Building an Enterprise VC Firm with Jai Das, President and Co-Founder of Sapphire Ventures | Founding the Fund 4

frameworks never make money, but if you can build a product or some kind of a service around the framework, that makes a lot of money. Look at what, you know, Vercel has done with Next.js. You get everybody hooked in and then you sell them other stuff around it.

Welcome back to another episode of The Room Podcast.

Claudia, I'm curious, do you know who the first venture capitalist was?

No, I don't actually, Mad.

I know it's kind of one of those questions that I think a lot of people take the claim for. I think people believe it was Arthur Rock who famously actually was an HBS alum, so shout out, but he was the first check, if you can even call it that, into Fairchild Semiconductor.

Wow. That is a throwback for sure.

I feel like he wasn't even sure he was starting a fund at the time. He literally just said, these are 8 really smart people and I probably should put some capital against this. And what was it, the 1960s, maybe even the '50s? And really that became what we call today venture capital.

I mean, it's so funny you say that because the company that he first backed sounds like a story we would tell. I mean, we've been telling so many incredible founding stories of raising capital, building a team, building a business, becoming a unicorn. But there's so many parallels to that when you start a fund, if you think about it.

Yeah, honestly, it's been an opportunity of a lifetime to tell over 140 founding stories of zero to IPO companies. But we haven't taken a keen look at the investment vehicles and ultimately the startups themselves, which are the venture firms that have taken many of these companies through that journey.

I mean, the way that AI is changing the companies that are being built, it's fundamentally changing the strategies and theses of incredible funds. When I was back as the founder of Pryve, I always found it so interesting that the questions were always on us, but I had questions about how my VC that I've built a multi-year relationship with got started. It's like quite crazy bringing billions of dollars together to put their faith into the next generation of iconic founders.

I couldn't agree more. I take for granted that I understand what things like an LPAC is, right? A limited partner advisory committee and how these decisions get made. And oh my gosh, VCs have bosses too. So in this season, we're gonna sit down with respected venture capitalists to talk not only about the companies that they've backed, but the firms they've built.

Uh, So with that, I'm excited to open the door. Rippling is one of those tools I wish I had even earlier when I was building my startup, Pryve. If you're building a startup, every minute matters, but it's surprisingly easy to lose hours to onboarding paperwork, fixing payroll issues, or setting up laptops for new employees. We've ran into this constantly, and it's not hard work, but it's constant and it adds up. That's where Rippling comes in. Rippling is a unified platform that lets startups run HR, Payroll, IT, and finance in one system from day one. Rippling's startup stack replaces disconnected tools that don't sync now with a fully connected platform. It lets you get back to the real reason you started your company. Right now, venture-backed startups can get 6 months of Rippling's startup stack for free. Head to rippling.com/theroom and sign up today. That's R-I-P-P-L-I-N-G.com/T-H-E-R-O-O-M to sign up for 6 months free today. Focus on what you're building. Leave the rest to Rippling. rippling.com/theroom.

Perkins Coie supports the most innovative entrepreneurs and investors in fast-moving and high-growth sectors, addressing their myriad of legal needs. But the firm doesn't just provide end-to-end legal and business counseling to its startup clients. It also facilitates introductions to key advisors and sources of capital. Perkins Coie's interactive website Startup Percolator offers access to programs, resources, and rich dynamic content designed to assist entrepreneurs on their startup journey. To learn more, go to startuppercolator.com and perkinscoie.com. We sat down with a corporate venture veteran, Jay Das, who is the president, managing director, and co-founder of Sapphire Ventures. He was one of the architects behind spinning out the firm from SAP's corporate balance sheet into an independent platform. And today, Sapphire manages north of $10 billion in assets by backing category-defining businesses from Box, Square, Monday.com, and MuleSoft. Jay himself grew up in India with a family of academics. After attending Brown in the States, he started his career as a developer at Oracle in the 1990s, then cut his teeth on two startups before ultimately earning an MBA at University of Chicago's Booth School. This path ultimately led him into corporate venture at Intel Capital and Agilent Ventures before he joined SAP. Sapphire's thesis is simple: back enterprise software companies that already have product-market fit and win the deal not on price, but on platform, with a combination of dedicated portfolio growth team built to deliver customer introductions, talent, and go-to-market help before anyone else will even call it a category. In this episode, we explore insights and themes such as what it takes to start a new venture firm out of a corporate entity. What then it looks like to take that corporate VC and earn founders' trust, and ultimately how 3 decades of watching enterprise buying shift from developers to sellers and now to agents is reshaping how Jay looks at the next generation of category-defining companies. Let's open the door. First of all, Jay, thank you so much for joining us today in the room.

Yeah, thank you for having me. It's a pleasure.

We're, we're delighted to have you as well, and we're gonna be telling the story of you building Sapphire Ventures. So before we get into that side, We'd love to start at the beginning with all of our guests. So tell us a bit more about where you grew up and how that's shaped your view of the world.

So I was born in India and I was born in, in Calcutta, which is in the eastern part of India. And my dad was a professor. He was a professor at a couple of the IITs. And, you know, so I grew up basically surrounded by academics and my career path was supposedly to be, you know, get a PhD. A STEM degree, go to the US, you know, get a PhD and become a professor or something like that. So I kind of upended all of that because, you know, I did not go to the IIT, which broke my dad's heart. And, you know, and I did get in, but, you know, I was very lucky that I got into one of the universities here at Brown and my dad didn't really have the means to pay for our education out here. So I was very lucky that Brown gave me a scholarship. So I kind of came out here and, you know, and I, although I did do electrical engineering, I actually spent all my time in computer science. And that was again, like a black mark against me. Not quite, but I understand. Yeah, the perspective. And then the worst thing was I actually ended up not going into grad school, although I got into grad school, and then ended up joining Oracle as a developer. Wow. And at that time, this is in the '90s, San Francisco was there, but it was not really known as a mecca for anything, right? There was like startups and companies in the East Coast, like Data General. There was like IBM, VAX, all of these things you guys probably don't even remember now. Right? But yeah, I decided to move out here to the West Coast, to San Francisco. Because I, I love the Bay Area, right? And I've been here ever since.

I mean, nothing better than the Bay Area. We're, we've been here 7 years now and we're very excited to be here probably for the long haul. That's right. Um, and it's interesting to make that point, right? At the time, Boston itself actually was a big hub of investment and technology entrepreneurship. That's right. Um, and it had not yet moved the center of gravity.

That's right.

Over here.

That's right.

Well, we're gonna get to like more about ultimately the journey from Oracle to today. But you really are a founder. You started Sapphire Ventures. So when you move out here, did you have the founder bug? Did you always think you'd be one?

No, you know, I don't think entrepreneurship or founding companies was such a big deal like when I started out of college, right? Because then again, the path was you go to, you know, a lot of people went to business school right out of college or went into investment banking. You know, at Brown, a lot of people ended up in media. So there are a lot of people were in LA writing screenplays and things like that, starting bands. So, you know, it was It was like a very different kind of mindset of people than right now, right? My kids are in college and everybody from freshman year, all they're talking about is how can I get into YC?

Yeah, drop out.

Drop out. Exactly, right? So I think it was never in my cards to be a founder, right? And I kind of fell into it by chance because I started out at Oracle. And one of the things that are still an issue right now to be a founder is that if you're on an H-1B visa, you really can't do anything, right? You're kind of beholden and handcuffed to that company. So I didn't even think about it while I was at Oracle. But then when I left Oracle, as soon as I got my green card, the first thing I did was join a couple of startups, right? And that's kind of made me go through the whole founder journey.

Yeah. Well, tell us a little bit more of what it was like to be an engineer at Oracle in the '90s. I think there was a moment when Oracle lost its relevancy in the zeitgeist, but with the conversation around data centers, it's certainly back. So, would love to just be inside those rooms.

You know, I think one of the things that you learn at Oracle is that technology is not— is actually what makes you win, right? Yes, you have to have a good enough product, but it's all about go-to-market and sales and marketing, right? And Oracle was probably— was not the number one database when I was there,, but they were very, very good at kind of selling and having a great go-to-market team and got distribution, right? And over time, I think Oracle just kind of lost relevancy because the way that Oracle was built was that everything went up to Larry Ellison. And I think the innovation kind of engine disappeared. Like when you have people who have been there for 25 years, you really can't innovate. And you know, you would bring in other people, you know, you get into politics. And so I think that's what happened. And I think now they've kind of pivoted into becoming a data center business, right? If you look at their financials, their software, you know, subscription, it went down like 2% last quarter. So yeah, so they're like a data center business, which is kind of interesting because, you know, I'm digressing a little bit because, you know, data center businesses were not looked upon as being great businesses. And we, unfortunately we passed on CoreWeave because of our experience with the first generation of data centers. And it kind of ties back to how I got into venture because there was a first generation data center called Exodus that came up during the dot-com bubble. And when these cloud companies were called ASPs, application service providers.

Thank you for saying that out loud.

Right?

And that kind of, went, really got going, but the whole thing was, you know, it didn't really have huge margins. So at the end of the day, data centers kind of became this commodity businesses, right? Became almost like REITs. They're like, you know, real estate businesses, right? So yeah, but what you look at it, you know, the change that has happened with AI, and we'll get into that, has really changed the whole dynamic about data centers, about, you know, asset-heavy businesses, right? People would kind of shy away. You guys all there around VCs, Nobody would do an asset-heavy business, but now for many years, but now you look at it, you know, all the stuff that we are doing, uh, are all very, very asset-heavy, right? Especially in the infrastructure side.

It's fascinating. And what I think is really interesting is some versions of the history book related to cloud would say that Oracle dropped the ball. It was their game to win and they didn't. Do you, do you agree with that take?

Yes, I think they, they, you know, but, but I think the other challenge was that Oracle kind of was focused so much on just the database that they didn't really build application, they didn't do a great job of building applications on top of it, right? They missed out like on the middleware side, right? Or like a MuleSoft, they could have bought some, they had their own thing that didn't really work. I think the innovation kind of went away because in some ways they had such a control over the customers, and customers would complain, right? Like, hey, Oracle raised prices 10% every year. And we can't really do that. So they stopped innovating because I think they didn't really have competition on the database business. So I think that's what happened. And you know, they— you can't really buy your way through innovation, right? Because you always end up buying the wrong company, or even if you buy them, they all disappear. And I think that's what happened.

Well, tell us about your startup stint post getting your green card and how that ultimately led you back into big corporate with SAP.

As soon as I left Oracle, I joined a couple of startups, right? And one of the second startups that I ended up with, and I'm going to date myself, was this company that had been almost like the first spin-in kind of company that was set up by Sun to actually develop Java, right? So, you know, this was when Java, like, you know, I joined that company and, you know, and I was working on, you know, what they were doing. And one of the things that I understood was the company that I tried to start was one of the first dev tools company, which was all about how do you support Java for the developers? And this was like, you know, mid to late '90s where open source really hadn't happened. And one of the early learnings was that, you know, you can't start a company that is supporting developers because one, they don't pay, they don't pay, and the support costs are so high that it was very hard to monetize. So we kind of pivoted into becoming more of a kind of a company that builds websites. And in the dot-com bubble, there were a bunch of companies that went public that all they did was build websites, right? And we sold to one of them and had an exit. And then my journey after that was I had a little bit of money that saved up and my dad was on my case saying that, see, it all goes back to your parents that, hey, You have done nothing in life. I said, Dad, I sold a company. Yeah, but you don't have a PhD. You don't have even a master's. And so he said, oh, you should go do something, you know, after your undergrad. And, you know, at that time I was really, really into behavioral economics. You know, Kahneman and Tversky had just come out in all their books. And one of the professors that I was working really closely with, was Richard Thaler, who's at University of Chicago. And he just, I think, won the Nobel Prize like 7 years ago or something like that. So I actually wanted to do something around behavioral economics. So I said, well, maybe I'll go to Chicago because they provide you, that's one of the only business schools that has PhDs. So that was the whole goal. So I entered the MBA program thinking that maybe I'll switch over to the PhD program. But then I met my wife there. Yes. And she was like, she was actually born in Boston and she was making her move to the West Coast and progressively. And so she was in Chicago. She was actually working in Chicago. And she was like, yeah, I don't know if I want to live in Chicago for another 7 years. And, you know, and so that's one of the things. So, so that's what happened that I ended up in business school, but while at business school, I actually ended up working with one of the professors, and I didn't really know anything about venture capital at that point. It wasn't like a big deal. This is like late '90s, early 2000s. It wasn't like a path that most people took. There are some schools, especially in Stanford, people would go into VC, but it was very boutiquey, right? It wasn't like there was a straight path to go into venture capital at that point. So I ended up working for a small firm that was actually one of the early investors in Exodus, tying back that story. Wow. Full circle. Full circle. And, you know, I spent some time over there and I thought, and they got me in to do more due diligence on products, on, you know, companies that were looking. And I looked at what they were doing and I thought that, hey, that's not a bad thing to do. Right. And it was not about the monetary kind of, you know, upside or anything like that. It was more the intellectual stimulation where, you know, you could spend a lot of time with the founders and every time a founder came in, they would just kind of educate you about, you know, you probably saw that, right? Absolutely. Right. The simulation that you get from founders and, you know, and working with them to figure out the idea. And the best part is that, you know, you can just go home while the founder has to do the difficult work.

It's a pretty good deal, isn't it? Yeah. I was very zealous of you for a few years there.

So, so, you know, of course we have our own, own issues about, you know, dealing with LPs and dealing with founders if it's not working out.

Privilege of doing it.

Exactly. Right, right, right. So, but we have this broad view of things. So that's kind of how I decided that, you know, I should try to see if there's a path into, into venture for me.

Absolutely.

Right.

I, I love that. I, I grew up every day with my dad saying, well, you have to learn something new today. And that is just a mindset that has really permeated how I approach my career, but it's endemic to being a venture capitalist because you do have to learn something new. What was the firm that you were at?

It was a brokerage firm called First Analysis.

Interesting. Yes.

Yes.

Okay.

And they're still around, you know, they still do their, they basically, they did both public and private. So they were like a brokerage house that did public investments and private investments. So they did like small investments in, in these companies.

Well, there's really been this institutionalization of the asset class of venture and what you're alluding to is this was not quite professionalized. I feel like people often call this like a cottage industry for, for many years. And there was this tipping point into the 2000s where ultimately the sophistication of both the LPs and then the managers started to codify. So for you then stepping into your early role leading SAP Ventures, tell us a little bit more about the early days of corporate VC, um, how that was coming on the scene, and then I'll hand it over to Claudia to dive into the founding of Sapphire.

So, you know, uh, I joined Intel Capital right out of business school and, you know, it was not called Intel Capital and I think Intel was definitely the pioneers of really of corporate VC, right? If you look back, you know what Les Vadés did, you know, he took a kind of a small entity called Corporate Business Development and really during the dot-com bubble blew it up, right? So I joined when there were probably 10 people in CBD and by the time I left after 2 and a half years, you know, it had grown to like about 300 people. So I think that was the first time that, you know, corporate VC kind of came into the scene. Intel was doing really well. Intel was like a high-flying stock. And so that was the thing. So then I ended up, there's certain paths around it. Like Nino and I met at this firm that was actually a publicly traded venture firm called MeVC, which was another, we can talk about it, which is something you should not be doing. But anyway, when I, when Nino, and so Nino and I had been collaborating for about, I don't know, 25 years now. Right? And so when Nino joined SAP Ventures, I was like, I don't want to do a third— I know I was also in Agilent Ventures before I joined SAP. I don't want to do a third gig in corporate venture. And, you know, so we talked about it a lot, right? Because I was like, okay, what is the end goal of doing this? And the whole thing was like, what we found within SAP Ventures was they were really not a strategic kind of corporate venture capital group, right? So they were just set up to make investments out of the balance sheet, but there was no tie-in to the product teams. And I think that was what kind of made us confident that, hey, if we join this, potentially we can spin it out in, you know, a couple of years, right? It took us 4 years to do that.

For some of our listeners who may be fundraising, you know, they've heard of your traditional funds, but sometimes When brought with the question of, do you want a corporate VC on your cap table? A lot of founders are not necessarily sure exactly what the benefits are. Are they just looking to acquire the business? How would you break down the function of a corporate VC to founders who are fundraising?

So I think, you know, you have to be very careful about which corporate VC you go with because they come in lots of different shapes and sizes, right? So I think the first thing about corporate VCs is that you need to know whether these firms or these entities are going to be around if you hit, you know, you do want to do another round, if you hit some trouble, are they going to be supportive? I think that was the biggest issue is that when you are like a regular VC or venture firm, you have reserves. At the corporate VC, people didn't really know whether there was reserves to be kind of backing up the companies. If something goes wrong, right? So I think that was the number one problem with having somebody on the cap table, you know, and there was not, you know, if the company's doing well, that was not the issue. It was always when the company was not doing well that, you know, hey, are these guys going to be around to help me? And then the other thing is that, you know, understanding how they can really help, right? You know, whether they're independent, whether they're going to help you within the corporation. So a lot of the corporate VCs are definitely focused on, you know, helping you navigate a large organization, which can be really good. But on the other hand, sometimes the other thing to look out for, you know, sometimes corporate VCs were trying to use the underlying company as an NRE. So they're trying to force the company to build a product that is really meant for that, you know, large corporation rather than what the market is wanting.

Well, the fact that SAP Ventures was not necessarily a strategic corporate fund, probably made the transition into Sapphire Ventures a little bit easier. So let's talk about that. So Sapphire Ventures today manages over a billion dollars, $10 billion, excuse me, order of magnitude off, backing category-defining businesses like Box, Square, Monday.com, MuleSoft. So many companies that have really transitioned from category-defining businesses back 10 years ago to still being incredibly relevant today. Tell us a little bit more about that exact transition from SAP Ventures into Sapphire and how the fund kind of found its own legs in the ecosystem.

Yeah, yeah. So, you know, it wasn't easy. It took us like 4 years to do that. And I do have to give a shout out to Vishal Sikka. He was the CTO at that time. He since has left. He was the CEO of Infosys. He was the one who actually spearheaded and went to bat for us with the, you know, the management board. At SAP to make sure that we could spin out. And the other thing that, oh, you know, there were certain other kind of lucky breaks that we got. One of the breaks was that, you know, SAP had a lawsuit against a company they invested in called TomorrowNow, I think, that, you know, that was doing Oracle kind of subscription or support, you know, and so they were really worried about the legal aspect, right? So that was the, and so that kind of also, they were worried that having a corporate venture team within the in a corporation would kind of open them up for liability. So that was the one other tailwind that we had. And the last one was that, you know, it was always run as an independent organization. So really carving it out, there was nobody from the product teams or, you know, the GMs making a big deal about saying, hey, this is strategic. I will lose something in the market, you know, because SAP Ventures is an independent entity.

It's so cool to just connect the dots now that the SAP in Sapphire is probably connected to its origin story. Um, especially in sort of like this decade, there's been a proliferation of funds. Um, when I was fundraising, I remember putting together a tracker of like every seed fund in the Bay Area. We got quite down the list in terms of the number of cells in that spreadsheet. Um, and a lot of these funds have a hard time differentiating. A lot of it's like, well, we have a platform team, or we can connect you with XYZ. How did Sapphire Ventures kind of create its identity and, um, positioning in the founder market. At my startup, Pryve, Rippling helped us avoid a lot of the operational drag that comes with scaling a team. With most tools, something as simple as onboarding a new hire involves multiple systems, payroll, apps, hardware, and it can take weeks, quite frankly. With Rippling, those workflows happen automatically in one place. That means fewer distractions and more time focused on building. Over 15,000 startups rely on Rippling to scale fast without adding additional ops and HR headcount. So if you or your startup want to move as quickly as you can and focus on what really matters, like your product and your customers, you need Rippling. Right now, venture-backed startups can get 6 months of Rippling's startup stack for free. Head to rippling.com/theroom and sign up today. That's R-I-P-P-L-I-N-G.com/T-H-E R-O-O-M to sign up for 6 months free today. Focus on what you're building, leave the rest to Rippling. rippling.com/theroom.

We took our bets all over the place. The first fund did consumer stuff, like, you know, it worked out fine with like Fitbit, you know, and a couple of other companies. I think we first and foremost kind of honed our strategy to be really focused on enterprises, right? Because you could not be like, we don't do biotech, we don't do, you know, consumer. We do a little bit of fintech, but even fintech that is sold to B2B, not consumer-oriented fintech. So I think that was the first realization, right? That you had to separate it out. The second realization was that, you know, we are not, like our brand is not good enough to compete in the early stage, right? So we didn't go down the path of, you know, being a VC and trying to compete with Sequoia or Accel or Benchmark in the early stage. Because we knew that we would just get the bad deals, right? Yeah, that's a selection bias. So that's why we kind of said, hey, we will go at company that have had product market fit that is scaling and we will come in at Series B onwards, right? So, and then doing that also enables us to get the venture growth because companies are still growing at that point. And then we kind of said, okay, what should we do? To make it so that entrepreneurs really want to come and get money from SAP Ventures or Sapphire Ventures, right? And that is when we put together our portfolio growth team, which is our platform team. And to be candid, when we started, nobody else had a platform team, right? This was like 12, 16 years ago. I think A16z had just come out. They were saying some of this stuff, but having a CIO network, having a talent team that was helping you with go-to-market hires, That was not there. And so that's what one of the first things we did was, you know, and I remember it was not a big fund. It was like the first fund was $350 million, you know, and, you know, we had, you know, a bunch of people. So every time you hired somebody for your platform team meant that you're not paying yourself. So, yeah, it was like an entrepreneur's journey, like, you know, founders. It was not like we were making a lot of money at that time. And I know, and the journey was, So, you know, I kind of empathize because when we first started, we couldn't get health insurance because, you know, when we spun out of SAP, you know, they were like, okay, here's some place that you can, you know, occupy an office space, but we are going to charge you like 20% above what we are paying because that's the market rate. And that's it. And so we had to get our own health insurance, our whole IT, you know, and that is one of the things that is so difficult that people don't realize, like, you know, with 5 people. Our 6 people when we spun out. Yeah, getting health insurance was like a nightmare.

We were just chatting the other day about how funds were startups too at some point.

Exactly.

And, um, similar to startups having to ride the wave of big market shifts, I mean, Sapphire Ventures saw kind of like the boom of infrastructure and then we've had marketplaces, we've had crypto, now it's AI. Tell us about a time where you really felt like the fund was going through its like startup growing pains amidst kind of these big market ships?

I think that was when we were just transitioning from doing everything, like we were doing, you know, Fitbits, we were doing fintechs, you know, to being just enterprise-focused startup, right? And that was kind of around the time when the whole SaaS, you know, the first like 2008 kind of the SaaS downturn was happening. And there holding, you know, kind of saying, hey, we are only going to do these kind of deals when there were all of these consumer, like, you know, at one point I don't know if you guys remember in 2008, people said enterprise, anything selling to the enterprise was dead, right? If you're not doing consumer, if you're not doing Facebook.

I know, it's not an app on the marketplace.

Exactly.

Yeah.

Yeah, you're dead, you know, exactly, right? And so I think that was very difficult because we kind of looked around and said, hey, look, you know, it's not our DNA to go do, you know, consumer investments. Because not only don't we don't always understand, but there's no way to help our founders. And I think that is the number one thing as you build a brand of the firm. If you don't help founders and the founder love that you kind of have to get, because they all talk amongst us, you know that, right? Whenever you talk to a VC and you want to go with somebody on, you ask like 20 people who have known them, who have had them on their board, what is the firm like? So I think that was the biggest challenge that we faced and we kind of said, and look, and I would say that right now is probably another big time when we are facing this challenge because our team is very well-versed in doing the SaaS metrics. You know how you look at CAC, how you look at NDR, you know, our associates and VPs can do that left, right, up, down, everything, right? But now that is not how businesses are being built, right? If you look at the business, it's all outcome-based pricing. People are not being asset light. We are looking at companies where we are going to put in money and the company is going to raise like $2 billion of debt and everybody is going, you know, kind of like, are we doing the right thing? What are we doing? You know, people, we are starting to look at maybe chips and, you know, kind of networking equipment. So I think that is the other thing that I think right now, you know, I would tell you that a lot of venture firms are going through this same kind of issue about what are the business models that's going to come out on the other side.

It definitely is like a sign that my startup was a pre-AI startup because NDR was like the one metric that we would just talk about every day to our investor. Like that's all we cared about. So funny to hear that.

And gross margin, right? That's right. But then you kind of look at some of the businesses, you know, yeah, you can go back to Snowflake, you know, who had, or even CrowdStrike had really low gross margin. But now if you look at, you know, Cursora, you know, and even, you know, things like Corvieve, you know, all the high flyers, you know, they don't have great gross margins. But on the other hand, you know, you know, and actually Anthropic also doesn't, and OpenAI doesn't have great gross margin.

Let alone Cerberus.

When we went public.

That's right. That's right. But, but you know, I think that people are just giving people credit that, hey, they'll figure it out. And I think what people have learned over time, that if you focus too much on gross margin, you know, you kind of forget the bigger picture. People used to say that Uber is going to go out of business and now it's just— Spotify, right? We actually passed on Spotify because one, it was consumer, but, but you know, because people said it's never going to generate cash, right?

So I've been a paying customer for 10 years.

They bought me. That's right.

Well, before we chat a little bit more about your strategy and the companies that you're looking at in sort of like today's AI, um, context, we'd love to go back to some of those like early yeses. As a founder, you always remember the first yes that a customer has given you and the first yes as you fundraise. Um, so similarly, tell us who was the first person to say yes as an LP in Sapphire Ventures.

So I think the first yes is still SAP, right? It has to be because they were the ones who actually, you know, let us kind of spin out and we were kind of, you know, more of one LP kind of firm till, you know, the last few funds, right? So I think that was the big thing that, you know, that they actually said they trusted us that, hey, you can spin out and we'll, you know, give you additional capital. But more importantly, the first yes was Fund 2, right? When they kind of said, okay, you know, you guys have done a good job with the first fund, we'll give you another $650 million, right? And then that was the kind of, you know, and then they did like, you know, they re-upped like, you know, another 2 times, like Fund 3 and 4. So that was the big thing to get SAP to say yes. And, you know, and, and, you know, they said yes because they were getting great results to, to the point where at one point I think half of SAP's net income was coming, was generated by Sapphire. Right. So it was, you know, actually in their public kind of, you know, filings. So yeah, so we did well, you know, in generating cash and returns for our LP that they kept saying yes.

If I could just ask too, you mentioned earlier the fund-to-fund strategy. So could you share a bit more about like, for our audience who might be less familiar, like the bifurcation of how Sapphire has built your own business there?

Yeah, so we have actually built 3 different products within Sapphire, right? So the first one was of course the growth, you know, that we spun out, which was a direct investment Series B onwards, right? So one of the things is that, you know, what we pitched to SAP was that, hey, look, you know, we are going to be outside, but you still have access to being a lot of companies, you know, we'll be your eyes and ears in the Valley. So our challenge was that when you are eyes and ears of the Valley, you know, we only invest maybe 10 to 12 companies in a year, you know, we have a kind of a smaller portfolio, like, you know, 90 companies or so. How do we get access to a much broader portfolio? And then as I mentioned, we didn't want to go early stage, right? Because, you know, we didn't know that we would have the right to win in the early stage given all of the other competitors. So that is why we came up upon the strategy of why don't we do a fund of fund? So they will actually invest in all of these emerging GPs. And through them, you will have access to a lot of, you know, companies, underlying companies, and show them to, you know, to SAP or LP. But also along the way, we would also get some indications about, hey, these companies are doing well, and we'll have some ability to go and kind of chase them before maybe everybody else knew about it. Although in reality, that never really happened. Because there's enough information flow in the VC industry that even if you're not an LP in that firm, people know about what are the hot companies.

There's sort of the strategy you're mentioning that you're selling LPs around how you're kind of winning these deals. Tell us about the first non-SAP Sapphire Venture portfolio company that said yes to you.

Our non-SAP portfolio company?

Yeah.

Okay. The first one that actually took our money? Yeah.

I was like, okay, I'll do that. I'm pretty badger for her, Ms. McIlwain.

You know, the first one I think I would say was ExactTarget, right? That is kind of, again, you know, name from the past. I know, and they had a kind of a really interesting history because, you know, they had tried to go IPO and they had failed and then they were later doing like a secondary, right? And I think that was the first time where we went into a big kind of battle because I think TCV was in there, Scale was in there, and we didn't write that big checks at that point. We were writing like $5 to $10 million checks. And to kind of get Scott Dorsey to kind of agree to let, we were still called SAP Ventures at that time, was kind of a big hassle. And he was not based in the Bay Area, right? He was based in Indianapolis. So I had to like fly out there, you know, and there's no direct flight from here. You had to go through Chicago. So yeah, so that was the first time we kind of chased them in a big way. But I think what he realized was that, you know, we were building up the platform team at that time. So we started making all these customer introductions for him, right? And that was what he kind of really liked about us. And that was probably the first big kind of investment that we did. That they said yes to us.

I mean, I wanna pull on a thread that you brought up briefly earlier, which is like the developer not necessarily being the best buyer, which is a true statement from a time. Today that probably is untrue.

That's right.

What would be your perspective on what's changed in that particular buyer and how has that informed your core investment thesis at Sapphire?

Yeah, you know, look, I think the developer within the organization has also risen up to kind of its value. Value, right? Because if you went back, you know, people, you know, even Oracle days, right? People didn't value the developers as much as somebody who was doing sales and marketing. But as, you know, the proliferation of open source, proliferation of people, you know, building, you know, the tools got easier, things got easier to build. It became like, okay, there is a whole market that you can sell to. And, you know, and that was kind of what started happening. And I also think that people figured out different ways to sell, right? Like open source, after it came out, was more about using it, but it really became a marketing tool to kind of get developers to start using it. And then you monetize it with a SaaS product, right? You know, kind of like what Vercel has done really well.

Yeah.

I was gonna get— you know, I, and I think that was, you know, one of my other kind of thesis is that frameworks never make money, right? But if you can build a product or some kind of a service around the framework, that makes a lot of money. You know, so if you look at what, you know, Vercel has done with Next.js, that is exactly right. You get everybody hooked in to kind of get the, you know, the framework and then you sell them other stuff around it. And one of our portfolio companies, LangChain, is doing the same thing, right? They have the whole framework.. But that's not what makes money. It's the observability part, like Langsmith, that's the one that people sell. And that has been the same case, like going back in history, there was a framework for Java called Spring, and there that was also monetized by observability and monitoring.

And what Harrison's building with Langsmith is really fascinating and seeing the evolution of that product that was, to your point, also open source roots, it's incredibly interesting. What I find interesting right in this time is that the definition of a developer has also evolved. It's easier than ever to push code to production. In fact, your agent can do it for you. So how have you been thinking about the evolution of this core buyer now that the actual TAM has expanded?

That's right, that's right. Yeah, so, you know, we think of, I think how do we provide stuff or products for people who are building stuff, right? It's like, you know what I tell my kids, right? It is like you're going to have builders and you're going to have sellers, right? That's it. I think everything else, like the whole product marketing, product management, all of that is probably going to go away. You're going to maybe have really core developers who maybe understand, you know, kind of the core architecture, but you won't need as many developers, right? So we are really looking for tooling and products that makes it easier for people to build these things, right? Build and deploy and manage these things and make it like, how easy is it to use, right? So one of the big things is like, what happens with inference, right? What happens with all these models? Who manages that? And what do you do around reinforcement learning? Because I think the way that you are going to train the models is very different than how you develop code before. Right? So how do you make it easier for builders to kind of take a model and post-train it so that it does exactly the job it's supposed to do? How do you make sure that the model is working? So I know make it all easier because that is what the middleware and the infrastructure needs rather than doing a tool to kind of, hey, how do I run my, compile my code or write the next compiler or anything like that?

Right, 'cause that's been solved.

Yes, exactly. Or if it's not being solved, the models can just generate it for you on the fly.

Absolutely. Right.

Well, a lot of this conversation we've centered around the past and where you've been and how that's informed both your personal story, the story of Sapphire, um, and the companies that you've been able to back. For the remainder, I wanna look a little bit to the future. Uh, and, and think about as this shift is happening, the buyer that you've been supporting for many years, and you were yourself, right? In your early career. Um, and, and what the systems around that are, are going towards. In particular, something I'm very curious about is the idea of an agent as a buyer. That's right. Now no longer are we just marketing to marketers and to developers who are human.

We're marketing to agents and the models.

Exactly.

How is that informing your investment thesis today?

Yeah, so look, I think when you talk to founders, the first thing, this is one of the questions I ask, is how are you getting into the flow of these agents, right? You know, and there are people figuring out, right? You do a lot of GEOs. That's a new thing where, you know, How do you make sure that when the cursor goes out and develops this code for you, they actually use your product versus your competitor's product? You know, and people haven't figured it out yet, right? I think there's going to be products that probably will be built to enable you to do that, right? But right now it's still the Wild West, right? Like everybody's trying to figure out. So I think you're absolutely right. And we are looking at, okay, one of the companies we are looking at, how do agents buy and transact with each other? What you need to do that, right? It's not securely kind of, you know, and probably, you know, with cryptography so that, you know, it's kind of you and maybe even on a chain, on a blockchain so that, you know, you know, and you can find out the transaction, what happened and, you know, go back in time. So yeah, so we are looking at all of these things, but you're absolutely right. Like, you know, agents are the future and you kind of have to really think about how are agents going to use it versus how are humans going to use it.

It reminds me of the PayPal story where that emerged because there was just this simple issue. People didn't trust buying things on the internet. And I think we're having this same moment now. We don't necessarily trust, rightfully in my opinion, so agents to buy for us.

Or agents to do anything for us.

Right?

Like, you know, that is actually one of the areas that needs to be fixed. Is that how do you enable humans to validate what the agents do? Like how do you build trust within agents, right? No matter what work you're doing, right? Even if you're doing a document processing using agent, how are you sure that the agent is not hallucinating and basically giving you wrong answers, right? So I think the agents are going to be built to even test all of that. People are trying to figure out how do you make these agents more deterministic. These things are all getting built. And frankly, I don't really have all the answers. I wish I did. Even if I did, I wouldn't tell you because I would invest in them. But that is the beauty of the times you're living in right now. It's like, you know, everything is being redone in terms of, you know, anything, not only software and typically how we run the world, right? We haven't even talked about physical AI, right? That is kind of the other thing that is coming in, like, you know, that is going to again radically change everything we do.

Absolutely. And in particular, it's going to change venture capital. And, and so, to close on this forward-facing question, um, for me is really like the value of venture capital has been asymmetric investing. In fact, actually, it's something you don't want an agent to do for you because an agent only mostly can do what it's been trained on. And so it's almost antithetical to how a VC operates, uh, because we try to break patterns. Rather than follow them. So for the firm or the GP who is trying to build a longstanding platform in this market cycle, how would you just think about staying relevant and existing in this paradigm?

I don't know, frankly, you know, there might be agents who get big and good enough. That's right. Right. But I do think that even in this world of agents and, you know, AI, The human connection is not going to go away, right? I think, you know, you still need founders to kind of go build something, go sell to the customer, you know, and that human connection is going to be there. Similarly, when you're on their board, if you want to help them build the company, you still need this, you know.

Buddy is still going to call you. He's having Kipper M&A process.

That's right. That's right. Agents can't do that, right? But, but we are for, for a while, right? But, but I do think our job is going to be, you know, a lot more easier because, you know, I, I don't need associates to kind of go in and do the modeling for me there or do the TAM analysis for me, you know, but I still need, uh, associates. I tell them your jobs are not, you know, going away because to get that information, this, you know, the, uh, underlying information about, hey, which company's doing well? Who's doing this round, who's, you know, how much valuation is this company getting? That information agents are not going to get, right? So I think, you know, again, I think we are kind of on this journey of really trying to understand how much of the stuff these agents will do and how much humans will do. But I don't think humans are going to be irrelevant.

No, for sure. I mean, venture has always been a relationship business. I mean, even after exiting my startup, I'm still texting my VCs, like giving them life updates. So, I don't think our agents will be doing that. Hopefully not anytime soon.

On the other hand, venture has become institutionalized, right? It is a big platform. There's a lot of capital flowing into it. So I think it will go through its whole pain point about, you know, like if you look at every industry in financial services, you start with investment banking, right? There used to be like 20 small investment banks. There's like, you know, maybe 3 or 4. Private equity the same way. There were lots and lots of private equity firms and, you know, has kind of consolidated. So yeah, so there is going to be this consolidation of firms for sure. I know you see firms buying each other up, right? All right. So there is going to be consolidation, but you know, just like everything else, every time there's consolidation in any industry, there's always going to be people coming out and kind of trying to do things differently. And there's going to be diversification.

Not only are they buying firms like Alt Capital, Benchmark, they're also buying podcasts. With TVPN. I know, but it's like, I don't know, are we for sale?

Maybe, maybe we are. Anthropic, give us a call. Um, awesome. Well, as we wrap up on time today, maybe more on the personal side, what are you excited for this year?

Ah, well, I'm excited about the World Cup. That's right. That's right. So I'm a big soccer fan. You know, I'm taking my son and flying around the country watching like 8 games. So I'm excited about that. But truly, I'm just, you know, this is like an exciting time. I've been saying this for a while, but I literally wake up every morning and, you know, kind of wait to see what new things I'm going to hear. Like we just, you know, ended up meeting this company that is basically building giant data centers in the sea. So they're using, you know, energy out of the ocean.

It's cooler.

Yes, and it is cooler. So they can, and it was like this cool concept, you kind of know what's going on, but then when you, you know, talk to them and how much progress they have made, you're like, wow, this is like, you know, this is going to change the whole kind of, not the paradigm, the curve for, you know, how you create energy. So yeah, that is the most exciting part, right? You know, like in this time you really wake up and you just don't know what pitch you're going to hear.

That's incredible. Well, we're excited to watch this episode maybe a few months from now and see how much has changed since this conversation. Well, we'd love to ask our hero question of the podcast. Who is a woman who has had a profound impact on your life and your career?

Probably my sister. So my sister, she's, you know, older than 8 years older than me. You know, she grew up in India with me and she was kind of, you know, very much didn't follow what my parents wanted her to do. She was the one who came to the US before me, and she was the one who kind of, you know, paved the path for me to go there. I know, but I don't know if you have big sisters, but the problem is that I still am like a little brother to her.

Little brothers, so I get it.

Yeah, it doesn't matter how old you are. It's the same thing. You can have the same dynamic. But yeah, she's definitely been a big, big influence on my life.

Well, Jay, thank you so much for joining us in the room today. It was such a pleasure having you.

Thank you for having me. It's been great.

Thank you so much for joining us at The Room Podcast. If you want more from The Room every week, subscribe to our newsletter at theroompodcast.com/newsletter. We'll be back next week with a new episode and inspirational guest. Tuesday, 10:00 AM Eastern, 7:00 AM Pacific. See you in the room.

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