Why the most expensive Seed deals are the cheapest | E2299

This Week In Startups is made possible by: NetSuite - Netsuite.com/TWiST Deel - Deel.com/TWiST Squarespace - Squarespace.com/TWiST Two days before SpaceX launches the largest IPO in history at a flat $135/share, our VC roundtable drops a scorcher: The top 1% of seed deals might actually be underpriced. Plus: the "Sequoia scam" dual-tranche controversy, tokens-for-equity deals, and whether Claude Fable 5 is a true step function. Tomasz Tunguz (Theory Ventures), Michael Downing (Castalia Capital), and Paige Doherty (Behind Genius Ventures) join Alex to go deep on Seed investing, startup economics, AI spend, and the impact of smarter AI on the founder journey. Guest Links: Tomasz Tunguz: https://x.com/ttunguz Theory Ventures: https://theoryvc.com/ Michael Downing: https://www.linkedin.com/in/michaeldowning/ Castalia Capital: https://castalia.capital/ Paige Doherty: https://x.com/paigefinnn Behind Genius Ventures: https://www.behindgeniusventures.com Show Links: Anthropic's IPO announcement: https://www.anthropic.com/news/confidential-draft-s1-sec OpenAI's IPO announcement: https://openai.com/index/openai-submits-confidential-s-1/ Bending Spoons F-1 filing: https://www.sec.gov/Archives/edgar/data/2004711/000110465926071170/tm2613674-7_f1.htm SpaceX IPO filing: https://www.sec.gov/Archives/edgar/data/1181412/000162828026040364/spaceexplorationtechnologib.htm Brendan Foody's post on Sequoia: https://x.com/BrendanFoody/status/2063470286515683759 Claude Fable 5: https://www.anthropic.com/news/claude-fable-5-mythos-5 OpenRouter data on Chinese models: https://openrouter.ai/rankings?view=day Saronic: https://www.saronic.com/ MotherDuck: https://motherduck.com/ Nox Metals: https://noxmetals.co/ Timestamps: 0:00 Tomasz Tunguz, Michael Downing & Paige Doherty join 2:07 The SpaceX IPO and the IPO window 4:22 Plaud: If your work depends on conversations — interviews, meetings, calls — you need a Plaud NotePin. You can check it out at https://Plaud.ai/twist and use code TWIST for 10% off! 6:30 The new bar: 10x growth (not 3x) to raise a great Series A 8:46 Net-new AI budgets 9:46 Squarespace: Turn your idea into a beautiful website! Go to https://www.squarespace.com/twist for a free trial. When you're ready to launch, use offer code TWIST to save 10% off your first purchase of a website or domain. 11:09 How some founders are outgrowing venture capital 11:44 The power pendulum swings back to founders 12:46 SpaceX vs. OpenAI vs. Anthropic: Which IPO is most enticing? 19:53 Deel - Founders scale faster on Deel. Set up payroll for any country in minutes, hire anyone anywhere, get visas handled fast, and get back to building. Visit https://deel.com/twist to learn more. 26:07 Tokens-for-equity, GPU-hours-for-equity & the financialization of compute 28:35 Founders airing VC dirty laundry (napping VCs included) 29:56 Netsuite - The business landscape is very chaotic right now. That's why you need NetSuite, by Oracle. Get the free business guide Demystifying AI at https://Netsuite.com/TWiST 36:38 Claude Fable 5 first impressions: pricing, benchmarks & orchestration 45:42 Where value accrues: application layer vs. models vs. private data 1:00:06 Nationalization of AI labs: Bernie Sanders, Sam Altman & Trump agree?! 1:01:25 Portfolio spotlights: Saronic, MotherDuck, and Nox Metals Subscribe to the TWiST500 newsletter: https://ticker.thisweekinstartups.com Check out the TWIST500: https://www.twist500.com Subscribe to This Week in Startups on Apple: https://rb.gy/v19fcp Follow Lon: X: https://x.com/lons Follow Alex: X: https://x.com/alex LinkedIn: ⁠https://www.linkedin.com/in/alexwilhelm Follow Jason: X: https://twitter.com/Jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis Great TWIST interviews: Will Guidara, Eoghan McCabe, Steve Huffman, Brian Chesky, Bob Moesta, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland Check out Jason's suite of newsletters: https://substack.com/@calacanis

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Hello and welcome back to Twist. Today is Wednesday, June 10th, 2026. And if it's a Wednesday here on Twist, you know that means it's Venture Capital Roundtable time. This week in startups is brought to you by NetSuite. The business landscape is very chaotic right now. That's why you need NetSuite by Oracle. Get the free business guide, Demystifying AI at netsuite.com/twist. Deal. Founders scale faster on Deal. Set up payroll for any country in minutes, hire anyone anywhere, get visas handled fast, and get back to building. Visit deal.com/twist to learn more. And Squarespace. Turn your idea into a beautiful website. Go to squarespace.com/twist for a free trial. When you're ready

• 0:42Speaker 00

  to launch, use offer code TWIST to save 10% off your first purchase of a website or domain. The good news is that this week we have some of my absolute all-time favorite investors, including Mr. Tomasz Tungus of Theory Ventures. Tomasz, you've been on the show before. You're brilliant. What's new in your world and how are you?

• 0:59Speaker 01

  I'm phenomenal. Thanks for having me on the show. It seems like the world is changing every day. Excited to talk about it more.

• 1:03Speaker 00

  Yeah, I feel like if we'd done this show a week ago, it would have been literally an entirely different topic list, which I think goes to show how fast things are moving along, which is why I'm glad we have Michael Downing from Castalia Capital. Michael, welcome to the show. Welcome back, I should say. How are you?

• 1:16Speaker 02

  Thanks very much, Alex. Thrilled to be here.

• 1:18Speaker 00

  Also, I'm glad you're wearing a suit jacket like Jason makes me. That way I'm not the only person who looks like the waitstaff. Appreciate it.

• 1:24Speaker 02

  I got the memo.

• 1:25Speaker 00

  Good. I'm glad I made it to your house. All right. And then we have, once again, we have Paige Doherty from Behind Genius Ventures. Latest fund was 8.9 million, Fund 2, making her one of the rare emerging managers that's really powering through and making it happen even in the era of mega funds. Paige, welcome back.

• 1:40Speaker 03

  Thank you, Alex. I'm so happy to be here. I'm excited to dive into the discussion.

• 1:44Speaker 00

  Okay, so clearly, we are sitting here two days before SpaceX will go public. It's supposed to price at $135 per share. No range, just a straight price. Elon's offering one number, take it or leave it. It's oversubscribed. We also have recently seen confidential IPO filings from both Anthropic and OpenAI, setting us up for about $3.5 trillion worth of liquidity if you add 1.7 plus 850. Six plus nine fifty, whatever it is adds up to about three and a half trillion. My question for you, Tomasz, is pretty simple. Are we seeing three unique companies go out and possibly return a lot of money to investors? And should not read into that about what it means for other companies that may want to find liquidity?

• 2:26Speaker 00

  Or is this more an indication that the exit market is finally, um, you know, de-icing itself and becoming a bit more amenable to the venture capital cycle?

• 2:35Speaker 01

  I think we're going to see broad liquidity. I mean, uh, Reuters announced, I think this morning that the SpaceX IPO was two and a half, maybe three times oversubscribed, which was a stunning number, just considering that the sum total of those three offerings that you mentioned SpaceX, OpenAI and Anthropic, if they raise what they intended to would be greater than the sum total of all IPOs dollars raised in the previous decades. So it clearly is just huge demand for exposure to AI and space. So I, I think that's, that's really telling. And then you're starting to see some other S1s, right? Bending Spoons came out, which is a holding company. They bought AOL, which kind of blew my mind. And that business is doing incredibly well on the back of AI.

• 3:18Speaker 01

  They're, uh, I think about them as like an AI holding company where they buy legacy businesses and then reinvigorate them with AI native coding practices. And it seems like there's more IPOs coming. So broadly, you know, speaking broadly, it looks like it will be a very good year. 2026 will be an excellent year for liquidity.

• 3:36Speaker 00

  I mean, I'm here for it. The Bending Spoons IPO, I didn't bake into the docket because it felt almost like, um, I don't know, Michael, something akin to like a, a PE roll up, but done under like a startup auspice. It's kind of an odd situation. Did you read that S1?

• 3:49Speaker 01

  I, I didn't read the S1, but I'm familiar with the company. I mean, it's a kind of IAC type of model where they've, you know, found slightly distressed businesses out there, kind of assembled them, fixed them up, you know, did some kind of fixer upper work and, uh, and now taking it public. I, I think it's interesting. We'll, we'll see how that does in the public markets, but I agree with Tomas that, you know, the liquidity that's about to come into the market is, uh, is going to be enormous. And there's a ton of companies lined up potentially to, to try to jump through the window here.

• 4:20Speaker 00

  There are so many companies. I'm going to do an ad really quick for the live show. Watch this. There's so many companies going public that you may lose track of all the names that are putting out IPO filings or announcing major, major deals. So that's why you should get yourself a Plaud pen. Plaud's excellent technology is a great way to keep track of your notes while you're out and about. Just push the button, get a little haptic feedback. It takes notes for you, syncs them to all your computers and that way, no matter what you're talking about with whoever, you won't lose it. It's the AI era, everybody. We're getting recorded, so get recording yourself. You can go to plaud.ai/twist and use the code TWIST to save 10%. Jason loves Plaud, I love Plaud, that's why it's on my wrist. Thanks, Plaud. All right, Paige. So I want you to weigh in on this because I think if one of your portcos exited to bending spoons, it wouldn't be the outcome you're looking for. No one wants to see

• 5:03Speaker 00

  a Vimeo-style acquisition from their own kind of leading lights. So I'm curious, what are you seeing in terms of inbound M&A interest or founder interest in outbound M&A from your own portfolio?

• 5:15Speaker 03

  We're still early on, so I started buying Genius around five years ago, so these discussions are starting to take place. We saw the acquisition of one of our portfolio founders, Magna, by Kraken earlier this year. In terms of inbound interest from our portfolio founders, the ones that are getting the most interest are usually have a deep technology that incumbents are interested in acquiring before those companies get much larger. I think what we're seeing is there's a lot more frenetic energy around how fast these companies can grow. So we're definitely seeing that from my perspective.

• 5:52Speaker 00

  I know you're rolling on Fun2, but I think it's actually a useful kind of timeframe. A half decade is a long time in the AI era, Paige. Are you seeing just aggregate growth rates for your portcos at the same stage over time increase? Because it feels like from watching these companies that they've... Okay, tell me about that.

• 6:10Speaker 03

  Yeah, so I think one of our biggest learnings from Fun2, one to two was going really deep on the markets. And one of the things that we found in how the markets are changing is that the bar for IPOs has continued to rise in terms of revenue across the last 100, most recent billion-dollar-plus exits. The IPO specifically, the average revenue is between 300 to 500 million in annual revenue. And so as we look at earlier-stage companies, what we started underwriting to was asking those questions about the market much earlier on. And I think that's true of most early-stage investors as well. But what that's resulted in is when we look across our portfolio, especially at the AI

• 6:53Speaker 03

  native companies, we're seeing growth rates at like 10x, uh, with like 100, 100x plus in a year from a revenue perspective. So we're definitely seeing that in our portfolio is that has, or I guess like one of the core metrics to look at is it used to be like you could go three X and raise a great series A. And now I feel like it's more you grow 10x in a year and raise great series A.

• 7:19Speaker 00

  Just to be clear, you're saying that if you have a three X a year behind you and you go into raise a series A, you're kind of middle of the pack?

• 7:25Speaker 03

  You might not get the best terms that you want to see. Yeah.

• 7:28Speaker 00

  Wow. All right. Tomas, back in the SaaS era, if you came to any of these with the three X trailing result and your cash burn wasn't, you know, pre-IPO box, people would literally roll out a wheelbarrow full of hundred dollar bills. Um, why, why are expectations up so much higher than they used to be? And is it a sustainable level of growth? Or are we in kind of a moment in time in which technology is shifting enough that we're going to get a, a particularly strong crop of startups? But this won't be the case in say five years.

• 7:56Speaker 01

  The companies are growing faster. I completely agree with Paige. One of the reasons is many companies are selling to labs and the labs, um, the contract sizes of the labs are measured in tens of millions to hundreds of millions. And so a single contract can, can grow the business 10 to 20x to 50x. And the dynamic there is a competitive dynamic, access to a particular technology or a particular data set can meaningfully move share with a single model release and that can drive market cap by say 10 or 20 or 50 billion. And so the willingness to pay the urgency associated with the procurement of those systems or data is extreme. The other dynamic that's really important is corporate America broadly, every board, right? This is not new. Every board is now pushing towards AI.

• 8:42Speaker 00

  Yeah.

• 8:42Speaker 01

  The, the, and so the budgets are new. Their net new, I think Morgan Stanley ran an analysis, more than 50% of AI budgets are net new. Some of that is coming from future labor spend. In other words, we won't hire additional people. And labor spend is three to seven times larger than than software spend. So both of those dynamics are at play.

• 9:01Speaker 00

  All right, we're going to get into more about the realm of corporate AI spend in a minute. But I want to go back to what you said about these startups are able to sell to the AI labs and therefore drive, you know, a low eight figure contract dramatically increasing their growth rate. That makes me slightly worried and I'm not a person.

• 9:15Speaker 03

  I was gonna say, that's actually like not where we're seeing growth happen. It's more like in companies that either like got skipped over in the software waves before that are now interested in buying AI applications. I might preface this with like, we mainly invest in application layer companies. So I think that's true of some of the more like infrastructure developer tools. Even perhaps like chips and energy, but it's happening on the application layer as well. And I know you've invested in lots of companies in that space.

• 9:46Jason Calacanis?

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• 10:47Speaker 01

  Yeah, yeah, I mean, one thing we've seen is especially in AI infrastructure and kind of application infrastructure, these companies that grow to like.

• 10:55Speaker 02

  Hundred million in revenue really quickly. Um, it it's incredibly frequent is what we've seen. So for example, one company um, that we're working with now, they only raised a $4 million seed round. They're at $120 million revenue run rate right now. And for those founders, you know, they're like, should we raise money? Do we need to raise money? You know, should we go through that process? And, you know, it's a totally valid question. Like at that point, I think they're making 750K a month in free cash flow.

• 11:24Speaker 00

  Okay, but I do hear from some people that raise quick successive rounds that they weren't looking to raise, but they went ahead and did it anyways. So, so Michael, when you're kind of worried about dilution versus maybe capital that accelerated already impressive growth rate, where do you kind of come down on the advice side of things?

• 11:38Speaker 02

  Well, I mean, this is where the kind of balance of power has shifted, right? I mean, AI has created a lot of different uh impacts in the in the landscape, but one of them is when you can scale a business that quickly and you've only raised four to six million dollars previously, I mean, you control your own destiny quite a bit. And so of course you have people coming in to preempt and offer crazy terms and so on. Uh, but it feels like founders have become more savvy and just uh more wise about what they want to do. I mean, obviously some are jumping in and taking the, you know, 75 million dollar round on a 1.1 billion dollar valuation. But we've seen more and more of them really think about, are there other ways we can go about this and maybe not the traditional route?

• 12:20Speaker 00

  I mean, I would sell 6% of my company for 75 million dollars. I mean, that that doesn't break my leg or pick my pocket. And I can afford to buy a Goldstone 600, so.

• 12:29Speaker 02

  Yeah, I would have loved to do that.

• 12:30Speaker 00

  Yeah, it's a great time to be a founder with a hot company, I gotta say. Um, I want to get to the founder point in just a second, but before we move on from the the IPO week, I'm curious if anyone here who doesn't already have exposure to SpaceX shares is going to go ahead and try to get allocation in the IPO. Uh, I'm only asking because the audience wants to know, and by the audience, I mean me. So let's start with some laws and go around.

• 12:53Speaker 01

  I think I'm going to wait. I'm sure there'll be a huge surge and then it will come back down and trade. So I'm going to give it a quarter or two before getting some exposure.

• 13:03Speaker 00

  All right, Michael.

• 13:04Speaker 02

  Yeah, same. I'm gonna wait until the midterms, just after the midterms. And then I'll buy in and put some, you know, hopefully Anthropic, OpenAI, and SpaceX in my kids' accounts, basically.

• 13:18Speaker 00

  What hinges around the midterms that you think could impact the SpaceX business? Because I can make a joke about why I think that might be the case, but I'm curious if you can kind of put that into more concrete terms for us without getting in too much trouble.

• 13:31Speaker 02

  Well, without getting in too much trouble, you know, a number of my friends are kind of close to, you know, some of these companies and particularly SpaceX. And so the expectation is that historically, you know, midterms and shifting of kind of political views can certainly impact the public markets. And I think in this case, they're expecting that there may be a little bit of a reset. And so I personally think that's pretty likely.

• 14:00Speaker 00

  All right, that was, see, you didn't get in trouble and you got your point across. That, my friends, is media training in action. 10 points, Michael. All right, Paige, over to you. SpaceX, how much are you buying?

• 14:10Speaker 03

  I think I may wait. I mean, I guess what I've seen in the public markets is there's an incredible amount of volatility based on narratives. Like, we've seen this play out. But as I was reading the S1, one of the things that surprised me was the focus on energy as the core bottleneck of AI. And I guess like I hadn't learned that they were, like, one of the core points was we're gonna use the sun to make energy for AI. And I thought that was really interesting.

• 14:43Speaker 03

  So I think I'm gonna wait until the lockup period, or... Maybe earlier, we'll see.

• 14:49Speaker 00

  Wow, wow. I really thought it was gonna be two, I'm gonna put in like a flyer on this and one conservative, not all three of you. If, if I lowered the price to one trillion, would your answers change?

• 14:59Speaker 01

  No doubt.

• 15:00Speaker 02

  Maybe.

• 15:00Speaker 00

  Okay, alright. So it's a pricing question. And the thing is, I don't even have a dog in this fight. I'm not trying to cast stones or anything. I don't know how to value an Elon Musk company. So I don't even know if there's a right or wrong answer, because having watched Tesla over the years, people are valuing it the way they want to, and that's fine. It doesn't track fundamentals the way, you know, Tomasz and I used to track, you know, SaaS multiples, right? So it's a little bit more esoteric, you might say, but I'm very, very curious. Paige, though, sticking with you, if you had to pick, you know, if you had X dollars to put into one of the three IPOs, SpaceX, OpenAI, or Anthropic, which one would you pick?

• 15:33Speaker 03

  Hmm, Anthropic. I've, I've like moved so much of my AI workflow over to Claude and been like super impressed by Claude code. So I, I mean, that's like my personal.

• 15:47Speaker 00

  Does anyone disagree with what Paige said? Because I think that's probably gonna be the answer, but I figured I would give you guys a chance to say no. Tomasz, Michael?

• 15:54Speaker 02

  I have a little bit different answer there, which is, and I, I love Anthropic and I of course use, you know, the product, but I also use OpenAI's products and ChatGPT, et cetera. You know, we're, we're obviously in this kind of, you know, to quote Jeffrey Moore, we're crossing the chasm with AI, right? Like all of us in Silicon Valley love these tools. We think it's cool. We can keep up with the two or three announcements per week of new releases. Nobody else outside of 25 miles from here even knows, you know, what it's about and what's happening. I mean, it's, it's, it's, you know, a different world out there. And so between OpenAI and Anthropic, I think one of the most interesting things that we'll see is, you know, what is going to be required to fully cross the chasm and get adoption going, you know, amongst a broader set?

• 16:39Speaker 02

  I do think what OpenAI is working on this, you know, potentially a headset or earbuds or something that's a consumer device may, if it works, and if Johnny Ive and the team that's working on this, if that actually drives adoption beyond all of us nerds. That could be super interesting. Obviously, it's a big bet, but it could kind of change the velocity of how these two are competing.

• 17:07Speaker 00

  All right, Tomasz, a billion weekly active users or a chokehold on every enterprise CFO? Which one delights you more?

• 17:14Speaker 02

  I think, well, I think OpenAI, I get really excited about them if they develop an ads model. I think, you know, Google is generating about $120 in our per average revenue per user per year. I think the information on top of ChatGPT could get you a multiple of that, a whole number of multiple of that. And so I'm excited to see what happens with some of these trials. But in the short term, I'd probably take Anthropic. I mean, I'm a B2B guy at heart. And so, yeah, gotta be true to your school.

• 17:39Speaker 00

  Well, it's just amazing how, you know, I think it was last October, I wrote a headline that was something like, Anthropic is catching up to OpenAI. And it felt so weird to say, I was like, maybe I won't publish this, maybe I'll change the headline. I'm like, no, let's just go for it. And then by December, and then by March, and then here we are today. It's, I think, a testament to how fast things can change. And speaking of which, Michael was talking about founders earlier, raising less capital and having more optionality on how they approach fundraising down there. It feels, Michael, like we've seen a shift in the power dynamics between capital and founders. If you go back to the 2021 boom era, founders were king of the castle. Money was being thrown at them at 100x, 200x revenue.

• 18:22Speaker 00

  Then there was a period of time in which founders had to cut burn and raise bridge rounds and come, you know, kneeling to San Antonio Road writ large. And now it seems like we're going back. So tell me if that's right or wrong. And if it is right, how far has power shifted back to founders?

• 18:37Speaker 02

  Yeah, well, it's totally true. I mean, I was just looking back. Two years ago, Jason and I did a podcast with David Weisberg where we were talking about these companies that had grown so quickly, like mid-journey and hadn't really raised, you know, any significant funding. And we speculated that, well, will they even need late-stage venture guys? Like, why do you, why do you need to raise this late-stage venture? And now, I would say, in the last four to five months, we know why. It's not to hire 500 people and get offices in downtown San Francisco. It's because your token spend is going to be, you know, massive. And I've seen this amongst a few companies where they say, yeah, we're raising $25 million. I was like, great, what's the use of funds? And they're like, token spend.

• 19:21Speaker 02

  Yeah, I was like, oh, you're not doing this. You're not, you know, hiring these people and creating this division and whatnot. It's all about the cost of applying AI within the business. So it's a really interesting kind of shift that's going on and how they're spending money and and also where that capital is going to come from.

• 19:40Speaker 00

  Uh, the episode that you were referring to with, uh, with David Weisberg, who's fantastic is, uh, episode 1903. If anyone wants to go check that out, I'll have a link to that in the show notes. Paige, jump on that and tell me if you agree with Michael and why.

• 19:53Jason Calacanis?

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• 20:56Speaker 03

  Hmm. Well, I think one thing that can get swept under the rug when we're just talking about like valuations and capital into the business is the relationships that a fundraising round like that unlocks. So if you were to work with a later-stage partners, help help predecessors go through IPOs, navigate challenging situations in companies' history. I do think there is something to be said for bringing on board really great advisors through a later-stage fundraising round. That's what I would say to that point.

• 21:27Speaker 00

  So essentially, help is it's the it's the it's the capital and that you think still has a lot of value to those founders.

• 21:33Speaker 03

  Yeah, like the the guidance and experience of folks who have been through that path before.

• 21:37Speaker 00

  Yeah, to Mars, without gassing yourself up, how valuable is kind of the median VC? What everyone, this is a completely innocuous question. Stop laughing. What is the what is the value add of the median VC that a that a founder in a hot company might be able to access? So not not your median VC, period. Like, you know, people at the more elite firms and so forth. How helpful are they really?

• 21:59Speaker 01

  I think, well, I think they venture capitalists are really helpful in particular situations, right? The dynamics around acquisitions, dynamics around IPOs, anything to do with capital markets. I think broadly speaking, they're a huge help because they're on the side of the company and can represent their interests and have as if should have a all have a sophisticated view. And then and then there's sort of, you know, a gradient of what are the introductions you can make? Which customers can you introduce me to? How do you fill out the board? And then how do I navigate certain situations that arise within the life of a company? But I think on the whole, we've seen later stage investors being extremely helpful. I mean, and if you wanted to be unbelievably reductionist about it, through an IPO,

• 22:42Speaker 01

  you are transitioning from a private investor base to a public investor base. And ideally, you have crossovers that are investing in private and then are key members of the investor base through IPO and then beyond. So I think they serve an important function.

• 22:56Speaker 00

  Yeah, I mean, you can always notice when a company is going to go public because they've had fidelity on their capital for 24 months. And then, shockingly enough, they file. I mean, who who could have seen that coming? I'm actually glad you said that, Tom, because I think it's actually a good point. I think people get a little bit too productionist in their thinking about VCs and reduce the job to just capital allocation and then shutting up. But I do think that a lot of founders go into this game, not as a repeat founder. They haven't done this dance before. They haven't taken a company through acquisition offers, dealing with board composition and so forth. And so I think having the bestie that's done this before with you makes a lot of sense. But that doesn't mean you need five of them, I don't think. And so I wonder Back to Michael's point about making capital decisions based on other terms than just burn.

• 23:40Speaker 00

  I wonder if we'll see even more concentration of partnerships between founders and VCs and reducing the number of them as companies maybe need less money to scale unless they blow out their token budget.

• 23:50Speaker 01

  I think it's a different manifestation, which is the board and the voting construct, where you see founders having tremendous voting control over a business rather than shrinking the size of a board. You still need an audit committee chair and a nomination governance and then a compensation committee chair. So there's just a certain number of people on a board, but you definitely see founders with tremendous control over the board. And that, I think, is, you're going back to a point we were talking about before, a sign that echoes, say, 21 of how much control they have over a business.

• 24:22Speaker 02

  Alex, you bring up a really good point, though, which is kind of interesting. Obviously, we've seen over the last five to seven years, the entry of new capital sources. So the crossover funds, some strategic funds, even large sovereigns coming in and participating in the later-stage rounds of these companies. And so, to Tomas's point earlier, it's possible that the role of the VCs and/or the composition of the later-stage VCs is kind of a moment in time when founders have the options to load up and go to the next level of capital because there's more of those sources, be it sovereigns or crossover funds or whatever it may be.

• 25:04Speaker 02

  But it may just kind of change the choreography of how they scale these companies. And there's some pretty specific examples, CloudFlare being one of them, where it's a disproportionate amount of the capital that's come in is not from venture.

• 25:19Speaker 00

  Yeah, we'll get into why that's the case in a second, but you're telling me that essentially Tiger is not dead and that the crossover story is not over because I feel like for 18, 24, 36 months there, the idea of seeing all this quote-quote tourist money coming into tech was written off again.

• 25:35Speaker 02

  Well, there's the crossover guys, there's your T-Row price fidelities, others that you mentioned. There's BlackRock, Blackstone, and then there's the Mubotolus, G42s.

• 25:45Speaker 02

  The milieu of kind of sovereign funds and sovereign spinouts that are getting wiser, smarter and more aggressive about getting involved earlier. So I think that changes things a bit.

• 25:55Speaker 00

  I'm glad you said Mubadala, because if you can't say Mubadala or Tomasek, you passed the Shibboleth test, and therefore you can't come on the podcast. You have to be able to pronounce them correctly. And I learned that in a Tomasek conference room once, when I butchered it, and it was corrected by every single person in the room. So now you know, if you're listening to this show. All right, here's, here's the thing, if people are raising money to go out and amp their token budgets, right, to cover their token spend, why do we need VCs at all? Why shouldn't Anthropic and OpenAI just meter out tokens in exchange for equity? Cut out the middleman. Paige?

• 26:26Speaker 03

  I thought that, that one of them was doing a program quite similar to that. I mean, like, we have partnerships. Yeah, yeah, I think that's very interesting. I think we're starting to see more experimentation around spend because it is like a more of a clear line of return, I would say.

• 26:47Speaker 03

  So yeah, I think it would be interesting to see OpenAI move more deeply into that. I mean, they also do have quite good partnerships programs, like we have partnerships with OpenAI and Anthropic, and that allows our portfolio companies to access a certain amount of tokens. And I would say they've been pretty aggressive about that for a good reason, as those companies grow larger and spend more on tokens later on. It's a great acquisition for them.

• 27:13Speaker 00

  The thing that I missed that everyone's reminding me of is the OpenAI pitch to Y Combinator companies offering $2 million worth of tokens in exchange for equity on, essentially, it's a, it's a SAFT, a Simple Agreement for Future Tokens.

• 27:25Speaker 02

  There's also, I mean, there, there's this notion of, you know, tokens, AI tokens for equity, the financialization of tokens. But then there's also the financialization of pure compute that's happening. And I don't know if you guys have seen this, but there's been a couple of funds who announced that basically, you know, they'll say, oh, I'm investing $20 million in a company, but half of that, 10 million, is actually in the form of compute. And so in a world where

• 27:50Speaker 00

  Like GPU hours, Michael?

• 27:52Speaker 02

  Like exactly GPU hours for equity. And so, you know, this is really interesting because when you're kind of raw, you know, materials for what you need to actually build your product or deliver your product becomes the currency, the financialization of compute and/or tokens. You know, that could create a very interesting environment and bring in some different participants, for sure.

• 28:14Speaker 00

  So then the closer to the metal you are, the better of a VC you can be. Because if Neil has, they're going to dole out compute GPU hours for equity and OpenAI is offering tokens, I guess beneath that's offering electricity access for equity at some point in time? Like, how far can we go down this rabbit hole?

• 28:29Speaker 02

  Eventually, if power is the bottleneck, you know, potentially.

• 28:34Speaker 00

  This is what I love about the current moment in technology time. Everything seems completely unsettled and shifting. And if you go back to the SaaS era, it felt like it is entirely solved. Like you wanted to triple, triple, double, double, double. You wanted to have rule of 40, blah, blah, blah, blah. And now, everything feels upset. And so I guess, Tomasz, is that why we've seen founders recently airing a bit of their venture capital dirty laundry in a way that in all of my years of hanging around this world, I haven't seen? It feels like founders are almost less afraid than they used to be. And I wonder if it's these dynamics that are leading them to be a little bit more fearless when it comes to sharing spicy anecdotes about your team?

• 29:13Speaker 01

  Yeah, I think it's, it comes and goes, right? I mean, we had ValleyWag and then there was, gosh, when I started, there was a website where you could anonymously rate venture capitalists.

• 29:22Speaker 02

  That was, that was the fun day. Yeah, that was Adeo. Adeo created that site in 2006. Very spicy takes on bad behavior in meetings and so on.

• 29:33Speaker 00

  I think you would get sued out of existence today if you did that, like instantly. Yeah.

• 29:38Speaker 02

  So I'm pretty sure he did get sued.

• 29:40Speaker 01

  Did he? Yeah. I think it comes and goes, you know, it's kind of cyclical. And I think it's, there's a cathartic, there's a catharsis that happens, just kind of a big release of emotions every once in a while. That's healthy for the ecosystem.

• 29:52Speaker 00

  So this is like a dam breaks, we'll rebuild the dam, then everyone will kind of go back to normal?

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• 30:55Speaker 00

  Okay, because because some of the stories surprised me. And I have friends who are VCs. I've been to LP meetings. I've gone to be in a lot of rooms, and I have never seen people falling asleep in a pitch. Like, that that blew my mind. And the fact that it was like ten different stories of napping VCs, like, someone asked, is there like a plague of narcolepsy going through the valley? And I don't know, Paige, it doesn't feel like that would fly with kind of the modern founder who's in a hurry and has their eye on a pretty big prize. And so I'm curious, how do you manage to keep your eyes open when you're listening to founders pitch you and your fund?

• 31:32Speaker 03

  I know, I'm usually pretty excited to be on the call. So I don't think I've ever fallen asleep in a pitch meeting before.

• 31:39Speaker 00

  Yeah, okay.

• 31:40Speaker 02

  Well, I think, you know, in fairness, when the markets are high and cranking as they are now, you tend to hear these stories. And when they're really low, and the stories are slightly different, like, oh, they asked for Forex liquidation preference, and they brought in participating preferred, you know, so you get like, the unhappy peanut gallery when the markets are terrible. And then you get the, you know, I'm feeling my oats, and I'm going to talk about bad behavior, you know, when the markets are high. It seems like the kind of natural flow of things.

• 32:09Speaker 00

  So venture transparency is the, uh, it's, it follows the NASDAQ pretty closely then. NASDAQ's high, everyone's doing well, valuations are up, VCs are on notice. NASDAQ is down, everyone's poor, founders are quiet. Okay. So essentially this is peak, uh, share your story mode. Okay. Uh, I want to click on one, one story and no one here works at Sequoia. So we're, we're totally safe. Uh, Brendan from Merker, one of those, um, AI data companies that's grown to $80 trillion in revenue. Had him on the show a while back, lovely guy, episode 2159, if you want to watch that. Uh, he said the quote, Sequoia scam is worse than a single horror story. In the last six months, I've seen a half dozen rounds where Sequoia invests in two tranches. Everyone pretends they only did the higher valuation. Founders must represent this to their employees and then shop it to angels.

• 32:53Speaker 00

  And he calls Sequoia's quote blended price as blatantly deceptive. So I'm curious, one, not to pick on Sequoia in particular, but is this something that's happening broadly? Or is this a handful of examples being aggregated into what appears to be a trend, but actually isn't? And Tomasz, you're the perfect person to answer this.

• 33:09Speaker 01

  It's starting to happen more and more. I think it recalls like 2021 where you would have three rounds of financing happen within a single year. We're starting, we see that, I mean, often you can look at it, the infrastructure is a service vendors. They're starting to see multiple like GPU, I mean, fireworks in base 10. There are many other companies because they're growing so fast. And now because the anticipation is there, if you're an aggressive mid to late stage firm, um, and you want to get in, well, you can structure it in a way where you can blend this valuation. So I, I don't think it's, I mean, I think it's like, I would guess like still 5% of rounds, but it's not, um, it's not a red herring anymore.

• 33:48Speaker 00

  All right. Paige, have you seen, oh, Michael, please.

• 33:50Speaker 02

  I would just say it's, you know, this particular concept is, is not really new. I mean, if you were, had been a entrepreneur, starting companies, even all the way back to the late nineties and early 2000s. You know, it was not uncommon that a lead investor would come and say, great, I want to lead the round here. We noticed that your last round, you know, you had authorized a certain amount to raise, but you didn't raise it all. So do you mind if we take that last couple of million in the last round and then come into this round and their blended cost ends up being lower? So, I mean, you know, I've seen a fair amount of that over the years. So it's not.

• 34:25Speaker 00

  Is that generous, Michael, or is that predatory? I can't quite decide. Or is it both?

• 34:30Speaker 02

  I think it depends on the situation. If you're super excited to have that lead come in and lead that round and it helps consolidate and bring together other investors, then you may let them put in a small amount in that last round that didn't, you know, fully cap out.

• 34:44Speaker 00

  All right, Paige, how often do you see this kind of activity? And do you agree with Tomasz that is no longer red herring, even if it's not a kind of the standard route?

• 34:54Speaker 03

  Once in a blue moon. And I think the situations are usually one of two things happening. Like one, it's like an incredibly exciting company and there's a lot of pricing power that the founder has and interests and they're interested in, they negotiate with the lead on a certain valuation and then they have other folks who they want to bring in the round, but don't want to take that dilution. And then in other situations, it might be like less advantageous to the founder and more pricing pressure from the lead saying like, hey, we want a discount on this round. Like we'll do some of it at a lower valuation. But fair.

• 35:32Speaker 00

  So founders probably won't run into this, but you as an investor, if you're being offered a round at a certain price, how much transparency do you expect the founder to tell you if they have one of these blended leads, let's say, in the same round?

• 35:45Speaker 03

  Hmm, I think it's a very nuanced question because usually in your docs, like you'll have information access and information rights and not every investor gets those information rights. So I think it is like a nuanced question. Like obviously I would, I would like to know and I. I would like ask about how the round is structured. At certain points, we'll invest before a lead's involved. And so then we'll be pricing our own. But in any situation, it's like, I'm taking a look at, is this a founder we want to work with for the next 10, 15 years? And then also, is the valuation at a point that it makes sense based on what we think the potential outcome could be?

• 36:26Speaker 00

  This week, we saw finally Anthropic drop a version of its much vaunted Mythos model. It's called Fable 5. It's very expensive, costs literally twice what Opus 4.8 does. First of all, who here has not played with Fable? I'm just, I presume we all have, but has anyone here not touched it?

• 36:44Speaker 02

  I have not.

• 36:45Speaker 00

  Michael, okay, so Michael's the lead on today's show, that's fine. Paige and Tomaz, first impressions of Fable. I used it, but I didn't really put it through its full paces. So I'm curious if you think it's the step function that some people claim.

• 36:57Speaker 01

  I think it's really impressive. I mean, okay, so just to kind of set the context, you have new model releases approximately every 41 days. And most of those model releases on key benchmarks have one or two percentage points of improvement. A 10 percentage point improvement, so pretty fundamental. I ran it through its faces. I had it analyze three code bases last night.

• 37:16Speaker 00

  Okay.

• 37:16Speaker 01

  And then was using it to optimize performance and it did phenomenally well. Absolutely, there's the thanks for the model card. And so you have really some, I mean, the agentic coding going from, you know, 13.4 to 29.3 is just an enormous, enormous leap. So it is fundamentally much better. It's a bit slower. You can watch it like it will, I think about it as a central coordinator where you give it a task and it will federate, work to different agents and orchestrate them over long periods of time, manage its memory. It's incredibly effective, but also, like you said, extremely expensive. It's not the most expensive model, though. If you look at OpenAI's Pro models on a per token basis, those are three to four times more expensive than Fable.

• 37:59Speaker 00

  But OpenAI argues that GPT-5.5 Pro is token efficient to models. Are you taking that into account?

• 38:04Speaker 01

  I'm not taking that into account. I'm just looking at the input and output tokens.

• 38:08Speaker 00

  I thought GPT 5.5 was five per million in and 30 per million out versus 10 and 50.

• 38:15Speaker 01

  No, that's right. But there are, there are pro, my understanding is that there are certain pro models that are reserved for math and science and

• 38:21Speaker 00

  Oh, I see.

• 38:22Speaker 01

  that are significantly more expensive. And there, there's a tremendous amount of thinking tokens that need to be taken into account. So that, but yes, for general purpose models, Mythos or Fable is the most expensive.

• 38:34Speaker 00

  Staying with you, Tomas, you know, we've talked a lot about how in the last couple of years, AI has gotten better. Startups can do more with it, either to improve their internal operations, to make better products, better services. We see a step function here. I'm curious if you think this is going to change the quality of what startups can bring to market and therefore possibly increase their growth rates and find even better product market fit faster.

• 38:54Speaker 01

  I do. There's no doubt. And you look at the, what you can build in a day or and have the models

• 39:00Speaker 01

  operate overnight and self-improve. It's extraordinary. So yeah, I think the pace of innovation, the expect, maybe put it the other way. The expectation of a software buyer will be that the software is secure. You're, you're selling a suite, not a point solution. And the software is improving every two or three days. And this is one of the benefits of SaaS compared to packaged software was you were paying for an ever-evolving subscription. You might see a release a month. Now, I think the expectation is, oh, there's a bug next, tomorrow morning, I think it'll be, it'll be fixed.

• 39:30Speaker 00

  I mean, now when I see people talking about Notion, Michael, I mean, they literally like ping the founders and they're like, can you please fix this? And they're like, I, I, Captain, we'll get on it. I presume that's something that's now mostly possible via agentic coding. But you know, Notion has been, I would say, one of the leader in AI. We use Notion here. I'd launch every day. What do you see from model improvements moving forward? Do you think they're actually going to help companies like Notion continue to improve at the current clip? Or is this more of a, it'll look the same, but just be slightly more intelligent when I prompt it?

• 39:59Speaker 02

  Well, I think there seems to be breakout successes with companies like Notion, where they've been able to plug in so seamlessly to Claude and orchestrate and do things in really unique and helpful ways, which sounds like is how you're using Notion plugged into Claude and other kinds of tools. And to me, it's like a separation, kind of a tale of two cities. There's the applications who are figuring out how to perfectly blend in with the LLMs and core models and make their product that much more valuable. And then those who are struggling to figure out how they coexist and work with the larger models. And it's interesting to watch, for sure.

• 40:42Speaker 00

  Yeah, I'm curious to see what people build. I've seen the usual slew of demos like, oh, he built a horror first-person video game in one shot. Oh, look, it did my laundry for me. Oh, it took my boyfriend out to dinner for me. People are very impressed. But I'm always kind of curious, like, what's the second week of this, coming back to Tomas's wait for the IPO for SpaceX to see. Everything always looks really impressive day one. So, Paige, do you think that your portcos that use AI, which I think is most of them, are going to be trying out Fable in their production setting? Or is this more of a, dear Lord, we can't afford that. That would tank our margins and turn us into a shop selling dollars for 50 cents?

• 41:20Speaker 03

  I have to ask them. I am curious about this question. I think what we've seen in most of our companies is that there's like a hybrid approach where they would use a lower-cost model for something that is more repetitive. And then for higher-level reasoning or orchestration, they'll use a more expensive model.

• 41:41Speaker 00

  Does that work as well as people say? Because Tomas said orchestration.

• 41:46Speaker 03

  Tomas is nodding.

• 41:48Speaker 00

  He loves to nod while on mute.

• 41:52Speaker 02

  I don't want to interrupt, but yes, it works exceptionally well.

• 41:55Speaker 00

  So tell me how.

• 41:56Speaker 02

  Unbelievably well.

• 41:57Speaker 00

  Tell me how it works.

• 41:58Speaker 02

  Yeah, so I'll give you an example. So let's say you have a repetitive process for like updating your CRM or answering a particular email. What you can do is you can have like a state-of-the-art model create what's called a skill, which is in Markdown, which is a text file. This is how you do this. And you can pass that from, and I've done this, and I've done this.

• 42:19Speaker 01

  I've done this where I can get 90% of the things I do with AI on my laptop to run on a local model on my Mac. And that has meaningfully reduced my overall token spend. And as I add skills, I've gone from 65% to say 91% as of yesterday in terms of local model inference. And then Stanford released a study yesterday, the day before, showing across a broad distribution of different skills, this is very true. So I'm a huge believer in this, whether it's like model distillation or skill distillation, this will be the architecture for most, most applications.

• 42:53Speaker 03

  So we're going, we're going back on prem.

• 42:56Speaker 00

  We're going back, I mean, maybe, because I think, you know.

• 42:59Speaker 03

  It's definitely happening because I think also like if you look at the cybersecurity concerns of running some of that information in the cloud all the time, it does make a lot of sense, especially we're seeing that in, in manufacturing use cases because they're one of the biggest targets for cyber threats.

• 43:15Speaker 00

  So explain that to me in more practical terms. Are we talking about small language models running on air gapped hardware? Or is this more just like we have a Dell computer and there we can slap Quinn 3.7 on there and just have a good time?

• 43:26Speaker 03

  Um, well, so for example, one of our portfolio companies is a company called Maneva, and they build applied AI for the factory floor. And the founder was previously at DeepMind studying embodied AI. And so they use video to robotic action models, which I'm, I'm really interested in the continuing application of like multimodal AI. So goes beyond just text to text input and output.

• 43:51Speaker 00

  You use about five terms.

• 43:53Speaker 03

  Five big words. Yeah, I'll use some smaller words.

• 43:56Speaker 00

  No, no, you're fine. I just want you to explain them for everyone listening who is too lazy to Google them as we talk along. So break that down into little person words, please.

• 44:03Speaker 03

  Okay, sure. So a factory operator on the factory floor, I'll give you an example from one of their early customers at a candy factory. So originally there was someone who had to individually check every single candy bar for defects as they went down the line, and then press a button if there was a defect. And so what Maneva does is they have agents that do one specific task really well on the edge. So using off the shelf hardware. And they can use Maniva software to basically do that task now. And what's really interesting is the folks on the factory floor, like, that's great. Like, that's not the task I wanted to do. I wanted to help the factory run more efficiently and do higher level work.

• 44:45Speaker 03

  And so they're actually coming up with new ideas of where to use Maniva on the factory floor.

• 44:51Speaker 00

  So we don't need to use Fable five to see if the Hershey's with almond bar is a rectangle or a circle, is your point?

• 44:58Speaker 03

  Yeah, well, what's interesting is like when you deliver a model, it's not going to be fully trained because you need that like actual in in real life experience to fully train a model to be great at something. And this I have this like thesis around hyper specialized AI where, you know, these models are great at general intelligence, but to get them really, really good at a specific application task, they need a lot of data that is stored, you know, somewhere in a company or on a factory floor in real life. Um, so I'm.

• 45:29Speaker 00

  Who who builds those? Because on one hand, you think that the companies, the the customers who have the data would want to be able to take a model and then bring their data to it. But also, at the same time, SaaS companies who sit on top of so much customer data want to build the AI workflows and therefore maybe also tune the models. So Paige, where does the value accrue in that setup?

• 45:47Speaker 03

  I actually think that it's more new companies and startups like what we're seeing. I think vertical AI is still very early on in the commercialization stage. Like, we've been following the space since 2021, but as the models have gotten better, there's been more and more applications. So I actually think that a lot of this is accruing in startups. We've seen some larger incumbents move into this space, but ultimately it it's challenging because you have to almost like retrofit that software to fit with your existing company. So I think definitely like these AI native founders are having a have a strong advantage.

• 46:22Speaker 00

  I want to I want to get to Michael in a second, but I I need to ask Tomasz a question. Tomasz, does the the space that makes a skilled MD file different from an agent eventually collapse to zero?

• 46:34Speaker 02

  I don't think so. I think that's the domain of the application layer. I think if you're like a SaaS application or whatever, an AI software company today will be in the business of figuring out the managing a context database. So like the standard operating procedures associated with something, building the skills and the instructions and then selecting the models. So that you, a customer can operate with state of the art AI without state of the art AI prices. And we're going in with that. It's possible to run HubSpot entirely through Claude Fable five. You'll pay for it, but you don't want to pay for it. So why don't we just condense that and then have an application company bundle that intelligence into a software application, diffuse it across a whole bunch of different people.

• 47:18Speaker 02

  I think, I think that's the future of the, the application.

• 47:21Speaker 00

  Michael, weigh in here on where you think the value is going to accrue across the application layer, models, tune models and private data sets.

• 47:28Speaker 02

  You know, it looks like right now there's so much assembly required to really get these verticalized solutions to work in specific scenarios. It feels like the companies, the startups that can just create the kind of simplest, easiest onboarding and packaging of the orchestration, the workflows. And package it in a way to where, you know, non-Silicon Valley people can apply it are going to be the ones who are moving fastest. And I, I think it speaks to, you know, why is OpenAI and, and Anthropic spending so much time and money building out these like external consulting organizations with Accenture and Blackstone and all these guys.

• 48:13Speaker 02

  It's because, you know, there's a lot of assembly required to get this across the entire business landscape. And so I, I think you can't minimize that. And Silicon Valley has been great at creating companies that just dumb down and make the experience much simpler and easier. And I, I think that's thematically going to be an important concept going forward.

• 48:36Speaker 00

  Do you think we're still going to have these private equity dash AI lab partnerships in, in 10 years' time? Or is this simply just, we're going to bridge this temporary chasm in AI deployment? That is simply a, a artifact of a immature technology reaching the market before it's, you know, fully baked.

• 48:57Speaker 02

  Well, I mean, it looks like we're going to have it for some period of time, but that period of time is really can we materially impact adoption, right? Because the amount of capital that's been raised, as we all know, the amount of capital that's about to be raised from the IPOs, you know, you have to begin to create tangible ROI at a certain point, especially after you're public, right? And so at that point, there's a measuring stick. People want to see the numbers. And so I think they're on the clock to be able to prove, hey, there's tangible ROI coming from this industry and this industry and these companies. And so they're just doing everything they can to load up and increase the likelihood of that adoption and kind of successful tangible ROI being validated.

• 49:41Speaker 00

  All right, we're gonna, we're gonna scoot through a couple of topics really quick before we run out of time because there's a lot more I want to get you guys on. First of all, Tomasz, if you look at OpenRouter's data and you see one of the most popular models in the last week, the names are DeepSeek V4 Flash, MIMO V2.5 from Xiaomi, Hi3 Preview from Tencent, and then Minimax M3 from Minimax. I view that as startups being intelligent, going back to our model routing question and kind of choosing what's the ur model to guide things, that startups, even though they're very AI-intensive, might already have in place ways to offload some compute away from these kind of frontier leading models, and therefore they're not going to get whacked by the cost concerns, because the enterprise customers scream about for weeks now.

• 50:23Speaker 00

  Am I correct there, or am I being too optimistic about where startups have been deploying their AI inference in the last six months?

• 50:29Speaker 02

  No, I think you're exactly right. You're seeing a lot of shift to open source models. I think it's why it's critical that there's a dynamic US open source model ecosystem. Google's pushing in NemoTron, RC, Nvidia, I think Nvidia's committed like 23 billion to open models. So open models are incredibly important for the ecosystem. I think they allow application companies to compete with the labs, just like we were talking about. And then if you look, we were analyzing the data about six months ago, looking at open source adoption, the very first companies to adopt open source models were the ones with business models with small gross margins, which makes, you know, it makes sense, right? Like, if I don't have a lot of money to spend on infrastructure, I'm going to go and buy, you know, commodity AI, let's call it white label AI.

• 51:11Speaker 00

  Wait, negative gross margins are bad? Curse your topic, those are great.

• 51:15Speaker 01

  Yeah, it turned out pretty well. But yeah, so wherever, you know, when there's a need and the market fills, the beauty of capitalism.

• 51:22Speaker 00

  Shout out capitalism.

• 51:25Speaker 00

  All right, does anyone else want to weigh in on this before I take us in an entirely different direction?

• 51:28Speaker 02

  Just one more point there, which I think Tomas is right. There's also one other part when you talk about where the value accrues, which is we're all talking about models and which model am I going to use for this and that? That's obviously going to be abstracted away for the vast majority of people. And you're going to show up and say, I have this job. I want to do this thing. And whoever that solution provider will be, open router, you know, might say, great. This is the lowest cost and best model for you to use for that. And by the way, here's the compute that is the most regionally best placed and available and lowest cost for you. And so, you know, normal humans are not going to think about these things. It's like, what spark plug do I want in my car? It's like, I have no idea. Just give me a spark plug that works.

• 52:09Speaker 00

  Yeah. Well, this is why I think that the open router value add or the mode that it has is its auto switcher that chooses models for you and different providers for you. As an open router user, I love that because it takes that off my plate. But it also means that it becomes not just my gatekeeper, but also my tour guide into the world of AI, which I think is going to be a really important door to hold on to. Unsurprisingly, they just raised, someone help me out here, 113, something like that.

• 52:33Speaker 02

  Yep.

• 52:34Speaker 00

  In the last month, I forget the exact number. All right, turning the page, seed prices. Now, I've been a journalist covering venture capital since I was in college, which is getting to be pretty long ago. And if there's one thing that everyone agrees on is that for my entire career, seed prices have been unsustainable, too high. They're breaking seed economics and no one can make money anymore in seed investing. And then people still do it. So if you take a look at this chart that I now have on your screen, this is some data from our friends over at Karta. And as you can tell, we have reached a new era of seed pricing. If you're on the audio version, imagine a chart that's kind of flat, but trending up. That then goes parabolic in the last couple of quarters. And what it shows is that the 95th percentile for a seed rounds in the US that Karta can see have now have a valuation of $174 million.

• 53:20Speaker 00

  90th percentile, 94 million. And those are up from about 66 and 50 back in 2022. So is this what finally breaks the seed market and page? How are you managing to find entry prices into companies that actually are attractive enough to work for your fund economics?

• 53:34Speaker 03

  Great question. I mean, I think like when I think about it, I think about understanding valuations on a case by case basis. So when we think about the exit potentials of some of these businesses, there are markets where companies that may have been able to charge one price in software days because they're not doing the work can charge three to seven X. And so that means that down the road, there may be an exit outcome that's three to seven X like what we've seen before. So I'd say we we take like a very case by case approach to investing. And I think if you're looking at companies in the same pools that everyone else is, the prices will definitely be higher.

• 54:18Speaker 03

  And we've seen them continuously go up in in the past.

• 54:22Speaker 00

  Michael, your fund backs other managers to some degree. So I'm curious, how are your, you know, horses in this race dealing with seed prices that to me look not just unsustainable, but just uneconomical for early stage investors?

• 54:38Speaker 02

  Yeah, so here's here's what we're seeing. At the pre seed level, which is we're mostly in these emerging managers that are writing the very first check at day zero into these companies. From a pre seed basis, it's still you still see great managers getting in at low valuations. At the seed stage, I mean, my take on this is if we track the companies and we see who's doing what is that, you know, that median valuation that you have on the chart perhaps is a little overpriced based on our seasonal, you know, place where we are in kind of history right now. But I'm going to take the slightly more provocative angle here that the that top 1% or top 5% is likely

• 55:21Speaker 02

  underpriced because the scale, you know, the scale of the opportunity and where we are at this moment in time.

• 55:29Speaker 02

  You know, means that these outcomes are big. We already know that these companies are scaling revenues, you know, unbelievably quickly with, you know, less resources than ever before.

• 55:39Speaker 00

  Well, I didn't think this most scorching take of the show will come from the other guy in a suit, but here we are, Michael, doing us all a solid. Okay, so putting that in perspective, Paige says that we're seeing outcomes get larger. You're saying that the leading companies might be underpriced, the implication being that the exit they're heading towards is going to be truly staggering. And if I could take that one step further, that the fact that we're looking at three roughly trillion dollar plus IPOs this year, therefore, won't be an anomaly. It'll actually become more the norm down the road.

• 56:08Speaker 02

  Well, what we, what we do know is that in each one of these movements, be it the late 90s, 2008 to 2015, or now where we sit at this moment, you know, the, the kind of destination point in terms of valuation, the outcomes are always way larger than what we anticipated or what we saw, you know, in the last run. And obviously, we're seeing this now with, you know, 1.7 trillion dollar IPO that's happening in two days. And, you know, a 985 billion dollar round that Anthropic just did. And so, you know, we're seeing this in real time. So you have to think that, that, you know, valuations are going to level set to accommodate and/or just reflect that the outcomes are bigger. I would just argue

• 56:48Speaker 02

  the, the bigger issue here may not be valuations and it may not be, oh, are we paying more for the same type of companies or the same kind of outcomes. The bigger issue is with these IPOs that are happening and all the liquidity that goes back into the market, we know that, you know, the typical kind of LP and early-stage VC funds in all of our funds, family offices, high net worths, et cetera, just spent a disproportionate amount of their VC allocation in late-stage secondaries over the last two to three years. They're now going to get generational returns for doing that.

• 57:27Speaker 01

  Are they going to reinvest in small early-stage funds that go for 10 years? Or are they going to say, hey, this late-stage pre-IPO thing is the way to go? And I'm just going to continue to really look for those kinds of deals. That, I think, has more of an effect on the market than the fluctuating valuations, because it means the source of capital that feeds that seed stage, the pre-seed stage, compositionally may not be there in the same way it was in previous years.

• 57:57Speaker 00

  The numbers are getting so big. I feel like the Mendoza line for technology poor just keeps going up. It's staggering now what constitutes wealth. Even in my friend group, the people who worked for Anthropic for a while, they carry themselves differently in group chats, it feels like. They just have more swagger to them. But, Tomaz, the idea that these highly-valued seed rounds are not overpriced because of potential outcomes being so large really does put a lot of emphasis then on selection. Because if you back one of these and it's not one of those outcomes, you're going to overpay dramatically. So does this mean that we should see greater differentiation in seed-stage returns based on, essentially, GP discernment?

• 58:41Speaker 01

  Well, I think so. I think the venture capital market's evolving a lot like the public markets did, where you have indexes and then you have concentrated funds. We're clearly in the more concentrated category. Both strategies can work very, very well. But ultimately, selection is what matters, is power law underpinning all of this. And I agree with what Michael said. You look at, I think, Vencap published...

• 59:04Speaker 00

  Appropos of nothing, you know?

• 59:07Speaker 01

  Vencap published a study. You look at rolling five-year periods and the 75th and 90th percentile, 90th and 95th percentile exits, and you can see them going up in each year much faster than inflation or even venture inflation. So I think that's definitely true, that the returns are there. And what we're seeing with these IPOs is just liquidity is tremendous. I do wonder what happens to the secondary markets? We've seen huge inflows into the secondary markets. Do the secondary markets actually shift to the next, say, top 20 companies? And will investors want access there? And then the other question is around M&A, right? M&A has been historically very difficult within AI. Now you have a lot of national security concerns.

• 59:51Speaker 01

  And so you have many, many companies... With large valuations, the total number of buyers who can afford, say, $50 billion exit is probably fewer than 10, right? Yeah.

• 1:00:04Speaker 00

  Yeah.

• 1:00:04Speaker 01

  So what do those dynamics look like, TBD?

• 1:00:07Speaker 00

  Okay. Just for fun, because you kind of brought it up. Do you think that we're going to see any nationalization of the major American AI labs? This has been discussed by both. This is a great list. Bernie Sanders, Sam Altman, and Donald Trump. And I'm not quite sure if that's the coalition I expected to see forming, but I'm very opposed to this. I'll just be honest. But I'm curious if I, if I should actually be afraid or not.

• 1:00:29Speaker 01

  I don't know what nationalization really means. I mean, do you notice this government took a position in Intel and that's done very well, right? There's been some talk of a sovereign wealth fund. We will see what that happened, what will happen. You know, it's like nationalization, the creation of government-appointed monopolies, like in the case of alcohol distribution and also telephone networks. I really would not like to see that. I think there's a ton of regulatory capture that exists there. And, you know, the history of Silicon Valley is tied to the dual-use technologies, where there are technologies that are used both for the government and the private sector, the labs notably coming out of that. So I do think it's important that these major labs do have relationships with government. So I don't exactly know what nationalization means, but on the whole, you know, being capitalist,

• 1:01:14Speaker 01

  I think less regulation and less government involvement in the evolution of technology is a good thing.

• 1:01:19Speaker 00

  All right, we can boil that entire answer down from tomorrow's to hell no. All right, two in line. Now, I have one question for each of you, because I picked out my favorite of your portfolio companies and I want you to brag about them for a moment. This is your time to put the founders in the spotlight. And, oh, Michael, you're first. So there is a war going on in the Middle East and there was a helicopter that went down and it was captured. Sorry, the pilots were saved by a drone vote from Sironic. I believe it was a Corsair and I believe you're an investor in this company. So tell us why Sironic is the coolest thing.

• 1:01:48Speaker 02

  Yeah, absolutely. We're an investor in Sironic via one of our fund positions, which is Silent Ventures, an incredible pre-seed defense tech focused fund. Sironic is just, I mean incredibly impressive. They've executed like nobody's business. You can see in the valuation of the company and the rounds they've done, just how fast that business has moved. So yeah, it was pretty cool watching the news last night and they talked about the Apache helicopter that was shot down. And that, you know, immediately two of these autonomous boats were sent out to pick up the crew out in the Strait of Hormuz. I mean, it's kind of a, you know, perfect sales video for Sironic.

• 1:02:31Speaker 02

  So yeah, we're thrilled about the company. I mean, it's a no brainer, you know, that kind of product. But you can start to also see, I mean, just FYI, how these defense tech focused companies who where the demand and the instant revenue for them, you know, is coming strictly from defense, how that application, how that value proposition can be applied, you know, in many types of ways. So yeah, it's a phenomenal, phenomenal company.

• 1:02:57Speaker 00

  Shout out to them. Also, Vatten Systems, Android makes some sea drones and Blue Water Autonomy, I think is also in the mix. So it's one of those sectors, one of those startup niches that I think is really, really awesome and more deployed in the battlefield than I thought. I thought Sironic was still bouncing around the harbors to show off their cool tech. I did not realize we had enough deployed that two of them could go save some pilots. So I was very impressed by that. Shout out to them. All right, Tomaz, you're next. Open source in the AI era. You are an investor in Mother Duck, which is the commercialized version of DuckDB. I actually got to meet them at a recent MCP event in New York. I got to talk to their head of AI, I think.

• 1:03:36Speaker 00

  So tell me about why Mother Duck is the right choice in the AI era and why open source will not lose all of its value to vibe coded infra from the AI.

• 1:03:45Speaker 01

  Yeah, great question. So Mother Duck is a company that commercializes an open source technology called DuckDB. DuckDB is a very small analytics database that can scale to just as big as the very large analytics databases. But because you can have many small databases, it's perfect for agents. So you could spin up a million different agents. Each of them could have their own DuckDB or Mother Duck instance. And then it's all controlled from a central layer.

• 1:04:11Speaker 00

  Awesome. And how's the company doing? My friend Carly works there, so I have

• 1:04:15Speaker 01

  Oh, she's awesome. We just had the event at Snowflake Summit where we had dancing ducks outside the Jewish Contemporary Art Museum in San Francisco, right outside of Moscone. And just a phenomenal setup.

• 1:04:28Speaker 00

  Oh, I know exactly where that is.

• 1:04:29Speaker 01

  You know where it is? Yeah, the funny shaped building. Anyway, so the company is doing phenomenally well. We're products is expanding quite a bit. We just launched interactive charts and dashboards and have some more product announcements coming. They're all AI native.

• 1:04:44Speaker 00

  I'm disappointed. I have a mother duck swag item, which is two mechanical keys together with ducks on them. And I brought them home for my kids to play with. And I, I literally set it on the counter to bring out so I could show it to you. And I forgot it in the house, damn it.

• 1:04:58Speaker 01

  That fidget toy is so fun.

• 1:04:59Speaker 00

  Yeah, dude, more startups should do that. Good marketing technique. Hand out fidgets to nerds with ADD because we will just, we'll take six and we'll never let them go. They're fantastic. All right, Paige, to close us out, I want to hear about the progress of actual American reindustrialization. I know you're a backer of Nox Metals, one of my favorite startups in the entire nation. Talk to me about how this is not smoke and mirrors. And we're actually going to get some damn cold rolled steel back in the country.

• 1:05:23Speaker 03

  Oh, yeah, we are going back to the factory floor. So Nox Metals is a next generation, next day metal servicing platform. I had never heard of the metal servicing industry before I talked to the founder, Zane, who I met four years ago. And we reconnected when they went through IC. But basically, like, there's multiple deck a billion dollar businesses in the space, both public and private. And what Knox says is they were like, okay, like if we're building this new defense technology, space technology, we're going to need a supplier that is meeting the demands of these companies that want to move faster and innovating from a hardware perspective.

• 1:06:04Speaker 03

  And so, yeah, they are, they have built an incredible suite of products that have helped them push metal out the door faster. So they're in Detroit. They just expanded their facilities there and have been cutting seal. If you check out Zane's Twitter, it's, it's really cool because they're posting like videos of their bandsaws and the team on the factory floor. And they have a big announcement coming out next week. So stay tuned for that.

• 1:06:32Speaker 00

  Michael, thanks for coming on. I really appreciate it. Where can people find more about your firm in case they want to get in touch?

• 1:06:37Speaker 02

  Castalia dot capital.

• 1:06:40Speaker 00

  Very simple. Tamaz, what is the Theory Ventures URL?

• 1:06:43Speaker 01

  Theory VC dot com.

• 1:06:45Speaker 00

  Theory VC, why not Theory VC? Was it taken?

• 1:06:48Speaker 01

  Oh, we have that one too. And Theory Ventures, but Theory VC dot com is a dot com.

• 1:06:54Speaker 00

  Man, talk about traditionalism in the venture realm. Geez, I thought TLDs were free range now. All right. Michael, Tamaz Page, thank you for coming on. Twist is back on Friday. My name is Alex. I'll see you then. Bye.

• 1:07:04Speaker 05

  Thanks for watching This Week in Startups. If you liked this episode, check out more. If you're a startup founder, Founder University Cohort 13 kicks off this fall. It's a 12-week program that provides guidance on building your product, launching to real customers, and pitching to investors. Top startups receive $25,000 or $125,000 in investment. Apply now at founder.university/twist. Already have traction? The Launch Accelerator invests $125,000 and connects you with 500-plus investors to help you raise your next round. Apply at launchaccelerator.co. If you're an accredited investor looking to gain access to quality deal flow, apply for Jason's Angel Syndicate at thesyndicate.com. We find two to three

• 1:07:48Speaker 05

  deals a month. And check out This Week in AI, Jason's experts-only roundtable with top AI founders and operators every week. Find it thisweekinai.ai. Check out the Twist ticker, our daily newsletter, at thisweekinstartups.com/ticker. Thanks again to our sponsors for making today's show possible. Follow the show on Instagram. Follow the show on X.com. This Week in Startups publishes three days a week, Monday, Wednesday, and Friday at 5:00 PM Central Time. You can submit an audio or video file question by emailing it to thisweekin.com.