20VC: Why VC Today is Worse Than 2021 | Why Vertical SaaS is a Bad Investment Today | Why We Are Deluding Ourselves on Growth Expectations | Revolut Raises $3BN at a $75BN Valuation | Benchmark Adds Their Newest General Partner

It looks like the easiest way to make money in 2025 is to take the very biggest companies and double down one more time.

My gut tells me we're over romanticizing verticals in the age of AI. Like we're going to hit the same TAM exhaustion and it's going to be worse because expectations are so high.

If any kind of deceleration happens because of any kind of saturation or slowdown, everyone's estimates on what's going to happen here are wrong. Reminder, in a bull market, the most aggressive person will look the smartest just before the crash because the more risk you've taken, the more money you've made. Frankly, it feels tough today. As tough as it's ever been.

This is 20 VC with me, Harry Stubbings. It's my favorite show of the week. Jason Lamkin, Rory o'. Driscoll. And what a show we have in store for you today. Now there's a record for this one, the longest time that it's ever taken for us to actually get to the schedule. In the schedule, we discuss Benchmark's newest partner, OpenAI allowing Erotica, Revolut's new funding round, and much, much more. This was such a fun show to do. I want this to be the best podcast you listen to, so let me know your feedback. Harry0vc.com I want to hear your thoughts. But before we dive into the show today. Now, most people who get scammed never talk about it. And if it can happen to tech savvy professionals, CEOs and investors, it can happen to anyone. But the problem isn't just losing money, it's that today's scams, they're built differently for a very new world. One where AI can generate convincing messages in seconds and fake sites look more like real sites than the real thing. Traditional tool were not built for this future. And that's why Guardio exists. Guardio is this incredible predictive and proactive engine. It leverages advanced AI threat detection to block highly targeted, socially engineered scams before they ever reach you. From phishing emails and fake login pages to financial fraud, Guardio protects you across the ways people actually live and work online. And security shouldn't be complicated. Guardio continuously monitors across all your accounts and devices, uncovering risks in real time and guiding you to close gaps before attackers exploit them. Trusted by over a million users, Guardio is setting the new standard for personal cybersecurity. Visit Guard iO20VCT today to start your seven day free trial. Because the threats of tomorrow, they're already here and Guardio is built to stop them. And as Guard IO defends your clicks, HubSpot turns them into customers. You want to grow your company, right? But instead of having the time to get to the next level, you're stuck maintaining the status quo. It's freaking maddening. Will HubSpot's customer platform it actually solves this breeze? No, it is not a fabric refreshener. This is the next generation that built in AI takes over all the busy work. It writes emails, it qualifies leads, it answers common customer questions and even help create content. Also your marketing, your sales, your service teams can focus on what matters most and the impact is undeniable. Teams are saving 750 hours. A 1 even increase leads by 251% and these results show up in days, not months. Over 238,000 businesses already use HubSpot. So join them. Visit HubSpot.comai and while HubSpot builds your funnel, Framer builds the experience around it. Are you still jumping between tools just to update your website? Don't do this. Framer unifies design, CMS and publishing all on one canvas. No handoff, no hassle, everything you need to design and publish in one place. Framer Framer already built the fastest way to publish beautiful production ready websites. And it's now redefining how we design for the web with the recent launch of Design Pages, a free canvas based design tool. Framer is more than a site builder. It's a true all in one design platform. From social assets to campaign visuals to vectors and icons, all the way to a live site. Framer is where ideas go to live start and finish. No figma imports, no messy HTML. Just design, iterate and ship all in one place. And it's completely free to start ready to design, iterate and publish all in one tool. Start creating for free@framer.com design and use the code 20VC for a free month of Framer Pro. That's framer.com design and use the promo code 20VC framer.com design promo code 20VC rules and restrictions may apply.

You have now arrived at your destination team.

It is so good to be back. It's slightly earlier for you. Topic number one Everett Randall joins Benchmark Benchmark don't add partners very often. It's a big news announcement that he's joining joins Benchmark as their latest gp. He was with Kleiner and he was with Founders Fund before Rory, I always think of you as Benchmark because you quote a fantastic statement being reports of my Death have been greatly exaggerated. And I always think of Benchmark with this, with the portfolio, with great people like Adam.

Totally. Yeah, I know. We were having that, you know, overwrought. Oh, my God, the world is ending two months ago when, you know, Benchmark partner opted to do his own thing. And I remember saying exactly that. They're going to be totally fine. They have a great portfolio, they have a great tradition. And they did exactly what they. What they always do. They went a. I can just say it there. You make a list of top firms that have good young people. You draw a list and you get on the phones, you say, who have we overlapped on a deal with? And you go and you hire someone talented from one of the adjacent golden firms where the pitch is purely equal partner. You should do this. And mission accomplished. On they go, they're just fine. And China will be just fine. You know, Mamoon and Ilya, wildly talented people. There won't be any shortage of people if they need to fill that slot.

It reminded me of you, Harry.

Yes. Just like you, Harry.

Obviously he's wildly talented. Right. Recruited by everybody. I don't know, Everett, but he may be as ambitious as Harry and no one wants to screw around. Like, if you're ambitious today, you want to go fast, right? You want to go fast. Vista Bond Founders Fund, Kleiner Benchmark. I mean, those are five good ones to get on your resume in eight years, aren't they?

Yes.

No need to stop at anyone in the B tier.

And that is probably part of the message, which is that there's just a lot of change going on. If you're ambitious, if you're young, everything's moving at fast velocity. You're getting fast velocity markups. You get to declare fast velocity success. You take that fast velocity. You want to rise up the organization. Yeah. You can just keep on moving up in a time when there's a lot of change and there hasn't been as much change as this in the longest time.

I also know Benchmark are extremely generous in terms of like, backdated carry and being brought into this carry pool for this fund with Fireworks and with Macaw and with Lagora and with Manus and with many others. That's a very attractive carry pool to be bought into.

No, it's the Godfather. An offer I can't refuse. Moment good for all concerned. Capitalism is great. I mean, I was laughing. I think about it, preparing for this meeting and thinking, oh, my God, it's a wonderful deal. And then you have to remember, probably owning 1/10, 100th of what the best AI engineer is earning in Facebook matter just to put all of us, us included, in our place. It's funny, it used to be the best economic gig in tech and now we have to remember, no matter how wildly successful we VCS are, there are people vesting billion dollars over four years at Facebook Medic because they wisely did computer science and AI at school 10 years ago. Just the market for talent at the high end in these kind of winner take all moments. The market for talent in every market, be it AI engineering, be it top tier venture capital, it just becomes very heated. Let's go with. I was going to say overwrought, but that's a judgment. Heated is definitely true.

Well, let's play that out Rory, because I could have that debate with you where I could still argue that venture investors will be ending up with carry better paid if you're to thrive or you're at a GC or you're at a lightspeed.

I disagree. There's no one going to. If reports of the billion dollar plus package are true, very few people are going to like $1 billion four year vested in venture. So I actually argue with you Harry. I don't think you can top that over 20 or 30 years. Venture is a great career. So you look like you want to disagree. Please feel free to disagree.

Well, I think if you are one of the top one to three carry participants in one of the large mega platforms, be it Andreessen, be it thrive, be it gc, I would argue that you will have more than that in distributions in the next few decades.

Up until the last sentence you were wrong, but you were making your case. You admitted the truth in the last sentence. All these amazing funds and we hope to have amazing funds too, over 10 years you're going to get a ton of money. From 2016 on. If you look at distributions in every one of these funds, congratulations. You own a shit ton of private stock that's worth a whole ton of money. Whereas the comp package for restricted stock in Facebook is congratulations. Over four year you have fully liquid stock. In terms of liquid stock cash payment, it appears to be still the best. It appears to be the best gig on the planet right now.

How long was it before you guys got your first carry check?

The first carry check was relatively quick, but there was a 10 or 12 year period after that where it was very much the tail end of the 992000 boom. And then there was a 10 year period of squat when markets go down 80% as the NASDAQ did and then they stay down and IPOs are postponed and you have a European waterfall. Absolutely, totally venture. As someone said to me years ago, it's the get rich slow program and There can be 10 year periods of non payment.

You know Brian Halligan this morning was quote tweeting Benchmark about Benchmark 1 coming up on 20 years and how it was a great vintage and great wine's age or whatever it was. I'm like but I'm not sure I want to wait 20 years for my wine. I'd like a few sips tonight. I do think it's complicated but my 2017 fun should hit 5x on paper by the end of this year. Right, but that's like a lot of years already. Like it could be 18. And listen, do you really want to sell your winners in today's world? Of course you don't, right? Hopefully I'm not in a walker by the time I get get my, my my my distributions from it.

That that increasing period of privatization as you kind of mentioned there ties in beautifully into Revolut's $3 billion fundraise at $75 billion up from $45 billion in 2024 mass. Everyone wanted this one to be fair in terms of large institutional platforms. Private markets win again and publics delayed. How did you read this?

The big picture story is it's another round where the public markets have seeded that business to the private market. Right? This company could clearly go public. It could have gone public years ago. It's doing, I want to say last year 3 billion in revenues making a billion growing at 60% could go public anytime it wants.

I'll tell you what it made me think about a little bit is challenged one of my early tenants for many years which is that the best founders figure out their tam, right? A small market's okay. They figure it out. They add layers to the onion. Absolutely true. With the best founders, right? I'm sure we could all come up with a story but when I think about Revolut and Fintech's gone in and out of fashion the last since we all met, right? It's been hot and unhot and then people don't like the margins and this and that but man, the markets are big. This is my new heuristic. If I could, I would like to invest in startups that 100 million ARR have 1% or less market share. 1% or less market share at 100 million. That's what I would like. And not even Fake market share. If you look at the public markets and B2B, there's almost no one except Palantir that's having an easy time. North of a billion. We can look at all of them and there's even folks like Klaviyo that are crushing it and still trading at 6x north of a billion. And so I want to believe that founders will figure this TAM thing out, but now that we're staying private longer and that a billion dollars doesn't even count as an exit right on Monday afternoon, it just counts on a few million Dex to buy the house in Woodside, per Rory's earlier story. I'm much more worried about TAM than I was even 12 months ago. I'm much more worried about TAM exhaustion.

Obviously, if the goal is to get to a billion dollars in revenue before you go public and our job is to get these companies public, then you need a bigger market than if the goal was 100 billion. So I totally agree with you on TAM. I don't agree for what it's worth on the 100 million, 1%. I think the best deals, because if you go into a big wide market where you only need 1%, you're probably undifferentiated. I think the best wins are you start with this small market and then as you succeed, your addressable market expands. So I would argue Revolut's early market, they might still have only had a couple of percent of. It was not everyone banking very much, folks who were doing travel and had a lot of FX things. So you pick this pointy little niche, you get traction in it, you get good margins. And then the beautiful thing is if that expands out and you find yourself able to address more and more customers. Because if from day one, I mean, if from day one they'd gone after everyone in Europe for all banking options, all consumer banking options, I think they've gotten spread out. So I greet you on the tam, Jason. I just think the best of all things is when, as it were, as you grow up as a company, your TAM grows up as well.

I'm with you. I just don't believe it anymore. In my heart, we believe that. But if the a was at 25 post and the exit was at a billion, it all works out right? And TAM exhaustion is someone else's problem because you've distributed 24 months after the IPO. Now I see TAM exhaustion across my portfolio. And I never used to, even 18 months ago, I didn't think about it. I see TAM exhaustion everywhere. And you gotta run so fast as a founder to keep ahead of it. Faster than maybe we used to think we used to have more time.

Rory, I agree on TAM exhaustion. Almost all these high private market bets. Interestingly enough, even there you have a TAM question. Not exhaustive TAM question, because typically when you're paying 70 billion, you're buying the winner in a space, you're buying the undisputed winner. So for all these comp. And you're probably paying a premium in terms of revenue multiple. So in fact, in all these cases, you're making some kind of the TAM's even bigger than you think bet. So it's interesting you're worried about it at your 25 pre round, but if you were writing the Revolut memo at 75 billion, you'd be writing the same question, which is, how big can this thing get? Because look for context, Revolut's got a $75 billion market cap. The biggest bank in England, there's one at 110. And then I think Barclays is at $60 billion. So you already as big as the biggest banks in the country you're domiciled at. So all these things are TAM bets at the kind of multiples people are paying.

I go exactly to your statement, though, which is the founder determines the TAM that they grow into. And Rory, you don't know, but I'm super close to Daniel at Spotify. I'm super close to Alex at Deal. I know Nick at Revolut very well. All of them have expanded TAMs sequentially over time, opened up more new chapters in a way that has unlocked more and more enterprise value. The best founders unlock new TAMs.

They do. But Harry just. And I was thinking about that as well. You have Deal. I mean, I know they're not directly competitive in every space. Okay. But you've got Deal rippling gusto. Even ones that are much smaller, that are older, Justworks, they're all at 9, 10 figures in revenue. My point making is all of them have to start as point solutions for the most case. Right? Unless you take the rippling version. But the notional TAM is huge. The best founders do it faster, right? They're not stuck wherever deal was in 2018. But the notional TAM was large when Deal was started, even if everybody didn't see it.

So to pile onto Jason and be director. I think you're wrong. I think. And the three. I'm wrong.

Yes.

And I'll tell you why, to be clear. Right. I actually think Jason said it. Well, you name three companies, I'LL just deal with the specifics of those companies. Spotify, Revolut and Deal. I think in all three cases it was pretty apparent that there was a potential very big market there. You have music consumption. That's what they started with. That's what they're doing today. They expanded geographically, but that's the story. Second Deal payroll is one of the biggest markets. We'll talk about that in a second. Then Revolut, FinTech, obviously from day one niched big market. So I think what you are correct and I respect the founder comment is all three of those founders threaded the needle to go from the entry point to a much bigger to grab that TAM and kind of think of it closely adjacent empty space. That's how I think about TAM is that you have initial small market and closely adjacent empty space.

To be clear though, I never said that they didn't start in big markets. I just said that they've unlocked more and more value.

Yeah, but my point is the implicit statement you're making that I'm just specifically disagreeing with here. There are lots of people who have started in much more circumscribed markets and no matter how amazing the founder is, there's nothing they can do. But my point is it's not just they succeeded because you were implicitly saying some version of they succeeded because they were great and other people didn't. And again, this is me being a little pointed. I don't believe that. I don't believe entirely in the great man theory. There are lots of thinly sliced SaaS markets that people invested in in 20, 17, 18, 19, 20 and you just ran out of space and you're never going to be big.

We mentioned some alternatives to deal in the exact same market who have grown much more slowly.

Agree, that's important. I agree with that statement. Right. But the way I describe it is this. The addressable market determines the size of the prize and the skill of the CEO determines who gets the prize. But you can say if you put the Spotify guy running workflow for back office banking that he's going to turn up and get $100 billion market cap. You have to start with big, wide open spaces. That's my only point. I'm just being a little bit of a nerdy investor. And then you can say now in each of those spaces, why did Spotify win versus I mean, we looked at a bunch of the other music companies at the time. It was all vechan. I have a little arcane theory on why they won, but we can come to that.

Yeah, I'd love to hear why you think they won.

All the other music startups based in the U.S. got strangled at Bert by lawyers because it was all about IP property rights. And little old Spotify got going in a bunch of European countries that, let's be frank, your average Big five record label didn't really focus on, so they got a much more attractive licensing deal. While in the US all these guys were wrestling with shitty gross margins and litigation with the music companies. So they got critical mass early on, built an excellent product and then gradually increased their leverage versus the record companies. And if you look at Pandora was always slugging it out because of the radio type license. All the other subscription companies in the US always struggle to get access to the music because the record companies were such a pain in the ass. And I really love it that Spotify has stuck it to the record companies. It's kind of 10 years late revenge. But again, combination of great execution and a little bit of serendipity to keep them away from the fray and get critical mass.

For what it's worth, I think in the age of AI we're making the same mistake again in our euphoria. We're very excited. I mean, oh my God. Replit and lovable. 0 to 250 in 10 months. A billion at the end of the next year. And that's putting aside the anthropic and open this is. There's so much froth and there's so much greed and excitement in good ways that we are funding so many vertical AI plays that we magically think are massive, right? And we're funding them. You know, there's, there's no one better than Brett Taylor out there, right? But we're funding Sierra at 50 million ARR at 10 billion. Assuming what's the assumption, Rory, that that will hit 10 billion ARR in five years or something. I get the upside and I get people budget turning to software. I'm already seeing it, right? We have four humans and 12 AI agents at Saster, but my gut tells me we're over romanticizing verticals in the age of AI. Like we're going to hit the same TAM exhaustion and it's going to be worse because expectations are so high. That's my take on Revolut. Harry is ham exhaust. And we're doing it again. We're doing it again in exuberance. And maybe it's fine. How many legal niche tools in AI do we really need? Like they can grow like a weed, but how many can achieve the velocity at a billion in arrow. We need on this 20 year journey to get these carry checks like the bar is so effing high to accelerate at a billion.

I agree. I think like Legal is actually a very good case though, because it's actually very enterprise, very sticky revenues with people who don't change tools much and a.

Crappy TAM that only looks good today because everyone's in market. Here's a weird thing happening today in AI. It is blowing up our assumptions. We are in our greed and our rush to make money. We are ignoring something that's happened, happening. And I just got back from Dreamforce. In a way, it was the conversation of everyone at the CIO level and everyone's at market in the first time forever. Every law firm. Listen, I've invested in legal and had a decent exit. It might be five or ten years for someone to look at a tool, kick the tires, think about it, get nervous, wondering if it's Win3.1 compatible. Now because of AI, everyone's being yelled at and said, go find a tool. And they're buying. They're coming up with 50 grand, 100 grand, 150 grand.

And.

And it's nothing to buy a tool. The fact that everyone's in market instead of 5% of the market, which is like our traditional metric in B2B, is warping how we think about market size. It's like 2020 all over again. When everyone was in market for a contact center or E signature or a digital events tool like a hoppin, everyone was in market and then they disappear the next year. They're not going to be in market every year for an AI tool. This will be a window that will disappear.

I think this is a huge point, Jason, Seriously. And by the way, you expressed it so crisply, it's been kind of running around in my head. But that was just super. Because if you think about SaaS, there was this 20 year period where it diffused gradually and some people would market every year and your companies grew pretty consistently, you could lean in five or six year growth rate. What you're postulating here, and if it's true, it's going to be terrifying. Is that because AI is on the front cover of Lily, every business magazine on the planet, you're saying, all right, everyone's in the market. So your signal as an investor on what's going on in 23 and 24 and 25 might be entirely wrong. I love it. You're making the COVID mistake. When you looked at the growth rate for Zoom in 2021 and early 2022 people, what do you think was going to happen? There's not a human being on the planet who didn't have a Zoom account by late 22. So the growth went to 10%. And I don't know if it happens like that here. But Jason, if any kind of deceleration happens because of any kind of saturation or slowdown, everyone's estimates on what's going to happen here are wrong. Now, the counterargument that Harry's just dying to make is the eat the work argument. But at the very least, you articulate the buried downside case extremely well there.

And that's why I bring up Legal, because no one would touch legal for years because the TAM was too small and. And all of a sudden we think it's huge. And don't get me wrong, people are going to make a ton of money here. There are markets that are utterly changed forever and will absorb massive capital. But I think in B2B, we're going to make as more mistakes here than get them right, per Sam Altman's point. And as investors, I think we're being delusional. We're running that late 2020, early 2021 playbook again. And assuming not realizing the impacts of no one's people aren't going to buy a legal AI tool every year. They're just not. They're exhausted.

The comparison to Covid, I think, is not right. It was a temporary moment in time that did not sustain. It was not enduring. To apply the same here would be to expect that we won't have AI continuing to have improvements in our productivity in the future, which I think we would all disagree with. So I don't think that's an apt analogy in terms of the huge TAM and Legals. I don't think that's why we're all getting so excited. I think it's because of the structure of data with legal that makes it so relevant for this current set of AI technologies and makes it so relevant.

Well, hold on, just to step back. Superficially, you're right. And listen, even before this week, I never would have said 2020. I don't even use the C word. Was anything like today? Okay, it was so weird when everyone all of a sudden needed a contact center. They needed a. In a week I had to buy everything. Okay. Because we were stuck at home. Right? At least the privileged were stuck at home. The real people still had to work and go to go make your coffee. But I don't Think the analogy is all wrong.

Okay.

I think it wasn't a change to software. Software was no better in 2021 than 2015. It made no sense. But the fact that everyone is in market is similar. And I think it's worth just learning a few lessons for investing confusing permanent changes from folks briefly for exogenous reasons being all in market. And that's the only similarity. Because software is radically better today. It's an exogenous reason that every CIO's neck is on the line. Every CMO is told bring in an AI tool, you're going to get fired. That will not last. It will not last. And deals will get harder because they're just going to get harder.

Are you not making the case for why it's so important to own a market very quickly? Allah, Harvey, then they're all in market now. They won't be next year. You have to get it now because they are spending. But they're all here now.

You mean that kingmaker point you come back to?

No, it's not even kingmaker. I think kingmaker went up. But I think how you. That's the argument to make. What you're saying is what should have been a steady progression of company by company decisions over five to seven years has been compressed into every company is going to make a buying decision in the next one to two years and then roll it out and stick with it for the following five. So you're right. Unfortunately the game you have to play is you got to be here now. Because showing up two years from now, when, when take Harvey's example, 90% of American law, type 500American law will have made a decision. It's just too late. So it's not that Jason's saying it's crazy to be doing it right now. He's simply saying you could over extrapolate the growth now and think it's going to be like this for the next five years. When in fact what you might find is everyone makes a decision and then you slow down quite a lot. The business doesn't go away. It's not hop in to invoke a bad memory of your Covid days, Harry. But it's like the top law firms have all made a decision and now you're embarked on a three year steady rollout. And maybe those growth rates go from the unprecedented 5x 10x that you're seeing this year to a more prosaic 2, 3, 4x which is still damn amazing. But if you've leaned in too much on valuation, you Might be over your skis and if you've done the number 3, 4 or 5 player, you might be shit out of luck.

Yeah. And it goes to Harry's point of listen, if you've got a winner, lean in. Because I don't think every law firm for the next five years is going to be in market every year and they're going to, they're going to settle on whoever they bought when it doesn't work. They might switch once, but it's exhausting to switch vendors. Business process change is huge. We're ignoring business process change. Right. One of the talks at Dreamforce this last week was CIOs were saying how onboarding business process change was. This is the highest it's ever been in their lifetimes. They didn't budget for the costs of onboarding these AI apps. They got the price of the vendor right, but the soft cost, the training, the onboarding, the business process change were the highest it's ever been in their lifetimes. They're not going to do that every year. And so we may go back to 5% being in market in 24 months instead of 100% and just get it right in your venture models and get it right as founders, to Harry's point, like, run like hell because they won't be in market again.

But I do think that we obviously just have to acknowledge the difference between enterprise and consumer because I think consumers will continuously be in market for a new generative AI. Tools to videos, pictures, websites, you name it. That's a big difference. And Jason, how do you square that away though, with your statement before, which I always remember, which was, you know, you can see a future where you have so many more instances of Supabase and you need like 10x more. You just couldn't consume enough compute. Combined with Benioff saying 0.1% of Salesforce has AI. What happens when 50% have it? How do you square away those two opposing.

I don't know that there's. It's a good. Like, I feel like I'm becoming one of those curmudgeons that says you should only invest, invest in trillion dollar markets. I'm agreeing with it because I mean, Amazon just went down in part. I mean, whether it's DNS or whatever, it's database contention with Dynamo because so many folks needed databases and Supabase hit Amazon issues because so many people need databases. So every single app in the world needs a database. And what's changing is now folks might need 10 databases or 20 databases instead of one. So it actually is just to the point you should take more and more Supabase risk investing because the TAM is not only massive but even bigger and maybe do less vertical AI agents. That is like a small part of what service titan does, but it's amazing. But it also might increase the odds your portfolio comes up snake eyes because you're trying to do all the Supabases Pre revenue at 200 or like, you know, throw the dice at them at 5k a month in revenue. You're going to have a high loss rate too.

No, I'm. First of all, I'm laughing. This is the longest we've ever gone without even actually starting on the agenda. So congratulations everyone. I don't know if it's markets only do billion dollar markets. I think what you've got to be very wary of. Sorry, trillion dollar markets. I apologize because I think there's lots of different ways to play it. I mean I think what it does speak to is don't confuse 25 growth rates with long term growth rates. Have a good handle on your tam. Therefore valuation. The interesting style question, actually I'm processing through in real time here now. The interesting style question is there are probably lots of these good vertical markets where you can make money. There is going to be adoption. You're going to see 5, 6, 7, $800 million revenue companies. The question per your thing is in a world where you don't go public until then, how well do those investments do and how do you think about valuation for those companies versus valuations for a company like Revolut, which is de facto already public and you're really just doing public investing at scale.

If this is 2020 and we are overestimating TAMs and adoption and we go back to that, does this pop or does this deflate? Is there a it's not 20?

I thought you said it's not that, it's 2020. I don't think Jason said that, so I'm going to defend him. I think he merely said when you're assessing trajectories, there have been instances recently like 2020 where extrapolating on the last year was a mistake. If it's true in this case, it would be for very different reasons than 2020, but it could be rate of diffusion slows down. I think the market's, you know, everyone may be in market to pick someone and then slow down for a year or two to adopt it. So it's not quite the same as 2020. It's kind of the history doesn't repeat it rhymes comment. I think what Jason's saying to this wise is if you take these growth rates and extrapolate them for the next four or five years, you could be catastrophic. With your mental model of SaaS slightly acceleration every year, you could be catastrophically wrong on growth rate. That's what I say. I don't know. You look like you disagree.

No, honestly, it's my thoughtful face.

I learned that's why I didn't recognize her.

The other the related corollary just for investing in which this is the problem with being a solo gp. You only have so many people to talk about with the thesis. But I think that if you get an M and a offer as a founder or an investor and the founders make the decisions, the VCs don't make the decision.

Yeah, we make no decisions.

If your TAM isn't really accelerating, take it. This is my new learning to simplify all this stuff. Listen, if you get a great offer at 50 million ARR and you have half a percent market share, don't take it. This is the classic Paul Graham advice. Like everyone regrets selling because the next year you're twice as big and then you're four times as big. But that can happen even if you're hitting TAM exhaustion. You can still keep growing but your value doesn't. And we're seeing that in a lot of folks. The value stops increasing. It's not all like Revolut where every year you go from 40 to 70 to 140 to 280 and so I this is my new learning when there's an M and A offer. Let's be honest, has our TAM grown faster than our revenue and are we at tiny market share penetration and fatter? Do what you want, but if your TAM isn't large and expanding, I'm too worried the odds are against you that you're going to hit a TAM headway. This is just my learning. So just sell. VCs are going to lose like 80% of their investments in AI B2B because they're ignoring these issues and so be it. It's okay as long as one, one or two of them work out of 10, but they're going to lose so much money. We're hyper funding niches once again like we used to because of this in market thing. We're hyper funding niches we shouldn't be. Right? We just don't need need that many legal apps or veterinarians that only treat cats. There's just only so much demand as.

An investor in vertical SaaS. And with many vertical SaaS providers, I'm.

Going, that's why I think about it too. I've changed my mind. It's just the stress at scale is so high now you really need, you know, you can say Toast is a vertical SaaS company, but it's the largest vertical there is in B2B is restaurants. Right. It's the largest segment of SMB. Toast is 22 billion. So you're really going to be worth 220 billion or 440 billion. I mean, maybe, but your vertical better be bigger than restaurants. And you know what? None of them are. So you have to ask yourself, why will AI make me much better than Toast? Otherwise, don't make the investment. And that's a tough question to answer at the partners meeting, isn't it? Why will this be much bigger than Toast for any vertical SaaS? There's no vertical. I don't know about over there in the uk, but I think they eat a lot of chips and a lot of. Maybe you should only invest in restaurant versus even though it's the worst vertical, also the lowest TAMs, the highest churn. But at least you can make it up at scale.

I mean, I'm not torn on it because 22 billion is an incredible exit, but so is 2 billion. And 2 billion would return my funds several times over.

Yeah, but when you do that overinflated investment, sure, if you got in really early, it's one thing, but when you did the A at 150, at 3 million air. Because everyone else wants to do it, Harry, and you're patting yourself on the back for beating out Sequoia and Excel and Stride and all those guys does the math pencil out on any of these deals. Is it really better than Toast, this vertical SaaS? I'm getting more worried as time goes by.

That's the nuanced reply, which is you look at these verticals and you kind of go, they're adding value. The product is better for the business customer than the prior version of SaaS. They're either making the customer experience better, they're replacing labor. There's a business here. Typically what we're seeing is in these verticals, it's a wedge product. Maybe it's document recognition or voice bot. And you can see, you can build a story down the line. You have time expansion within that vertical as you just do more and more and you kind of take from that and you kind of go, are you building value every day? You're damn right. You are right. And therefore you're probably creating a valuable enterprise. Money should be available to fund those. Now at the cutting edge, it's AI, it's not trailing edge plain vanilla SaaS. You've got this vertical, you may be on the a smaller number of competitors, you can build enterprise value here. I think the two things you're saying are one, that's all very well, but if you go in and pre money equal to your total tam, you're never going to make a dime. I think you're exactly right on that. Assuming that every market is as big as the biggest market is the fatal error, then the other thing is because the bar is so high for exit, as I said, there's really two games going on. There is the game of investing in companies at 1 million and trying to get them to 2,300 million so they could go public. And frankly, that's the game that 25% or 30% of the dollars are playing. And then I think it's not our game. But I look at them and go, maybe the savvy money is playing a totally different game, which is these companies are already long past the point they can go public, but let's do this winner take all. Keep funding them in private space and these little vertical companies aren't going to become that. So you've got to say to yourself, are you making a perfectly good product for a perfectly sensible world that no one gives a shit about? Because you're not revolut. And the easiest way, it looks like the easiest way to make money in 2025 is to take the very biggest companies and double down one more time.

Here's the bull case, right? For me, when I started investing, I stole this from a slide someone did at emergence when I started. But for a vertical SaaS, a vertical B2B, that's, that's somewhat SMB, right? That's basically an ERP. It does everything that does payroll, it does backend, it does for the smallest customers, you want to get to $10,000 a year at least, okay? It is what they run their business on. Get 10,000 of those, you got $100 million business, right? And that proved to be true again and again and again. It's just 100 million isn't enough today, right? So the question with AI, with replacing humans with software, can those same 10,000 spend 100,000? If they do, you may still slow down at a billion. And that's the question that I think we're going to have some wins on and some losses on. Can, can. Will people really spend 10, $100,000. Small businesses on your same vertical, agent software and those same 10,000. And we'll find out, right? We will find out.

That's where I think legal is attractive though. Like, you know, we have this company, solve intelligence. It sells to IP law firms. Yeah. All of their contracts are over 100 grand. Several hundred grand in a lot of cases.

But so were the vendors you're competing with. So are the Lexus, Nexus and others. It's not 10 times larger. I'm not saying it's not a great investment. I'm not saying it's not going to return your fund. But it's got to be 10x higher for the math to pencil out. Adventure Day. Like the deal sizes, not just the number of folks in market. That's where the confusion is. You could confuse the two. Number of folks in market and is deal size 10x what it was 24 months ago? So I think that the lovables and the replace have massive deal sizes in a sense. Right. It's so much TAM extraction away from crappy agencies and vendors. But if it's just a little bit bigger deal size, we were going to. We're going to get crushed. Right? I don't know. That's my simple math. Can you get 100k from a small business or a million from a mid sized enterprise? Like will a plaintiff's law firm that used to spend 100 or 200k on just a couple pieces of software spend a million dollars on your software because they don't need humans anymore. If they do, it's golden, stepping back.

And giving the case for the defense, as it were. Right. You had legal software, horrible market for many years because it was basically selling workflows to people who didn't care to be fair. LLMs manipulate words. That's the core of what they do. And lawyers, it's the most LLM obvious market out there. You can definitely make the case in all these verticals. We could talk about patent law, which is where you are. You can talk about Harvey and corporate law. You could talk about even up in plaintiff litigation. But you can definitely make the case that what came before is not predictive of what's happened now. From a technology perspective. There is something really exciting going on in law because of LLM. So I want to put that out there right. And it will change the practice of law. Just because at some level you have to be a techno determinist. The technology that the world has invented, Sam Altman has invented. Whomever has invented is supremely good. At ingesting, synthesizing and spitting back out word concepts. And that's what lawyers do. So if ever there's an industry that could be automated and change, it's these guys. So that's the case pays for. A lot of these companies can in fact swallow. So I don't think the past is predictive in terms of the amount of dollars you can extract from these companies. I think it could be 10x Jason, to your point. But you are right in the sense of if you start slicing it, you take the overall lawyer count and you slice it how many are patent, how many are litigated? You can, if the borrower's 100 or 200 million, I don't think you hit TAM exhaustion. If the bar for an exit is a billion, then you could hit TAM exhaustion in some of these markets pretty quickly. So the ultimate return buz down to entry valuation and the healthiness of the exit market. Stepping back, you should be investing in the area where the technology is having the greatest impact, which just means it totally makes sense. We're looking at these spaces.

For me there's like three areas where I'd be investing if I had infinite capital sources like the absolute winners in this space. Your OpenAI's, your anthropics, the absolute anointed winners. Your absolute winners with great economics, which is your revoluts, it's your deals of the world and then it's your really early and I think that is three great pillars. What I don't want to be doing is respectfully and I don't mean this horribly, this is a different game. But your mirror Marathi is 2 billion. At 10 billion you're 300 million into periodic labs. So it's like it's a huge amount of money into a very still questionable early asset. That's where I'm like ah, I don't know.

And it's interesting that the fact that two out of the three Harry chosen spaces are effectively post public eligible anointed winners speaks to where the market overall is. Most of the dollars are going there. Right? What you're saying, Harry, is with 1/3 of your money you'd like to do venture capital and with 2/3 of your money you'd like to do public style investing with a 2 and 20 comp structure because they're still private. And I think you're exactly right. And the market seems to agree with you that that's a good way to make money.

There we go. Listen, we mentioned the anointed winners there. I'm loving this conversation. OpenAI have said that they will spend potentially more more with Oracle than with Microsoft. I find this relationship fascinating and how it's developing the OpenAI Microsoft, how did you guys read the OpenAI spending more with Oracle than Microsoft and what it means for the power dynamics and that relationship.

I think Microsoft didn't want to spend money economically irrationally and Oracle wanted to be in the game. And OpenAI seems to be extraordinarily good at defining other people's needs and wants and desires and taking advantage of them. On Microsoft side, when all is said and done, the shareholders should award medals to Satya, their CFO and their gc and they should hire someone else to do their technology because they haven't shipped. They have cut a Brilliant deal with OpenAI and now they're gradually stepping back as the hype comes in and they're saying we're just not going to make economically irrational investments. I think it's smart.

Obviously in the end, I mean OpenAI needed much more capital than they thought when they started. Microsoft bailed them out in buying 49 of the company. Now they need much more capital than Microsoft thought, probably two orders of magnitude more than Microsoft's high end model of how much capital Open Air required. So Microsoft by. By de. Acquiring it. Right. In essence spinning it out for 30 ownership of what they get but not having to to fund it. They're getting the folks that can tolerate a much lower margin, right. And can somehow get a market benefit out of this in order to Oracle. So it's kind of crazy that Oracle comes out of here and replaces Microsoft. But Microsoft also gets out of maybe even what could have been an awkward situation, right? If they were somehow stuck funding their subsidiary. That might be more than nickels and dimes if they had to fund OpenAI for eternity.

You said about economic rationality and Oracle kind of stepping in and being that capital provider in a lot of ways their debt to equity ratio is now is like 4.6x. It's high. Oracle out over their skis or am I being overly cautious?

Well, we said two weeks ago we think they're over their skis and since then the stock's down. So I think we can claim an attaboy on that one, right? I think, yeah. Look, you'll only know when they play the game. If the demand for AI compute is as high as OpenAI appears to think and Oracle appears to think and they can bring this investment in on time, then they will be rewarded with a perfectly good business at decent growth margins, not as bad as they're currently on because I think there's some startup costs. So it will have paid off and their current market cap will be validated. I just look at the risk return profile and say it's no accident that Microsoft said that's an interesting risk return profile, but I don't need that bet. And Oracle said, I'm a wannabe in this space. I'll take it. One of the interesting things going back to what I said is I saw a dumb tweet that was like, oh, OpenAI is gonna go bust. Cause you had the whole Karpathi AI is not gonna get there as quickly and a really dumb OpenAI is gonna be in trouble. No they're not. They have brilliantly pammed off all the risk on everyone else. I mean if you step back and say, because we're going to talk about pulsar in a second. OpenAI said, yeah, we OpenAI need gigawatts and gigawatts of data centers. We need gazillions of chips. We need all this stuff. You all should do it. Go team. And yeah, we'll sign commitments and if we need them, we'll actually pay you Shock hour one fine day with money we don't yet have. But they're not taking on huge amounts of leverage, they're not taking on huge amounts of building. They're just like we're in the market to buy this stuff. You should invest on our behalf. It's brilliant. They've offloaded a lot of the balance sheet risk to everyone else and all these other people seems to be happily taking it on right now. And we'll see. That strikes me as a lot of risk to take, especially when in the end, if it all works, OpenAI gets the upside. Your best case is the commodity compute provider to someone who is very rational and going to be able to grind you down at scale. Your worst case is you put billions of dollars into fixed assets that aren't on a return. So I think that again, the OpenAI corporate development deal making machine is second to none. They have a ruthless instance for weakness and take advantage of other people.

Totally agree with you. I'm pleased you mentioned Poolside there and I do want to go to it now actually because it is a super relevant one tied to that which is on the vertical ownership side. Poolside announced building its own 2 gigawatt AI center, which is a big announcement. Also, Poolside have not released a product to the public. They have customers and they do have usage, but they haven't officially launched A product to the public. And for those that don't know, Rory, how would you or Jason, how would you describe it?

They're building a core LLM to do enterprise focused coding and software development. So some version of that. Right. And provide an entire runtime environment for these models. So big enterprise idea. So. So not knowing the traction, stepping back if they're right or if they're wrong, either way, it's terrifying because the conclusion they're basically saying, and they're very smart people, is in order to compete at the software layer, you have to not only build your own LLM, but now, God damn it, you got to build your own data center. So what they're basically saying is, this game that you thought was a software game is now a fixed asset at scale game. They're not doing it because they're saying, hey, I'd really love to own a data center. Because nothing says fun like fixed assets. They're presumably doing it because they can see no other way of doing it. And what that means is these smart people have concluded that's what it takes to win in this space. I don't know if I agree, but I haven't looked at the specifics. But again, if they're right, if they're 100% smart and 100% right, what they mean is, do all the other companies trying to build models have to do the same thing? Is there a conclusion here for the capital intensity of safe superintelligence, for the capital intensity of thinking machines, do you really have to own your own damn data center if you want to build an LLM? It's a interesting and big ass conclusion. And I looked it up. It's not even like they're doing the Altman thing of having someone else build it. They're partnering with Core Weave, but per the documents I read, is that Poolside's going to be developed. I might have guessed it would have been one. You know the way big corporations often do a build to lease, where they say, I'm a software company, Mr. Developer, build this building and I'll lease it from you from 10 years. So I might have thought they'd have said to Corweave, Mr. Data Center Guy, build this data center and I'll lease it from you. But in fact, they're actually stepping up and being the prime on it. So I think it's a big escalation in capital intensity. Think they must have been driven to that not by choice, but by necessity. And it just speaks to the business of playing in this space. Has become even more and more high stakes.

But what is clear is the competition's gone way up over that time, right? The competition, everything from Claude code to GPT5 codecs to whatever now. Now, no one wants to manage a massive data center, but there's no way to achieve their goals otherwise. And going to Rory, I think I got it wrong. It's not about cost, right? There's no way they can do this cheaper, right? It's not about cost. It's about the fact that the bar has gone up to compete with horizontal applications and it's just much, much, much bigger than when they started this journey.

Because, I mean, if you think about it, if someone came into you, just think how different the economic intensity is if someone came into you when you're building a SaaS app and said, I'm building this great SaaS app, but by the way, we're not going to use aws, we're going to need our own infrastructure layer. And you said, hmm, that's interesting. And then they said, oh, and by the way, we're not even going to use someone else's data center. We're going to build our own data center, right? And we're going to do all this so we can have really great software. You'd be like, get out of my office. But that's where we are in this market.

It's good to sneak some of these things up on your VCs, isn't it? You don't want to scare them in the first or second check on things like this.

It's a cynical Kamacheff, but you're exactly right. What's the happened here? It is the boiled frog of capital intensity. And I think this, again, I'm going to say it is where OpenAI, maybe they've made it a game of capital intensity, where they're clearly winning and it's making it harder and harder for people to emerge and compete again. I don't know what level of compute they felt they needed and therefore what they had to do. But again, I repeat what I'm saying. Assuming smart people making intelligent decisions based on the facts they have today, it's a terrifying conclusion about capital intensity for people want to play in this space. And you write that you said it sneaks up on you as a VC. You think you're in a business that needs 500 million to cash flow break even, and suddenly you're in a business that needs 5 billion to cash flow break even and you want bulldozers digging a hole in somewhere in Texas oh, my God. What the fuck just happened?

I was actually one of the first investors. I don't know if you guys knew this. I invested in ISO, the founder of poolside's business, which pivoted into poolside. And so I got rolled in very luckily into the first round, which is great. I'm very grateful for it. It's like a 50x. Thank you, ISO. I'm just trying to understand the rationality for all the providers who are building models. What do you think poolside are seeing that they are not?

I'm going to make a really pointy distinction here. You use the word rationality. Let's agree that the word rationale. Rationale is not the same as the word rationality. Rationale is why you think you're doing this. Rationality is whether you're right. And I think the rationale is pretty clear here.

Oh, my God.

I need this compute. Right? That's the rationale. And we'll know in five years. Was that rational or not?

That's very helpful. Thank you for that English lesson.

It wasn't actually meant to be snarky, though I can see why you often think I am in the. It was just really trying to distinguish carefully between why you think you're doing something which can make a ton of sense on the day, on the assumptions, and whether in fact you're correct in the end.

But oh my gosh, I need the compute when no one else who is building their own models shares that opinion.

Well, OpenAI does. And anthropic, I mean, need access to the compute. It may well be what you're seeing here is that because OpenAI and anthropic, through all their faults and the hyperscalers have sucked up all the capacity. It may well be it's as simple as these guys realize I need x gigawatt of data center capacity and I just can't buy it today. So if I can't buy it, I gotta build it. Lily. It speaks to all this capex is sucking up all the capacity there. And you know, even though going back to the now versus the future, I might be skeptical of the ultimate return on this marginal capex and I could be right or wrong on that. You'll know in five years. It's probably an objective fact today that if you woke up and were trying to build your business and needed that scale of computer, you simply couldn't get it because you'd ring core weave and they'd say, Look, I promised 22 billion to OpenAI. I promised $10 billion to Anthropic. I promised 5 billion to Microsoft, I got nothing for you. And then you're left going, I either give up my dream and say I can't do this or I can't put my company on pause until 27 when I think all this shit is cheaper. So I got to play the game now. And they said, in that case, I got to go build it. I can totally see how you get to that point, which is different than saying you won't regret it in two years. I assume they're doing it because they rang and said, will you sell me 2 gigawatt of data center capacity, whatever? And they couldn't find anyone to sell it to them at scale because it's all been taken up by people with bigger balance sheets.

It also to me though, indicates their expectations on future abilities to fundraise. It is a bet the boats decision to have this permanent investment. They clearly think they'll be able to raise a huge amount more.

Well, probably when they started they didn't. I'm sure their slides look looked great, but deep down I don't think they thought that Claude code would be at a billion, that cursor would be at a billion, that replit would be coming up in a billion. I mean this is. I think they believe the notional TAM was huge. I just don't think they thought we'd be in the billions of revenue already. And so now, I mean, going to Rory's point, there probably no other way to get 40,000 Nvidia GPUs and the like. It's just not possible otherwise because you're not the leader. But going to your point, it's probably fundable today because they didn't. This is much bigger than they probably. They knew they would be huge. They just probably didn't think it'd be this big in Q4 of 2025. And so now they can raise 5 billion or 10 billion, I don't know, whatever the number is, which was probably impossible when the, when they started.

The thing is, everyone's aspirations and their risk appetite have been walked up. You're exactly right. No one had a plan back in 2016 for OpenAI or 2000 and whatever 22 or 23 for these to say I'm going to need 5 billion to even play. You think you'd get there on 50, you think you'd get there in 500. It the stakes have gone up, the signal is strong because the returns are there in terms of market adoption and everyone's risk appetite increased now at Some point could that perspective change and would that be pretty painful? Yeah, but that's how every boom goes. That's what it feels like. That's what it feels like when you're trying to buy memory chips. When there's a memory trip shortage and you've got no choice but to sign up with five different distributors and commit to buying them because you can't get any capacity. And then one fine day capacity comes online, demand diminishes slightly and oh my God, these things go down 25, 30% in value. That's what the boom and the buzz cycle is like. At some point that will happen here.

It's really interesting that the boom and the bust cycle makes me think of a bubble. And I was looking at definitions of a bubble last night because I have far too much free time on my hands. And it really was two things. One is a more than proportionate drop in the value of assets. That's more than proportionate being more than 20%. And the second is productive capital leaving a market for more than three years.

And that's a bust. To be clear, that's not the bubble definition. That's the bus definition.

That's a bust definition. And I thought, wow, that's not where we are today. We will not have productive capital leave AI in data centers for more than three years. And so everyone that's like, oh, we're in an AI bubble. We're in an AI bubble and it's going to bust. I don't think so. Because if we're in a bubble and you're anticipating the bust, you're suggesting that those two elements will happen.

No, I don't buy any of that. I mean, I think your description of a bust is actually correct. That's what it feels like on the downturn, which is different than saying it's going to happen. I think it might, but the definition is correct. If it goes wrong. Let's go with the if. If it goes wrong, I don't think it'll be because none of this stuff works. It'll just. Because. Oh my God. To Jason's point, we over extrapolated on one year's adoption and, and we thought everyone's going to buy this in three years and we're going to need X gazillion dollars of capacity. It turns out that growth next year slows more than we thought. It's still a dominant long term trend, but the diffusion of this technology is going to take 10 years, not two. And we've overinvested in capacity. The Marginal player cuts back on their purchases and then pretty soon instead of having a shortage of data center capacity, you have a mild glut, then the price goes down and that's how it unravels. That's what happened in the bandwidth bust. It was a boom in 1996, probably about till 99, 2000. And then there was five years where no one invested in more bandwidth. Because you wouldn't. Because once there is existing assets available for sale at less than the price it takes to build new assets, then no one rationally builds new shit. And you could imagine all. I'm not saying it's going to happen yet. The way it goes wrong is if people don't need the marginal data center that they build for $2 billion, they have to sell it. And if the only offer is a billion, that's what they take. And if that's the case, no one's going to build another Data center for 2 billion. That's what the unravel would look like. Now, separate question. Is it going to happen?

Is it going to happen?

Of course. Because if I had certainty on that, you think I'd be wasting my time talking to you, Harry? I'd be trading as we speak. Right. It's super hard to call the time. I find it almost inevitable that at some point you will overinvest. Because that's the nature of the beast.

We could talk more about it in subsequent. I'm making an investment this week, a B2B AI investment. It's early, but it uses more inference than anything I've invested in yet. And in fact, what they want to do soon is to use 247 inference to be running massive amounts of compute for a relatively common B2B use case 24 7. And so there's work to be done. You can't afford it. Right? Right. But it's a sign of the future that smart folks are going to figure out already how to use a thousand times more inference and compute than we're using today. Because instead of running a little one off thing, right, or even using Lovable for an hour and then letting the servers with no load go, this is 24 hours, 7 days a week, 365 days a year, running like 20 different passes through the cloud API, wanting to go as quickly as possible possible, we're going to have more apps like that at all levels. That's three orders of magnitude more inference than you really want to use today. And if it was available today, cost effectively, they would consume all of it. They would consume all of it today if they could. They have demand from their end customers.

And that was the key sentence, cost effectively. And then on today's price, they probably can't afford that to do other all the time. And the bet you're taking is as price comes down, that will get used up. Correct.

Historically, folks have gotten smart at this. Right? Like an early bet I made is a company called Opus Pro. Opus Clip that Harry knows. Right. And they, they made clips from videos. The truth is it didn't need as much compute as you thought, but they got really good at it. For example, in the early days they'd only show you the first couple clips and you'd have to request the rest because there was no point in giving you 30 clips when the 30th was never as good as the first one. And they got better at a million things. Now we're at the age I don't know. You know, if you're running massive inference constantly, it's, it's not that simple. But it does, does auger well for the build out. Forget about where's the apps we've just started in the amount of inference these apps can use. Maybe the next legal app, the next Harvey or maybe Harvey does. It shouldn't just do what you want on demand 24 hours a day. It should be figuring out what you want and you wake up in the morning and it's done all your legal work for you all night long.

If you believe that. Should we not just be plowing money into Nvidia?

Yes. I mean it's, it's where all the we all, we all are. It's all of our 401ks. We're already deep. We're already all of our QQQ and 401k. We're already long Nvidia. It just depends how much more you want to concentrate.

I think one dimensional sentences aren't useful. Right. Because a couple of things. One is almost inevitably with a trend this amazing and impressive as the technology of AI, with something that powerful in terms of a powerful economic impact, you will get overinvestment because it's just the nature of the beast. People will keep leaning in until it hurts. So it's inevitable that at some point in time people will find themselves overextended and there will be a retrenchment because that's just the way markets work. Because if it works at 10x go 20. If it works at 20, go 30 and the only thing that stops you doing is when it hurts. So of course there's going to be a correction. So sitting here and going, is there going to be a correction? Sometimes isn't that useful? The challenge you all face as investors, we all face as investors, is you can't sit it out and say, I'm going to wait for the crash. That's not a useful thing. How do you make sure you're there to take the upside and still be survivable when the shakeout comes? So it's not a one dimensional comment. It's like, is there a crash? Yes. No, it's more a question of. Of you want to take all the advantage of this amazing technology, but you want to run your business, time, your investments, do temporal diversification, such that at any point in time, and you don't know when the whole market's going to find itself overextended, you can survive that overextension and lean into the trend afterwards.

But no one's doing temporal diversification now, are they? Everyone's just raising the fund every 18 to 24 months. There's no temporal diversification.

If you go back, temporal diversification is one of those things. You probably early on in the cycle you'll regret doing it because you want to get as much as you can and then later on in the cycle you regret not doing it because you get caught. But yes, that's what you see. You see just like 21. Temporal diversification compresses. People get greedy and then they regret it.

Salesforce invested 850 million of their new billion AI fund and I was with one of the largest foundations yesterday and they were like, honestly, we're back to 18 month cycles. Harry, we love that you're three years, but you're the only one, dude. Like 18 months. Months is where we're at.

Okay?

Yeah. The diversification is having three funds and if one of them, if one of them's negative, the other two make up for it. It's another way to get your diversification is just to do three funds.

Right.

If you got a 5x, a 3x and a 1x, what are those average up to? 3x.

For the record, it depends massively on the relative size of the fund.

No, I know, but I do think that's what we're having. Right. I do think that's what we were doing. You can't get diversification in 18 months from temporal diversification. You can go from like, like ChatGPT 4 to 5 in one fund. That's the diversification we're getting. We're getting an LLM or two again.

Reminder in a bull market. The most aggressive person will look the smartest just before the crash because the more risk you've taken, the more money you've made. And then that same person is going to get hurt the most on the downside. So if you actually think about it logically, the correct algorithm you're trying to figure out is how aggressive can I be to be one step below the level of aggression that blows up in my face in the crash, such that I can power through. And we talked about this in the context of 21. The most aggressive funds really hit acute problems. But some funds that were aggressive took a little licking, got a lot of the upside, a little bit of the downside, and kept on rolling. What you want to do is be aggressive enough to be relevant and make all the coin you can in the boom without at the same time getting caught over your skis and getting shot in the dark. That's why it's a two dimensional problem, not a one dimensional one. And where do you come out in that?

I just don't know if today we care about any of this stuff anymore. I don't know if we care about fund diversification or risk profiles or any of this stuff. It's just go, go, go. In the age of AI, and even if LPs are concerned, they're still funding the leaders.

All these little things about nuances on how people's motivation happen, but at some level, in the end, the capital will get allocated rationally over the long term, it's just going to take a long time. And my guess is over the long term, it will be interesting to see how capital allocations to venture trend over the medium term. It takes a long time to get there if you're funding people moving really quickly, if you're not getting the returns, if you're not getting the time diversification, in the end, the numbers will tell. All the endowments report their numbers each year at the end of June and you can see the strategies that are working. And one of the things that gnaws at me, including us, is that the truth is the venture return over the last five years has been massively lower than the public market returns. And at some point you will see a pressure because of that. And the Infinite Spigot venture capital, if this AI boom doesn't come good, the infinite Spigot venture capital faucet is going to get impacted. Because one level up from all the relationships you decided, Harry, because to your point, there's someone sitting there going, I just have a spreadsheet and I just have the last five years for the S and P. And you're illiquid. I need 3, 400 business points more than that minimum to do this. And you. We're not getting it, so why am I? Maybe we should just do less of this this year. That's in the end how things get normalized.

And it takes a lot of energy to do venture. There's smaller checks, there's a lot of managers. You need a team, right? You, you sure better achieve that because there's a lot more cognitive overhead than sticking it in the public markets. And a little bit of time and.

You got to earn more. You got to earn your booth.

When I got into venture, I just didn't really understand the soft costs involved. There's so much manager selection, there's manager turnover. Unless you're doing a Yale model or others, it's a relatively small amount of your portfolio for the soft cost. And if you're putting 5% of your assets into venture to get a little alpha, is it, is it really worth meeting with 100 managers and flying to London and Harry having to reschedule the pod for his ELPA AGM like it's. Unless you want to be. Unless that's your job going where Harry started. It better be worth it, right? For a small amount of your portfolio.

Look, the truth is, The Cambridge Pool 30 year return says you get exactly what economic rationality would assume you get, which is around 600 basis points on a pooled return, not a median return above the small cap. That's worth doing. Venture is worth doing on aggregate over time. That's what the facts say and that's what economic theory would say. What's also true is it's massively cyclical and you have periods of massive overfunding on euphoria, massive underfunding on depression, and riding those is brain dead hard. Then we're just in one of those euphoric periods. Now.

When was the underfunded part? The first two weeks of March of 2020? I don't remember the underfunded part of venture.

The underfunded period part was really like.

Two weeks when it was underfunded.

Your time periods are wrong. I can remember two vast underfunded periods, each of which went from about 87 to 1963.

This was Arthur Rock and Arthur Patterson.

Hang on, guys. No, but the point is, the part with this, there's something going on here that's actually worthy of pointing out. If you're in a business with 10 or 15 year cycles, you just have to internalize that you have to have a 30 year span to talk about cycles. Right. So I'm actually right when I'm saying the big underfunded cycles after the PC boom in about 87 to 93, 94, 95 was massively underfunded. And the Internet kicked off in that period of time. And then the money roared in. By 96, it was boom time. By 99, it all went wrong. After 99, the money went out, but it took 10 years to go back out. So from about 2000 to 2010, the funding rate went steadily down. But it takes 10 years to unwind bad decisions. By 2010, we were massively underfunded. And then obviously those survivors were able to make compelling returns. More money's rushed in. The interesting thing about the last 15 years is it's been a 15 year cycle, not a 10 year cycle. Because the equity markets have been so forgiving living at some point that turns in the context of anyone playing this business, from 2010 on, there has never been a period of longer than a year where there's been a substantive correction or a curtailment of capital. The only year would have been 22, 23ish. And God bless ChatGPT, it ended that. It's a very different vibe when you're dealing with year after year of just grind. We haven't been through that. Please God, we won't. But that's what it looks like.

Rory, 30 years. When did you enjoy it the most?

Tomorrow.

That's a good answer.

I enjoy it most of the time. It's a good question. I think that.

But is there a period where you were like, that was a golden day.

The good question you can ask is when was it clearly very attractive to invest in 2010? Sometimes it's a great time to buy, sometimes it's a great time to sell. Very rarely is a great time to do boat. You got to enjoy the process, not the outcomes. Because the outcomes, they're outside your control. I can't answer the question. I can answer when it was a great time to invest and when it's been a tough time to invest. It was a great time in 2010, 2015. It was tough in 21. Frankly, it feels tough today, as tough as it's ever been. Because the good news is stuff is working, but there's a lot of variance, a huge amount of capital, and it fills your way out there on the risk curve, as we said. So you can enjoy the entrepreneurs, you can enjoy the excitement of all the new technologies. But when you're writing checks, you're like, wow, it's sobering the risk you have to take here to play.

Do you agree with that, Jason? It being harder than ever?

No, I think this is the easiest ever.

Oh, wow.

I love that.

Yeah, because there's. Because there's so many entrepreneurs. Changes when you make money in venture, there's so much change. There's so many great entrepreneurs and we don't have to worry about gross margin margins, which really makes investing in B2B easier. And LPs, even though they're conservative, they're still pressuring you to go, go, go. This is the easiest time to be now. It may not be the easiest time to make returns necessarily, but it's the easiest time to have a checkbook and to feel smart about yourself. I was literally talking with Claude the other day about how much money I'm going to make investing today. And it said you should assume 40 to 50% lower fund. He said you might, you might end up with only a. A 2x to 3x fund. And it's okay. And you. And that's the moment in time. This is just Claude. We were comparing. I had to upload all the analysis and saying your last one's going to do really well, but look at your entry points and ownerships. Right. And so that may all happen. But I feel privileged to be part of this moment in time. I'm just worried about the entry points, ownerships and gross margins.

The rest, the rest is great because typically I've. In investing, when you're most happy, you're probably less likely to make money. And it's a great time to be doing the activity of investing, meeting these wild entrepreneurs. But the problem is the euphoria can often be an angstlick concern about return. That's all.

I do want to do one final one, which is very entertaining, I think OpenAI to allow erotica. Sam Altman has sat in a room and gone like, yeah, generative AI erotica. We're allowing it. And it is the largest use case for Grok on their image and video generation is erotic creation.

I'd believe that. I mean, it's funny, I remember back in 22, even before Chachi PT, we looked at a company, I won't name it, they were doing this online role playing game and they'd started off with OpenAI as their LLM provider and they told me that they actually had to switch off because it turns out the demand in the role playing game was for conversations that OpenAI at that point was not working, willing to support, but another LLM provider, who shall remain nameless was very happy to support. We ultimately didn't do the deal, but that's typically what you see. We saw the same thing in kind of early social networking, too, which is there's a genre that wants that kind of product. So I get it right then the question is from a business perspective, not from a model perspective so much as a business perspective is how much of that do you want to support? And it's been interesting. Even companies, a lot of social media companies have wrestled with various forms of content moderation, and they might find, yeah, they'll do that for a while, but once they become an ad platform at scale, they might decide that's not something they want to do. So the demand is inevitable. Human beings like to talk about sex Shock hour. The question is which businesses meet that demand and how? So we'll see.

Well, look, two things. One, just at a high level, I haven't done any OpenAI erotic. I'm not opposed. I should have done the research for this, no joke. Right?

Right.

But I suspect it's great because I'd love. If we had a little more time, I'd. Well, maybe we do have time. I'll ask both of you what your Chat GPT moment was when you knew it was good. Okay. And the moment for me was when Deep Seat came out and everyone was. I mean, this was the talk, right? I mean, it wasn't even that long ago. And I went into Deep seek to get a sense. And I had said what happened in the Sopranos after it went dark? After the last episode. After the last episode. And it was so good. It wrote the next episode of a TV show that didn't happen. And its ability to use the LMS and transformers and GPUs. Because it doesn't have to be 100% right, does it? It just had to be great. And then I went to Claude, which I had low faith in before, and then I went to ChatGPT and they all wrote me a great ending to after the Sopranos Got Dark by Jaw Dropped. And then I became a convert. So I'm sure it makes great erotica because you're just taking all the erotica of all times, adding a little bit of faux creativity, and you could be on it all day. It does worry me, you know, again, I pay close attention to everything Sam says because I know it's bigger than what he's saying.

Right.

And he did walk this back a little bit on Twitter. He said, I didn't mean it to be as big a deal as it was. But I think he's saying we're pushing the boundaries now. You know, we want more adult, we want to let have less adult supervision. I don't think that anthropic are the good guys and open air the bad guys or any of that Sony baloney. But this one worries me. This one worries me. Just like in the beginning, to get these off the ground, we had to trample copyrights and destroy everyone's IP rights. All of my iPad is stolen. Everything I've written, all my videos were taken without my consent. Crossing the line on what's right or wrong with as AI gets better and better, it worries me. It really does worry me. And I think we shouldn't cross these lines. We shouldn't cross these, these moral lines.

Is it crossing a line to have an erotic AI partner?

No, but crossing the line of what type of interactions you have with AI, it does worry me. A lot of things that are adult and do worry me. It just worries me.

AI is too powerful to give a contrast. Is it worse than a racist chatgpt or a fascist chatgpt? Because this is the tricky. My big aha is content moderation is astonishingly hard. And tech bros blunder into it and spend 10 years in the congressional spotlight making idiots of themselves and no one's ever really nailed it, I think. Right. And then you kind of have to flip flop up with the administration. It's just, it's a really hard problem. Right. So. And I think this could be even more complicated. Interesting nuance. A lot of the imperviousness of the social media platforms has been because their line is we didn't write the content. We're just a connection mechanism. It's other people's content. And what's super clear on ChatGPT is you are writing the content. So for things like, you know, advice that goes wrong, medical stuff, maybe even some of the political stuff, over time there are a lot more of the crossfire. So I think the content moderation, content decision job at ChatGPT is going to be a hot seat for the next five years. And I don't think erotica is going to be the hardest problem they face. So I agree. I think it was an interesting one, Jason. But oh my God, it's just a start.

The point was we're going to allow a lot more usage.

Right?

Erotica, It's a cute one, right? We all kind of get it. We, we can, we can pretend we're embarrassed, but I think it's Just the wedge. You get it.

Right?

Yeah, that's a little naughty. But why not leave people alone in their rooms and read. Read erotic on their phone. Right, what's. What's the. No harm, no foul. But I worry it's much more than that. Just like everything Sam says, would you.

Be happy with someone else seeing your chat GPT history?

Absolutely. Except if it's another venture firm.

Yeah, I wouldn't. No. No way.

No.

I would not be remotely comfortable. That's to Harry's. It's a. It's a good question to ask. Right. And that's with whatever guard roles they have. I would not be happy.

Yes. Was not actually.

Once it got good after that Sopranos moment, I was all in.

I've got to admit something, and it's not gonna be nearly as shocking as you think, but going back to Spotify, do you remember where Spotify used to share your music? I hated that feature. I listened to such boring, shitty, mediocre. My kids laugh at me that I'm like. It was far more terrifying to me that people would know how old school my music taste was than anything they could about my chatgpt chat. So yes, I get it. People don't want to have their inner selves revealed, even if it's just their taste in country music.

Much worse than your venmos getting out.

Yeah. Yeah. Much worse than my Venmo, Much worse than the venue. I mean, when you listen, you're like, you listen to those sad ass songs. As my wife says, what kind of loser are you?

Okay, we're going to play a game and it's agree or disagree. I'm going to say a statement two and you're going to say agree or disagree and why? And we're going to finish there. Okay, so number one, and I am making it up, but Jason, you gave me the inspiration for this. Replit will hit a billion in ARR by the end of next year. Agree or disagree?

It's only 4x. I'm all in. I'll take the bet.

You probably hear a 250 now by the end of next and you've gone from nothing. Yeah, I'll disagree. It's a time market size question I don't have clarity on.

I'm going to disagree that 250 by the end of this year, not now. So it's not 15 months or 12 months. I think they're in a more prosumer element of the market, which is smaller. I think Lovable's got a larger town because it is literally Everyone now it's higher churn rates associated potentially, but there's a much, much bigger TAM being everyone. And then I think you're just going to start to see like cohort maturation and real churn occur.

I think we have it all backwards and I think this is a real concern for early stage investing. It's a huge concern replit today I started about 100 days ago. It is so much better than when I started. It is so much better with the current agent already. I don't know how many in the last YC demo day classes their sites were, their marketing sites at least were vibe coded but it might have been 20 or 30 were vibe coded. Okay. But I could see the cloud artifacts on the front end. I don't know whether it's rep lovable or both or, or even Claude code. It doesn't matter. I can, I know Claude artifacts. I know it was built in Claude. Like it's painfully obvious when you've been in it and it just looks vibed. If in six months all this stuff can be vibed by anybody like then how the hell can we tell as early stage investors, we can still judge founders, don't get me wrong, right? But when a 19 year old founder walks into 20 VC and the product is really, really good at 30 pre, you know the classic ways we could judge software at that stage go out the window. So I think this is super disruptive for early stage investing. And that's why I think ability billion is easy. Because we're missing how many new categories of software are going to be built. Like I didn't believe it when I started. Now it's painfully obvious as this gets better, everyone has an app they want to build. Everyone.

Jason, if they scale to a billion in revenue that quickly, then they will be raising at 20 billion. And then my question to you would be, as one of the top 0.01% power users, you should, from a logic capital allocation decision perspective be investing in rapid it.

Yeah, I get it now. The biggest unlock was when Amjad said he has all the money left from the last round. I don't get that right. He said he would share all the data at Saster. I don't know, but let's assume it's mostly true. I mean founders are always kind of. They're directionally correct. But there's a spin. If there's really a path there, then competition and other things inside you unlock the biggest issue. Right. If the model is self sustaining, I think you, I mean I know it's Trite that you say you got to look forward, not back, but the rate like this Replit V3 and I'm sure it's true with level. I'm not taking sides. I can't tell you how much better it is. And literally now pretty much anything I want to build that I can build, I can see it in my mind, I can sit down and I can create it, I can get it into production as more folks can do that. It's just crazy what we're going to build. And so I just don't think a billion is a lot. And Rory, help me. What's, what's the TAM for mediocre outsourced dev shops and WordPress agencies.

This is the point.

They'll all disappear. We don't need these crummy WordPress agencies and terrible offshore dev shops that never finish a project and charge you 20 or 50 grand. They're all going to be gone.

I can summarize this in a sense because if you think of this as a tools market, it's probably going to flatten out. If you think of this as replacing all the people using those tools to build crappy products and you can just compress that labor spend, then the tax clearly supports a billion dollar outcome. And then the only remaining question is, is it going to be reps, it's going to be level, or is it going to be both? So I see where you're coming from.

Love it. And Jason, you should, then you should leverage being a top point one percent and fucking invest. Go do it. I'm with you in this show. Amjad. He said it. There we go. Five million.

Gotta be 10 to make enough money, but I'm with you.

Okay, 10 it is. You just up the game. I would rather be a deal shareholder than a rippling shareholder. Agree or disagree?

I'm going to punt on this one. I have an adjacent investment and I'm trying to avoid commenting on areas where I have an adjacent investment. Yeah, I'll punt. I know that's lame.

Come on, Rory, you can do better than that.

Jason should actually allow you to answer the question better than me. You have a little bit of inside information.

I think I'd step back. I'll get him big picture comments. These are great markets and the reason something Jason mentioned earlier, which is one of the most universal business process that every company has, is they got to pay their employees. It's a big ass horizontal business Marketplace. In the US the old school supports $100 billion plus company ADP1 like $70 billion company work there, which is originally HR and then you've got paychecks at around 50 billion and then a bunch of 10, $20 billion outcomes. In other words, the business process of paying people their money supports a load of really great outcomes. So when I Look at the two companies, Rippling is doing that next generation in the U.S. it's kind of like a gusto story. We're going to live more high end, we're going to integrate all the HR stuff and we're going to replace these existing products. Because to a rounding era, the only negative on this market is by definition it's a serve market because everyone pays their damn employees. Because we've all been small business owners. You can get almost anything else wrong. You can skip your vendors, you can skip. But if you don't pay people on a Friday afternoon, you don't have workers on Monday morning. Every single company has an existing vendor, especially in the U.S. so that's the negative on the rippling side. They're just grinding through, they're picking up new startups and then they're in a big ass replacement and they're doing great and amazing and then you'll build a big company. The attraction on Deal, the attraction of my company that we've invested in, Papaya, the attraction in all these spaces is internationally. It's much more the wild west. I mean obviously people are getting paid internationally, right? But what there isn't is an international vendor of the same size and scale as ADP in the US who can say to the US CFO hey Mr. CFO, you got employees in 20 countries, we'll pay them all, we'll make this go away. If they're EORs, we'll pay them. If they're employees, we'll pay them. We'll solve your international payroll problems. That's the opportunity there. I think my company Papaya, more kind of at the mid market and higher end. I think Deal does a brilliant job at the kind of lower end of the market and is expanding up. I think these are big opportunities because I think what happened in Covid was people's eyes were open to how much more talent you can access worldwide. And all these companies got lift from that. Because you think about it, someone runs in and VP of engineering says I want to hire three people in Liechtenstein or Kazakhstan. What the frick? Does anyone know about employment laws in Kazakhstan? You are open to someone who solved that problem for you, right? So I think in this giant growth of international payroll, I think there'll be a couple of big Companies built in that space.

I agree with you. You say you're rooting for Deal.

I'm not rooting for them because we're competing with them. And I'm not rooting for anyone who kind of. Of those two choices, I would bet at the margin. Despite a little distaste for what went on in terms of the espionage thing. I would say maybe what I'd say is the TAM and the competitive matrix is more attractive for deal. And that's as much as I can get.

Despite the espionage thing. That little espionage thing.

We move on quickly these days. Guys.

By the way, you guys were right on that. We had talked about this and I was troubled by it. And you're right. The world moved on so fast. Your head spins, dude.

Business completely uninterrupted. Churn zero. They're profitable. Killing Jason Rippling or deal Going to.

The start of the conversation. If we're ending the conversation. A billion still early to me today. Not because I don't have profound respect for a billion and ARR. But because I worry that for us to get our exits we have to see enough acceleration past that point. So at the end of the day Deals Pain point from I think inception today is more acute than Ripplings. Okay. It is an acute pain point. It is a problem that we've all lived as a founder. We've lived it very difficult to solve. This is international onboarding versus Rippling is a very clever problem to apploat. Rippling was Zen payroll and Zenefits done better. And a problem that every US startup and company has. But there's already point solutions there. Right? So one.

What?

What's the one?

He said deal. He said deal.

No, I didn't say that. I have to pick. Pick one. Yes.

Damage. What do you think we're doing here? Shooting the shit.

I'm going to still pick Rip Airplane.

Wow. Because.

Because as great as Deal is. Listen And I. As great as deal is then this is. This is a limit of my intelligence. This is a limit of me. Okay. This. You have inside information. I don't have Harry. As does Rory. You both from dealing papaya of information. I don't. I don't know. Ultimately, as SMBs coming in out of the market and companies churn. I don't know ultimately which is the most defensible because both can compete with each other. Deals a very. Is a much more agile company than I realized. It can build everything Rippling has. Right. It's already built a lot of it. Right. And why. And we. You can Bring Parker on and, and we can say, hey, were you slow to do some of this? Right? Why was Gusto, like super slow? Like, why was Gusto so slow to do like. I genuinely don't know. But I'm not going to say in the age of AI that having these massive installed bases isn't a huge asset. So I just, I, I, I, I'm.

I'm going to ask something totally different for you because you said in passing, if a billion is still early, why in God's green earth are you writing checks to people doing a million dollars in ARR?

Because if you stay out of your sweet spot investing for me, like, we're different. I found all my losses are when I strayed out of my sweet spot, all my LPs are like, take more risk. Jason, that was the worst advice I ever got was to take more risk. Adventure best advice for me is to take less risk. That's how I make the most money.

But do you think it's less risky to go later or more risky for me?

Yeah. I don't have any unique value to add to give to the CEOs of Dealer Rippling today. I don't have any unique value to add.

What you're saying is, and I think, and I share that sense, what you're saying is I'm really good at this thing, which is picking $1 million AR companies and trying to do something else. Even if it's a more attractive. From an intellectual risk return perspective, if I'm not good at it, then I shouldn't do it. I actually totally respect that I have come out the same door. We tend to be around later than you. But it is just fascinating for both of us and even for you, Harry, right, We're doing these deals at half a million, a million five, 10 million in ARR. And then Jason can casually say, oh, by the way, when you get to a billion, you're still early.

I mean, this is the problem with venture, it's slow. I finally figured this out. It's my anxiety. It's my anxiety today.

It should be, yeah, you're back with that.

But the only competitive. I'm not hairy, I'm. My only competitive advantage is you start getting customers and you don't know how to scale revenue and you want help scaling gtm. And enough of those folks come to me that I can achieve at least top decile or whatever rates and by, by being chill. But, but I'm not a, like a competer. Like I'd have to learn how to, how to I can't nuzzle my way into co leading lovable. I don't have those skills.

To your point is what it means is it's just the elongated time to exit, which we can talk about next time. But yeah, because I think you're great. It is stunning that in the same business, in the same rough construct, in the same quote, asset class, you have Jason doing $5 million in companies doing a million, and you have people doing half a billion dollar investments and people doing 5, 6 billion in revenue. And we think of them the same. And it's obvious when you think for even a second that those two things are so not like each other, each other that it's absurd. But that's the world we live in now, guys.

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