20VC: $3.5BN - The Price Zuck Paid for Thinking Machines Co-Founder | Goldman Sachs Acquires Industry Ventures for $665M | Softbank Borrows $5BN Against ARM Holding to Invest More Into OpenAI

AGENDA: 03:44 Rory Is So Old He Worked with Arthur Rock!!! 07:28 Goldman Sachs Acquires Industry Ventures for $665M 16:37 Thinking Machines Co-Founder Raises $2BN and Then Leaves for Meta 29:36 SoftBank Goes for $5BN Leverage Against ARM Stock To Buy More OpenAI 39:35 More Data Centres Than Offices: Are We In a Bubble 43:28 Where is the Alpha in Venture in 2025 51:48 What 90% of Managers Get Wrong About Portfolio Management

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

• 0:00Speaker 00

  Everything in life you can price as an option.

• 0:03Speaker 01

  In the face of unprecedented wealth, I'm shocked to discover that most people behave badly.

• 0:07Speaker 00

  I don't know, man. Something's broken in, I think, the way that we're evolving as humans. If everything ultimately reduces to what's in it for me.

• 0:18Speaker 01

  Would you prefer $2 billion in Thinking Machines unlisted stock with the chance to be amazing or the chance to go burst, or $3.5 billion of liquid Facebook stock over the next five years?

• 0:29Speaker 00

  What I'm hearing Rory say is essentially reduce it all to fuck the big VCs. They're playing the momentum game. If shit happens, shit happens. They can handle it. This is life.

• 0:39Harry Stebbings?

  This is 20 VC with me, Harry Stebbings. It is my favorite show of the week. Jason Lemkin, Rory O'Driscoll, and one of the OGs of seed investing. He just launched his new fund. I never do LP checks. Never. When Roger did his fund, I was begging to be an LP in Roger's fund and also writing my largest ever LP check. Roger is one of the greats. Today, we discuss everything from Andrew Tullock leaving Thinking Machines to rejoin Meta, to SoftBank borrowing $5 billion against their arm stock to invest more into OpenAI, industry ventures being bought by Goldman Sachs and what that means for the future of venture, and so much more. I want these shows to be the best shows you listen to every week.

• 1:22Harry Stebbings?

  Let me know what I can do to make it better. Harry at 20vc.com. But before we dive into the show today, now, most people who get scammed never talk about it. And if it can happen to tech savvy professionals, CEOs and investors, it can happen to anyone. But the problem isn't just losing money, it's that today's scams, they're built differently for a very new world, one where AI can generate convincing messages in seconds and fake sites look more like real sites than the real thing. Traditional tools were not built for this future, and that's why Guardio exists. Guardio is this incredible predictive and proactive engine. It leverages advanced AI threat detection to block highly targeted, socially engineered scams

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• 2:51Harry Stebbings?

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• 3:35Harry Stebbings?

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• 4:20Harry Stebbings?

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• 5:03Harry Stebbings?

  learn more about Finn at fin.ai/20vc. You have now arrived at your destination. Roy, what was it like co-investing with Arthur Rock?

• 5:15Speaker 01

  I actually have invested with Arthur Rock, and I'm totally willing to talk about it. That shuts you up, you little punk, right? And let me tell you what it was like investing with Arthur Rock. He was the scariest dude I ever saw. He was old at that time and just as grumpy as when he was young. And when he said things, you just trembled in fear. So it was pretty awesome investing with Arthur Rock, actually. And you just like heard a guy speak. He was literally the first VC on the West Coast who did Intel. And he was pretty direct. It was great, is the answer.

• 5:47Harry Stebbings?

  Well, there we go.

• 5:49Speaker 01

  And you thought it was just a rhetorical bullshit question.

• 5:52Harry Stebbings?

  I did, I did. I mean, Arthur Rock was like 1960s, 1970s. I mean, like.

• 5:56Speaker 01

  He was still doing deals in the thing.

• 5:58Harry Stebbings?

  I knew you were old, but.

• 6:00Speaker 01

  I did, he was still doing deals in 2004. Yes, Arthur Rock wrote checks in 2004, 2005. I was in a board meeting, only one or two. He was pretty damn impressive.

• 6:10Harry Stebbings?

  Yeah, Jason.

• 6:11Speaker 01

  And as I say, you just were scared.

• 6:14Harry Stebbings?

  I mean, no one's going to argue with him, are they? It's like, you know, are you written out?

• 6:17Speaker 01

  No, there's a sentence, Mr. Rock, I think you're wrong when you said that. Just did not come out of my mind. And I'm pretty punky and I was even punkier then. But no, I'm going with, this is received wisdom down from the mountain. This is, you know, cards and tablets. I'm taking it as well. By the way, we lost money on the, no, we didn't actually. We made money, we made money on that deal. Yeah, we did.

• 6:35Harry Stebbings?

  Roy, when did you start in venture?

• 6:37Speaker 01

  1993.

• 6:38Harry Stebbings?

  I was born in 96.

• 6:40Speaker 01

  Oh, that killed the conversation just fucking dead.

• 6:43Speaker 03

  You know, Harry, you think it's funny, but I say, you know, when you, when you come out here and you go to Y C Demo Day, you're gonna feel old now.

• 6:48Speaker 01

  I do. I already feel old. I was in Stockholm for four years.

• 6:51Speaker 03

  You're not. I mean, when we met you, when the three of us met you, you were young. You're not young anymore.

• 6:55Speaker 01

  I hope we're just taping on this. It's great content, but my partner Andy has this great line. He says, the real problem with this industry, he says, there's a huge period of time where everyone says you're a little too young. And then there's this brief shining moment where you're good. And then there is the, when is he going to retire moment? And it seems to me it's like 10 years each and three years in the middle. And you know, what the fuck?

• 7:14Speaker 03

  What about the moment when someone comes out of it and decides to do another institutional fund after being wildly successful? That's the craziest one of all, isn't it? Why would anyone do that? Why would anyone cash out at the top of the game, go out and manage their own capital and then have to deal with LPs? What a headache, man. That's like a sucker bed, isn't it?

• 7:32Harry Stebbings?

  Dude, my favorite thing with that is LPs. For the first three funds, you know, there's no DPI, there's no DPI, there's no DPI. And then you return a shitload of DPI. And then LPs go, mm, but are they really hungry anymore? Because they've made a lot of money.

• 7:47Speaker 03

  That is, that is so true. That is so true. You can't win, Harry. You can't win.

• 7:54Harry Stebbings?

  I had LPs, Roger. I don't know if you know this. You were like, oh, but is Roger still hungry? I'm like, have you met Roger?

• 8:00Speaker 03

  I just dive the shit in, man. It's all for the ego.

• 8:03Harry Stebbings?

  Guys, before we dive in, there's one bit in our last show with Roger I did. And he said, I plant both feet on the ground every morning and I say, let's fucking go.

• 8:14Speaker 03

  Go.

• 8:14Harry Stebbings?

  And I just love that. It's so good.

• 8:17Speaker 01

  That is so much.

• 8:18Speaker 03

  I say that to my AI agents now, too. They've been working, the problem is they've been working all night. I'm already exhausted by the time I say it to them. They think I'm kidding, but I'm not. They've been working all night.

• 8:30Speaker 01

  It's the strength of your relationship with your AI agents that's just beginning to worry me ever so slightly. I just want to put that out there.

• 8:38Speaker 03

  What a world we're living in. Can you believe when we all started in venture, obviously at different times, and here the four of us are?

• 8:45Speaker 01

  Totally.

• 8:45Speaker 03

  It's just like, what is going on, man?

• 8:48Speaker 01

  It's a, it's a good time in a bad kind of way.

• 8:50Harry Stebbings?

  Guys, I'm so excited for this. We have a very special guest in Roger, one of my favorite people from the industry. And we're going to start with very fresh news that Industry Ventures has been acquired by Goldman Sachs. Six hundred and sixty-five million dollars as the starting price with, I think, a three hundred million increase depending on performance over the next five years up to 2030. They have seven billion dollars under management as an asset manager. I wanted to start with this. How did we analyze and how did we think about this on the breaking of the news last night?

• 9:23Speaker 01

  Good for hands. Good for the founder. He grafted for 25 years. It felt like, I think it was just after the crash in 2000, built that secondary business and great entrepreneurial act and well done. I mean, let's start with that. Just well done to the guy.

• 9:38Speaker 03

  Can I ask an ignorant question to Roger and Rory, maybe? I should know that I don't know how fund-to-fund economics really work. So at first I read it and it's like, one, congratulations for not pushing to a billion. It's like 970 with the earn-out. It's like, congratulations on letting the ego walk it back and not putting your fist on the table and saying-

• 9:55Speaker 01

  That's cute.

• 9:56Speaker 03

  In 2025 founder language, it has to be over the top. Like, that was one thing. But then I stepped back and I thought for a minute, hold on, they've got seven billion under management, right? And here's where the math, like, I should know this, I don't. I know it's a fund-to-funds, but imagine you're taking home a minimum of 20% of that. You could do more. That's 1.4 billion. What am I missing?

• 10:15Speaker 01

  No, no.

• 10:16Speaker 03

  What am I missing in the math?

• 10:18Speaker 01

  You're missing the math.

• 10:19Speaker 03

  I know I'm missing the math.

• 10:20Speaker 01

  Yeah, because it's just, I mean, you don't get quite that much. I mean, you're implicitly asking two questions, maybe. One is how are asset managers valued?

• 10:28Speaker 03

  Yes.

• 10:29Speaker 01

  And then separately, if you're the owner of a business, when should you sell versus keep it and just keep the income stream? On the first, I mean, look, this thing traded at roughly 10% of AUM, right? And I actually went and looked it up because the mental model for assets under management to kind of enterprise value is very varied, which makes sense because there's different models. I mean, Carlyle and KKR, where they own all the economics, they roughly trade market cap 20% of AUM. In other words, if you manage a hundred billion, the entity is worth 20 bill, right? Here, which makes sense as a secondary because the economics aren't typically quite as good as primary investors, it's at 10%. And then you can go all the way down from there to kind of public asset managers trading at, you know, 1 or 2% of AUM. So a 10% felt kind of about right for this kind of thing.

• 11:15Speaker 01

  I think a little bit in line with Stepstone and Hamilton Lane that are publicly traded fund of funds as well. So it fell around the right price.

• 11:22Speaker 00

  Much as I hate to agree with Rory, because I don't know, I have so much joy disagreeing with Rory. I actually used to be in this business. I was in financial institutions, M and A, at the very beginning of my career and sold asset managers. His analysis is spot on. This is being kind of a hybrid. And if you look at it as a multiple of revenue, you know, if you think of Jason, if your your numbers, the the 20% of you were to say the expected earnings of that pool is 20%. As a fund of funds, I get 10% of that, right? So it's like 2%. So call it 140 million. And then you get some management fees on top. But of course, if you're to say 20%, it's probably not 20%. It's probably like 13 or 14%. And you adjust it, then you're saying it's probably like 10 times revenue.

• 12:06Speaker 00

  For a very, a very, very solid business with a great brand. And I honestly do think that, you know, they had started out early in the primary business. Actually, industry was one of the first institutional LPs at IA. So they were an IA one and two. But obviously, their secondary business now dwarfs their initial investing business and funds. So kudos to Hans. It's been a grind, but they have really ridden the wave beautifully. But I think it is a straight on market deal.

• 12:34Harry Stebbings?

  And for GS, the rationale behind it is they can push a huge amount of their private clients into industry moving forward?

• 12:39Speaker 01

  Yes. I mean, it's a platform for them. I mean, look, all the public asset managers are desperately trying to get into private assets. Because, I mean, at the most basic, the S and P, you can get your S and P exposure for less than 10 basis points versus 2,000 basis points running private capital. So if you were an asset manager in public stocks, your business is eroding away super fast, active management's going away. If you want to be an asset manager and Goldman is a big, big asset manager, getting a platform like this that you can expand just makes a ton of sense. So you're right, Roger. They're probably paying 10 times sales, which on a 50% margin business is 20 times earnings. It's a very healthy price, but they're sitting there going, we can jam this through our channel, expand this 10x and

• 13:25Speaker 01

  Keep our asset business going with some high expense, high fee assets when you know your public assets aren't nearly as profitable.

• 13:32Speaker 00

  There's also one, one other point I'd like to raise. You're a hundred percent right, but just a little insight on Goldman. So Goldman has this platform called Apex and Apex is a platform that is for their high net worth individuals where they bring these kinds of deals, primary and secondary deals to their ultra high net worth clients. This is something now where they can actually institutionalize it, make it create much more product and it's just, it's something else to give to their ultra high net worth clients. Plus, industry itself has institutional clients that can now become GS clients. So it's kind of a win-win both from a product perspective and from a distribution perspective.

• 14:13Speaker 03

  I'll tell you what I like about it. Maybe I'm in the wrong platform, but I get these calls from Morgan Stanley to invest in private equity. And first I'm like, have you looked at my exposure? Like, don't you have access to my account? And the ideas are so dumb. They're so dumb. They're so dumb. And I'm like, as long as Hans and team stays, I think they said they had like 18% IRR over history. Like if that's every day in and out, that's a good baseline for folks to get into, right? If they can productize that, I would take that 100 days out of 100 versus the crazy calls I get from Morgan Stanley. We'd like to get you a little more private equity exposure. Well, I'm 90% as it is, guys.

• 14:50Speaker 03

  But maybe 95 is the right diversification.

• 14:54Speaker 01

  And I think the other thing to note that's interesting is, you know, what kind of GP-led businesses can in fact be 100% sold? And I think the interesting insight is probably not a pure venture firm. Cause you know, you can't sell 100% of Benchmark because then you don't have Benchmark because you don't have the five great guys who are doing Benchmark. Whereas this, it's a more productizable business. It's got a lot of secondaries. It's a lot of fund to funds. Just like, you know, Greenspring, which was a large LP in scale, got stole to Seppzone, same kind of thing. These are the kind of businesses that can be sold 100% into a larger institution and it can work for both sides. Obviously the seller gets a great capital gain and the buyer Or gets kind of something that they can blend in.

• 15:38Speaker 01

  You couldn't do that with a venture firm, I would argue, right? Especially a small venture firm because in the end, you know, all you have is the three people and if you cash them out a hundred percent, then you don't have anything. So I will admit at times over the last 25 years, you kind of look at the secondary business and you go, that's not nearly as interesting as the business we're in. I love being a primary investor. I love doing my deals. But one thing you recognize is you can't sell this business. You can't, and Hans could sell his and he did. So well done, Hans. Who's laughing now?

• 16:05Speaker 00

  It's the fee stream. You're, you're a hundred percent right. Like you had mentioned, like the, you know, the Blackstones and the Carliles and folks like that. Asset gathers. I mean, ultimately Hans is an asset gatherer. Most of the revenue from it comes from fees. He's built a machine. I mean, kudos. He built an asset management business.

• 16:22Speaker 01

  Agreed.

• 16:23Speaker 00

  The rest of us here do not run asset management businesses.

• 16:26Speaker 03

  Well, give Harry time, but point taken. Give Harry, give Harry a couple of years.

• 16:30Speaker 01

  The more your business is predicated on either a brand or some institutional thing, the more it's like a business and the less it's like just three to five partners picking great investments, the more monetizable it is. I could totally believe that your media company with a venture fund attached could be monetizable in a way that Roger's fund or my fund will never be. By the scale will never be, right? You know, obviously Andreessen, who, who has clearly embarked on the AUM and great investing journey to bigness and maybe an IPO believes the same thing, right? There are some businesses that are-

• 17:04Speaker 00

  She's a general catalyst, same thing.

• 17:06Speaker 01

  Agreed, general catalyst, stated the same thing. And yeah, I would argue, I would argue Y Combinator, for example, not saying it's good, but it is the definition of a business. It's independent of the greatness or not of the current operators. It kind of has heft over and above that, right? Those kinds of things can be sold. But if your only asset is, I mean, we're going to talk about Roger's new fund in a second, but let's be clear. The only asset in Roger's new fund is Roger's IQ as a stock picker. God help us, right? So, you know, without Roger, there's nothing, right? I thought that was good, Roger. I thought it was a message, right? And, you know, that, that's just not a monetizable asset. And it's a continuum, but maybe you can sneak out as a media company. Roger and I are just destined to stay here and be simple, humble stock pickers.

• 17:47Harry Stebbings?

  This is so nice. With Roger here, you give him shit, not me, and you defend me. This is great. This is like deflection. Roger, nice.

• 17:55Speaker 00

  Anything for you, Harry.

• 17:57Harry Stebbings?

  Dude, you're too kind. Now, Jason, this next topic, I felt that you might have a perspective on, given our prior chats. Andrew Tullock leaves Thinking Machines, the company he co-founded and raised $2 billion for, to join Meta for a reported $3.5 billion. Well done, Andrew Tullock.

• 18:17Speaker 00

  Yeah, you, Hans. Better luck next time.

• 18:20Speaker 03

  I'm triggered.

• 18:21Speaker 00

  Should have done computer science.

• 18:23Speaker 03

  I'm triggered.

• 18:24Harry Stebbings?

  Jason, what did you think, dude? I know you have perspective.

• 18:26Speaker 03

  Literally, I was on LinkedIn just yesterday, and a founder I've known from a distance for a while, I didn't realize he'd left his unicorn and just raised 20 million from Excel to do his next company. I'm like, I guess it's totally cool today to do that. I guess it's totally cool to leave Thinking Machines. Didn't it happen with Ilya's co-founder too, right? I get it all confused who went to Meta. I guess it's just cool to like, forget about raising 2 million a demo day and quitting or keeping the money. Now it's cool to like, raise a couple billion and check out. I just don't. And if it is, I don't know how venture should adapt, if at all. Is it just a risk factor when you invest in thinking? What was the Thinking Machines pre-money? 10 billion or something like that?

• 19:05Harry Stebbings?

  It was 10 billion post.

• 19:06Speaker 03

  Good God. And so people are checking out of $10 billion seed companies now. I feel like a fuddy duddy because when I was a founder, good God, I mean, there was no way I would leave, no matter how horrible, tough it was with my start. I would just never consider it. And now it seems it's cool. And even your accelerator will take you right back after you quit.

• 19:24Speaker 01

  And this next sentence is genuinely not meant to be snarky, Jason, even though it's going to come across as it.

• 19:30Speaker 03

  It's okay.

• 19:30Speaker 01

  Yeah, you absolutely wouldn't never quit. You would hang in there, but you also probably never face the existential dilemma of being offered $3 billion to quit, because most of the time, most people, independent of their startup, aren't worth a multiple of their startup valuation. If they're lucky, they were, you know, $500,000 a year salary. In the face of unprecedented wealth, I'm shocked to discover that most people behave badly. The loyalty conversation erodes pretty quickly when you're, you know, when you enter the third comma on the check.

• 20:00Speaker 00

  That's all fair. I understand the words. And again, you said fuddy duddy, I didn't. But the fact that the notion of these are people that backed you and believed in you and supported you, and you just peace out and do something else. I do have a bit of an issue with that. There's levels to this shit where, yes, the person sitting at the helm of a $10 billion post-money company, and their shares $2 billion, and then they go for $3.5 billion? I look at that, and I'm like, are you fucking kidding me? Like, if my kid did that, I would not be happy with my kid. I would be like, you leave the people that brought you to the dance because you see a prettier girl over here?

• 20:43Speaker 00

  I don't know, man. Something's broken in, I think, the way that we're evolving as humans. If everything ultimately reduces to what's in it for me, and there's not another vector involved. I'm a wildly competitive guy. We know that. I want to, I want to win, but it's not at any cost. And let me say one more thing, and then I'll create some oxygen for others. But like, some of these deals like Scale AI were basically, you know, I saw that, and I like, it reminded me of the old style. The asset purchase versus a stock purchase, right? Where I don't want the liabilities, I don't want all that other stuff. I just want this asset, or in this case, I just want these people. And that has now become de rigueur.

• 21:26Speaker 00

  I mean, it's hard to call it an aqua hire when you're talking about many billions of dollars. But essentially, it's an asset purchase. And I think that's something we'll continue to see more and more of. But I feel less badly about that than I do what we're talking about right now.

• 21:40Speaker 01

  Leaving aside the morality question, which I reserve the right to come back to and take a different perspective. The interesting question Jason asked is, how should investors handle this information? And what should they do differently going forward? And what should other founders do? I mean, to state the obvious, you see this interesting thread where founders are realizing extended founder vesting, and cliff vesting, and stuff like that, and protections for them versus a co-founder leaving are a legitimate part of the discussion here, right? Now, it may not even have mattered, he may not even have made his cliff, but it does point to being Very sure that you and your founders have extended vesting. I mean, if they, for example, if these shares weren't subject to vesting, then you feel even stupider as bought a co-founder and an investor. And I I I mentioned the co-founder to make sure that to make it clear.

• 22:23Speaker 01

  This is not just a VC's taking care of themselves perspective, though we'll come to that in a second. Purely from a, if you're a bunch of founders, if you're seven people, leaving a safe job to go do this startup, you got to run the game theory of how will I feel if one of my seven co-conspirators bails on me? And what should the economic penalty be to them? So if I'm a founder looking at this, I would be thinking about, is there cliff vesting? Is there six-year, not four-year vesting? Is there repurchase rights? Are there ways to make sure that this doesn't happen? And if you leave for a competitor, something really bad happens.

• 22:54Harry Stebbings?

  I'm just saying, Rory, is this not just symbolic of the conversation we had before recording, which is the increasingly transactional nature that we're seeing in rounds, which I I moan to you about. I'm a romantic. I like to fall in love with a partner, whether it's, you know, an investment or a romantic partner. It's super important to have the relationship. And now it's like, hey, highest price, auction process, zero relationship. And this is just the embodiment of that.

• 23:18Speaker 03

  Well, I think that that's just, that's been true for, since we met here. I think it's just become institutionalized with AI, with deals being done on a Saturday for nine-figure, 10-figure. What I worry about, this is just me, we're mostly early-stage investors here. We're all, we're all relatively early-stage. I don't believe liquidation preferences matter. I don't believe they're a big deal, despite what they are next. But my liquidation preference has always been, and I put it in quotes, not true, knowing the founder would never quit. That's my protection as a seed investor. Forget the the preference stack or one million raised or one trillion. If I know Roger's never going to quit, that's the best protection I can get as a seed investor. The regular stuff is at the margin, right? But if I am investing and he might quit, and no matter how good I think he is, he might quit in six months for something better.

• 24:01Speaker 03

  I guess you can adjust it on a spreadsheet, but it's a risk I've never taken in my, in my history. This has been my, my, my downside protection is he won't quit, she won't quit.

• 24:11Speaker 01

  The interesting thing here is the core asset in these investments is a group of seven engineers, which is pretty unusual compared to most deals. I mean, let's be honest, most of the time, and you correct me if you're wrong at the seed stage, but the stage we're investing at, you know, you spend a lot of time with the CEO, you meet the VP of Eng once, you just assume it's a good team, you look at the product, you try and do your due diligence, but you're not leaning in and saying this seventh, the seventh of seven co-founders in a list is pivotal to my investment thesis. So it's different here because we're talking not about the motivations of a founder person, but the motivations of an engineer person who was like an engineer academic, then remind or spent 14 years or something like that at Meta,

• 24:52Speaker 01

  went to OpenAI for less than a year and was at Thinking Machines for less than a year and then went back to Meta. As a career trajectory for an engineer, that's not crazy. I was this long time engineer, place A, I bounced out to this other place, left with them and then decided I just want to go back to the original place I was. It's it's kind of not an unusual pattern of behavior. What is unusual in this case is because of the technical nature of these bets, how much reliance we're putting on the behavior of an engineering slash academic talent pool, which probably responds fairly differently than the I'm a founder, I want to be the CEO.

• 25:27Speaker 00

  But Rory, that that last thing to me is the bit. If this isn't just job hopping and then, oh, eventually going back to the place where you kind of earned your stripes, it's founder responsibility. And I think that's what's lacking here is that notion of if I am taking on this mission with a group of people with a set of capital partners, that conveys a measure of responsibility that I'm discharging. And the minute that I say, you know what, screw that, my responsibility is to me and my not optimal out. I wouldn't even say it's the optimal outcome, the maximal outcome, the near term max. Like, who knows whether or not this is better. This may way may well not be better.

• 26:11Speaker 00

  But the fact is, the people that they left behind are kind of screwed.

• 26:16Speaker 01

  Agreed, but I'm gonna go back and first of all, I'm gonna do the money because I've known you for years and you're a financially astute person. Question, Roger, would you prefer $2 billion in Thinking Machines unlisted stock with the chance to be amazing or the chance to go burst? Or $3.5 billion of liquid Facebook stock over the next five years, just as a pure financial call?

• 26:35Speaker 00

  Obviously.

• 26:36Speaker 01

  Yes, thank you. So let's not pretend that they're equi... I mean, you know, it's such an obvious...

• 26:40Speaker 00

  No, I'm not saying, I'm not saying...

• 26:42Speaker 01

  Ten to one, ten to one better?

• 26:44Speaker 00

  Maybe. You know, but there's obviously way more option value in Thinking Machines. That could be a $500 billion company.

• 26:51Speaker 01

  No, you're exactly right. You've embedded option value versus probably highly fixed $3.5 billion plus or minus 50% versus $2 billion could be zero, could be 10.

• 27:00Harry Stebbings?

  I do also think, Rory, in the context of who gets it and when they get it, the dude was at Facebook for 14 years before. I don't think he was exactly desperate for cash.

• 27:08Speaker 01

  Agreed, and I said 14, I'm doing that from memory, but it was circa 10 at least, right?

• 27:13Harry Stebbings?

  But it makes a difference. The dude has got 100 already.

• 27:16Speaker 01

  True again, but again, back to, I wonder, and I could be wrong on this next sentence, I'm just, don't love the behavior, but just advocating both sides. Jason, you made a comment, and Roger made a comment, you know, quote unquote, "This person made a commitment," right? I wonder, when I look at the due diligence process for that deal, where you have a very charismatic CEO and mirror morality, right? I wonder how many of the VCs met him? Was there any emotional connection? I'm just wondering here, did any of them even meet him in person? He made emotional commitment to his colleagues, to his co-founders, yes. But as a VC, I mean, I'm not gonna lie and say, if you're due diligencing that deal, obviously you've got to spend your hour with the founder. You didn't get to know what the product is because they're not telling you that. Did you spend an hour with this guy or not? I don't know.

• 27:59Harry Stebbings?

  As a VC, you should be fired if you write $100 million plus check and you don't meet the co-founders.

• 28:05Speaker 00

  But Rory's point is how deep do you go on the org chart, right?

• 28:08Speaker 01

  Yeah, and I'm positing in the context of a transaction that came together where you didn't even get to know what the product is, I wouldn't assume a whole bunch of emotional... I'm just pushing on the bullshit. I wouldn't assume a whole bunch of emotional connections on either side. The big picture thing is you thrust a bunch of money at people, some of whom you met once or twice. Some of whom you maybe didn't meet at all. And less than 12 months later, one of those folks, you went back, you know, oh, well.

• 28:32Speaker 00

  So what I'm hearing Rory say is essentially reduce it all to fuck the big VCs. They're playing the momentum game. If shit happens, shit happens. They can handle it. This is life.

• 28:43Speaker 01

  Exactly. Big boys rules. People who have a billion dollars shouldn't give out to other people who decide to grab it. And you know, and you know, you might think it's bad behavior. You might think you wouldn't back him again. But let me give you a clue. It's the president's dilemma. Once you're not playing a multi-period game. And when someone offers you three and a half billion dollars, you're no longer playing a multi-period game. You're playing a one and done. You're going to get bad human behavior. Frankly, the real thing is you as a person managing money should be thinking about how to deal with those corner cases. And I don't know how you can is the hard thing. If you're paying 10 billion pre for a raw startup. Where there's proven evidence that the asset, which is those seven mines. Will be pursued by someone who's willing to offer them a billion dollars.

• 29:27Speaker 01

  Makes it real how risky those investments are. And I'm not sure what the answer to that is. It's quite terrifying, really.

• 29:33Speaker 00

  The answer is a bigger fund. That way you can, you can have a few of these.

• 29:37Speaker 01

  Diversification.

• 29:38Speaker 00

  You don't want to be too concentrated with these deals. But Rory, the way you said that, that was a really astute way of putting it. You're right. It's like what used to be a series of multi-turn games. When one looked at their career, if somebody acted badly and burned bridges, that might be their last company. They might not found another company. Here, if you reduce everything because of the scale to a single turn game. Then that wildly increases the volatility of potential outcomes.

• 30:09Speaker 01

  You're, you're exactly right. Roger and I lost money together on a deal. And I would say every one of the management team in that deal behaved well. And every one of them is referenceable by us. And you know, would give the money again, depending on the deal and have talked to them about other deals. It felt like a multi-period game. Everyone was stand up and did the right thing. I think you're right, Roger. This kind of sums just change the calculus. And you can't all rely then on people doing the right thing.

• 30:36Harry Stebbings?

  Roger, rule number one, we don't admit that Rory is right, even when he is. Which is rule number one. To be fair, that was very astute. No, no, no, no, no. We don't say this. No.

• 30:48Speaker 03

  Harry, you know, I haven't worked together with Rory in a while, so I forgot that rule. My apologies.

• 30:53Speaker 00

  It will not happen again.

• 30:56Harry Stebbings?

  Rory's cheating on you with Arthur Rock, don't worry, it's okay.

• 31:00Harry Stebbings?

  Okay, we said he left OpenAI. SoftBank reportedly securing a $5 billion margin loan secured by ArmShares to invest in OpenAI. How did we analyze this? And if they're getting loans to invest in OpenAI backed by Arm Securities, what did you think of it?

• 31:20Speaker 03

  Masa rules. Nothing new to see here. This is what he does. For better, for worse, when he has a feeling, he goes all in. All chips, max risk, personal, financial, everything. This is Masa being Masa.

• 31:33Speaker 01

  Hundred percent. This man is full risk on all the time, just wants to get the bed on the table. And has been spectacularly right at times and spectacularly wrong at times, but spectacularly willing to play, which on behalf of the audience, we should be eternally grateful. And he's not even that levered. I mean, I checked, actually. He owns 90% of Arm still in SoftBank and Arm is trading 90 odd billion. So he's got 80 billion of equitable equity there. He can lever up some more. If he can, he will.

• 32:03Speaker 03

  And I think it does tie into the story of where the hell are we going to get all this money to fund the tokens that I burn every day as a vibe coder? Like, we still don't have the answer. But reflecting on it, when I thought more about it, and it's actually a smart use of leverage. If you have a $90 billion, $100 billion position, if you're an individual, you certainly don't want to pay capital gains on it. A $5 million margin loan at an acceptable interest rate is probably a smart position, right? That loan's not going to get called, right? Under any scenario, probably, right? But it is kind of weird. It still feels like part of this whole, we're all believing in Sam, which I do believe now, but we're all believing in Sam. That trillion in revenue is coming.

• 32:40Speaker 01

  For the record, let us remind ourselves that in 2002, the NASDAQ, you did see individual stocks go down 90% from the peak. So it is possible the loan will get called. It would just, it's just unlikely.

• 32:52Speaker 00

  Yeah, the question is, again, let's just for ease of analysis, let's say that ARM is 100 billion. That's leverageable pretty much to 50 billion.

• 33:00Speaker 01

  Yeah.

• 33:00Speaker 00

  But it very easily could see him back in the news with an incremental 20 billion. He could lever this. He could take 25 billion against the ARM position easily. And then to Rory's point, and we saw this, like, the thing about Masa, I'm old enough to have seen the NASDAQ run up, the NASDAQ crash, Masa being Masa. I mean, he has had so many existential moments where he's waking up in the middle of the night, sweat pouring down his face, wondering if this is it, but he's held tight and he didn't go over the line. He went right to the line and he's come out and then his macro theses have been have been proven out. This is like a relatively low octane Masa move.

• 33:41Speaker 01

  Exactly. Exactly about that, yes.

• 33:45Harry Stebbings?

  That's a great visual for the show. Masa surrounded by fires with low octane just around it.

• 33:52Harry Stebbings?

  The thing that I find hard is like when we said about kind of where does the money come from? And then the speed of just what we're seeing, we're now building more data centers than office buildings. We're seeing demand for compute be the single biggest constraint. And I'm looking at this going, really? The bubble that everyone's saying in comparison to we're building more data centers than office buildings and demand for consumer computers just off the charts. Is this not fundamentally different?

• 34:18Speaker 01

  Well, there's a lot in that. I mean, the counterpoint between building data centers and building offices, it sounds clever, but it's to some extent trivial because who the hell is going to be building offices? Because there's no one in them. Right? The reason we're building computer data centers is because we want to put computers in out of the rain. And the reason we're not building office buildings is people are staying at home. So it's pretty obvious what you'd build. But I think stepping back, I mean, the wider comment is we go around this, is it a bubble, AI cap expand for a while and over and over again. And it's funny, I was reading over the weekend that there's this new Stripe press have this, is it Dworkesh Patel's Scaling AI and Oral History of Scaling? And I kind of read it over the weekend. Really good. And the thing that impressed upon me was The matter of fact way that a number of the people just reiterated, it was just interesting

• 35:02Speaker 01

  to hear like reiterated, one, that the scaling law has been proven to hold for six, seven years now at a high degree of accuracy. And a couple of them blithely said, you know, it wasn't a question of when it was like they're literally saying, how long did it take? Of course, it was kind of, of course, we'll need 1% of GDP to invest in computers, but then we'll be fine because we'll have AGI. My point is, what I find fantastical, because that's a shit ton of investment, they were like, well, that's what it's going to take. And of course, we're going to get to that. It was, it was the matter of fact way in which, you know, the smartest people of our generation, thinking about scaling AI, accepted that this was kind of the to do list. That's a long winded way of saying, it's not just frankly, Sam spiffing out of his butt.

• 35:44Speaker 01

  It's like a whole bunch of these folks are like, yep, this is the task we've embarked on ourselves for the next five years. And it's going to take around 1% of GDP to build a compute cluster big enough to get the flops, to get the outcome we want. They're going for it. Right? And then the only question is, you know, how does the capital get fine and can it earn a return? But if the capital is provided, this is going down. These data centers will be built. You can see these guys going, this has just held for six or seven years. It's totally predictable. The loss function is predictable. It was kind of like 10,000 computers worked, so we're going to buy 100,000, then we're going to buy a million and somewhere along the line we'll get AGI. And what's your point? And why are you even questioning it?

• 36:21Speaker 03

  I can tell you just one thing for what it's worth for me, forget the macro stuff. So I've, I've, as Mr. Vibe Coder on, on the group, I vibe coded eight apps. I haven't built a piece of software, been part of building this piece of software 2012. I vibe coded eight apps in a hundred days and we have 12 AI agents working at Saster now, replaced almost all of our sales team and our whole content team. What I can tell you from that, and, and folks have been saying this, I didn't, I wouldn't have believed this 90 days ago, but folks like Amjad or Replet are saying, you've got it backwards. Everyone will consume every available token. And what I know is today, just what we're doing today with 12 agents and eight apps, I could use 100x the tokens. Even now, like I gotta wait like 20 minutes to build one feature. I mean, vibe coding is cool, but it don't work at Google's speed.

• 37:02Speaker 03

  Our agents could all do more. So if everyone today could use 100x the tokens and think how early we are on the journey, right? You know, as we record this, it's Dreamforce week, right? Harry's going to be there, I think, this week. And as Mark points out, like, only 0.1% of Salesforce customers are really using AI yet. So it's like 100 times 100 times a something. I can see it myself. We're not remotely servicing the demand that exists today. So how it gets paid for is a different question, but I think this is so different than the prior waves where we just can't even service this demand.

• 37:31Speaker 01

  The only thing I would actually question you on, because I'd love to hear your thoughts on it, is my mental model of this is from a technical and demand perspective, it's all going to happen because the people who are building it want to build it, and Jason at the margin wants to use it. So if anything's going to constrain this, it's going to be economics. And my big picture model here is you've got the technical trends, and then you've got, you know, the economic trends. And the real, the question is, I think if it's slowed down, if it's wrong, it won't be because the technology direction is incorrect. It won't be because the demand isn't insatiable. It will be purely and simply at the margin. The marginal capital provider says, oh, my God, people, even though the scaling law is holding, the economic return from that investment isn't holding. And,

• 38:12Speaker 01

  you know, the scaling law might be log linear, but every economic phenomenon tends to be diminishing marginal utility. And at some point, capitalism is going to say, I don't know how to tell you this, guys, but you can't have your $1 trillion dream, because we just can't afford it. And we're going to have to slow down a little here. And that's what I'm trying to figure out is, are we going to get the economic return quickly enough to warrant the investment? And, you know, back in the day, you were a financially astute investor. What do you think? Put on your trading and thinking hat here.

• 38:39Speaker 00

  No, I think you've nailed the dynamics. Yes, economics will dictate that not everything that people want to build will be built, because the capacity won't exist once diminishing marginal returns reaches a point where the value of the capital is not met. I guess, you know, one vector that I'm not clear on is if there are step change advances in processing efficiency or simplification of code such that the amount of processing required per unit, it declines in a way that people don't expect, is that going to relieve some of the pressure on the magnitude of infrastructure that's being built?

• 39:19Speaker 03

  I don't think so. I think we burn more tokens. You know, all, every company is like 30%, 50% of my company is built with AI. Our engineers, our engineers came back 50% built with cursor. Does that mean they take the rest of the day off? No, what it should mean is they're shipping more features. Because instead of spending an hour on Stack Overflow, trying to find a library that was stolen or pseudo open source, I can do it in 60 seconds. So I just go build another feature. It's just, and you'll just, so you'll just, the better that gets, the more tokens you'll consume. I don't think there's this great efficiency coming. We'll just build more and more stuff faster and faster. That's why it's actually so stressful at seed today. Because so many of these companies are born almost instantly today. So, you know, it's, it's tough doing the A and the B and the C and the D and the E. But seed is really hard today because that company probably didn't exist seven days ago.

• 40:04Speaker 03

  Or being less facetious 30. And when we, when we all started, even when Harry started, startups were never good 30 days in. They were terrible. I mean, once in a while, like an off the chart CTO would build demo ware 30 days that your jaw would drop. But if you picked at it, it didn't work, right? But it's just crazy what you can build so quickly today. It makes it so competitive, it's complicated.

• 40:26Harry Stebbings?

  Loveable had their first year anniversary today. Oh, the other day. And I thought that was insane. First year anniversary, over 170 million euro. Wow.

• 40:36Speaker 03

  It's great, but it also makes that pre-seed inception phase harder, I think. Because you can't, you can't intuit differentiation in the way you used to be able to with a little bit of software. Oh my God, Aaron, Aaron and Dylan built a folder. You could put a file in, I'm in.

• 40:51Harry Stebbings?

  Yes.

• 40:52Speaker 03

  Those days are long gone. How did they do that? You mean it stores on the internet? Get me Rory.

• 41:00Speaker 01

  Yeah, no, it's moving a lot quicker. You make a comment here, it makes it hard to be seed. You're right, because you don't know. It makes it also harder to be A and B because you have to pay up. And let's be frank, we're all looking for this really, I mean, it's pathetic when you say it from the entrepreneur's perspective. What we're really looking for is that wonderful period where it's, where you know, but it's not obvious and you can invest, right? And it turns out that period may have declined to like a half an hour, right? You have the pre-seeded lovable, then you have like day three, it's exploding in revenue. And suddenly you're at 2 billion pre. It's an exaggeration. But not by a lot. Six months ago, they were raising at a couple of billion. So the time period from we haven't launched yet to, oh, my God, it's so obvious, has, as Jason said, compressed. That sweet spot is vanishingly small.

• 41:43Speaker 01

  And therefore, you're left with the choice of do you invest into acute uncertainty? Or do you invest into two billion pre?

• 41:50Speaker 00

  Acute uncertainty or businesses that aren't specifically disrupted by this phenomenon, which generally have like legal and regulatory challenges that make it not simply drive better or faster or cleaner code. It's there's a bunch of these other issues to address.

• 42:06Speaker 01

  And is that your thinking? Because, you know, we didn't say it at the start, but Roger's getting back on the field, proving his timing is always brilliant. And is that your thinking when you're back on the field as a seed investor?

• 42:17Speaker 00

  I mean, it's part of it. The stuff that we're doing definitely is less resistant to the phenomena that we're talking about on this call. As you well know, acute uncertainty does not trouble me in the least. When that acute uncertainty is expressing a deeply held, well researched thesis that I have. And that's just the nature of very early stage venture. But I do think that the issues of legal and regulatory complexity, whether it's financial infrastructure or it's media rights, copyright, patent, IP, it makes it more nuanced than am I able to develop the next base model?

• 43:00Speaker 00

  Or a great platform for developing applications at work speed?

• 43:04Speaker 01

  I think that's fair. I think, you know, actually, we had Aaron talking to some of our LPs. I'll maybe come back to that later. But one of the concepts he introduced was something I've been thinking about at the AppSlayer. And Aaron from Box is always so crisp. And he talked about the diffusion rate of this technology across enterprise as a whole. And there's going to be different diffusion rates. The diffusion rate for a lovable will be very different than the diffusion rate of AI for your complex medical prognostication. And setting your expectations accordingly and your investing thesis accordingly and varying it by virtue of the diffusion rate, I think, will be one of the key skills here. Recognizing that some markets, it's going to be done and dusted in six months. And you're right, Roger, other markets with as regular constraints,

• 43:49Speaker 01

  you know, you might be two years in before you get your first big lighthouse, vertically focused enterprise customers, but then it's bowling pin and you get the other five and six months. And there's going to be very different adoption patterns by industry.

• 44:01Speaker 00

  Harry, I'm not going to say it. Somebody might have said some relatively smart things right there. I was paraphrasing someone else.

• 44:09Speaker 00

  Aaron Levy, he's a smart guy.

• 44:12Harry Stebbings?

  What you don't know is that I prep Rory before the show and I sit down, I share my thoughts and really.

• 44:18Speaker 00

  I'm just prepping. I know he's parroting you. Yeah. Yes, yes.

• 44:22Harry Stebbings?

  You said about value in regulated markets, maybe where it's more difficult to be disrupted. Rory, we and Jason, we had this great chat last week on the ability to king make and how capital can be used as a moat. We discussed, Jason, you very well and adequately discussed polymarket raising $2 billion at $9 billion. And then this week, CalSheep, the direct comp, raises from Andreessen and Excel at $5 billion, right after polymarket's raising at $9 billion. How did you think about this? King making not possible? What was the thoughts?

• 44:53Speaker 00

  Let's be honest, what's going on here. This is the purest regulatory arbitrage play of all time. You can look at the cumulative market cap of regulated sports betting and look at how it has dropped in response to the rise of polymarket and CalSheep, who are not subject to the same rules and regulations that they are. Literally, it's, we're going to take value here and we're going to place it over here. And the combination of, at least in the United States, the current administration being extremely predisposed towards the prediction markets companies. And now CalSheep's announced that they're like they're going to India as part of their 140 country coverage. If there was a level

• 45:36Speaker 00

  regulatory playing field, this would not be happening. But for now, this is one of those circuits. So you talk about king making. I think to an extent, they are trying to run as quickly as they can to get so big and so powerful that they will not face parallel regulatory scrutiny that the legacy companies have suffered through since PASPA.

• 45:57Speaker 03

  That was in my FTX investment memo was to just get to that scale where we could push through some of these issues. I feel like we just came up just a little short. If we could have just waited for our buddy David Sacks to get in, then I think we would have really had a fun returner on that one. It's a good point. Listen, you're obsessed with kingmakers, and I think it's a good topic, Harry. I think it's right. The only thing that fascinates me on this kingmaking topic was that literally Polly Market was founded by a solo founder in his toilet during lockdown. A solo founder in his picture on Twitter, in his bathroom. That was the only place he had to work during the worst lockdown of March 2020. He founded this. It gives me inspiration that founders will come out of everywhere, right? And so kingmaking works. It is

• 46:40Speaker 03

  a real issue to talk about. But if you can solo found Polly Market out of your toilet in March 2020, who knows where the next one's gonna come from?

• 46:48Speaker 01

  Couple of things. One is, I actually think this is an example of kingmaking not mattering, right? I think Roger nailed it correctly on what's going on here. This is two non-sports betting companies who are doing quote prediction markets where all we talk about is the 10% of their revenue that's political, and 90% of their business is sports betting, but we're not calling it that. And they're just killing it because we all love to sports bet. And the number of people who give a shit about, you know, who's gonna win the Nobel Prize or whatever else they're betting on that's not sport betting is low. But everyone in America wants to bet on the NFL, and they're cleaning up, right? And good luck to them and Godspeed. That's just what's happening. Roger was totally correct. Separate comment on the kingmaking. The implied, just tracking back to last week, because my short term retention memory is actually longer than a week, Harry. We were basically saying that money

• 47:32Speaker 01

  can pick a king. And I think this is an example, and I've been thinking about it since we talked last week, and I think this is an example of where it can't. There's two good companies that both get a ton of money, they're gonna slug it out, and they're gonna get relative market share. They both need capital, but I don't think there's kingmaking going on here, because there's two reasons kingmaking work. One is if you give one company so much money that they can overwhelm the other, then maybe that's kingmaking. And then the other is we're getting money from brand name perceived VC makes the customers default to you. And that actually happens at enterprise software. If you're awesome CEO, and then you get three awesome VCs... And you're selling mainly to tech companies in the valley, you probably have a herding effect. I mean, I think Brett Taylor is an example of someone at the high end.

• 48:15Speaker 01

  There's a perceived, oh, Sierra is amazing, would you want to take them on? Kind of vibe. I don't think that's true for a second. I don't think anyone betting on Polly or Kalshi gives a damn how much money they have, provided they can pay their bet and gives a damn who that money came from. So I think this is an example of non-king making, to be very clear. I think it's just making the bet.

• 48:36Speaker 00

  I, I think it's, but it's definitional. Like, what does king making really mean? I think to me, king making means something different. And to me, king making doesn't need to be one company. Call it an oligopoly, where a small group of companies that receive an exceptional amount of funding relative to everybody else. Here, what I would refer to as the king making is more money to spend on marketing, distribution and team. And that, because at the end of the day, bonusing, like, that's what makes these companies go around, is the ability to-

• 49:06Speaker 01

  Spend money at marketing.

• 49:08Speaker 00

  Exactly. As long as LTV to CAC makes sense, and that's exactly what they're doing. So to me, that's the money, but, but you're right, customers don't give a shit. They don't care how much money Kalshi's raised or Polly Marcus raised.

• 49:19Harry Stebbings?

  I'm probably allowed to say this because I'm outside the borders and we're not going to go into a political, but am I the only one to also realize that Eric Trump is on the board of one, another Trump is investing in the other, Howard Lutnick's son happens to run the fastest growing investment bank? My word, that seems like an awful lot of coincidences in one go. I wish I was as good at picking as the Lutnick's and the Trump's. What a, what a great deal, huh? For a regulatory arbitrage play, Roger.

• 49:44Speaker 03

  It was like the old days when you could be, work at Y C and have your own fund at the side, at the side, you didn't have to invest through Y C. It's a great deal.

• 49:50Harry Stebbings?

  A hundred percent.

• 49:51Speaker 00

  If you're in crypto, energy, gaming, prediction markets, right? There's those handful of things which this administration has very tight connectivity to. And if you want help and support and you're in one of those industries, it's extremely clear what the, what the playbook is.

• 50:09Speaker 01

  Which is why an intellectually coherent political philosophy is to say regulate as few things as possible because the more things you regulate, the more of this kind of behavior you see. And that kind of behavior you tend to see from every party because the minute something is regulated, people have an economic incentive to incentivize the regulators, right? I think the only real objection people have is the current generation appears to know how to do it at scale. We're not going to do trivial little jobs where, oh, I get a nice job when I leave my regulatory position and I get a nice $500,000 a year job. No, we're just going to go wholesale here. Just give me 5% of the company. It's just so much quicker. So the efficiency of the regulatory arbitrage has definitely gone up. But I think the zoom out comment is whenever you have regulation, there are economic incentives

• 50:54Speaker 01

  to get close to the regulators. And I think that's why, as I say, you should have a bias to regulating as little as possible, especially on economics, if at all possible.

• 51:04Speaker 00

  And I think this space is actually particularly interesting because you also have this issue of structural budget deficits in a lot of states, states that regulate gaming. And there are differential tax rates depending on the jurisdiction. Then you have these massive offshore operations of things like Bovada and Crypto.com and Stake. And these companies make billions and billions and billions and billions of dollars. And the more that, you know, Illinois jacks up rates in state, A, the regulated sports books that are subject to these rates, reduce investment in the state, handle those down, tax revenue goes

• 51:48Speaker 00

  down, and those customers that are now getting poorer service are going to trade offshore in unregulated markets. So Rory's right, again, Harry, sorry. But, you know, in this case, this is such a clear example of you can see how as levers move, it has these effects in other parts of the market and generally where it's heading is the unregulated part of the market.

• 52:12Harry Stebbings?

  Something that you said, don't piss off. I always think, don't piss off Peter Thiel. And Peter Thiel's made a very concerted concentration play in terms of AI bets. And it just struck me because it kind of was a piece announced this week where they shift from caution to concentrated AI bets, meaning they were out of the market and now they're obviously very in the market, but with few players. What struck me though was, you know, I've interviewed Hemonte GC, I've interviewed the team at Lightspeed, I know the team at DST, and they've taken the completely opposite approach of we don't really know the winners, so let's be in Mistral, let's be in Anthropic, let's be in OpenAI, and let's just index this wave of the best companies.

• 52:52Harry Stebbings?

  Given the venture brains and Rory, phenomenal wisdom, may I add, that we have, thanks to experience, if you didn't know, with Arthur Rock, guys, Rory does. Oh, for God's sake.

• 53:07Harry Stebbings?

  I wanted to hear your thoughts. How do you think about these two opposing plays in this new world and why you would say?

• 53:15Speaker 03

  I'll tell you my guess. I want to hear what Rory has to say. My guess is being too diversified from investing in AI today is biding time. It's not knowing, not having the conviction, not knowing. And I think it's better to bide time than to completely stay out. There's plenty of reasons to do a check into leaders, even if it's not going to 10x the fund, rather than to be grouchy or sit it out or criticize these rounds. But I think if you're Peter Thiel, sitting on what he has, you want to go concentrate. I mean, he's 40%, he's like 40% of the capital in Founder's Fund, plus his own capital, you know, making little teeny bets, little playchecks doesn't get you there, does it? But if you don't know, I would do 100. If you don't know, you might as well do if you don't know. If you're still, this world is so different than nine months ago. I think

• 53:59Speaker 03

  plan B is to make a lot of bets.

• 54:01Speaker 01

  I think that's actually right. There's a lot to unpack in this. It will take a little while, right? One is, you know, diversification reduces your upside. That's the nature of it. It also reduces your downside, right? I mean, it just is. It's the central limit theorem. It's not a great insight here, people. You will have a wider variance of returns positively and negatively if you have 10 deals in your fund than 30. Literally, the math is clear. Logically, the more certain you are that you can call the shots, the more focused you should be. Founders Fund both has the evidence that they can call the shots because they've done so. And frankly, the confidence to call the shots because they got it. That I totally understand why they're gonna try and be more focused. I actually looked at the article and I was honestly surprised at how diversified they actually.

• 54:46Speaker 01

  The information shared Founders One, the Growth Fund had thirty one. Investments Founders Two had mid-high teens and Founders Three is aiming to have ten. To me, I was actually surprised at how diversified Founders One was. It just didn't feel in sync with what we've seen from these guys in general. I mean, if you look at their SpaceX non-diversification, these guys strike me as the most likely to be most concentrated. So there was nothing surprising to me in that announcement. The only surprising thing was they weren't there already.

• 55:15Speaker 03

  Roger, how are you thinking about concentration with your new fund? You you you're back in the game. You want to do a hundred investments out of your new fund? Or you want to just do five big ones and go big and go home?

• 55:23Speaker 00

  No, the to me, over a three to four year initial investment period. Obviously, fund ones tend to go a little bit faster, more like two, two and a half years. I tend to be twenty to twenty five portfolio constituents. Create the farm team, but with, you know, significant ownership from each of those checks. But then where where I've tended to get very concentrated is on the second and third checks. And where we've gotten deep, deep conviction in a team, their execution in the market. And the fact that if they continue to execute with that skill and at that speed, that the market opportunity is massive. So we end up historically, and I'm following a similar playbook,

• 56:04Speaker 00

  of three to five companies out of the twenty to twenty five companies constituting seventy five percent of the capital deployed.

• 56:11Harry Stebbings?

  Roger, is your fund big enough then? If if we run through that, twenty average three million checks today in.

• 56:16Speaker 00

  They're not average three million, they're not average three. Our initial check is way less.

• 56:20Harry Stebbings?

  Are you going to get ownership if it's going to be a smaller check size to that given?

• 56:24Speaker 00

  It is in the spaces I'm investing in.

• 56:26Harry Stebbings?

  And they still exist.

• 56:28Speaker 00

  I mean, we just, we just, we just wrote a 1.5 check at a 10 post, so 15% ownership in a really, really cool analytics company that, yeah, is disrupting a seriously stodgy and screwed up sector that I think is generalizability outside of that space. So yes, I do think it's possible to write those kinds of checks. And then assuming they do a great job, then we'd love to write a three to $5 million second check into that company, maybe more.

• 56:57Speaker 03

  I'm switching to Rogers Fund. I want to find these deals. Like it's been a few years for me since I've gotten enough of those.

• 57:03Speaker 01

  If you're listening to this podcast and you can see people's eyes, what you're seeing in Harry's eyes is the wide eyed look as if can such things even exist?

• 57:16Speaker 01

  A 10 million post for a company with a product? Can such things exist? And yes, they can.

• 57:22Speaker 00

  And multiple, multiple six-figure ACV clients.

• 57:24Speaker 01

  Five on 50. I'll do it. Five on 50. I'll do it. Roger, and therein lies the danger to your model for that follow on check, which is the existence of people like Harry who'll just snatch it away from you at a high price. Coming, coming back to the concentration, I actually think Roger, again, at the risk of being nice, that that's exactly the right strategy, which is, it would be easy to say, oh, we're going to be concentrated. But I think what you're saying is correct, which is you have to start off with a significant element of diversification and then concentrate down. And in fact, this is top of mind for me. We just had our LP meeting and we would typically be at least a turn later than you, Roger. But my big picture comment was we've

• 58:05Speaker 01

  moved from a world where an exit is 200 million in ARR to a world where an exit is 400 million in ARR at an IPO. You're just doing your thing here, but way over there at the finish line, the finish line has receded another two or three years, which means logically you've got more risk and more upside. You just got to hold these things longer. So when you think about that, at the margin, that should have some impact on your portfolio strategy. And for us, you know, we typically been at our stage, under 20 deals per fund. And we kind of said, you probably need Aimed closer to twenty five, just given this dynamic, just nothing's changing at the stage we're at, but success is further away. Now, and then, like you say, trying to concentrate back down because in the end,

• 58:49Speaker 01

  I mean, it's no insight, but just to say it again, concentration, diversification is the enemy of upside. Concentration gives you more potential, more variance. You have to do that via aggressively on your follow-ons, right? And that's a very different strategy, just to call it out, Harry, back to you, then what Founders Fund articulated, but it's worth pointing out, they're articulating that strategy for a growth fund. And the big aha here is how bifurcated and different, different stages this business are. When you're still at the will this thing even work stage, which is Roger, or will it scale, which is where we are, or maybe Jason somewhere in the middle, you probably need some significant diversification and then concentrate. When you're effectively investing in what should be public companies, but are just private, then the growth fund strategy should be ten or eleven or twelve deal concentration.

• 59:34Speaker 01

  So it doesn't lend itself to a one dimensional answer on that. And I think that this question of how to handle portfolio concentration and you know, what should you be aiming for is just going to be a key part of making the math work.

• 59:47Harry Stebbings?

  My challenge here is that I've done the portfolio reviews and when I look back on like Fund One, where there's like a meaningful timeline to actually look back on the six years now, the best performers, your linears of the world, were not obvious early and the early outperformers did not signify enterprise value in the long term. Clubhouse, hop in, be real. And so if you think you can pick your winners early, I think you are wrong. Am I wrong?

• 1:00:13Speaker 00

  Yes and no.

• 1:00:14Speaker 01

  But more yes than no.

• 1:00:15Speaker 00

  I think one of the, the aspects of the strategy articulated is this temporal, many turns in order to be able to see progress. And yes, it may affect your ownership if in fact you don't have that high degree of confidence at the earliest days and you're leading or writing massive checks into every round. And I've got like these very, very different ways of getting to multiple fund returners. It was not, they did not all look the same. TTD, multiple near death experiences, multiple. Exit opportunities bridging multiple times didn't have a product in market for more than a year and a half. So that's one all the way over here. And then once it hit, then it hit.

• 1:00:58Speaker 00

  Then you had something like Wise, which was chugging along, chugging along, chugging along, chugging along. Not that they didn't have hiccups along the way, but fundamentally that was as close to an up into the right company that I've ever been involved with. My first check into Wise was 750 at a five and a half post. Okay. Yeah. Oh, yeah. But then, you know, Velar came in and then we piled in with Velar to 20. And then we piled in with Velar to 160 and we just kept going and we were 17% of TTD at IPO and we were 13% of Wise at IPO. Out of a little shitty seed fund, but then Data Dog's a great example of one that ended up being a fund returner.

• 1:01:38Speaker 00

  But we had 2.2% at IPO because we were in there at pre-seed and then RTP led the seed and then index led the A. We were not comfortable in that, just being honest, to back up the truck at either the seed. The A we wanted to, but at sharp elbows, we couldn't get what we wanted in there. We were able to write a check, but not as much as we wanted. But we ended up having 2.2% at IPO, but that still was incredibly valuable because that was a $40 billion company. I'm just saying there's multiple paths, but the thing is you want, you're playing a multi to going all the way back to the beginning of this because this is a multi-turn game.

• 1:02:15Speaker 01

  Yeah. And just bringing it back to this point, I think what Roger's doing, he's rejecting the absolutism of your statement, which is that you just don't know earlier on. And he's, and he's giving something more, there's a nuance, which is you don't always know, but you know, more than someone coming in from the outside. So at the margin, you can tilt it your way and that's all you can do. They're not going to put a big sign saying, I swear to God, I promise you this one's going to be a $10 billion outcome. But as long as you have a differential information advantage and the willingness to use it, what you're saying, I think, Roger, is you can tilt the thing slightly in your favor. Which is all you can do, which is all concentration is. I do think, by the way, after you get in revenue, it's much more, I mean, the stage we're invested at, I do. With about a 70% confidence level, once you have a year or two of revenue, you know.

• 1:02:58Speaker 01

  Right, and in fact, I can say that exactly because we did the math. If you get the first two years that we underwrote in terms of revenue from the moment of our investment, if you get the first two years correctly, your probability of getting greater than a 5X goes from 30% to mid 70s. In other words, once you're in revenue and you have product market fit, you do have a lot of information and you owe it to yourself to use that. So therefore, at the seed stage, it's by definition less than that information, but it's not zero. It's not flip of a coin is my point, and I think Roger's point. So if you think back on yours, there probably was signal there, if you're close enough to it, to be able to just tilt the allocation slightly, and it can make a huge difference.

• 1:03:36Speaker 00

  A hundred, a hundred percent.

• 1:03:37Speaker 01

  I've realized, as a comment on that, it's interesting to talk about it because I've realized even at our stage, you've got to be trying to do that more and more because the journey from our stage is still 10 years now, whereas before it was six or seven. Jason, what do you think at seed?

• 1:03:49Speaker 03

  You can get a relatively high degree of certainty at seed. Not, not the certainty you get late stage, you can get it. But what it means is you've got to have, you're going to end up with a pretty small box. You're going to have to hunt strange things outside there. You're going to have to be a founder attractor magnet. You're going to have to do something because you're going to turn away a lot of the deals. You're going to do the whys's, but you're not going to do the other one that Roger said. Maybe you won't do the trade desk or something, I don't know, or whatever the, you're just going to turn away some of them and you're not going to do the clubhouses because it's wacky, but it might be great, right? But you can still do whys. That's my error because I'm concentrated from first check, right? And so I have to turn away something where I don't have certainty,

• 1:04:32Speaker 03

  even if it's cool, because the risk is too high. There, I'm doing 8% of my fund into almost every deal. So I have to have such a high hit rate at seed. Now, there's exceptions, I'll do some small checks, but that's really where it ends up being. A check and a half is 8%. Like, half of them have to work, right? So it's a stupid model because you have to turn away clubhouse and hop in and maybe even data dog, but you've got to just find the whys's and go all in. But there's a, it's a big trade off. But I do believe that you could, you could just cut those ones out of fund one and still have a decent fund.

• 1:05:03Speaker 00

  That's so interesting. Yeah, I mean, for me, the 1 to 2% Of the fund at entry, that's what we do. And then it's that next check that could be for 5% of the fund or 7% of the fund. When we did Digital Ocean, our first check was three. And then when Andreessen came in and led the $37 million Series A, we wrote a seven. So we had 10 million in two checks in Datadog. We ended up having nine million over four checks in Wise. But that was a much smoother function. But with, in the case of Digital Ocean, we could just see it taking off as, and then as reflected in Andreessen's leadership. And we're like, you know what? This is going to be one of our best companies.

• 1:05:47Speaker 03

  But what are you going to do today when you, when you, when you got in at eight million posts, like the one you talked about? But the next round's at 300 because the AI kids come in or 500. This happens all the time today. How, how much can you, of your fund can you really put? Like, is it even worth writing that second check?

• 1:06:00Speaker 00

  It depends. We are hyper, hyper, hyper disciplined. We look at every check independent of the check prior, period. That's the rubric. So if I look at that and say, ah, the information I've got about this being a 300 million or a 3 billion, right? Is I think this could be a $100 billion company. Then I will write a very meaningful check into that company up to about 10% of the fund, which is exactly what we did with Trade Desk when by the time we, we had written four checks, precede, bridge, bridge, and then a check into the series, a Series A, which is barely a Series A. It was at a 16 post. Okay, we just crawled to that point. Then it was whoosh, then there was an air gap and there was nothing until

• 1:06:44Speaker 00

  the $20 million Series A, which was 15 primary, five secondary at a 280 post. And we wrote a $3 million check out of a $50 million fund into that at a 280 post. After having cumulatively, cumulatively written a little over 2 million over those first four checks. But that 3 million ended up turning into 40 million and that was a great investment.

• 1:07:08Speaker 03

  Sometimes I wonder today if that math works as well, right? Because let's say you did the seed, the one that you did at eight and you own 15%. And how big's your fund today? 150 million or something like that? Um, maybe 100, 100, okay. The next round's at 400, okay? Now, listen, you could put in, you could go to 10% of the fund, but the impact on your ownership is, it's irrelevant. Like you're not, you're going from 15%.

• 1:07:32Speaker 00

  Who cares about ownership? It's a cash on cash business.

• 1:07:35Speaker 03

  Fair enough, but it won't change your carry or your personal economics all that much to go from 15 to 15.1. Like, it's just not.

• 1:07:42Speaker 00

  That's not the issue. The issue is if it goes from 300 to 10 billion and that checks at 30x, that certainly impacts my personal economics.

• 1:07:51Speaker 01

  I think, can I try here? I think there's an embedded concern in what Jason's saying is not articulating, but when you articulate, I think it's okay. It's like, what you're saying is if all the follow-on rounds are priced incorrectly relative to ultimate exit value, does your strategy work? And it's a fair question, and it's a question you would ask if you're living in Silicon Valley in 2025.

• 1:08:12Speaker 03

  Then I don't invest in those rounds.

• 1:08:14Speaker 01

  I was going to say, save Rods with the trouble of making the point. I'll say that then the worst, if the worst thing that happens is my initial check gets marked up and on the follow-on, I don't need to chase the money, then I'm money good on the check I've written. Every check I've written is money good. And provided every check you write is money good, in the end, you'll die rich. It's just one of those things, right? I actually feel the need at this stage to remember that I was on a board with Roger for years and for the longest time, because he'd worked in finance before this, and this is a compliment, really, Roger, for the longest time, I actually thought he'd been an options trader, because no one I know understands option value better than Roger. And I think halfway through, you explained to me you'd actually worked in risk management, core IT in, I think Bloomberg

• 1:08:56Speaker 01

  or Goldman or somewhere like that. But I do think you've got a very good understanding of option value here, and it's just showing true, right? What Jason is saying is a fair comment, which is sometimes all those options expire useless because other people are paying too high a price. But over time, it's a good model, and all that happens is you don't write checks at silly prices, right? And you don't get quite as much ownership. Yeah, if the rounds trade up to the point where the follow-on round doesn't have the return, so be it, is your point, Roger, correct?

• 1:09:25Speaker 03

  100%.

• 1:09:26Speaker 01

  The odd thing, the reason I'm kind of so focused on this is my big summary is as the exit bar has gone from 200 to 400 to 900 or whatever it is, right? More of those dynamics are going to even pervade the business we're in. Because if you back into it from exit, this is what you're dealing with.

• 1:09:44Harry Stebbings?

  For me, I think of like the the next check is the opportunity cost of cash, which is like that cash can be deployed elsewhere in a new option, so to speak. And as you see the price inflate, and I get it, what you say, the exit potential inflate too. But as you see the price inflate, the multiple does compress to some extent. And to me, I'm always like, shit, I think the opportunity.

• 1:10:06Speaker 03

  But Harry, what is the risk adjusted value of that capital? That's the question. Every time, whether you're writing a check at a 10 or at a billion, that's it. So you need, you take into account all of those variables in order to make a decision. Everything in life, you can price as an option. I Rory's heard this spiel. I walk through life, everything looks like the Greeks. Everything looks like options theory because that's life.

• 1:10:37Speaker 01

  And what he's saying is you have information there.

• 1:10:39Speaker 03

  Yeah.

• 1:10:39Speaker 01

  And it's also worth the Peter Thiel quote at this point, which is the big learning he had is, and it is true, is when you do a deal and then a big reputable outside investor does a follow on round at what feels like a high price, do everything you can in it. Because there's a lot of signal in that. And it's not always true. And I could cite examples of it where it's not true. But risk adjusted, information adjusted, that next round in the deal that you've been in, that's performing well, provided the follow on price is contemplatable. The advice would be adjust your scales up or don't be guilty of anchoring on what you did. You got to find a way to take into account the information since then, both operational and the outside round.

• 1:11:21Speaker 03

  One nerdy thought, and maybe Roger, you can educate me offline sometime. When I started investing, I learned from Founder's Fund, I came up with that 10% threshold to put 10% of the fund into your winners. I've done it since I was able to do it myself. The mathematical problem I've had is imagine you have three or four potential winners in your fund. You do exhaust a lot of your capital relatively early. Listen, I'm not as good an investor as you and I never will be, but I have come to regret some of my third checks because I just wish I had more flexibility in the midlife. I just, I wish, because yeah, you know, but but you can back, you can get up to that 10% limit pretty. Damn fast if you have more than one breakout and you could be super disciplined and say it has to be open AI or better. But you could exhaust if your funds 100, you could exhaust 30 or 40 a million of it if you have four breakouts in today's world.

• 1:12:06Speaker 03

  You could even do it in a year potentially, right? And maybe it's okay, but you run out of reserves, you run out of capital.

• 1:12:11Harry Stebbings?

  You, you, you're right. And I think what Andrew is saying is he wants that to happen.

• 1:12:15Speaker 03

  No, I know. I just think if you're on the board and you're not checking out, if you're going to be on the board for 10 years, you have, even though the founders are now allowed to quit whenever they want, time this, the start to the end, they can check out any day they want today. I think if you're going to own double digits, my view ethically is you got to be there till the end. Otherwise you're dead weight on the cap table. You, you don't get to check out after 24 months and, and say, great job, guys. And show up once a year to, as a, as an observer, you gotta, you gotta show up. And sometimes that means writing more checks, right?

• 1:12:43Speaker 00

  Sure, but that's one of your, one of your core investments. But the other thing is you can, you can always write small support checks after that, just like I'm participating in the round, but I'm obviously not driving it because I'm, I've already invested 10 million out of my hundred million dollar fund. That's one thing, but obviously in terms of stewardship, it's one of your core investments and you will be with it until the day you're done. The second thing, and this is something that's a whole other set of conversations, which we could potentially have another time. And one of the ways that I very intentionally structured IA as we move through time is parallel LPs to be able to do cross fund investing. And that's a very hard thing to do, but if you can do it, do it because create that title line.

• 1:13:27Harry Stebbings?

  For people that don't understand that you're saying have the same LPs across funds. And so you're able to have cross fund investing without conflicts.

• 1:13:34Speaker 00

  That's exactly right. So it does not become this existential issue. And by the way, we dealt with this with a portfolio company in IA1, where IA1 and IA2 did not exactly have matching LPs. And it was a conversation like the, you know, the LPAC was like, yes, I would show them the analysis, whatever. If you want to do it, go do it. Just understand like, if this doesn't work, you got some splainin to do. So it was the risk of that check was not simply financial, it was reputational. Ultimately, we ended up deciding not to write that check. In the case with later companies, fund two and three, when we had parallel LPs,

• 1:14:16Speaker 00

  then all of a sudden we weren't investing out of a hundred million dollar fund, we're investing out of a 260 million dollar fund.

• 1:14:22Speaker 01

  I think that's true and we do cross funds too. The only comment I'll make is actually it doesn't directly address Jason's comment because we're really direct. Any cross fund you do is going to be a good deal. Otherwise, you're an idiot and you're not an idiot, right? So I think good deals, you can find follow on checks for you can cross fund. Even if the LPs aren't fully aligned between funds, provided you want to process because it's a good deal. And in the end, right? What I think the separate comment Jason was making is, I mean bluntly put, how much do you keep back for your marginal deals if you're stuck in them for 10 years and you want to be supportive? Versus playing early in your best deals at the risk of not being able to follow on checks later.

• 1:15:05Speaker 01

  Right? And, you know, I, I heard your answer, Roger. You're basically cold bloodedly allocating to the very best deals and you're willing to have a hundred grand. Hey, I'll try my best, but a hundred grand. I don't have a million bucks left in my pocket.

• 1:15:16Speaker 00

  Correct. And, you know, at some point, if, you know, obviously we also, we try to get to between, you know, 110 to 120% invested through recycling.

• 1:15:25Speaker 01

  Yep.

• 1:15:25Speaker 00

  Recycling dollars can be used for those purposes, but I'm not going to optimize my asset allocation because of the potential of uncomfortable conversations down the road.

• 1:15:35Speaker 01

  Yes, I remember one of those uncomfortable conversations and you didn't optimize your allocation for it. He said, just keeping score, Roger, not that I forget. It's only been 10 years. Yes.

• 1:15:44Speaker 00

  Wow.

• 1:15:45Speaker 01

  And I remember what the other larger investors said to you at that point in time vividly.

• 1:15:52Speaker 00

  I might remember that as well. This is great. This is fun, Harry. Thank you for inviting me.

• 1:15:58Harry Stebbings?

  I do. I, I told, listen, Arthur was busy doing the board work that Rory should have done.

• 1:16:03Speaker 01

  Guys, this has been so much fun to do. Thank you so much for joining me. I've loved having you all.

• 1:16:08Harry Stebbings?

  Thanks so much, guys. Appreciate everybody.

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