Stemcentrx. Exactly right. It got a 5X and took money off the table. It's worth pointing out that 3 years later, the acquirer canceled the program. Huge amount of risk, made it work, but never forget the risk was there.

Those guys built a product that said, “We're comfortable with the risk because we like risk. We think we're smart enough to underwrite risk,” and they were. It's a very high-IQ, high-conviction strategy.

I think an LP saying, “I'll do Founders Fund because they got these returns, and 10 other funds will be just like Founders Fund,” that sentence doesn't make sense. They won't be just like Founders Fund because they're not the same people with the same approach.

You're right. But I have 2 LPs a week managing between $350 million and $500 million who come into our offices in London and say, “Harry, you've got all the data from the shows. Walk me through how I should do this. I've got $100 million going into Index, Accel, Founders Fund, Sequoia—25 each.”

And now, let's take the low end of the budget: 350, with 100 going to the best assets, like your Founders Fund, as we said. Now I've got 250 left. Where do I put that? That's my annual budget for venture, Harry. I need to spend that. Let's go to Lightspeed. Let's go to GC. Let's go to Redpoint. Let's go to—

It's an interesting point. You have to accept the fact that you probably are going to do deals—it’s going to sound really obvious when I say it, but it matters—that won't be as good as the best deal you do. But they still can pass your IRR threshold.

At the end of the day, let's assume there's a forced ranking, and let's agree, for arbitrary purposes, that we put Founders Fund at the top. I don't know; I haven't seen the numbers, so I can't comment on Sequoia. But based on observed data at scale—in other words, not including seed funds, but in terms of turning industrial quantities of money into 8x and 9x returns—let's put Founders Fund at the top. You put what you can in there, and then you've got 2 choices. You can stop and go home, but the problem is that any money not allocated to that has to go into small-cap public companies and gets 11%.

Or you can decide on a portfolio of folks and go down the list and hope that they all perform as well. But you're just looking at building a portfolio of companies whose strategy says not that they can replicate the best number, but that they can comfortably outperform the public markets with a strategy that's repeatable and differentiable. Many of the names that you just said have that.

Can I ask 1 question about Founders Fund? Not to interrupt, Harry, but before we go on, just because it started this conversation. What do you think, Rory and Harry, about the fact that Founders Fund doesn't do B2B intentionally? They make exceptions, but they don't believe in B2B. They don't believe the outcomes justify it. They explicitly don't do it.

I think that you’re mixing the point. There are a lot of different ways to make money. It's the intellectual conviction of wanting singularity deals. It's wanting deals that are N of 1, where there's typically a high technological component to winning, but then, once you have that done, you have low competition and you get the prize. It's a totally realistic way of playing the game.

The interesting thing is that there aren't as many of those deals. This actually goes back to the point. Conversely, with B2B, they are right: very few companies in B2B have the same level of untrammeled competitive free space that something like SpaceX does. That's the negative on B2B. But the positive on B2B is that there have been 200 to 300 SaaS winners, and there are a lot of different ways to make money in B2B.

So it's a different strategy. I'm sitting here thinking, would I prefer to have put $20 million in SpaceX, gone home, and compounded to $360 million? Yes, of course. That's 1 way to make money. But I'm pretty damn happy about the way we chose to make money in a whole bunch of B2B software companies, each 1 of which doesn't have the same investment multiple as you might get on a SpaceX 10-year return, but nonetheless provides a very attractive, risk-adjusted return profile.

And when I admire them for the way they look at the world, they've basically said, "We are smart enough to look at a whole series of wholly different markets and have the raw IQ to recognize greatness in biotech, space, et cetera. That's all. We can do that. We can see those deals, and we can pick them."

Whereas, conversely, by focusing on B2B, little old us, we're saying, "We're just going to focus in this space. We're going to try and see all the deals." The competitive set in each one won't be as compelling in terms of white space as doing rockets, but there are going to be a lot of winners. We can pick by market. We can have a nuanced way of picking the winners and make it work. It's a different gig. Good luck to them. They're amazing.

I would also just say that 2 companies they are most excited by are Rippling—

Yes.

—and Ramp.

That's true.

Well, I don't think—my limited experience, because I talked with Sam Blond, who was at Founders Fund for a while, and is a good friend—they told him they don't do B2B investing, and then they viewed Ramp as a fintech.

Beautiful.

That's how they think of it. Now, I just thought it was eye-opening. You can do it, but I'm saying from the inside—and this is not a criticism—that I found it eye-opening. Rippling is good, but they did that deal with Sam. It's only so large, and it's minor, right?

I think even if 1 is a fintech and 1 is an exception, it doesn't mean the point isn't true: they don't generally do B2B. It just doesn't work for their model, right?

You know what? I think the refined version of that statement is: look, we're not going to focus on an industry and do 50 B2B software companies like you're doing, Rory, or you're doing, Jason. We don't believe that's the way to greatness. We're going to do everything, and if some percentage of them—3, 5, 10—turn out to be B2B, that's fine. But we didn't back into it with a thematic market focus.

Yeah.

We backed into it saying, "I only want to do greatness, amazing greatness. If I run into a B2B guy who has amazing greatness, I'll do it. If I don't, oh well."

Do you think the fact that it's, like, a 50% capital commitment and it's run by rich people informs that, too?

I certainly hope so.

Because I have a pretty large capital commitment myself, but if I had that much, I wouldn't want to be going for triples either. I'd want to hold for 20 years because I'm plenty rich, and I'm certainly not in it for the fees if my capital commitment exceeds anything in the fund.

Exactly. It's exactly what they should be doing. As I say, what I admire most about it is that the practical steps they're taking are in sync with a stated strategy that is ambitious and hard to do, and nonetheless they've been able to do it. Go team.

8. The Venture Funding Cycle

Will we have more or less LP money going into venture in the next 3 to 5 years? There's a lot of macro uncertainty. We have endowment funds facing large fines, and more uncertainty there. We've got the denominator effect impacting their public books. But then venture is powered by AI again, and now is the best time ever. Will there be more money going in or less over the next 3 to 5 years?

My gut would say that at some point you'll see less. It boils down to this private-for-longer trend. There’s an optimum amount of money relative to the opportunity set. The tricky thing is that the opportunity set has massively expanded because of this whole stay-private-for-longer trend, which consumed vast amounts of capital in the later stage. So it makes sense that the amount of money going in has also expanded.

You look at that, and you can make a modest, optimistic scenario that says the capital has only expanded proportionate to the opportunity. But on the other hand, the cynic in me says that in financial markets, things tend to overshoot, especially when the indicators of success are lagging, and venture is the most lagging market.

So what will probably happen, in my view, is that LPs are going to steer based on the trailing 10-year returns and overshoot on capital in. At some point, those returns will go the other way, and then it'll take a while for the shoe to drop. Then they'll start withdrawing capital, probably just at the point when they should be investing.

If I had to guess, sometime in the next 5 years you'll see a significant change in the availability of capital. I remember in 2010 people saying—what I tell people is this: "It would not be a great time to invest in venture until people spit at you when you mention the word."

In 2009 and 2010, they were saying, "Literally, get out of my office. None of you have done anything for me for 10 years. The last good fund you had was in '96. Why the hell would I even do venture?" It turns out that was the time you should have done nothing but venture.

So if that's true—and it is—the inverse is probably true. When it's obvious to do venture, when everyone wants to do venture, it's probably a tough time to do venture. When does that turn back? Hard to tell, but intuitively, at some point I think it will overshoot and then start to pivot back. It'll be a better time to invest and a tougher time to raise.

Rory, let me ask you this heuristic. If you take a window of time and maybe elongate it to 7 years, okay? The amount of exits in IPOs and M&A—roughly speaking, all the exits should be how much venture comes in, right? New venture comes in, roughly, right? Roughly.

I think LPs are pretty smart. They get scared and smart, but if those exits keep going, it should happen, right? But it's been a while for IPOs. It's been a hot minute for IPOs, right? Maybe the window's 7 years. I don't know how long it is.

Yes. At some point the money has to come back because, in general, my observation is that people don't stop doing stupid shit because they intellectually figure out they should stop doing stupid shit. They generally stop doing stupid shit when there's no more money to do stupid shit.

The answer is that if the money doesn't come back, then eventually the money won't be given to us. And that's simplistic. There's a famous Ben Stein quote in economics: "If something can't go on forever, it will stop." A famous quote from Herbert.

But I think the corollary is also true. Until idiocy has to stop, it will go on. So the real question is whether a Stripe, a Databricks, or an OpenAI IPO means the cavalry comes back quickly enough to keep the money flowing at roughly the same level. That would be an indicator that probably the amount of money in the system was roughly about right. Individual funds might do better or worse, but the system was about right.

If, on the other hand, those keep pushing out, then at some point it becomes really hard to have all this money in private, illiquid assets when you have pressures on your endowment and all that. At that point, you would see the money go down.

On that, we've seen your Klarna, which was going to go out, push back. You've seen several others push back in the wake of macro uncertainty.

Yeah.

StubHub. You've seen Stripe. Stripe doesn't want to go out for a long time, Rory. If you know the Collisons, they're like, “Why would I do that? I don't need…” They said on a show recently, “Why do I need some analyst at a bank to tell me about my margins?”

Agreed. If you step back from that, first of all, they're correct. And it's a massive public policy failure, because what's happened here is this: It is more attractive for companies to stay private and access capital from GPs who are paid 2 and 20-plus to make those investments than it is for those same companies to go public and access capital from Fidelity Growth Fund, where Fidelity only gets paid 70 bps to make the same investment. If you think about it, we have defaulted to the higher-priced capital alternatives, which is absurd.

So you have to say to yourself, why has that happened? Remember, one of the rules is the company doesn't care if it's public or private. Stripe is going to be an amazing company, all other things being equal, public or private. So the only thing that's changed is that instead of being public and compounding nicely and, as I say, getting funded by low-cost public mutual funds, it's private and getting funded by high-cost venture funds. That's a weird outcome. Why is it? You have to say to yourself, why has it happened?

Well, you would also say that it's not high-cost capital from venture funds in a lot of the latest rounds. These are very, very large pension funds—

No, actually, you're agreeing with me, not disagreeing. I didn't say it was high-cost to the investor. It's the other way around: it's not high-cost to the company. You're exactly right. That's one of the key points.

To the investor, if I was a pension fund in New York, 20 years ago I gave my money to Fidelity Growth, and I got Stripe at 70 bps. Now I have to give my money to Thrive and get Stripe at 2 and 20. That's why I said it's a public policy failure. The ordinary investors of America are either not getting the good assets or getting the good assets at massively higher fees.

And if you believe, as we said a few minutes ago, that the performance of Stripe is not impacted by whether it's public or private, what it means is this: If, say, Stripe's compounding at 15%, and I owned it in Fidelity Growth, as an investor I got a 15% gross return, 70 bps, and a 14.3% net IRR. If I owned the same asset in a privately held venture co., it would be 15% gross and 10% net after fees and carry.

So my return as an investor—an ordinary saving American who's trying to put money aside for their future—has been reduced massively because all these companies are staying private instead of being public. That's a monstrously stupid outcome. So why is it happening? That's the question. I think it's a combination of things.

I think being public is a pain in the ass, which is something you need to fix, and I think being private is cheap and easy money, which, my gut is, is something that would eventually be fixed. Those 2 things together have to change for it to be rational for late-stage, big private companies to want to go public.

I was with one of the most successful founders of our time the other day, and he said, literally, there is no really significant reason for any great company to go public today. For the not-so-great but still very good, yes. But if you can raise endless money at great prices with private investors with no scrutiny—

Agreed. And that sentence is why it will eventually stop. Go back to the thing: those poor investors have 2 choices. There are public companies where they can get 15% gross, 14.7% net, or there are private companies where they can get 15% gross, 10% net. At some point, they will reallocate capital away from those private investments to those public investments. Then what will happen is private companies will not be able to access effectively free capital.

It's absurd that the free capital is at a higher cost in terms of total cost to produce the capital. It's absurd that it is cheaper to get money as a private company from a provider who has a 500-basis-point cost structure than to get money from a public mutual fund that has a 70-bps cost structure. It's intellectually madness, but it's where we are now.

Until that stops—and intuitively, when you say it like that, you say to yourself that at some point, what logically will happen is that late-stage private investments will underperform equivalent public investments by the amount of the fees, and then it'll switch.

I guess that's the efficient-market thesis, right?

9. Late Stage Terms Get Aggressive

Can I throw one out there? We've said this about the enormous funding rounds. Superintelligence: $32 billion, $2 billion in, supposedly no product. What did we think? I have some thoughts. I'm intrigued.

I think, go team. I think, look—

Go team.

I think there are compelling arguments in favor. OpenAI invented all this, and as an investor, you can say to yourself, “I either do OpenAI, or I can do 1 of 6 or 7 other foundation-model companies.” If you fast-forward 3 years, all the foundation-model companies that weren't populated by people who were at OpenAI haven't done great. Anthropic, which was populated by people who came from OpenAI, has done pretty well.

So what it says to me is, “Hmm, they cracked the magic code in OpenAI. They have the secret recipe. Fund people who have the secret recipe, and it works. Fund anyone else, and you kind of get a me-too outcome.” In retrospect, that was the logic for doing Anthropic. They have the secret recipe. They snuck away from the Magic Kingdom with the secret recipe. Back them. Don't back all these other people who are trying to figure it out.

Using the same logic, you've got the guy who invented the secret recipe. Why not? At least you know he'll probably crack it, so your risk level of not being able to figure it out is pretty low. And remember, the risk level for people who didn't have the secret recipe of not figuring it out—with the exception of Groq, which is astonishing—is quite high.

So it makes sense, because you can buy something that can crack the code. Now, what that model is worth once the code's been cracked is a totally separate discussion. I don't have an insight on that, but I totally get what I'm making clear.

I cannot see why one would not do this deal. I think this is… People looked at this and went, “What? No, it's not…” With a liquidation preference, there is zero chance this does not get bought for at least the preference. It's fucking Ilya. Microsoft will buy him for $10 billion tomorrow.

Provided the government lets them buy in, but yes, agreed. No, you're exactly right. More marginal foundation-model outcomes have yielded returns beyond a 1x with exactly that mechanism. So yes, that's your argument. You're exactly right.

Rory, can we really count on the liquidation preference in these types of deals? Can we really count on it being honored, or that we're going to get our money back?

That's a brutal comment, and you're quite correct. It's always stunning when you get down into the arcana of Delaware law and what can actually happen the day of a transaction. If someone decided to actively not honor the preference, there are a bunch of ways you can do it. So yes, I hear you. That's the risk.

Or if you acqui-hire most of the team for $10 billion and you leave the liquidation preference over in a C-corp., doesn't that work?

Yes. That works too.

It's just—listen, my limited visibility recently in M&A is that every acquirer is looking for ways to get around all the VC preference stacks. It's aggressive. It was always true, but now it's super aggressive. It's like, we just don't even give a rat's ass in corp dev about how the certificate of incorporation is structured or what the documents say. We'll do side deals, back deals. We just want nothing going to the VCs in bigger, nine-figure deals, right?

So why would you honor this liquidation preference when I want that going to the engineers? I don't want it going to the VCs. Why would I want it going to the VCs? And why does Ilya even care about them? I think founders care less about their VCs today than they used to. I think they care less.

I would love to have been in the room on some of these marginal sales where Google did one and Amazon did one, where, in fact, they did take care of the VCs to some extent and of the founders. Because you're right, Jason. I'm not going to comment on those.

In smaller deals that we're in, both when we're a seller and when we're a buyer, you're exactly right. Anyone buying the company says, especially if it's a business where you want the customers, you pay down the cap table because you want the whole damn thing.

If it’s an acqui-hire, every dollar you give to the venture guys is wasted. So you’re exactly right. You do a small headline deal and then large earn-out contracts, and you sit there. I can pretend that I’m appalled by it, but perfectly honestly, when I’m on the other side of the table and my late-stage companies are trying to buy early-stage companies, I do exactly the same thing.

I don’t give a shit about Jason and his bloody preference. I want to hire those 5 great engineers. Let’s just give him a contract. The question you asked—

I mean, though, Rory, respectfully, is that not a bit shortsighted? Maybe I have a grudge, but if you did that to me, I’d be pretty pissed off, and I wouldn’t be that willing to give you my next great deal.

Come on, it happens every day.

I think if I’m a corporate acquirer, let’s leave these big deals out. If I’m a corporate acquirer and I come up against Rory and Jason this time, I don’t sit there thinking I’m going to come up against them next time. I push as hard as I can, and if I don’t push totally brutally, it’s not because I’m worried about a multi-period game. It’s just that, at some point, I’m not paid enough as the VP of corporate development to waste enough time and take the litigation risk of fucking over Rory and Jason.

It’s just easier to give them their $30 million and call it a day. Now, as Jason points out, when it’s $2 billion, who knows? But so far, the observed fact is that even in these transactions, investors have made money in a sideways sale and have been able to rely on their preference. Whether this happens in the future, I can’t speak to. I don’t know, but that’s all you know.

In the meantime, you’re getting an at-bat with the guy who figured it out and made the magic recipe at OpenAI. So that’s what they’re doing. Again, one of the things that every one of these discussions today has in common is that, in almost every item, we’re realizing we’re all taking a lot more risk than 10 or 15 years ago.

We’re all playing a high-stakes game. It can be the price, a high-stakes game. It can be the pre-money, $2 billion round, high-stakes game. It can be concentrating the fund in a smaller number of investments. But the one thing all this stuff has in common is we’re way out there on the blue, on the yield curve, on the risk curve.

Except for one thing, which is we’re seeing this increased trend, again, of founders taking secondaries more and more early in the journey. I saw a tweet yesterday where it was like, “Hey, founder secondaries at A again is completely the new norm.” Are you finding founder secondaries at A really back in vogue, one? And have we just shifted risk to founders taking money off the table earlier, which may or may not be a good thing?

Well, I can tell you what I’ve seen, for what it’s worth. But in all of my hotter companies in the last whatever months, I’ve seen the later-stage investors put everything possible into the term sheet to win. There’s no more waiting for revenue, the maximum secondary, the maximum refresh, the maximum even cram-down of the prior investors, because they don’t care. They just don’t care as long as the founders get their post-money—

Yeah.

—their equity and their secondary. So what I’m seeing is, straight out of the gate, all the boxes you can check in hot rounds are all checked. There are no more games. There’s no more, “Is it too much secondary?” Don’t care. “Is it too much…?” Just don’t care. I just want to win the deal, so I’m not going to—

And someone else is going to do it. So I see it all. Every box is checked in the term sheet today in the hot deals. Every box is checked to the maximum, to the maximum. I haven’t seen it in A’s. I’ve only seen some A’s. But after that, every box is checked. Win every deal. I just want to win it, don’t care.

I want you to be capital efficient. I want you to be stingy, but here’s an extra $100 million and $30 million of secondary and extra stock. I like capital-efficient companies, but I’ve got to win the deal, right? You just have to do it to make this big money in growth. You’ve got to win it, right?

Yes. There’s only one thing worse than the—

For 7.

Yeah.

That’s the play in growth today. Sell 5, we’ll give you 7. That way, it’s not even a dividend. You come out ahead, right?

Yeah.

Well, a dividend might be better—

Yeah.

—because you don’t have to sell, right?

Yeah.

The refresher always exceeds the sale.

I’m going to be sympathetic to the investor now. I’ve lost a deal through not doing that because, again, it sticks—back to my comment, I tend to be perhaps stuck in the mud on history. I think that’s just nauseating because you’re effectively replacing the comp committee of the company you’re investing in.

But you’re right, Jason. You see it, especially in later-stage rounds, not at the A round, later, and you’re like, “Hmm, if you’re going to lose the deal, bad money drives out good, and bad habits drive out good habits. If you’ve got to win the deal, maybe you do it.”

I mean, I’ve had 2 deals that were done in 1 day—hot deals. How do you get a deal done in 1 day, right? How do you guarantee you win? You check all the boxes. If you check so many boxes, there’s even an argument that the valuation doesn’t even matter at some level, because you’ve checked all the other boxes.

This is what worries me so much, though, with growth funds today: They assume that the outcomes are equiprobable in size. What I mean by that is they’re going, “Okay, I know X company is great and only worth $2 billion. But if I pay $3 billion and I put in $200 million, I know it’s a $10 billion company, so I’ll get a little bit of a compression on my outcome size in terms of multiple, but it’s a $10 billion.”

Look, I want to point out that I’m always ready for you to stuff me with $200 million, dude. There’ll just be no ambiguity around that stuff. But yes.

10. Venture Standards Collapse

No, I want to throw out one final one before we wrap, but one that is— We said there about, “Hey, play the long game, maybe being nice.” Something that is just getting more and more Hollywood movie, popcorn-salivating is Deel and Rippling.

Jason, you and I were messaging about it last night, like, “Hey, is this just going to turn into a shit show? What happens from here? Can you be nice and win?”

There’s a big gap between being nice and committing what is at least some level of civil—having some civil issues—and potentially, I don’t know, criminal issues, right? You can be pretty driven without actually planting spies. If, in planting those spies, you actually steal secrets, I’m winging it without—

My wife was a criminal lawyer, so she hit me on the head for practicing law without a license. But there is a point at which this is industrial espionage, and you get caught, and you get criminal proceedings. No CEO and no company can survive that.

I think it is possible to go too far. You can be aggressive, you can be driven. And I’m not talking about the facts of the specific case, first, because I have to use the word alleged, and I don’t know. And second, I have a company broadly in the same space, so I’m not unbiased—Papaya.

If what’s alleged is true, it’s very troubling. You would be struggling as a board member to figure out what to do. But even more importantly than that, as a customer of this company, if you’re relying on them to manage your payroll, to move money on your behalf, you possibly can tolerate them having some kind of civil liability. But if it trends over into criminal liability, you probably have to find a new payroll provider.

I think that was way beyond the norm if the allegations are true, which obviously I can’t speak to. But broadly entertaining their complaint.

The growth trends we discussed are part of it in general because they encourage— There are fewer and fewer boundaries in these massive growth rounds with no diligence and all the tertiary, quaternary, and secondary you want, and all the deals at $8 billion, $10 billion, and $12 billion. There are no boundaries.

You don’t ever have to go public. “Harry and Rory, it’s cool. Take our money in whatever terms you want. Just get us our target.” Anything goes. Whatever exactly happened here, some of the stuff is hard to argue with, okay? We can’t argue with that. But I think there are 100 startups doing versions of this.

But he was paying $5,000 a month. You can’t get an intern for $5,000 a month—

Well, that’s because he’s got 10 of them. That’s because he has 10.

You can’t get an intern for $5,000 a month these days.

I know, but I think you’re going to hear 100. Just like fraud. Every day now we pull up the media and there’s another founder who stole $30 million from the investors, and we shrug it off, right? There are going to be 100 of these in this—

In this environment, right?

Things truly get revealed when the tide goes out. John Kenneth Galbraith wrote The Great Crash, a great small book about financial euphoria, and it's worth rereading every couple of years. One of the things he has is this concept of the bezel: at every point in time, there is an amount of embezzlement that has taken place. In a boom time, the bezzle just increases because nobody knows. The minute the tide goes out, all the shit comes to the surface.

I think you're exactly right. Typically in a boom time, you see erosion of “good behavior,” erosion of standards, erosion of due care and due diligence. Then things turn bad, and everyone starts focusing very fast. Everyone looks at the numbers very fast. It's interesting: you had one other thing in your pre-show prep. You made a comment on ARR versus GAAP.

We started really focusing on GAAP revenue now because ARR is a made-up number and the GAAP number is a fact. When the tide goes out, there will be a whole bunch of this kind of stuff surfacing, and people will go, “Hmm, missed that.”

Sorry, for anyone who doesn't know, why is ARR not so important and GAAP more important?

ARR is a really good leading indicator. I used to lean on it because it's better than GAAP—it's a forward-looking metric. But the beauty of GAAP is that there are rules on how it's produced. If you break them, you've lied, and there's no ambiguity around it.

Whereas ARR is more loosey-goosey. As I say, you're trading a better forward-looking metric with more variance about its correctness. ARR has more signal about the future, but more variance about whether it's correct. GAAP is a trailing indicator, but it's pretty damn accurate, usually.

In today's market, where there's a lot of experimental ARR, leaning into that ARR gets us back to where we started this conversation. Leaning into that ARR and thinking it's repeatable, scalable, forever ARR—like a SaaS multiyear contract from Salesforce—it's just not the same thing.

Yeah, most of the A and the R aren't real.

Yeah.

It's not really annual.

It's not really recurring.

It doesn't really recur. What's the third one?

What's the third one?

Revenue.

Yeah. It may or may not be revenue.

Yeah.

It definitely doesn't recur, and there's no way it's annual if everyone can get out after a month or 2. So it's neither A nor R nor R.

Can I share 1 number just for fun? I was just pulling up a SaaStr survey.

I asked 2,000 folks in SaaStr how many lie in deals to win deals. 93% said they lied, out of more than 2,000, to win deals. If 93% of 2,000 B2B folks are lying to win deals—lying about features, lying about feature gaps—and you've just been handed billions, would you throw someone into your competitor to get information? Yes. Do you really think that, of those 2,000 people, if they could get someone working at a competitor and feeding them information, they wouldn't? Forget this happening at the CEO level. What if just VPs of sales could do it? 93% say they lie in deals. 93%.

I think there's a big difference between lying about a product roadmap and when a feature is going to come versus saying, “I'm going to orchestrate a spy in Rippling because he wasn't paid $200 million. Sorry, buddy. I'm going to plant him in...” That's not—

Listen, I like to think of myself as fairly ethical. I'm not sure the line is as black-and-white as you think. If 93% of folks are lying in deals, how many sales reps have gone to a competitor's sales pitch and wasted a rep's time for an hour to learn their thing? Does that cross a line? Doesn't lying cross a line?

How many of them, if they could make $1 million a year as an AE, wouldn't have their buddy send them information? How many reps have taken their Rolodex with them? How many folks take their Rolodex with them when they leave, which violates many laws? All of them.

Yeah, I remember in 2003, a company that shall remain nameless did something like this. The only difference is that the FBI pulled up at the company the next day. They were accused of stealing trade secrets, and they basically emptied every desk. The process grinds on.

I think a lot of this stuff happens because people experiment and figure out where the line is. They'll discover by going over it and getting caught.

Is it a little bit coincidental that Rippling is going to go out and raise money now at $18 billion?

If only for his cunning and acumen, you'd want to give him money. That was pretty damn clever.

I think it's an anti-coincidence.

It was pretty smart. I mean, he captured that. Not, by the way, the timing. I don't think there's anything about the timing. I just want to say that was very clever of the Rippling team to figure out what was going on and trap the person involved. I looked at it and I thought, “You win, dude. That was good.”

It was a good day, Parker.

And then the way you reported it through Parker—it was calm. I don't know how else to describe it.

It's very smart of these people. You know, George, John le Carré—a double agent. Now we've got a double agent. They probably could have run him as a double agent for a while, feeding false information. It's just great.

Well, the best part is that the story got worse, like most good stories. Act 2 was worse.

Yes.

When Parker's first tweets went out, I remember someone asking me, “It can't be this bad, can it?” I was like, “No, I guarantee you, I've known Parker for years. It's got to be worse.” He would not, given fundraising and other things, do this. There's no way he would waste his time. He has a complicated company. It has to be much worse than the first step.

Otherwise, you can't do it. This stuff is so distracting, isn't it? You've seen it on boards. It's so distracting, right?

Is this a case where it can take down the company, though? News cycles are so fast these days. I honestly believe that if Trump does something crazy, Elon does something crazy, we move on. No one cares. Do B2B customers really give a shit?

Probably not, because in the end, you can always make a change. I don't know the dynamics of this company, but what would happen in a public company?

The rest of the board would do the “I'm shocked and appalled” routine. The attorneys would come in and explain their fiduciary obligations, and they would basically say, “You sack this guy right now, and you can burn this liability off. You stay in this thing, you go down with the ship, and you're going to get sued by everyone.”

They'd be drawing up the for-cause termination before the attorney stopped speaking. The person in question would be out. They'd hire an interim CEO and a crisis PR manager, and they'd say, “Shocked and appalled to discover this is going on. New day, fresh broom”—pick your cliché. They'd hire Skadden, some ex-SEC lawyer to go on the board and do the whitewash, and power right through. You'd lose a year.

That's what you do if you're a public company. Maybe if these guys have board control, they don't do that, but if I was on the board, that's where I'd come in from. Companies are bigger than any 1 person. Sacrifice them and move on.

I don't think many customers are going to leave. Where it might hurt you is at the margin, with new customers.

I am a customer.

It's going to hurt you for new customers. It's a weapon for the sales team to use against you.

Probably.

I say 2%. You know how much work it is to change payroll providers? I'm outraged, but not that outraged to do any work.

When it gets company-endangering, you fold. But you're right, I don't think it will be, because there's a lot you can do.

So we're going to play a game, and then we're going to wrap up, okay?

Cool.

The game is called “Buy or not buy.” I'm going to say an asset, I'm going to say a price, and you can say whether you buy it or not. Not “sell,” because it's not a negative.

Yeah.

That's a really important addition. It's not a negative. It's just, like, “I wouldn't at this price.” OpenAI at $300 billion: buy or not buy?

Not buy.

I recently took a look at my investments. I just can't make any decision well north of $100. I'm out. All my decisions are bad. North of $100, they're just all bad for a variety of reasons.

I'm the opposite of you 2. I would buy the shit out of this. Escape velocity reached. Cursor at $10 billion.

The irony is that the ARR multiples for some of these, if they're ARR, are pretty low, relatively speaking. If you're really paying 10X forward revenue on some of these deals, we've all done worse.

By the time I did Lovable, it was like 10X revenue.

The whole reason this business is awesome is that there are singularly amazing companies in every generation, and maybe these are they.

And when you do those companies, everything works, and you're just so glad you bought it at any price. That's why this game is fun. All other things being equal, you should be doing private equity. The reason it works is because you have those singularities. I just don't know enough about the data to know if this price gets to that point.

The thing is, I know you want a one-word answer, but going back to the beginning, if you want to tie a bow on it, right? The problem is, listen, if it's a SaaS company with highly durable revenue, then Cursor at $10 billion is a good deal. It's not a great deal, but it's a good deal if this is a classic, high-NRR company coming up on a billion. It's probably got 140% or 200% NRR on paper, right?

So if you treat this as a B2B company with a massive moat that has destroyed its competitors, it's a pretty good deal. Now, if you look at everyone I talk to who, in a week, switches, they're like, “Oh, Windsurf is cool.” My portfolio companies switch back and forth. They're trying, they're switching IDEs, which seems crazy to me. My son is switching.

Then, at this durability, this is the question of the ages for us: Is this revenue durable? Because if it's SaaS, then take my money at Cursor, right? I just wish I had $500 million. But if it's not, this is the risk, to Rory's point, right? Because as a SaaS company, they don't get any better, right? There's nothing better—

And—

—than those metrics.

And you can, back to the OpenAI comment, you can say it's Google. It takes the entire market cap. That gives you, plus or minus, a little over $1 trillion, so 3 or 4x from here if you replace all of Google in 3 or 4 years. Is that the best 3 or 4x you can do? I don't know.

Guys, listen, I've loved doing this. Rory, it has been so fantastic to have you with us. Thank you for joining us. This has been amazing, and I really appreciate it.

Harry, I think you need a $4 billion fund for the next one. That's my big takeaway from your bet. The way you like to bet, I would go—

Yeah, he's got the—

—for $4.5 billion. I would start there.

I would do a hard cap around $5 billion or $6 billion because it's going to be hard to deploy in 24 months, but I'd do $4.5 billion for the next one.

Just remember, we like to stay small.

Yeah.

With small funds. We're a small and focused fund.

Yeah, a small handful of partners.

And we all work on all deals together.

That's what—

So we're capping it—

Suddenly everyone remembers right at the end that we have to stay on message. That was really touching, Harry, right? And now, of course—

Thank you.

—you have editorial control, so he can just nuke all his crazy shit, leave ours in, and at the end, Harry Stebbings says, “I really think we need to stay focused and keep our deals small.” No wonder you're a fundraising genius, Harry. I'm wise to you. All right.

Oh, wow.

Okay.

You know me so well, Rory.