💰 Why IRR is being gamed & secondaries are the new exits1.
📉 The LP crisis: what happens if liquidity do not return?
🛑 Why AI investing is worse than 20211
🌎 Should U.S. funds back Chinese AI startups?
🇪🇺 The Europe vs SF debate (Jason Lemkin: Europe has a βbaguette and red winee cultureβ)
Harry Stebbingsβ 6 key takeaways with Jason, Rory O’Driscoll & Fabrice Grinda👇
1. Why IRR Is the Hardest Thing to Control?
- The timing of the exits.
- Everyone is suffering from degradation now.
- They are going to get the same return in 2026 that they thought they were going to get in 2024.
2. Sell Your Winners: The Anti VC Strategy
- When I feel like a company is overvalued & can no longer underwrite a 10x, I sell my winners.
- Most of my exits in the last 3 years have been secondaries.
3. Sequoia the Best Strategy at the Worst Time
- Sequoiaβs evergreen fund was a brilliant idea.
- Unfortunately, they launched it in the only year where it was the wrong timing.
- Fundamentally it was still the correct insight across 20-30 years.
4. Fund Returners Are Not Good Enough Anymore
- 1x is not good enough for me at this point anymore.
- It does not put me in carry mode.
- We need at least 3x.
5. Three Different Players in a World of AI
Three players:
- AI behemoths: ServiceNow, Oracle, etc.
- AI teenager: Pre-LLM companies, already building something from 2018.
- Post-LLM: YC, next-gen companies.
6. Are Benchmark Wrong to Lead Manusβ Round in China
- It may make sense financially β idiosyncratic risk, lower price, high upside.
- BUT they are also taking firm risk.
- Itβs a very different risk from investing in Anduril vs getting involved with China.
Rory OβDriscoll is a General Partner at Scale where he has led investments in category leaders such as Bill.com (BILL), Box (BOX), DocuSign (DOCU), and WalkMe (WKME), among others.
Jason Lemkin is one of the leading SaaS investors of the last decade with a portfolio including the likes of Algolia, Talkdesk, Owner, RevenueCat, Saleloft and more.
If you prefer, you can listen to the episode in the embedded podcast player.
In addition to the above YouTube video and embedded podcast player, you can also listen to the podcast on Spotify.
Transcript
[00:00:00] Jason Lemkin: One X is not good enough for me anymore at this point in life, and it’s not worth it. I want three X the fund.
[00:00:04] Rory O’Driscoll: The problem with series B is if you get it wrong, you end up effectively paying Series B prices for series A risk, and it’s exactly correct. Now at the A, you’re paying series A prices for seed risk.
But the whole point of having to be good at this job is being able to figure out which is which.
[00:00:19] Harry Stebbings: Guys, I am so excited for this. First, thank you so much all for joining me today. There’s three of you, so like, I’m just gonna dive straight in. I wanna start, we have more LPs listen than I quite realized. cause I get pinged by all of them. And I wanted to start with like, what the fuck are we seeing in venture right now and what your one takeaway is from the last week.
Fabrice, you’re our new joiner. When you think about like what you’ve seen in the last week in venture that has struck you, what is it?
[00:00:48] Fabrice Grinda: I’d say what struck me in venture and the, and the, the new trends is, we’re, we’re still in the middle of an AI bubble. If you look at like, the amount of money that’s going into AI versus every other category in terms of valuations raised, the amount, the number of companies getting funded.
And I thought we were at the peak a year ago and then ventured, you know, they went a hundred billion investments in, in the category, and so doubled from Q1 to Q4. And the other categories we’re not seeing much love. And I think venture as a ca, as an asset class has been somewhat in the doldrums because LPs have felt overexpose.
They haven’t had distributions in 22, 23, 24, and frankly 25, we were hoping the markets were gonna reopen, but so far the IPO window’s not reopened and the spigot of M&A has not reopened. And so I’d say it’s become an unloved asset class. I think it’s the best time to invest, but in a way, investing in venture right now is contrarian.
And I think you should be investing in. Funds that are not going after the Lumy. You know, AI all AI all the time, category.
[00:01:51] Rory O’Driscoll: Agree on the timeframe. You know, the big comment stepping back is nobody cares. I always thought no one cares about our problems. We’re VCs, right? One thing I’ve learned is you, when you start bitching and moaning and then you realize and you step back and you talk to anyone else on the planet, they’re like, lemme get this straight.
You have this wonderfully interesting job. If you have a reasonably good current comp, you get to pay the percentage of the upside. You have visibility over three years in your comp. Nobody cares about our problems. And then when you start explaining that our number one problem is that valuations are too high, then they go, lemme get this straight.
Your number one problem is that you have to pay me the entrepreneur more money for my company. I like your problems. I’m glad you have problems. I want you to have more problems. So let’s start with that. That said, I do think it’s a weirdly tough time right now, right? Because it’s simultaneously a hard time to put out new money.
Cause things are expensive and a hard time to get money back cause exits aren’t there. And if you think of the two by two quadrant, normally one of those things is hard. And one of those things is easy and it’s good, like 21. Easy to make money, easy to get money back, hard to put money out. It was expensive.
Right now we have the low, low quadrant. It’s very expensive to do these new great deals and at the same time, exits are tight. So it’s a tough time. But again, after I say that, I go back to first principles. Nobody care about my problem.
[00:03:08] Harry Stebbings: I actually just had a conversation with one of the large endowment funds in the world and they said the lack of liquidity.
The big question that we have around that is, is it a temporary adjustment in the venture ecosystem and public markets, or is it a permanent structural shift in company building and maturation stages and liquidity cycles? If it is the latter, we cannot be in this asset class any longer to the extent that we have been.
If it’s the former, we will be patient.
[00:03:33] Rory O’Driscoll: The sentence has the answer because the only time it will change is when they get out of the asset class, is what we said two weeks ago until while they keep putting money into the asset class, it will remain a stay private for longer asset class and once the capital.
The asset class reduces, then we’ll go back to going public earlier. So economics is about seeking equilibrium and kind of things push things back into balance. So the very statement sets up the solution.
[00:04:00] Jason Lemkin: I would just say two things, Harry. I think you asked what’s changed in the last week or something.
What was the question? Some version of that. Yeah. I’ll tell you my micro learning, this is just, I think even in VC and LP land, we live in this new news cycle. So like I had a company close, a unicorn round on, I, I think April 7th, that there was actually a downturn in venture because of the Nasdaq, right?
We had these Trump drama. I think the stock market fell 15%, didn’t it? Nasdaq or something. And man, everyone was freaking out in growth stage VCs for at least three days. For at least three days. And already this company that did a unicorn round has an offer to do an EA, a top up round at an even higher valuation.
Like we for like, you know, we used to be, when there was a, a downturn or something, it would have shocks for the system from at least a few months. Right now, the shock, the shock doesn’t even last until the next 20 VC comes out, right? So it’s just, I, I hear all this stuff, but all I see is a gold rush. All I see is gold rush in the SF Bay.
All I see OpenAI says they’re gonna grow a thousand percent by 2029. Everyone’s just looking to make an insane amount of money, and they don’t care about the nickels and dimes and the casualties, and they will deploy every dollar they can. I think we can talk about liquidity and all this, but I honestly think that today is a much bigger gold rush than 2021.
Or other times we get like, I’ve never seen such a goal because this gold rush goes all the way down to high school kids. This gold rush is up and down the stack of, of tech and it’s both fun and a little cynical and a little crazy. But it’s, this is, you know, in the 2020 Gold Rush, you had to be a crusty old B2B guy, right?
That had been doing this for years or have something interesting consumer. Now, every 17-year-old kid is dropping out. I mean, Harry, you know what this is like, but they’re dropping out and they’re in the gold rush and it’s glorious and weird and risky and full of baloney, but I’ve never seen the anything like this gold rush.
Never. Never. Right. And yeah, we talked about this before. I honestly think almost every GP in market will deploy every dollar during a gold rush. This is the way booms work, right? You’ll deploy every nickel possible in the boom. And then we pull back for those three days.
There was a pullback in growth April 7th through 10th and back to the Gold Rush
[00:06:08] Harry Stebbings: Fabrice, are you not concerned that given that gold rush realization and the speed of revenue, stretchies being what they are today? You know, I have new AI companies like Macaw and Lovable in my portfolio who are scaling in just the most insane race.
And then I am in ERP systems for concrete businesses, which are going from one to 4 million and I’m going, fuck me, lovable does that in about a day. Do you not worry that you are gonna miss out on the gold rush?
[00:06:38] Fabrice Grinda: So, look, 9% of our investors remain in ai. It’s just that I try to be disciplined and I try to invest in the companies where I feel that they have differentiated data sets that they have valid business models.
And where I’m seeing lost competition, the worries me, the gold rush is there’s too many companies doing the exact same thing going after the exact category, and it feels, it’s unclear who’s gonna win. And, and historically I’ve waited until there was an emergent winner be before investing, so I was happy or to pay up.
And frankly, you don’t necessarily even pay up because the prices kind of adjust with traction over time. Like the traction evaluation metrics start aligning as you get a series B, cd, et cetera. And, and what worries me. About the lovable type examples is, yeah, they can go from zero to 18 million in, in AR in like three months, but I think they can go back in the other direction.
I mean, people, I dunno if people remember that AI company where everyone for a month basically changed their profile photo using AI, the name might come back to me and their AR or their MRR went from 250K a month to 30 million. And 99% sure a month later and we’re back to 500K and they raised like at that moment in time.
so these things, you know, are, are, are, are risk, are risky than people think they are. Do I think that GitHub or what, well maybe GitHub is not the best example, you know, can launch like coding tools to compete with the, the likes of lovable and cursive, et cetera. Yeah, absolutely. So I don’t mind missing the bubbly elements of the bubble.
And I worry that people are underestimating the orthogonal risk of disruption from either open AI extending their sack, right? I build my own AI. For fun. I built FabriceAI and I started using LangChain and Pinecone, et cetera, and then Open AI released 4.0 and became so much better. I just ripped out my entire back stack and moved to OpenAI.
So I was using a different stack for text to voice and I used Whisper. I, I feel people were underestimating the risk of zeros, even though something can go from zero to a hundred million a r very quickly, and usually they’re priced accordingly. And I care about like, what returns, what do you need to underwrite so I can, you can still get your 30% IR and I think the risk of zeros is too high.
[00:08:48] Rory O’Driscoll: How do you weigh off, you know, the absolute undoubted risks of, you know, technical obsolescence, of being crowded out by the model companies, all the risks, the massive amount of competition, right where you are on the mega trend versus, you know, having none of those risks, but being so off the mega trend that you might just be in a backwater when nothing happens.
Right, and to some extent, I always think any company that has to go from a million in run rate revenue to 300 million, which is what an IPO looks like, you need something more than hard work. You need some kind of mega trend behind you. So we always wrestle with this question, Fabrice. How much do you have to play in the spot where the trend is versus how many orthogonal deals can you find?
How do you think about it?
[00:09:32] Fabrice Grinda: I think I am actually playing a mega trend. It’s just a different mega trend. The mega trend I’m playing is the penetration of digital writ large in B2B as is very, very low, right? Like in your consumer life where you’re about 25% penetration of commerce, writ large.
So you can get anything you want in two days. You can get food delivery in 15 minutes, groceries, you can get anything on Amazon, you can get Uber, Airbnb. Your life is amazing. And then all of a sudden you go to the B2B world and you wanna buy petrochemicals. And this is not even a catalog.
Catalog just a list of what’s available. There’s no connectivity to the factory to understand manufacturing capacity and delays. There’s no online ordering. There’s no online payment, there’s no online tracking, and there’s no financing. And all this needs to happen in every vertical, in every industry, and every geography.
And it needs to happen in like for inputs. It needs to happen for like helping SMBs digitize. It needs to happen for like helping the entire supply chains move out of China into other countries. I mean, there’s so many of these mega trends where currently penetration is like. Sub 1%, and these are multi-trillion dollar categories.
You know, petrochemicals is like 4 trillion you know, gravels like a trillion. I mean, so it is a mega trend. It’s just a slower one because it’s happening because boomers are retiring and the new managers are replacing them, want be in marketplaces rather than using RFQs.
But yeah, it’s slow, but it is a mega trend. And I’m coming in at 4 pre at pre-seed at 10 pre at seed and at 20 pre in A’s. And I feel very comfortable than in 10 years these will be much, much larger with valid business models and way less risk of disruption.
[00:11:04] Harry Stebbings: I am really interested, you said there about kind of slow, I’m interested, this is for the whole group, but Josh Kapelman tweeted this week something that really struck me and I respect the shit outta Josh.
He said speed matters in venture. How fast you win matters as much as how much you win. You know, being able to return in 10 years versus 17 years is a huge difference to the performance of your investors. Three x in 10 versus three x in 17, obviously enormous. And people just talk about three X funds.
I wanted to hear your thoughts and lessons on the importance of speed of returns, how big that is.
[00:11:39] Rory O’Driscoll: I saw the tweet and obviously it’s true because, you know, we’re being evaluated versus other use of the money and the common denominator of all of capital allocation is going to be some kind of way to return for you in a time.
So the tweet is definitely true. I think the interesting thing is it’s actually the hardest of the three things to control. So lemme tell you how I mentally think about it. There’s really three things that determine your return, youβre in within a fund level. There’s, you know, picking, picking out of, we do 20 deals for them, have to be great deals.
That’s a hundred percent in your control. If you can’t get that right, you should lose your job. Then the second thing is valuation on the way in and valuation on the way out, right? That’s controllable a little, right? But not as much. See the conversation on valuations going in now and then on valuations on the way out.
We have an excellent 2014 fund. That exit in 2021, and we always tell our piece, one entire turn of that fund we don’t deserve. It was multiple expansion. The other turns we do right from our picking, but sometimes you get lucky on the upside on return, and sometimes you get unlucky on the downside. So valuation coming in, valuation coming out, a little bit of control.
The hardest thing to control is IRR because the timing of those exits, you know, everyone now is suffering IOR degradation, they’re gonna get the same return in 2026 that they thought they were gonna get in 2024, right? It’s just very outside your control. So, it’s a very unsatisfactory answer, but the nature of our business is we are judged on IOR.
It’s very hard to impact it directly. You gotta get the other parts right, and then to some extent, if you do your picking really well, if you have reasonable control evaluations, then delayed exits simply mean more compounding and perhaps, you know, good IRR. See, for example, the Founders Fund example, last time they compounded for a decade and a half or 20%.
Sadly, a lot of the time pushed out IRRs, pushed out exits just means lower IRRs, and it sucks. But to some extent, you know, it’s the hardest element to control.
[00:13:46] Jason Lemkin: So,
[00:13:46] Fabrice Grinda: I, I a cheat code for that. Oh, sorry, Jason. Go for it.
[00:13:49] Jason Lemkin: I was thinking about this a lot, Harry. It’s interesting that Josh wrote that.
I was literally thinking about it this week and I wanted to hear Rory’s thoughts. I thought it was very interesting that Fabrice led with IRR to describe his seed, his fund. I do think it’s impressive, but I was literally looking when, when Josh, that I was looking at my 2017 fund, and it is at. Here here’s the question to maybe especially to Rory.
My virtual mentor here, it’s at 4.31 x with a 32.56 IRR. Okay. And I was doing some modeling. I’m not that good at math. Okay. That’s why I do late seed. But I was doing modeling of, if the winners do a certain amount and I of different scenario planning and honestly, unless I was delusional.
Unless I was delusional, the IR would never go up. It’s at 32.56, it will it five x fund, six x fund, even an eight x fund. This is kind of Josh. I’m like, okay, let’s, what if this fund does eight x? Like, it would require a lot of things to, I’m not a chess beater. It would require a lot of things to go well.
Okay. But the IR still wouldn’t beat 32. So I’m like, what’s, and I did ask my LPs if they cared and here’s the thing, they didn’t care. Okay. But I think maybe that was a too simplistic answer. I think the answer is for early stage managers, we’re just looking at multiple, right. But I’ve never understood this since I started investing, because I’m looking at this, I’m like.
I can’t do better. Like I cannot do better than 30 and even 32.56. Like it is great, but that’s all the way to get to 4.3 versus the Nasdaq. Like it’s still like, this is a tough one. The IR thing, right? Well, it is and it is. I mean,
[00:15:16] Rory O’Driscoll: sorry, go. Just please.
[00:15:18] Fabrice Grinda: Yeah. I wouldn’t say that cheat code I use for IRR why still can get 30% IRR today is the virtue of being diversified means I own two, one to 3% of any of the companies.
And so what I’ve been doing is getting secondaries on the way up. So I’ve been doing the anti VC strategy of selling my winners. When a company I feel gets overvalued and it can no longer underwrite a 10 x I’m underwriting a three X in the future, if they, and a round is happening and whatever, Sequoia, Andreesen, Greylock are all competing to get in and the founder doesn’t want dilution of 15% of pop.
And so it’ll, it will take like 30% primary, 15% secondary. I’ve been doing secondaries. And now that you have things like shares, posts and forge and secondary marketplaces and so the vast majority of my ex exist in, in the last three years have come from secondaries.
[00:16:08] Jason Lemkin: The secondaries to get that IRR.
Fabrice Grinda: Exactly. And it works.
[00:16:10] Jason Lemkin: Nothing wrong with it, right? Yeah, nothing wrong and it works. The only thing, and I think work even more. The only thing is, and you know, there’s another tweet, Harry, and it was talking about I forget who it was one of these talking about tax efficiency at the GP versus the LP level.
Right now for me, I’m not selfish, but I would not want any, I like QSBS is good, don’t get me wrong, but for me, I have some personal liquidity. I’d rather go long. Right. It’s so much more valuable to me. Selfishly, I don’t care about IRR as a GP, right? If I can get another X as a GP tax deferred or tax free, whoa.
Like I can’t be, I can’t beat that, right?
[00:16:46] Rory O’Driscoll: And everyone wants that. So I, and coming back to you can, I don’t think the algorithm, so to be like, I don’t think the algorithm is maximize IOR logically subject, and I’m such a geek subject to some caveats. The real algorithm is maximize multiple subject to a constraint on IR, right?
They don’t want you maxim, no one wants you to maximize your multiple by holding at 7%. But if you’re at 32 and the cost of funds or the target for your sector, risk adjusted is 20 and you can hold another year and get 20% for that extra year, which brings down your overall IRR. You should do it. Right. So
[00:17:24] Jason Lemkin: well explain that to me.
My IQ isn’t that low, but I don’t get it. Why should I do it if that only matches their cost of capital versus asset?
[00:17:31] Rory O’Driscoll: 21. You’re right. 21, right.
[00:17:32] Jason Lemkin: No. I’m not challenging you. I’m just trying, I’m honestly just trying to learn.
[00:17:34] Rory O’Driscoll: Anything right at or above the target return. Right? Yeah. Because it’s extraordinarily hard to find other places to compound money at 20% plus, right?
Yeah. So I don’t think the algorithm is pick the fund with the most IRR you the highest IR cause you often see an interstitial one year. A hundred percent. But it’s not sustainable. I think a, a smart LP and they are you on aggregate Smart is, they’re looking for. You know, seven, 800 base 800 basis points above small cap, pretty consistent.
So 20% plus you’re probably crossing the cost of capital and therefore to, to your point Jason short-changing the multiple for the sake of optimizing IOR. Not a mistake. It’s a mistake. Right. And for you and for the investors, right? Because the truth is this, what you end up doing, and I wanna come back to Fabrice’s thing in a second about when you should take secondary, what you end up doing.
It always amazes me when I end up selling the company that I know really well, where I’ve been on the board. I have a pretty good sense of what it’s doing and I’m six years in. To reinvest at a slightly higher revenue multiple than a company I know nothing about, right? It’s such a risk escalation. If you have good share, hold onto it.
Now, for reasons why, there’s a couple of reasons that you don’t. The first is the institutional imperative. Either if you or your LPs need capital back, then give ’em capital back to show you have a pulse. And then the other thing is if people offer you, and this is where it is tricky, and I’d love to get Fabrice’s.
So how are your thoughts on it? When people offer you quote a crazy price where you kind of go, I believe in this company, I love it, but I’m getting, I don’t know, two years forward, credit for revenue. At what point do you say, Hey, even though I’m a believer, it’s a smart thing to take some money off the table?
I think sometimes it can be,
[00:19:18] Fabrice Grinda: by the way, these are the only companies I can sell, right? No one’s buying your dogs. Right? Like the only companies you can sell, the ones that everyone knows is a winner. Yeah. And thinks is amazing. And they end up, look, I sold so many companies at a hundred X ARR in2021.
And like it was an obvious, like, I love the founder, I love the company, I love the traction, I love the, I love everything, but the price is too insane. Like what I need to believe to underwrite this valuation is like every star in the multiverse aligning. And I just don’t see that happening. And, and that’s even to just justify the valuation, let alone get a three x or a 10 x from here.
And, and by the way, I disagree with you on, on. The, when I see that a company is only a two or three extra more it is because on average we’ve been shooting for the 10 Xs earlier. I’m very happy to recycle
[00:20:05] Jason Lemkin: That problem with the selling in the secondary. Fabrice is obviously an excellent investor.
But because you have so many names, right? There’s not pressure on every number to return the fund. I feel like for me, I want every winner to return three times the fund, not one x. Because if I just return the fund like let’s say that’s my first distribution.
I don’t make any money. One X is not good enough for me anymore at this point in life. Honestly, it’s not because listen, maybe it makes someone on Twitter happy, but that, that doesn’t even put me into real carry mode. Does it? One x the fund, right? It’s not worth it. I want three x the fund. It’s just not worth it.
I don’t care about one x, it’s, it’s nothing. Even two x is nothing. Right. Jason, what I was,
[00:20:42] Harry Stebbings: what I love about you is A, I am always learning, but B, you said last week, if I know I can five X a check. Yeah. I will do it. Yeah. And then you are also saying this week A one X to fund isn’t enough. Yes. I need to three exit.
Those to me seem paradoxical. Can you help me?
[00:21:00] Jason Lemkin: I think they’re paradoxical and they’re both true. Imagine you, you’re in carry mode, right? Yeah. Then you’ll be like, God, if I’d only put 5 million in lovable and it went from one to 5 billion, that’s another 20.
That’s another 5 million bucks in my pocket. I mean, that doesn’t go far in London, but I could take some good holidays. I can’t buy a good flat, but I can live good in Monaco or wherever for five, that’s 5 million. See, that’s the weird, I’m still trying to learn, which is you want your winners to be huge, but the ones that you aren’t winners that are like the ones in that next bracket below, just making money on them is, is terrific.
Right? And. And if you get an ex and the other, the other weird learning I’m still learning is like, you know in that 2017 fund we talked about, I got an extra deal in, I got an extra deal in four years later, that’s almost a fund returner an extra deal. So think about this extra deal in that outlying year of the fund.
I just think the extra money is where you make, is where you can make money too, right? It’s not always in having the one huge winner, the extra money lit, literally. You can buy at least a decent flat in London for 5 million. Right. You know, especially if you’re like Fabrice and you pay no taxes, then it goes, your 5 million goes further.
[00:22:07] Rory O’Driscoll: When Marie Antoinette took this attitude, she ended up with her head chopped off. So just, this is why no one cries for us, Jason. you even know that that 5 million bucks won’t carry you far enough. I’m still willing to get out of bed for a million bucks. I just want to be clear on that.
[00:22:21] Jason Lemkin: Well, I’m having some fun, but venture isn’t about little numbers, is it? That is the part that is true. It’s not about little numbers. Right.
[00:22:27] Rory O’Driscoll: You’re exactly right. And that is the part that I kind of agreed with you more at the margin than Fabrice is that I do believe it’s so hard to get a winner that.
If you do think it can run the compounding in the out years is the only way in which the venture thing really, really works commensurate with other equity businesses. You know, we’re not playing with big dollars like the PE guys, right? Most of our stuff doesn’t work, unlike the PE guys. You know, the only thing that’s good about this business is occasionally you can make really great companies and ending up holding onto lots of them is the way forward.
That’s one of those almost always true rules and those times, however, to Fabrice’s point where it’s not like 2021 was one of those periods where that’s not a good rule because everything is so overvalued that they’re never gonna return to those valuations. But most of the time, yeah, most of the time you’re compounding on your winners covers up for your mistakes.
So bias long. It’s why Sequoia, you know, did the evergreen fun thing, which was a brilliant idea. Unfortunately in the only year, in the last twenties, where was the wrong timing? Right? But fundamentally, across 20, 30 years, it’s the correct insight. And they’ve had it, you know, from way back when they did Cisco and you distributed at 200 million pre when it went public.
And anyone who’s still holding their stock feels pretty good.
[00:23:50] Fabrice Grinda: I think it’s different based on portfolio construction, right? Like you guys have concentrated funds. I don’t, right? Like, so in my case, 2% of my deals follow the power of law, return the fund one x, so even a hundred x or it doesn’t return my funds, right?
Like the, so because I have 500 deals per funds, so 2% of the hundred return me one x and these are like the 46 x average, 8% of the fund return, another one x, and these I think were eight x average. And then I have the remaining 90%, I actually make money in 40 on a bit, slight less than half of those deals return another one X.
So for me, it’s 1, 1 1 and that’s how I end up with three X and the 30% IR because IDPI early because of the secondaries on the way up. And that’s been true. For the last 28 years. Right. So, and, and I haven’t seen it change despite the bad, the last bad three years. So it’s just a different way of playing the game.
But so far it works and it keeps working.
[00:24:43] Harry Stebbings: I think the right question to us if I’m an LP actually is, are the IRRs actually reliable?
[00:24:47] Rory O’Driscoll: You asking the very basic question, are the numbers on the page? Correct. Right. Yeah. And it’s a great, look, we are in this, it’s hard to know. And I say that not being glib, you know, we are in this weird period where we appear to be all quote unquote, creating value.
You know, we’re getting unicorns, we’re getting markups. Everything’s working. These companies appear to be doing really well. But as a very astute friend of mine in the late stage business said, because there’s no IPO relatively no IPOs and MS, there’s no feedback loop. Like we’re grading each other’s exams and we’re all saying we’re getting A’s.
But teacher hasn’t graded the test yet. Right? And teacher appears to be on strike right now and prohibited from doing anything or caught up in antitrust. And until teacher grades the test, we’re all just saying, yay, I’m great. cause Jason said I’m great. And you know, Fabrice said I’m great and at some point all these companies are going to have to.
Have that horrible moment. I’ve lived through it to some companies that, that, well, you filed the S1 and you have that moment where you’ve got it on file cold and no one’s seen it. And then, you know, tomorrow morning you’re going to unveil the numbers and it’s like you’re gonna take your clothes off and whoever’s gonna see what you really got.
Right. And that’s when we’ll find out what things are worth. You know, until then, it’s an ungraded test where everyone’s getting A’s.
[00:26:01] Harry Stebbings: Rory, do you agree with the Gurley statement that you should go public earlier? It’s great to be public for discipline. Everyone should go public as soon as possible. That theory?
[00:26:12] Rory O’Driscoll: Well, for bill’s in an odd quadrant, pro going public early, which I agree with, but anti IPOs, right. So I actually, so I, I would argue that’s a little intellectually nothing because that’s not fair. It’s a very smart man. But I think companies stay private because they can. And as long as they can, they will.
And at some point I think we’d all be better off if they could go public earlier. Right. That will happen. As I’ve said, not when people, people don’t do what they should. People do what they must. Right. When they can’t get cheap private capital, they’ll all go public. And yeah, being public, it has some good strengths.
Yes, it does force discipline earlier. It’s not perfect cause you also have to deal with activists. There are some good reasons why people stay private. Lots of being public is a bit of a pain in the ass, but I do think IPOs will come back and come back earlier once capital gets withdrawn from the private ecosystem, which I think it will.
[00:27:05] Fabrice Grinda: I have you guys been founders before? Because, you know, when I was a kid, because I was crazy, I was like, my dream was to be a public tech, CEO. And then I built three large venture backed companies and two of which ended up being public. And I was like, the last thing I would ever want is to be public ever again.
Like, in fact, that took all the fun out of being a founder for me. cause like all of a sudden like had it having to create the annual budget, the quarterly budget, the updated, the quarterly budget. If I could never go public as a tech founder, I would do that. It, it is so painful and so expensive of time.
All your information’s out there is bureaucratic. It, it like slows everything down within the company. It’s like I would rather not go public.
[00:27:47] Rory O’Driscoll: There are significant negatives around being public that I think we have to fix as a country if we’re gonna have a more successful dynamic ecosystem.
But I also think the cost of that capital is so much lower in most times than what you can get private, not for the last couple of years, but, you know, across two or three cycles, I think just logically makes sense that liquid money should have a lower cost of capital than illiquid money. Shoot. When I say it like that, it’s pretty obvious, right?
It is absurd to think that one person is getting capital where you can trade it every day, and the other company is getting capital where you’re locked up for five years. How in God’s green art, if the companies are the same, does the first company not have a lower cost of capital? But right now it doesn’t.
It’s a point in time absurdity, and it will change.
[00:28:35] Jason Lemkin: Everyone that I know directly or indirectly that has a subscale IPO. Yeah. Okay. That tried to IPO in the a hundred million, 200 million range that’s growing 20 or 30% today or wherever, they’re all miserable. They’re miserable.
They have to be profitable. They’re not enjoying. Great. You have a six or $700 million market cap. It’s sort of illiquid as a founder anyway, right? You could sell a little bit, right? But again, it doesn’t go that far in London, right? You could sell your 10 B five, you’re selling a couple million bucks a stock a year, right?
It’s not fun to be a $600- $800 million market cap with no analyst coverage, no liquidity, a three X multiple, right? With no one to buy you and miserable employees that now exactly know what their equity’s worth to the nano cent, right? Like so sure if you can go public like, what was HubSpot?
I mean, where are you guys invested? HubSpot? I mean, that was a rocket ship at IPO at a hundred million, but I think it was growing 60% at a hundred million or something like that. Right. Those deals no one wants to do today. 60% growth at a hundred million. Right.
[00:29:37] Rory O’Driscoll: You know, there’s a shift between those two examples, to be clear.
Yeah. A company at a hundred, 150 million with 50, 67% growth should be able to go public, is my belief. In other words, five hundred’s too high. Yeah, you’re exactly right. However, 200 million growing at 30%, the mathβs starting to not work depending on the multiples. Right.
[00:29:54] Jason Lemkin: And your life’s miserable as a CEO, your life is miserable, I think. Right?
[00:29:58] Rory O’Driscoll: The bar should come down from today where it’s effectively zero. The year of the great.com explosion, it was literally 350 IPOs, meeting and trailing revenue 18 million. And that was clearly too early. But that was the, that was the venture. Coming back. Actually, interesting comment. Coming back to IRRs, that was the exit environment where a bunch of 1996 funds posted six x net a hundred percent plus IR funds.
You know, it was the best of times, as Mr. Dickens would say, can I ask you, I think
[00:30:30] Harry Stebbings: people are starting to realize that we saw the CEO of Discord. We saw the CEO of Ironclad both leave this week is the realization, is the penny dropping that shit? Being a public company, CEO sucks. I don’t want to do it.
[00:30:45] Jason Lemkin: 90% of B2B companies at IPO have a founder/CEO at the top 90%.
Will that go down with 20 year life now that it takes so much longer to get there? What I’ve learned, so that’s my number. What I’ve learned is, and Fabrice, I mean, going to your point, you really do have to reinvent yourself as a CEO every five years and sign up for another tour of duty. Yeah. And so if you squint, a lot of these turnovers happen in these sort of four to five year cycles.
Right. But I do think coming to the Discord point is, is Jason Citron or coming to Jesus and saying, listen, I don’t wanna be CO post IPO. Right? This is if you’re a founder and you like big teams and you like scaling, but you don’t wanna do the IPO leaving 12 months before the IPO is the right time.
Right. You’re, the market’s not gonna be shocked and you like scaling, you like people, you just don’t want to deal with Wall Street. That’s the perfect time to leave like discord. Right? That’s, that’s and hand it to the professional guy. Right. I just personally think most, when I look at the other ones, they go into terminal decay is my concern.
But that’s a different issue. I just think they go into terminal decay.
[00:31:46] Rory O’Driscoll: Yeah, no, it right. They definitely do. Especially when, I mean, the hardest thing to do is a CEO change when the founder/CEO doesn’t wanna do it, but for whatever reason you think they have you should make that change. And for me, that’s an extraordinary high bar because a βfounder/CEO , with some managerial limitations, usually performs a lot better than an excellent, a reasonably good manager with no founding DNA.
Right? So Iβm not one of these grandiose people who said, oh, we’ll never change a founder. I think statements that use the word never, just don’t tend to work as well. When you take longer to get to the same place, you’re just gonna have more change. I. Right. It turns out, if it look in 1999, as I said, it was a sprint.
Found the company go public. In three years, most people can do a sprint. Then it was 10 years. Yeah, a fair number of people could do the 10,000. Now we’ve converted this into a marathon or, and by the way, at the end you have to run a few more few sprints at the end just for fun, right? It’s not surprising that when it’s a 10 or 15 year journey, lots more people tap out life.
You know, life takes care of a lot of this. People get older, people have other things going on. So the longer this private holding company period lasts, the more this kind of dynamics you’re gonna have to wrestle with.
[00:33:00] Harry Stebbings: I find it easier to pick founders with that realization than with the shorter term horizon.
Very specifically. cause you have to be a fucking psychopath. Like I am deranged. I run two marathons a week and you know, I’m an addict in every way. Like, I have more energy for 20 VC than I’ve ever done before. 11 years in, I’ve done three. Like, there is nothing normal about me. And I look for nothing normal
[00:33:26] Jason Lemkin: You can’t make money of normal people, unfortunately.
[00:33:28] Harry Stebbings: No. And so, but you can, if it’s five year windows or seven year windows where you can kind of scrape it by the 15 year, you have to be so deranged and obsessed by a problem that is your, it’s your unwavering life’s work. I find it easier almost to pick.
[00:33:46] Jason Lemkin: You know, it’s funny, when Harry, when you and I were in London this last summer at the Sapa, there was a CEO speaking and he told me that he’s in a WhatsApp group of, and they’re at scale.
They’re at nine figures in revenue. He said they’re there, they’re a 20 percenter club. They’re all telling each other how 20% growth is more is great today. Like the, I get it from as a human, but like, you can’t invest in these people that they’re in the 20 percenter club. They’ve all convinced themselves as for group therapy, that 20% growth at nine figures in revenue is as good as it gets, right?
You need people who won’t join who, who log outta that WhatsApp group who delete it.
[00:34:22] Harry Stebbings: I think there’s a really interesting question, which is like, are we gonna see the acceleration of terminal decay? And what I mean by that is if you look at companies like Pinecone, they went up and they went down and like fucked very, very quickly with, with changes in technology cycles Squarespace, Wix, any of the website builders, I’m not picking on them or being horrible, but your Lovable and your Bolt are absolutely killing them on the consumer.
And, you know freemium modes. Are we gonna see the acceleration in that terminal decay rate?
[00:34:53] Rory O’Driscoll: Short answer, of course. I mean, that’s almost a given. I mean, look one, all technology companies have obsolescence written into them from day one. You know, it’s sad, but it’s, you know, true. I mean, anything before Microsoft and Apple at this stage isn’t here in Coca-Cola’s been cranking for a hundred years, right?
So obsolescence is inevitable in general. On top of that, periods of acute technical disruption are going to increase the amount of, you know, technical obsolescence that companies face. And then overlay that with, as we’ve been discussing long beholding periods. I mean, I think I said this last week, but my number one fear is that the technology lifecycle to obsolescence is now shorter than the holding period of privately held software companies.
Which means every company, at least one time before it gets to go public, will have an existential reinvented itself, second product crisis.
[00:35:44] Jason Lemkin: It’s a huge issue. Yeah. All of them today, they’re all too old. All of them today. All these ones that scale are too old, aren’t they?
[00:35:51] Rory O’Driscoll: Are you talking about VCs?
[00:35:52] Jason Lemkin: I thought you were talking about the portfolio companies, the poor. If it takes you 15 years to IPO, you’re so far architected before the AI age. No matter what you agent, you add on top of it. It’s you’re having an existential prices. Right.
[00:36:04] Rory O’Driscoll: The quick snide win, the argument response back would be SpaceX, but I would be intellectually honest enough to admit that would be a snide answer.
Right? Yeah. For things like hot, this is one of the reasons, the brilliance of those kind of companies for really hard technical problems, you got probably get a 20 or 30 year run, but you’re exactly right Jason, for kind of core first generation, what we refer to as plain vanilla SaaS, it’s highly likely that, you know, 10, 15 years in, if you haven’t exited, you have some degree of technical obsolescence.
Now, it’s not fatal, but there’s often a reinvention act required, which actually circles back to the founder comment, the ability to take that company and, and drive it to a new architecture like. Yeah, Zuckerberg did with mobile or add a second product is in my view, what will separate the companies who kind of peter off at a hundred million, at 20% going to 15, going to 10, versus the companies that you know, have a year or two bumping at 20, get another product out the door, re-accelerate to 40 and make it, I mean, I have some both in my portfolio, honestly, I have one in particular.
I’m thinking that latter credit. I’m just so impressed with the CEO. We hit a 20% year, year and a half. We did some acquisitions. We really cranked an engineering. We didn’t cut engineering in the downturn. We doubled and you know, now it’s back up to 40% plus, but it’s going to be existentially tough. And it gets back to, you know, to you guys that’s going to take winner, winner CEOs wherever they come from.
Founder are hired.
[00:37:32] Fabrice Grinda: By the way, I think that’s true in B2B SaaS. I don’t think that’s necessarily true in other categories, right? Like if I look at what my bread and butter, which has been marketplaces with B2B and consumer facing. The AI disruption is actually benefiting startup incumbents because they have the data moats.
And so it doesn’t benefit eBay, you know, because they’re slow and big. But it benefits, you know, in a common startup that that has already liquidity, that is the most efficient to operate, that is at scale. And then now they’re adding an AI layer and they have all the data to make the better decisions and prove the funnels, et cetera.
And so I don’t think in these cases they’re not at risk of disruption actually. They’re, they’re just at very, they just improve.
[00:38:11] Rory O’Driscoll: I totally agree with that and that that’s perfect once again, that a diversified portfolio has that advantage. No, you’re exactly right.
[00:38:17] Harry Stebbings: Sorry. Are eBay not advantaged because of their touch points to end consumers and the sheer distribution, the remaining brand that they have?
I would just argue that they just have shit internal policies, slow decision making and poor teams compared to startups.
[00:38:32] Fabrice Grinda: No I don’t think that’s the issue. I think the issue is actually simpler. It’s the horizontal and multi-category. And even though they have all the information, like their tech stack is not built such that you’re a best in class in every single vertical, right?
Like, so the, the collectibles that the treat, the PokΓ©mon marketplace is gonna do better than eBay. And that’s true of every single category you can think of. And so we’re in a handbag marketplace called Rebag and that they have this AI where you take a photo and it tells you the model, whether it’s fake or not, the quality, the price, everything’s done.
Even though eBay has the data, their tech stack is not that flexible that they could do best in class transactions in every vertical. So it may just be a vertical horizontal play where the verticals just do better. But eBay will buy a lot of these. So it’s more tech stack, I think. And, and the new team is amazing for what it’s worth.
They’re going back to the basics. They’re going back to, collectibles, use the natural, be an Amazon clone.
[00:39:26] Rory O’Driscoll: That’s a super interesting and nuanced point. By the way, Fabrice, it’s equivalent to what you’re hearing in kinda enterprise software, which is with AI. The deep verticals will do better than each, than a broadly horizontal, which, because what you don’t need is just a horizontal transaction management platform. You need to full solve the problem, and it’s incredibly hard to solve the problem in insurance and solve the problem in retail and solve the problem for manufacturing.
[00:39:55] Fabrice Grinda: Here’s the interesting, the interesting point is I think that’s true in at the application level, but at the fundamental LLM level, I think the horizontal, you know, GPT may just win most categories the same way that Google won search, reasonably writ large except maybe kayak for travel.
I suspect I, I think OpenAI and Judge JPD win most of the LLM type categories. Like, you know, I used to use Midjourney, but like Dally is so good and it’s part of my subscription. Like I just don’t use Midjourney anymore. And that’s true for many things. Now, you know, it does it end up being true in every category, like Cursor or Lovable?
Not so sure. These are maybe still verticals that work. But the application area, I think the hyper vertical where you solve the problem menu end wins over the horizon at all.
[00:40:41] Harry Stebbings: I think all of us are idiots, by the way. I spoke to a friend of mine who is doing a quarter of a billion dollar SPV into OpenAI at 300 billion, and you are looking at that going.
Christ there is a non-zero chance you’re gonna three to four x that SPV on a quarter of a billion with a 20% carry. It’s not a bad deal. I do. It’s not a bad deal. Not a bad deal.
[00:41:06] Jason Lemkin: Especially cause it’s an SPV. You don’t have to going to Rory’s prior point. You don’t have to talk about it if it doesn’t work out.
There’s no downside to the, to the, to the perfectly constructed SBV. There’s, especially if there’s no GP commit, it’s and you just don’t, you just don’t talk about it.
[00:41:21] Harry Stebbings: A quarter of billion’s quite hard to hide. I think. I do want to also, you know, we mentioned like incumbents reinvention.
[00:41:26] Jason Lemkin: Which you want in your, in your LP report.
True. Your core LPs just get the main funds and only the SPV guys get a separate, a separate distribution that I do over on Carta, and I got some of the email addresses wrong, and I don’t, I
[00:41:40] Rory O’Driscoll: don’t know how to break it to you, Jason. When you get a little bigger, you’ll hire a GC and this would be the moment in the podcast where your GC has a heart attack, but it’s okay for now.
So keep, keep it clean. Keep it tight. Jason,
[00:41:51] Jason Lemkin: Why do the lPs that aren’t in the SPV need to know the data and performance of the SPV? They don’t Do they? Okay.
[00:41:57] Harry Stebbings: Rory, just get your inhaler. Okay. It’s okay. Breathe. That’s okay. The GCs behind you, just breathe.
[00:42:02] Jason Lemkin: I’m the most transparent person. You’ll see.
I just, I see a lot. I forget about the big G. I see a lot of stuff swept under the rug. A lot of investment space. To your point, I see it advantage, right?
[00:42:12] Rory O’Driscoll: Some people wear their heart under their sleeve. Jason wears his cynicism on his sleeve. That’s why I like it.
[00:42:19] Harry Stebbings: Oh dear. I totally agree with that.
But we mentioned the reinvention of like incumbents there. ServiceNow popping 24%, growing 20%, well, almost 20% at 12 billion in ARR. I just want to hear like what do we make of that? Bill McDermott coming out with another master stroke. How did we evaluate this?
[00:42:40] Jason Lemkin: First of all, at a meta level world, all trying to wonder, and everyone in enterprise exaggerates how much AI has had an influence in their business, right?
I mean, mark Benioff’s great, but he said they’ve had 500,000 transactions on Agent Force. We’ve had over a hundred thousand on SaaStr AI. It sounds great at first blush, but if you think through it, it’s early and he’s acknowledges that it’s not a criticism. He acknowledges it’s early, right?
So I think. All the talk about ServiceNow, of all these agentic automations, I still think it’s early, right? So on the other hand, we’re all kind of wondering, listen, do these guys all win the most, right? You can put a really, really good AI on top of almost any system of record.
Really good. You can make Zendesk better. And so ServiceNow up 24% Palantir, even though you know it’s, it’s kooky up. SAP up 14, I mean SAP, you know that was founded in the 1800, I think. Rory, it’s up 14% growth at 32 billion in revenue, right? That’s the meta question is will they really benefit from AI?
Right? The data doesn’t totally support it. What I actually think, but Harry, you hinted at it with Squarespace and Wix. I think AI helps the enterprises on balance and hurts the S&P players on balance. The S&P players they have a lot of data, but it’s not as deep. You can disrupt them faster. The sales cycles are quicker. I don’t know this, we’ll see this in 12 or 24 months, but we might, we might see the enterprise overall get stronger with AI and the S&P leaders get weaker and weaker because they’re disrupted faster.
[00:44:01] Rory O’Driscoll: Rory? I went and looked at the actual numbers on ServiceNow and it clearly it beat expectations, but plus or minus, it’s been a 20% grower, little over 20% grower for, you know, five or six years.
It’s just a really well run market dominant company. So I don’t have an insight on the actual the minor question of the jump. Based on Q1 versus actuals. I don’t know what they were thinking or what they were worried about and why it popped 24% on what was pretty much the prior logical estimate for revenue growth.
Right. But zooming out to the Jason point there’s two big questions. One is, you know, what happens to these two or three ultra large SaaS companies, does AI help or hurt? And you know, my mental model has always been that, at any point in time there’s actually three different players.
There’s the pre, the pre AI behemoth is the ServiceNow there’s the AI teenager, which is typically accompanied pre-LLMs, that had been building something in AI from about 2018 on. And then there was the post LLM, you know, YC Next Generation Company. And in all these spaces, that’s roughly true.
You can name the ServiceNow, you can name the mid-tier players, you can name a bunch of new ones. And we just think about ServiceNow is they, you know, made a shrewd move. They bought one of the teenagers, they bought Moveworks just now, and they said, you know, hey, we had an AI story before we bought a small company.
Clearly gave ’em some traction, but clearly not enough. And they decided, you know, let’s take 3 billion, what’s that 1% of your market cap? And by ServiceNow, sorry, by Move works and get really relevant in AI. So I thought it was kind of a shrewd move. I think the market’s saying, I don’t think there’s anything more profound in it than saying this is a company that looks like it’s going to be a winner in the post AI world.
That still has scale, that still has profits probably worth something.
[00:45:52] Jason Lemkin: You know, the one where I’d be curious what you thought that I think about in the middle, right? The SMB Enterprises box. Yeah. You, you were an early investor in Box what scale was, right? Yep. And like Aaron’s all over ai, right? And I’ve been in the document management space, there’s fewer spaces that you could disrupt more with good AI than documents, because all our goals since the early days of documents was how do we take this un, these unstructured documents? Sure we can OCR it, we can extract a little, but you couldn’t do much with these documents. Right. And this is why Aaron’s in love with AI. Right. The question is, will it be enough for Box?
I’m just watching this a student, right? But I think it’s in the middle. Like we don’t know will this re-accelerate Box because Box is a more valuable app or not. But there’s no question we have a CO that’s all over it. Right? An S tier CEO that’s all over how to make AI, how to make a 2005 company with AI better.
Right. I’m watching as a case study.
[00:46:41] Rory O’Driscoll: Yeah. My comment would be. First, not only do I like Aaron personally a whole ton, but more importantly, he’s one of the CEOs I most respect. And going back to the comment earlier on, gritty and hard and sticking with it, that’s a team that’s been there now probably for 20 plus years, doing the same job, never blinking when it got tough, never blinking when the activists showed up.
So there’s no one I wanna win more. Right. back to the thing, if what it takes to make it as kind of that teenager plus company, if Moveworks as a teenager, Box is clearly a young adult, right? And if what it takes to add AI at that stage is great focus from the CEO and the team and just driving change, I think Aaron will deliver it, right?
Yep. Sure. So I’m a big fan. I’m still a stockholder. Glad to be a stockholder. And you know, another day could riff long and hard about the negative parts of being public. I learned a lot from Aaron and what, and I’ve changed my thinking on how best to ensure. Founder CEOs can be successful in the in the public ways.
He’s done an amazing job.
[00:47:43] Harry Stebbings: I’m sorry, I’m naive guys. You’re right. Aaron’s all over AI and you are right. And you’re right Jason, the document management space is the most perfect space for it. Why is that not reflected in the excitement around their market cap? The market cap has always been bluntly pretty depressing.
As a multiple, sorry, Rory, and you can just recuse yourself.
[00:48:00] Jason Lemkin: Well, I think Rory would know more. I just think it’s a question of what will, like AI, it may not lead to breakout growth for some of these players, right? It’s like has ServiceNow, bill says it has for ServiceNow. I’m a little s skeptic. I think it’s just think it’s early, right?
If it was as simple as having an incredible AI on top of all the data you need, Box should win, Box should reaccelerate to 20 or 30%. I’m talking about a big public company like a VC. It should reaccelerate. It has all the AI and it has the data. Box has trillions of documents, that you can’t even find. Now, I can talk to my documents, right? It should, if we’re, if we’re shooting from the hip as investors, it should re-accelerate. But if it doesn’t, then I’m trying to learn how AI will change it, right? Because box is going to be in 12 months, an order of magnitude better application than it was 24 months ago.
In 12 months it will be an order, not a little bit better, it will be an order. And will that ref be reflected in growth? That’s the meta question, right?
[00:48:56] Harry Stebbings: Does that actually come out in value extraction? Sorry to interrupt you Rory, but can be as a better product, but actually they’ve just got margin degradation because they actually are paying more without charging more for a price.
[00:49:07] Rory O’Driscoll: I think in the end, if you deliver value, you’ll get value. And you know, contrary to Scott Fitzgerald, I do believe there are second acts in American life, and I do believe that, you know, I genuinely do believe that AI could provide a strong boost to the Box value proposition, which needed it because the reason, you give me grief on the stock price, but it’s a compelling achievement to done to have done what they’ve done. But the reason the stock price is always hard is we’re competing against Microsoft and Google who give it away for free. You know, the fact that they’ve built this profitable, widely cash positive business competing against the two largest companies on the planet who give the damn thing away for free, just hats off to them smarty pants, right?
But now the question is can they reaccelerate? And I think the interesting thing, there are examples in the past, like for example, Adobe way back in the late 90s, one of my partners used to work there and she said they were stuck at a billion in revenue for like three or four years. And then they got the unlock and theyβre accelerated.
I mean, I can’t tell you what’s gonna happen. I’m not on the board, but that’s obviously. You know, just as Bill McDermott is looking to grab onto AI, I think Aaron is wisely grabbing onto AI. And you know, I’d prefer to be playing that hand than the guy doing a billion, billion and a half in revenue saying AI won’t impact my business cause he’ll be gone in X months.
[00:50:21] Harry Stebbings: Rory, you said if you create value, you’ll be able to extract value. I’m worried because you see people like Windsurf and Cursor who are creating the most insane amount of value now doing like a billion lines of code a day charging now Windsurf price slash I dunno what the prices are, but they were like $30 before.
I think now they’re 15 or $20. Are we moving into a world where there is this dislocation between value creation and value extraction?
[00:50:47] Rory O’Driscoll: My guess is probably not, first of all, given the background noise, I don’t think we need to worry about Windsurf’s ability to quote unquote extract value. They appear to have found a higher source of value to extract them capital market side.
So I think they’ll be doing fine if they get 3 billion bucks. But I think on pricing, I thought it was a clever move. I think that you’re going to see this, I mean, yes, they lower the lower price down, but they have tiered pricing and you know, it kind of, it’s the conjoint question you were asking about value pricing, which is very hard to do for a product like this. But having tiers of pricing where you get lots of people using the base product and then escalating steps of value as you deliver more value, probably is the simplified version of quote unquote value pricing in much the same way as OpenAI has zero, 20, 202,000.
Right. And, you know, they’re gonna keep giving stuff away in the lower tiers, get you hooked and upsell. So I don’t think it’s a charitable act or an act of madness. I think it’s probably a pretty shrewd pricing strategy.
[00:51:49] Jason Lemkin: I think what they’re doing is vaguely similar to what HubSpot has done, which is they’re going more and more low end.
Like HubSpot, two years ago didn’t even have this essentials edition, which is like 45% of the new customers and more enterprise. So if you look at Windsurf to get going, it’s simpler and cheaper than it was, right? But the average enterprise customer pays like 60 or $80 per seat, and they have 200, 300 people in their enterprise go to MAR market motion, right?
So they’ve got a barbell where everyone can get on this platform. They’re have incredible marketing from it, right? I mean, in three months everyone says this is better than cursor. We can all have our own opinions, incredible marketing benefits, even from HubSpot, from this long tail. And then they’ve got 200, 300, 400 sellers selling six and seven figure deals.
That’s six due to a hundred bucks a month per seat. That’s a quietly better model than it looks, right, and it probably can scale and absorb some significant costs from OpenAI and Anthropic, at that level it probably can.
[00:52:43] Fabrice Grinda: I worry that these things are gonna be more competing and competitive than people think, right?
Why isn’t GitHub, you know, competing with Cursor, right?
[00:52:51] Jason Lemkin: What they are? It’s Copilot versus Cursor and Windsurf is number frigging one on their on their gotta kill list for Microsoft, number one.
It is existential for that, for GitHub to destroy them.
[00:53:02] Fabrice Grinda: It’s the reason I’ve been avoiding these AI deals that too many, it’s kind of like 21 where in every category you were going after, there was like eight great teams well-funded.
And the very fact that there were, that many actually killed the economics of the category. Until eventually a winner emerges. But the problem is if you invested at very high valuation in a company, in a category where there were eight people going after it and overspending a customer acquisition or are offering too low prices, it ultimately didn’t lead, to great outcomes for investors.
And I worry the same thing is going to happen here. And so while I do think eventually, a winner or two emerge and they’ll have the proper pricing fire, and I do think in the long run you’re able to extract value when you create value. There may be a, a lot of investor value destruction in the way up because people are competing on customer acquisition, on price, like if this ends up with winner it takes most, you’re willing to do whatever it takes to win.
And as a result you’re willing to give up a lot of value on the way there, and it’s gonna take a lot of capital. And that, that’s what worries me about these models writ large. And that’s why I’ve been staying on the sidelines, especially considering the valuations they’ve been investing, theyβve been raising out.
I’d rather pay up when one of them seems to be the dominant winner. And I suspect that then price and traction will be more aligned.
[00:54:20] Harry Stebbings: I think I’ve said this before, but one of my friends led around in one of the model companies at 4 billion and now it’s at 60 billion. Yeah. And their multiple is a 3.1 x.
Yeah. And it’s because they’re shedding 9% a year in employee stock com, and they’ve raised billions and billions and billions. Is, is not really a venture fundable asset in that respect, I don’t think. It’s not the best. Well That’s a bad sigh, Rory. Don’t hit me. Come on.
[00:54:47] Rory O’Driscoll: No, I hear you. It might be the best venture return, but I just think on these broad trends not showing up. Yeah. Just walking away from the trend entirely is just too hard. I mean, I think there’s still up pre-X think they have upside from there, so I think in retrospect they’re probably still glad they did it.
They might be nervous about the burn. I think, you know, we we’re, we’re, we’re probably saying some version of the same thing. The best of all worlds would be a wonderful tech trend and low capital availability, which means only two companies get funded. They slug it out and they both make money that, welcome to 2010 or even 1994.
cause I was in the business. It was awesome.
[00:55:23] Fabrice Grinda: Yeah.
[00:55:24] Rory O’Driscoll: I’d still prefer a really strong tech trend and five or six competitors to no strong tech trend because the great thing, Going back, I do love where we are from a tech perspective right now. This is some of the most amazing technology we’ve seen in 20 or 30 years.
We get so used to it. You sent me your questions, Harry. I just loaded ’em off the ChatGPT and oh my God, I’m an expert on everything on the podcast 10 minutes later. It’s just a wonderful world here, right? So there’s a huge amount of value happening. Right.
It’s incredibly tricky given the figuring out how to play with just the capital. The capital is definitely massively eroding the returns. You find yourself as an investor trying to find a way to play the trends. We’re known at this every day.
It’s so hard, do you go a little earlier and try and catch it just before when you know, the bad news is you don’t know who the winner is and there’s eight. Do you pay up for the winner at 5 or 600 when there’s only a million? Is that enough traction? You know, it’s damn hard.
Last sentence is this. I’m not saying it’s the only game in town per Fabrice, but it is the biggest game in town. And pushing away the table entirely is a bit much
[00:56:29] Harry Stebbings: Roro. If I was on your team I would be saying to you, play the trends, dude. We’re pre-seed, seed and A, our game is backing generational, defining founders.
We don’t play trends. We just try and find the best founders in this business. How would you respond to me if that was what I said to you?
[00:56:49] Rory O’Driscoll: I’d say to you at the pre-seed and scene, that’s probably true. And by the way, I liked your tweet just to turn it right back on you. All you have is three things. You said this.
I’ll give you the three things you have per your tweet and I’ll contrast it to where we are slightly different. You said there’s only three things I’ve got awesome fricking founders, roughly directionally correct market and economics that make sense and you’re exactly right, Those are the three things.
But you did add, the second one is there, right? You do need to have some semblance of directionally correct market. You know, we’re probably paying around and a half by the time you get to an in revenue A, which is where we play early revenue with product market fit, you have to have product market fit.
That’s why we use the word, right. And the thing is, if you pay up for a company that has product market fit, and then you lose it and have to reacquire it, by definition you’ve overpaid. So by the time we invest, I wanna at least say, I believe that this is the right solution. It has some element of product market fit.
We’re not gonna, you know, tear it up and start again on something else. That happens and as we discussed last week, it happens more in AI than anything else. But I can’t afford the luxury of just saying, these are meat eating founders and they’re going to figure it out. who the hell cares what they do?
Right? I wanna at least know they’ve locked into something that can hunt, right? So that’s, and then the economics, like you have to make sense.
[00:58:12] Harry Stebbings: But I don’t think you can find that. Number two with number three today. Really a tool because I see these deals every day in SF Rory, and they’re 400 k in ARR.
That’s not product market. Okay. You caught me.
[00:58:24] Rory O’Driscoll: That’s the big problem, dude. Okay. You nailed it. Exactly. That is absolutely the issue we’re wrestling with is by the time you have our first criteria of product market fit and a good founder, the third criteria value. No. That is why venture capital is hard.
Abs. No, you’re exactly right. Is the solution to try and do what you do and go proceed? I don’t know. Right. We’re wrestling with that.
[00:58:46] Harry Stebbings: I think you have to. I think you also have to, given the fact that pre-seed funds are now $400 million like mine, I can do the seed and the A and so, I mean, good luck trying to take my best pre-seed cause I’m gonna cling onto it as hard as I can.
Like being blunt. And I, I think that’s why you’ll see Neil Mater lead the greet, lead the seed for Windsurf. Because there’s a realization that there’s no fricking way you can get in unless you are there.
[00:59:14] Jason Lemkin: But even there, that one, I mean this is, it’s a good question when, you know windsurf it, both windsurf and cursor, any sphere were radically different companies.
When they were seed funded, they were not even the same company. Okay. They were nothing. And then when I don’t, I think I have the chronology jet. When Green Oaks doubled down on Windsurf, it was βCodeium, which essentially the company abandoned three months ago. Every engineer was repurposed to build a better version of Cursor called Windsurf.
And so this is like betting in an S tier founder, which Varun is, but those bets don’t work out a lot. I don’t think those bets work out most of the time. The S tier founders, that are not, and the classic B2B investor is at 40 KMRR to your point. And is attached to a trend, like the world is changing the world.
It’s AI, it’s web RTC, it’s mobile. And they’ve attached to an early trend that even you couldn’t see like in the old days, right? There is early product market fit at 400 KARR, right? It’s just we used to be able to invest in those companies that in the teens, right? Not in the hundreds.
[01:00:15] Harry Stebbings: I’m sorry. In SF is their really early product market fit. You’re a YC company, you’ve got all your YC mates around you, you’ve left a firm or you’ve left square or you’ve left whatever, and you say, Hey, come on, sign up for a 20K contract. You get 20-20K contracts. That’s not early product market fit. It’s having good friends with some budget.
[01:00:31] Rory O’Driscoll: Agreed.
[01:00:31] Jason Lemkin: I think 10 folks that weren’t in your batch might be though.
[01:00:34] Rory O’Driscoll: Totally. And more importantly, I mean, Harry, what you be turns out it’s hard to make money. Right. Tough shit, you know? Right. Yes. We are paid to figure out which product market fit is bullshit and which product market fit is not. I remember back when the round that we now do, which is, they used to be the, I remember venture wisdom when the A used to be C was.
Yeah. The problem with series B is if you get it wrong, you end up effectively paying Series B prices for series A risk. And it’s exactly correct. Now at the A right, you’re paying series A prices for seed risk. But the whole point of being, having to be good at this job is being able to figure out which is which.
There’s an element of the job that is picking and turns out that’s what they’re paying the commas and the salary for. Right. And you gotta get it right. And if you don’t, you are gonna lose money. cause you’re in a more forgiving capital environment, your margin for error would be much higher. And that’s the really hard thing about today.
If you get it even slightly, you know, you don’t have enough room in the price to bury a lot of errors, so you gotta get your picking much better and your win rate much better. So, yeah, it’s, it’s harder to make money when there’s 20 VC competitors than those three. Yeah. What are you gonna do?
[01:01:44] Harry Stebbings: I love it. Fabrice. I basically get a schooling every week from Rory. Last week I was a hypocrite, so this week is a definite improvement on that. I wanna part, I thought hypocrite was wrong. I just should have said you’re just incorrect. No, Rory. I have a thoroughly inflated ego and so it doesn’t really harm me.
You also mentioned something in 1994. I was born in 96 and so I, I wouldn’t have actually remembered that. But thank you.
[01:02:07] Jason Lemkin: Yeah, maybe if you read anything that wasn’t on social media, you might,
[01:02:11] Rory O’Driscoll: That generation doesn’t read. We know that.
Books are dead. Yeah.
[01:02:16] Harry Stebbings: Was it a, a tweet? It is not a tweet.
I’m out. Fuck that.
[01:02:19] Jason Lemkin: It wasn’t a real.
[01:02:21] Harry Stebbings: Guys, I want to just run through a couple of fundraising elements that I just have to hear your thoughts on and then we’ll wrap. Manus raised 75 million for X loss valuation led by Benchmark. It’s a Chinese company. I love the Benchmark guys and like their friends.
So this is no shade, but should we be funding Chinese AI companies?
The first one I thought when I saw it was Rory’s point before was we’re all taking more risk. So there’s a political element here, right? Which I’ll briefly and other folks can talk about, but when I saw that Rory just, just rung in my ear, it’s like, would benchmark, would anyone ordinarily want today, in today’s world, wanna do a China-based AI company?
No, but it’s disrupted ai, at least for now. So you, you’re taking more risk. You’re taking more risk. You won’t get liquidity, you’re taking more risk. The government will take away your shares. You’re taking more risk. You can’t re repatriate any earnings. I don’t even know all the risks, but so many folks have walked back from China, right?
That they walked in. I just thought it’s taking more risks to get the massive outcome right. The second thing I thought when I saw this wasn’t really Benchmark, I just think in general, nobody cares. Nobody cares if you’re selling weapons. No one care, like people love defense tech. That’s off killing people.
Now, we could argue either side of it, but I haven’t talked to a VC that thinks there’s anything wrong with that. I’m sure there are. Everyone’s like, I’m Mr. American Dynamism. And maybe that’s okay. But I, I forgot about, I, I just think it was just a couple months ago we were talking about that AI might kill us all and that we needed safety and control.
And I haven’t heard a, a peep outta that since Anthropic was formed. No one cares. Right. So, but there’s risk that Rory rang in my ear on risk.
[01:03:57] Rory O’Driscoll: Yeah, and so much to unpack in what you said and then what Jason said, and silence on some parts does not indicate consent. So let’s now go back to it and say for on the decision, I think you led with the should.
I mean, I wanna avoid kind of the, should they, shouldn’t they, you know, playing geopolitical guru? cause I’m not. My comment was as a fund investor, the way I think of this is. On an individual deal level, quite a lot of risk, but they’re probably massively getting paid for the risk and it’s an idiosyncratic risk.
So probably from a pure portfolio management perspective, adding 1 of 20 deals that has this very weird risk where you’re probably getting a lower price but have some exogenous political risk, you could say from a pure finance perspective, might be a good idea. I wouldn’t do it. cause there’s two other criteria.
The second criteria is, are you taking individual deal risk or are you taking firm risk; where the blowback from doing the deal slops over, not just from the individual 1 out of 20 deals into some impact on the firm. I can’t assess it and need to be clear. I’m not yet making a moral distinction, but I’m just saying, Hmm.
With so many people leading and so much congressional pressure around that, I wouldn’t have had the courage to maybe bet the firm, or at the very least bet that I’m gonna spend some portion of 2026 in front of Congress explaining this in a way that we saw very intelligent investors, Sequoia, people like that get out of billions of dollars of value cause they just wouldn’t want to be there.
Having got out something like that, I wouldn’t wanna go back. So I think institutionally, as a firm, I probably wouldn’t have done it. I’m not, the last one is the, yeah, some vague moral, like trying to articulate the moral stuff. And I’m deliberately punting on that, which is not to say I agree, how to put this.
[01:05:52] Harry Stebbings: Rory, your wife just said you couldn’t say anything in that regard.
[01:05:54] Rory O’Driscoll: So yeah. Yeah, that was one. I’ll get a list of banned topics, but and that’s one of them, but I think there’s very different risks from doing a US based defense contractor like Andel versus getting involved geopolitically with China.
Right. Not commenting on the specific of the company. I probably would be happy to skip that risk. Let’s just put it that way. I don’t have a developed opinion on the whole OpenAI, closed AI, βOpenAI, Open source AI. I don’t know enough about geopolitics in China to bloviate on it. And that product is available elsewhere from VCs.
So I don’t need to fill that market gap, but I just go, Hmm, that would be a tough one for me.
[01:06:36] Fabrice Grinda: Look, I used to invest a lot in China and Russia back in the two thousands and 2000.
[01:06:40] Rory O’Driscoll: Wow.
[01:06:40] Fabrice Grinda: And early 2010s. And, you know, I was an early investor in Alibaba, right? And financial, et cetera.
The thing is, to me, there was a path possible where both of these countries would actually be US allies, right? Like Deng Xiaoping. Really saw the two countries and βDeng Xiaoping is probably one of the greatest, you know, statesmen of the, of frankly ever and got a billion people out of out of poverty.
And the path he was, he was going on was pretty profoundly different from the one Xi Jinping is on. And so Xi Jinping having this nationalistic, you know, can conflictual great power issues. Once Jack Ma was disappeared I pulled out of China completely and my remaining Olding is, and financial, which should have been a massive home run.
And that Xi Jinping just personally decided, you know what? I don’t like what Jack said to the regulators. I’m shutting down the IPO. And I did the same thing in Russia. Russia was an amazing market for us. And then in 2014, Putin decided to invade Crimea. And when that happened, all several of our unicorns were funded by like Tiger Ambassador, et cetera, were the, all the capital pulled out.
The only people to fund them were like local, well connected oligarchs that were like, okay, I’m out. And so would I take that geopolitical risk today? No, absolutely not. Do I think actually backing people that are contrary to interest is a good idea? Absolutely not from a just moral perspective.
Now, do I think that at some point this may change and they may become, again, more aligned and we can get away from this, you know, great power war, great game type world that we’re back in currently? Yes. I hope that that’s true, and I’m actually hoping that in the long run, as China becomes wealthier the masses will not want taxation with that representation and turns into democracy.
But the problem with dictatorships is as people can see dictators a very long time, even if they don’t do right by their people, you know, look at the Castros or what’s going on in Venezuela. So for now, I would completely avoid these geographies. I frankly I even moved away from Turkey which remains a democracy and a US ally.
But that GaN is like, to me, going against all the principles of AtatΓΌrk’s, and the positive revolution that happened there. And so I stick to my personal moral principles. And by the way, speaking of defense tech and I know we need to wrap this up. I’m investing a lot actually in Ukrainian defense startups because I think my vision is that Ukraine could become the manufacturing hub for defense.
I’m an investor Anduril. The problem is their cost is extraordinarily high. And so the way you measure this is cost per kill and they’re not battle tested. You want to minimize cost per kill, basically. And so these startups in Ukraine that are using super low, yes, I know that sounds horrible.
[01:09:36] Jason Lemkin: I wanna see a few investor decks with CPK cost per kill. I wanna see it declining over time, and I wanna make sure it crosses over by the series C that your cost per kill declines.
[01:09:45] Fabrice Grinda: Look, if you’re backing defense tech, this is at the end it’s RI. Right. No, I get it. It’s , it’s a learning People make you be efficient and if you are a country with lost resources, you need to be more efficient.
And what Ukraine is doing is building an extraordinary stack that if we are ever in a great power war of China or Russia, we’re going need access to it because their costs are too high. Right now, we don’t have the manufacturing capacity. We would lose a war with China right now. And, and I think the only way out of that is like backing things where you can build scalable, cheap man mass manufacturing.
The reason we won World War II is we out- manufactured the axis and that was the US Today, we don’t manufacture
[01:10:24] Jason Lemkin: CAC, CLTV and CPK are the metrics. I really run the fund based on. Sometimes a high CPK can be disguised in a low CLTV and that’s the problem with the lower margin American dynamism of investment is your CLTV can seem high, but your CPK is high as well.
You’ve gotta get the cross. What is, what is the magic number here for the ratio of CLTV to CPK?
[01:10:51] Rory O’Driscoll: Five to one. Five to one.
[01:10:53] Jason Lemkin: Five to one. Is that how it works? Yeah. Yeah. Look, maybe Davids can help us, us, with the ratio, like a burn ratio. We can do the ratio.
[01:10:59] Fabrice Grinda: Look, it sounds awful, but I think that does, this is existential, like it’s existential for Ukraine. I think it’s existential for the West. I think we need to be in a capacity to be strong enough to defend ourselves. Otherwise we’re gonna be bullied and otherwise we’re gonna lose. I think our perceived weakness is more likely to lead a war and invent like invasion of Taiwan or whatever than if we are perceived to be strong.
And so it’s distasteful and look, I would much rather we all live in harmony to be clear. And I would rather we don’t have the leaders we have in both sides, but I think it’s, it’s existential and essential and we need to do this.
[01:11:34] Jason Lemkin: Can I just ask one question? I know we’re over, but to Fabrice, since you, I haven’t done any defense tech do all these new seed investors and folks that are excited about, do they have any idea what they’re doing?
Or are they just chasing trends? Do all these folks in dog patch investing in hot startups, do they know what the hell they’re talking about when they do, when they pop down to El Segundo for the day? Or are they just flushing their money down the drain?
[01:11:56] Fabrice Grinda: I think no, they’re doing what Rory said people should be doing, which is investing in mega trends and as defense tech and mega trend, absolutely. And they’re trying to latch on and what are, and, and by the way, they’re very good. Funds in this, like shields in the AI in the defense side, they’re amazing and they know exactly what they’re doing. Do most people that are latching onto this are lemmings? And look, I’m an investor Anduril, but I think most people are like, this is the emerging winner.
We need to pile up the truck here and invest. How thoughtful are they and have they really looked at the cost per kill, et cetera? I think the answer is no. But probably they still do.
[01:12:29] Rory O’Driscoll: But to be clear, they’re probably just as thoughtful as the dude who piled in 250 million on the SPV and opening.
Exactly. Don’t ever, don’t conflate overthink momentum investors may actually be impacted negatively by overthinking. I think it’s actually one of my faults is that if you just wanna on the dominant winners and the mega trends, please stop thinking. cause that sentence is all you need.
Right. And on the last just comment on that. Listening to all this. Yeah. I remember 15 years ago, investors asking us why we don’t do China investing. And we didn’t then and we have never done and get, my perspective as an immigrant coming here is, you know, the US is 25% of the world’s GDP, 50% of the world’s software and enterprise technology market.
If I can’t make money on 50% with the rule of law, adding another 10% with no rules whatsoever isn’t gonna help me. I’m so glad I haven’t had to do that to make a buck and good luck to the Benchmark boys. It feels like a hard word to hold.
[01:13:29] Fabrice Grinda: Look, every founder, especially, I’m European, right?
I’m an immigrant as well. All my French founders are like, where should I build startups today? Does it matter? Like, no, come to the US, you have like 300 million rich people that are early adopters, that are very dying to buy your product. You’re playing the game of life on easy mode and or very easy.
I mean, yes, it’s harder to get visas, but whatever, like you, you can figure it out. Like there is no doubt. And by the way, what I tell my US founders when they’re like, Hey, should I go launch in Europe? I’m like, don’t go to Europe. Like if you’re at a hundred million revenues, it’s easier to go from a 100 to 200 in the US than zero to a hundred anywhere else.
And that’s true. At a billion there. It is true. Probably, maybe forever. Just buy European
[01:14:05] Rory O’Driscoll: Fabrice, you’ve just kicked off Harry. And the good news.
[01:14:08] Harry Stebbings: Heavy pushback. Classic glib statement from American and American in Turks & Caicos I add lovingly Fabrice. Lower salaries in Europe, higher retention. Fantastically like to have both. Okay. Easy access to cash. There’s a lot of money in Europe actually. And there’s I completely agree. And you can sell actively into the US from Europe. Pigment have showed that and scale to a really meaningful revenue size from Europe. You have to get on a plane more often, but it’s absolutely possible. You can leverage cheaper engineering teams, higher great sales teams in the US. Very possible.
[01:14:46] Jason Lemkin: When I started investing in European startups accidentally Pipedrive and Olian Talkdesk. It’s not a great insight. I’m always shocked how much cheaper engineering talent is in Europe.
In Paris, the best engineers it’s half the price and people stay past their cliff. Even at OpenAI, they leave at their cliff. And why that arbitrage doesn’t work even better is the odd question. Not it’s less understood that it exists, which is frigging true.
I’ll tell you just one thing, Harry, just on this, when I’ve asked a lot of the European founders that I still work with on this, right, and they’re all relentless, they’re like, we’re, they’re just not driven. Our European folks are just not driven enough. I don’t care about the cost. They’re just not driven like SF.
Everyone says this to me. The ones I’ve invested in, gorgeous, Nicholas from Algolia. When I saw him at YC demo day, Nicholas is like everyone in every French startups. They’ve gotta come now. He’s like, I didn’t think this three years ago, and maybe he’s talking the YC thing as a general partner, but everyone I’ve worked with, they’re like, we don’t care about cost or retention, it’s just the pace.
We cannot get our team in Nice or Barcelona to work at the pace of the US and we don’t care. That’s worth much more than anything.
[01:15:49] Harry Stebbings: Do you want me to lose a load of friends.
[01:15:50] Jason Lemkin: I know project Europe disagrees. I don’t have the database issue
[01:15:52] Harry Stebbings: I’m gonna lose, I’m gonna lose a load of friends in one sentence.
[01:15:54] Jason Lemkin: None of those are generational defining founders. Go to Revolut HQ. And Revolut is awesome. I’m just saying
[01:16:00] Harry Stebbings: No, you are right. And I agree, but the founder sets the cadence.
[01:16:03] Jason Lemkin: I think there, I think the ultra-outliers will be everywhere outside of Antarctica. You will have the rest.. But we, but when you have to hire hundreds of people, that’s where that’s where it gets hard. Right? I just think then you’re stuck with the average no matter what anybody says. There aren’t 500 S tier engineers that wanna work anywhere but Cursor. They’re just, they just don’t exist.
They’re gonna work at your boring B2B company. It’s just you’re lucky to have four S tier engineers at your concrete B2B company with an AI copilot. If you get four, you’re lucky if you have one person that would work at OpenAI that will join it’s a serious issue. We are lucky if you have one, but maybe if you’re an SF, you could get two
[01:16:42] Harry Stebbings: Rory you look frustrated. Are you okay Rory?
[01:16:45] Rory O’Driscoll: I dunno if I agree with you, Jason, on that gross generalization but I actually don’t think you have to. Because the real truth in enterprise software as a thing from consumer where Fabrice is playing in enterprise software, it doesn’t matter where the R&D is and it should be wherever you can get good βR&D , the spend is 50% in the us, 20% maximum Europe, you know, 30% rest of world.
And the US is the early adopter. So the thing that is true is for enterprise technology companies, your βR&D can be anywhere. Your go to market will have to be in the US and you can make that statement wonderfully without type casting the, the confidence or not of the entire 300 million people in Europe.
And as a European, I don’t wanna do that cause I do wanna be able to go home sometime, right? So I think we, we have loads of investments where they have European engineering staff, et cetera, and they’re awesome and great and, but I think in the end, the reason. The reason we mentally think about the American market is cause you know, Willie Sutton, that’s where the money is.
[01:17:44] Jason Lemkin: Yeah. But I just don’t think you can win today if you’re comfortable leaving work at five.
[01:17:47] Rory O’Driscoll: Now I’m gonna defend the Europeans. Now it’s working. You’re pissing me off. What? I don’t think, I think, I think there’s a visible difference between the Europe of the people who get it, and the Europe of the people who don’t.
And let’s be clear, out of the 300 million people, not all of them or even most of them, get it right, but when you run into the people who do, you’re like, yeah, you’re with the program. And you’re right. Look, if you’re going to do, because it’s not anywhere close to most, the generalization that you’re making is correct, Jason, but that’s looking at the whole working population.
There are groups there are teams, there are critical mass areas where people do get it and they’re cranking, you know, all La American. I mean, look, Dublin is a great place for American tech companies and fundamentally it’s cause people are with the program and cranking.
[01:18:31] Jason Lemkin: I think it’s true in, I think, pre AI I agree with you. I’ve just changed my mind in the AI world. Just the value of a 10 x engineer is a hundred x now. It’s a hundred x. It’s a hundred x. Your companies are gonna go, wonder if they’re not dominating AI in their market and B2B, they’re all gonna die. They’re all gonna die. You’re not number one B2B
you’re gonna die. You’re die.
[01:18:51] Rory O’Driscoll: Harry can hide. Lemme tell you why Harry’s hiding here. Lemme give you the bad news for what happens. And I’m, what happens in this program every time is we crank up stuff and then by the end, Jason escalates and that’s okay. But the problem is this. The social marketing team from Harry’s team then picks up the most inflammatory quote that Jason made, puts it out on the internet, your face and my face.
So tomorrow morning we’re gonna see a thing that says, you know, no Europeans worth a damn. It’s gonna be your picture of my picture, and will never go home again.
[01:19:23] Jason Lemkin: No, no. I think there’s plenty of Revolut. I just don’t think going home at four 30 to have red wine in baguettes, I think you’re gonna lose today.
You’re just gonna lose. I agree with, and I can tell you from all the French, with founders I know, they all think it’s like, not them themselves, but their teams think it’s, I literally talked this week. If you, I know we’re going over to someone that for an SVP of engineering role that’s incredibly respected in Europe, okay.
Doing the cycle on all the portfolio companies, B2B, it’s like, well, I just got off for a month off. In Europe for my vacation. And I wanna spend some time really thinking about AI. He said, I really wanna spend some time thinking about AI. Right? And so I took the chat and I put it in the SaaStr AI and I said, should we hire this guy?
And the AI said, whatever you do pass on this guy. This was something that, that is, you know, these candidates that get passed around all the VCs, cause they’re a hot candidate. This was a hot candidate that like the month off the baguette and, and is gonna dilly dally into AI. And you’re gonna get destroyed by the kids in SF. You’re gonna get destroyed
[01:20:20] Fabrice Grinda: Right now, if you’re a 10 x engineer with AI, you’re become a hundred x engineer.
[01:20:24] Jason Lemkin: It’s true.
[01:20:24] Fabrice Grinda: The question I have in the long run, could AI actually have the opposite impact where the regular engineers become Yeah, they become themselves. Maybe they’re not a hundred x where they become, you know, 70 x and that’s good enough. Like, I don’t know.
[01:20:38] Jason Lemkin: But it’s already a regular engineer today is already went from one X to two x. Like there’s no debate. Okay? There’s no debate. But the 10 x become a hundred.
[01:20:47] Fabrice Grinda: No, but that’s, that’s the question is in the long, long run. Yeah.
[01:20:50] Jason Lemkin: But the problem is if you have team that knows AI your whole team has already been two XD in the last five months, your whole team is at least 50% more productive.
Right. I mean, even, even Salesforce commits 20% of their code through AI. So if you’re good, you’re 50%. Okay. And, and literally it’s 50% across Windsurf, like 50% productivity. No matter what anybody says, there’s, there’s no 90 nines. Okay? It’s 50. But everyone has these tools. As Harry said, it’s 15 bucks a month, a hundred bucks a month, everyone’s twice as productive, right? It’s an arms race.
[01:21:17] Fabrice Grinda: Yeah, yeah. But when in the long, long run, when AI becomes so much better, do you think that the gap will shrink between the very best engineers and the average engineer? And because if that happens, that changes the game. If it doesn’t, you know that then it’s not, it’s a question.
[01:21:32] Jason Lemkin: I’m still learning, but I’m gonna make the not stating that bet that for all of history, 10 x engineers have become better and better. They’ve become better and better. And that’s what we’re seeing in startups today. That’s why they can grow so quickly. That’s why Harry’s, this is, are small.
It’s not just that they’re small teams, they’re much better than they used to be. So I think we’re gonna see bigger and we’re gonna see 10 X engineers even better. And I think half of these sales teams will be gone in two years. Half of these sales and customer success teams will be gone in two years because they’re mediocre.
They’ll be gone. They’re all gonna be laid off. We’re not gonna need any mediocre at two call S & B reps we’re not gonna need any customer support folks, that don’t even show up to the QBR. They’re all gonna be gone with AI and the engineers are gonna be even better. And, but the arms race because cur the arms race between cursor and Windsurf is so huge.
And that arms race is gonna lead to bigger and bigger engineering teams that are better and better and better. And I know Windsurf is a hundred percent in the office. I think Cursor is too. They’re gonna be these, these. Aggressive in the office, six and a half day a week. Teams that don’t get baguettes and red wine at 4:30.
I still love Europe, don’t get me wrong. And I’m, I’m a fan of Project Europe. I’ll but I think we gotta find the revoluts because baguette culture I think is worrisome, but it’s crazy. The rate of changes crazy. And I do think all these B2B companies are just gonna die. If they can’t change fast,
[01:22:46] Harry Stebbings: they’re gonna die.
I cannot thank you enough for doing this. This has been so much fun. What deal? The highlight of my weed.
Now what about deal and rippling?
Shooting Real and dippling.
[01:22:55] Jason Lemkin: What about real and βReal and dappling this week.
[01:22:55] Harry Stebbings: Do you know what we we’re gonna pause before we lose more friends. You’ve pissed off a continent already, Jason, so you’re cool.
But guys, thank you so much. This has been amazing.
[01:23:06] Jason Lemkin: Thank you. Talk to you soon.
Nice talking Fabrice.
[01:23:09] Fabrice Grinda: Thanks for the time. Likewise. Bye.
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