20VC: Sequoia's Leadership Transition | Michael Burry Shorts NVIDIA and Palantir | Gamma Raises $100M at $2BN | Has Defensibility Died in a World of AI | Datadog Surges as Duolingo Plummets: What is Happening

AGENDA: 04:22 Sequoia's Leadership Transition 09:46 Michael Burry's Big Short on Nvidia and Palantir 17:41 Gamma Raises $100M at a $2BN Valuation 32:34 Does Defensibility Exist Today When Copying is Easy 40:31 Should All Funds Be Way More Diversified 47:12 How to Run a Fundraising Process & What Not To Do 57:57 Datadog Surges 20% and Duolingo Crashes: What Happened

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

• 0:00Speaker 00

  Tools are great. When the AI is part of your team, for real, not VC talk, the amount of revenue that it's accessible is so high.

• 0:08Speaker 01

  Sell shit to the people who are making AI and if they grow, you'll sell more shit too.

• 0:12Speaker 00

  You just can't take that early first month explosion as seriously as you used to. It's not as defensible.

• 0:18Speaker 01

  The pace of evolution is so fast. If you decide, well, what I knew six months ago is still useful, you're probably going to be wrong very quickly, right? That's what I find the most stressful about right now.

• 0:27Harry Stebbings?

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• 1:11Harry Stebbings?

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• 1:54Harry Stebbings?

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• 2:37Harry Stebbings?

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• 3:20Harry Stebbings?

  Beats every competitor in every head to head bake off, completely configurable and code optional setup. My word, I mean, the benefits just go on and on. It's easy and efficient implementation. It works on any help desk with no tedious migration needs. It's trusted by over 6,000 customer service leaders, including top AI companies like Anthropic, Lovable, Synthesia, Clay, Vanta. So if you're ready to transform your customer service team, scale your support and give team members time to focus on the really high level strategic work, learn more about Finn at fin.ai forward slash two zero VC. You have now arrived at your destination. Guys, it is so good to be back with you. I've just come back from my AGM and it's a humbling thing for me

• 4:06Harry Stebbings?

  because for 10 years I did this show solo and then I go to my AGM. And do you know what everyone says? Oh, we love Rory and Jason. We love Rory and Jason. And I suddenly realized that I wasn't the star of the show. Just kick us off and this now.

• 4:22Harry Stebbings?

  Fine, I'll kick us off with big, big venture news. We've said before about Sequoia being the king of venture. Leadership transition at the top. We saw Roloff Botha moving out as steward after a three-year tenure and being replaced by Pat Grady and Alfred Lin, which was, I think, quite surprising news to the venture ecosystem. I'd love to hear how you thought about it.

• 4:45Speaker 01

  Sure. It just brings home how tough venture is right now. This is the best firm in the world, and they're feeling what's going on in AI that they're behind. I think everyone in venture, especially if you have bought a large existing portfolio and you're trying to compete these new deals in the last three years, everyone is feeling stretched. Everyone is feeling tired. Everyone is feeling it's brutally competitive. This is going to sound kind of not schadenfreude, but it's more reassuring in a way. I get up and I go, God, we need to do better. We need to sort this out. And then you realize the best firm in the world is having exactly the same feelings. That was the first comment, just super indicative of.

• 5:21Harry Stebbings?

  Why do you think your leadership transition is showing that they're behind in AI?

• 5:25Speaker 01

  Look, whenever you have a CEO change, it's because something is wrong, right? And again, if you want to kind of go down in the weeds of the interpersonal stuff and people's perceptions of other people, we can talk about that later. But my outside-in reading is in part this is dissatisfaction about how the firm is doing relative to the competition. Look, I'm not saying they are behind. I'm saying there's a perception internally that they could do better. They missed some rounds and some deals. They passed on some great companies. That can be frustrating.

• 5:51Speaker 00

  Well, maybe two thoughts. One is, maybe in general, in general, more people should be stepping aside today. I think more people, VCs, executives, founders. And I'm not saying this is exactly what happened at Sequoia. I mean, that's the articles, right? It's about AI and missing Cursor and missing these deals. Maybe that's true. Most folks from the last decade or 15 years are not the right people for the next decade. I could only imagine we don't even need half the VCs we have today for the AI world. Maybe they'll spend the money. Maybe they'll throw a few nickels into Cursor at $30 billion, get a few logos on the website. The old playbook don't work, and the pace is so fast. Take your coins, take your Nvidia shares, and buy a beach house.

• 6:36Speaker 01

  Seriously, check out. It's a good time to check out, guys. One of the things I admire most about Sequoia is their toughness and their willingness and ability to evolve. I'm not commenting on the merits of the case, but if the internal group feels they need to make a change to continue to execute, what they did not do is that fatal error, which we can talk about in politics in a second, is, you know, it's someone's turn. And they said, it's so-and-so's turn, so we'll leave him in. They did the exact opposite. They ruthlessly said, if we're going to compete, we need these people, not those people, and they made a change. And I admire that. All they needed to do was call a vote and have a discussion and sit down with the partner question, have a discussion. I think that's healthy. I think some of these orgs where so-and-so can't be touched, you always say to yourself, does that create a false sense of security when you just can't afford to have that in this market?

• 7:21Harry Stebbings?

  To me, I think it's like a specialization in leadership that's correlated to actually the winners and losers in venture in the next 10 years. And I think the winners are Walmart, which is your mega platforms, it's your Thrive, it's your Lightspeed, it's your GC, it's your Walls of Money, and it's your boutiques, which is your Chanel's. Walmart versus Chanel. And the boutiques are your benchmarks, your USVs, your specific products. And I think when you see this splintering of leadership between Alfred Lin on early and Pat Brady on growth, I wonder if it's this kind of attempt to play into one of those, because right now I do see them, and I love Sequoia and respect them intensely, but actually in the middle, which I think is quite a hard place to be.

• 8:03Speaker 01

  It's an interesting comment. They are more like a manager of managers. You have an early-stage team and a late-stage team. What that means, by the way, and I want to talk about this for a second and then come back to the mega fund comment, what that means is the person on top is no longer even a manager of venture firms, he's a manager of managers of venture firms. One of the big a-halts is being on top of those organizations where you have these structures underneath is just a very hard and precarious place. If you're not actually running one of the groups that's putting out the money, if you've allowed your job to become helping other people do things who in turn are managing money, you're more removed from being able to eat what you kill, and it just becomes a more precarious position.

• 8:42Speaker 00

  Having watched venture firms and law firms and others, I really Can't think of something more dysfunctional in many ways in partnerships. One of the reasons just partnerships are dysfunctional, and maybe it does have, maybe we could move on, is that it's almost impossible for performance to tie to economics. If Harry and I are equal partners, if the three of us are equal partners, and I have all the winners, it's all fun the first year, but the second year I've got the winners, and then Harry made that big bet and it blew up on us, and we're friends, but like, but our carry is equal, and then we're raising another fund and we have to argue over carry in the next fund. I just, my limited, my limited experiences in partnerships, the daggers are always out. And I love your kumbaya view Rory, but I haven't seen it in the real world yet.

• 9:23Speaker 01

  I'm gonna push back hard on that and say, I didn't say the daggers weren't out. I think, again, look, respectful professional, because seriously, let's talk about this. In the end, economic performance drives change. One of the things about Sequoia you gotta admire is they didn't do the, we've made this decision, let's stick with it for five or six years. They did the, it's not working, let's make a change. It's very Sequoia. It's very unbrand.

• 9:46Harry Stebbings?

  Listen, I wanna discuss Michael Burry, famed for big short, pulls another big short. A big short from Michael Burry this time, $1.1 billion short on Nvidia and Palantir. Had some pretty significant ramifications on market. How did we think about Michael Burry and the subsequent downfall that it caused?

• 10:06Speaker 01

  Zooming out, you look at the AI cap expand and you go, at some point, this is gonna overshoot. Then there's going to be a downturn. Uncontroversial statement, even Sam Altman would say it, right? Because, and I did the numbers, because it's not my norm, but I actually did, I decided in this case, I've been opining on AI cap X. And I said to myself, what would it look like to make Michael Burry's bet? And let's make it real here, right? I actually look at the numbers. Nvidia stock on Monday was 188 bucks. If you wanted to buy puts at 180, which means these things have no value unless your stock is below 180. And let's just say you buy December of this year, so you got 47 days for that stock to go down. For every $9 you bet, right, you make 2X your money if the stock goes to 160. So you gotta call it, it's at 188 now, you gotta get 180.

• 10:51Speaker 01

  And you make 8X your money if the stock goes all the way down to 100, and that was almost. Haves, right? If you're buying puts, you betting that in the next forty seven days, you gotta have that stock go from one eighty eight to one sixty, just to make a two X on your money. And remember, if it doesn't go down, you lose it all. You don't even get a quarter. Yeah, it's you lose it all. It's not like a stock. So that's I look into that and I'm going, hmm, I've got to get it right to make a two X and that's pre-tax, right? I'm saying, would I have the guts to do this? I believe the capex is over invested. I believe at some point it'll correct. Would I take that bet? Would I put a million dollars in where I could get two million dollars? If Nvidia goes from one eighty eight to one sixty by December twentieth, or whatever it is, and I lose it all if it stays above one eighty?

• 11:35Speaker 01

  Hmm, eh, no, right? One of the interesting things he did was he released my brother, he released his filing early. In other words, he didn't have to disclose it until the last day. I think it's forty five days after the end of the quarter. He disclosed it early. And to me, that was probably him trying, because if you're taking a very tightly coupled time bet, we've only got forty seven days to be proven right. You have every incentive to pile out the bad news and shit talk the stock to try and move it down. You're not just a passive investor. You're actively trying to say, hey, everybody, look, this is a pile of shit. It's going to go down. And that's what he was doing in a very polite way by giving people the information earlier than he legally had to. And as someone pointed out, he filed on the last day every other time. And this time he filed early.

• 12:19Speaker 01

  So this was someone saying, hey, everyone, look, this is my bet. So that's what it takes. And I just did the other math. Interesting math is if instead you decided, no, I don't think it's going to crash in forty seven days, but I think it's going to crash over the next two years. So I'm going to buy these long dated options leaps. So I'm going to buy puts, same thing. I'm going to buy puts. Stocks at one eighty eight, I want to buy puts at one eighty. And they're going to cost a lot more. They're going to cost like fifty, fifty five bucks. Put trade, right? And now you lose money unless the stock in two years gets to below one fifty. And to get a two X, to get that same two X. It has to go below a hundred. I mean, you know, people talk about shorting and obviously shorting is more risky than buying puts, but it just brings home how hard a business

• 13:03Speaker 01

  it is to bet against AI capex. That was my big takeaway is that.

• 13:07Harry Stebbings?

  I don't understand as an asset allocator, how you can rationalize that as an economic decision to make against other asset classes, what you have to believe for that two X to be real, risk adjusted, it's not a good decision to make.

• 13:20Speaker 01

  I think, yes, it's a very hard decision to make. There will be one moment. I mean, remember, we did see an 80% Nasdaq decline in 2000. If you time it right, you look like a genius, but it's so hard. I agree with you. On average, the return, especially to amateurs like me trying to do options, it's just net negative because it's a zero sum business. Unlike equity investing, where there's an intrinsic overall return, for every winner in options, there's a loser. For every idiot like Rory, there's a smart guy, the other side of the table who prices it better. So I agree. I struggle to think how most people can make money shorting, which is why, to your point, Harry, in some weird kind of way, it's kind of good that there's some guys like that out there. Was it Jason, you made the point, just keeping the whole system honest? That's an expensive way to be a policeman.

• 14:04Speaker 01

  You got to bet your own money to police the system.

• 14:06Speaker 00

  It's courage. If you're, if you're great at it, Roy's point is it's almost impossible to be great at this. If you are, you get leverage. You do get leverage on your investments. So there's, it's a great way to get leverage, but man, you better be really good at it, right?

• 14:18Speaker 01

  You gotta be right. Jason, you're right. The thing that really impressed me when I did this analysis is you're not just gotta be right, but you gotta be right on timing. I think it's easy to be roughly right. I'm going to say it here. I think, Michael, it's very hard to imagine a company trading naught of 110, 120 times revenues like Palantir, growing at 50 or 60% last quarter. Great, amazing quarter, kicking off cash. It's very hard not to imagine the next two years that doesn't have a significant correction. It's very hard to imagine that the AI capex boom doesn't have a significant correction. But going from that kind of arm wavy bullshit podcast statement to actually being able to make money on it, that's damn hard.

• 14:56Harry Stebbings?

  You said about kind of, you know, the excitement waning from AI and air being let out of that kind of bubble and excitement, you know, that's all. Predicated around, oh, well, will the revenue show up? Will the revenue show up? Well, the revenue is showing up. Altman says OpenAI is going to hit 20 billion ARR this year. Anthropic projects 70 billion in ARR by 2028. The revenue's showing up in the billions. Are we not answering our own question? And do you think we're almost being overly negative in asking where is it showing up? Where is it showing up when it's already showing?

• 15:28Speaker 01

  Agreed, and you are, and they are uptaking their estimates, not just a few. I mean, I regard, if you're changing your 2027 estimate up, I don't care. But the real fact is if you're changing your 2025 estimate up as the year goes on, that's an enormously positive signal. I think Anthropic in particular has been doing that. So you're right, the revenue is showing up. The growth rates are showing up. And even when you look at funny, CoreWeave had a little bump today. But the problem is not lack of demand. The problem was, oh, my God, we couldn't get the data center up and running. So it's very hard to make an intellectual case right now for anything other than there was massive demand for compute and there is massive revenue traction. So what you're left with is saying some version of I don't think it'll grow quite as quickly as other people think. It's all in the hypothetical. Right here, right now, the revenue has shown up.

• 16:13Harry Stebbings?

  Gamma announced last night. I was reading at midnight after my AGM. Gamma raising $100 million at a $2.1 billion valuation, having hit 100 million in revenue with 50 people, 2 million ahead.

• 16:27Speaker 00

  Yeah, we run Saster on Gamma. It's great. It rocks.

• 16:30Harry Stebbings?

  And so I guess I'm just asking, are we being overly British? Are we looking for a problem that's not there?

• 16:36Speaker 01

  First of all, I'm definitely not being over British. And if that's what's happening, it's time to end this show now. Sorry, Harry. But I think you're right. I should, there's wisdom in what you're saying. I mean, look, it's the cynics sound smart and optimists get rich. This is a great enormous mega trend. It's the biggest mega trend we, maybe since the early days of the internet. Maybe it's even bigger. It's an enormous, ginormous mega trend. And leaning into is the only sensible thing to do. And playing against it is dumb as rocks. The only reason you have to have discussions, you have to have the second order comments is, you know, I mean, to make your question useful. Because on an overall trend basis, you're of course right, the demand is huge. It's some version of the question, are we going to sign 80 billion of CapEx for next year or 40 billion? Both of them are still huge.

• 17:20Speaker 01

  Both of them are still, the trend is exploding. Both of us still, everything's amazing, but one of them is 40 billion more than the other. And that's where you do have to start saying, things are enormously great, but are we over extrapolating? So I don't think it's being negative to simply say in a hyper growth company, exactly how much, how much should you lean in? How much risks should you take? That's all that's going on here.

• 17:41Speaker 00

  Let's talk about Gamma and actually did an all-company meeting for Rep last night. I mean, they're, they want to end the year 250. I can tell you what I learned from both, but we use Gamma at Saster. Folks may not have heard of Gamma. Folks talk about it as like an AI PowerPoint, but they miss the point. I'll tell you how we use it. We use it now instead of when we have, you know, we have to close 8 million of sponsors at Saster a year to keep the lights on. Instead of sending them the same dated prospectus, which we did before Gamma, the same crappy thing. Now Gamma automatically pulls all of our data from Salesforce and our marketing automation system. If they've been before, it knows the exact number of leads and ROI from the calculation, knows who their competitors and similar companies are, and makes a fully dynamic piece of collateral for them in about 10 minutes. Now, it's actually a great deal. We spend 100 bucks a month for Gamma. Now, a couple of ways to think about that.

• 18:26Speaker 00

  One, it ain't much for what I just described, is it? But it's 1,200 bucks a year. How much do we spend for Google Slides? Zero. It's built in. How much do we spend on PowerPoint? I don't even know where my key is to Microsoft Office. So it is a stealth TAM expansion that we're spending $1,200 a year on PowerPoint, but we are because Gamma, I'm, I'm the biggest super fan. It's all over Saster because it is, you can do epic things that we would have to wait for a market, a marketing ops team, three weeks to never do and do a crappy job of. Now we do it in 10 minutes. If they keep going, it's a billion dollar ARR business. 20x revenue doesn't sound expensive compared to some of the deals we've done, does it? It doesn't sound expensive. There's one to 100 in 11 months at 20x revenue? Sounds cheap.

• 19:11Speaker 00

  And profitable. Yeah. Now, look, there's some meta issues. I think we're going to see a lot of these folks adding revenue teams, adding sales teams, adding marketers, never at the ratio of 2021, we'll never see those those levels of staffing of humans. But more power to Gamma getting to a billion with no sales team. But knowing a few folks on the team, the B to B use case is pretty small today when I'm describing. As that blows up, they're going to add a whole GTM team. They're going to need 100 people to service it. But yeah, I think I think we are we are underestimated. And for what it's worth, the other thing I did, I did this present. So I've been vibe coding for 126 days. Feels like a lot of change. So I did this presentation, all hands at Replit, 125 days and 10 apps. I launched 10 apps in 125 days without an engineer.

• 19:56Speaker 00

  I shared the data and most of the stuff that went well and a few areas to improvement. And I learned a lot of things, including the engineering team. There's really, really, really good. But it occurred to me in the middle of this, while I was talking, that the agent now, the Replit agent, of all the agents we use, we use about 20 agents, 12 real ones. The Replit one, the V3 one, is the first one that is literally part of our team. Not making us more efficient like our SDRs and BDRs. Reply is part of our team. It now has essentially infinite context window. It remembers everything I've done for the last month with it. We talk about it, we talk about our mistakes. And so I'm doing the presentation, I'm like, oh, I have this new idea. I want to build a page that spotlights all the AI apps we've spotlighted on Saster.

• 20:38Speaker 00

  I want to rank them and I want to do links and everything so you can go discover these, all the ones we talk about. So I fired up Reply, I'm like, here's my idea. And he remembers, yeah, that's what we did on the other one. That's what we're going to do with this one in 15 minutes, we're in production. Like co-pilot, the lame thing about co-pilots is they were just tools. I mean, tools are great. When the AI is part of your team, for real, not VC talk, the amount of revenue that it's accessible is so high. We, if you go to our office, we have little signs, we make fun of them. We have Reply for Replit, we have Arti for Artisan, which is an SDR. We have Qualy for Qualified. You can see how clever we are in our nicknames, right? Arti, Reply, Qualy. And they all have these little desks where there's no human at it anymore. It's kind of weird. But Replit V3, this latest agent, is the first one that jumped the line to not being one of the parts of our team,

• 21:22Speaker 00

  but literally being part of our team, just like a human being. And so that is just going to unlock so much revenue, so much revenue. It's just, that's just starting to be capable now. When Gamma is Part of your marketing team rather than a marketing tool. There's a lot of revenue expansion if they can pull it off. We literally have just gotten going because these agents are so much better than 90 days ago. If you're not doing it, it's hard to see how much better it is. I think people miss, they're not doing it. And so they're missing when we cross the line when AI is part of your team. That's what's coming in 2026. We're missing this. The agent was the story of 2020. The copilot was the 2024 story. It didn't work. It was a ripoff. Spend $30 more a month on office. Like, no one wanted the ripoff.

• 22:05Speaker 00

  This year, OpenAI and Claude finally actually got good. That's why lovable Replit, Gamma exploded. These, Gamma was founded in 2020. It had no revenue before this year. Replit was founded like in the 1800s. It had no revenue until this year. Vercel had no revenue until this year. And they exploded. That was this year, was the AI works, right? Next year is AI as part of your team, not replacing folks or layoffs. It is literally embedded in your team. I talked about it, but now I see it, and that's where we should be investing. As VCs, as humans, as leaders, is what happens when AI is good enough to be part of my team?

• 22:39Speaker 01

  And you distinguish that, I want to go down because I'm actually here to learn too. Is that you distinguish that from just being, having an individual agent? What's the difference between Replit as an agent or what, Arti as an agent versus being part of your team? What, how do you?

• 22:53Speaker 00

  It is sufficiently autonomous, knowledgeable, and powerful to complete material, high-value tasks on its own with some daily discussions, just like on our team. You've got to check in, like some folks, we can check in just once a month, like that's enough, right? But we, it does need some oversight and some discussion like a human does. But the level of autonomy and capability, Gamma, go out. We've got 20 sales calls this week, Gamma. Go into my Google Calendar. Create prospectuses and sales collateral for all of them. Pull all the data on them last year from Salesforce and HubSpot and Marketo. Put them all apart, review them once, and then distribute them to the team. And if you can, join the meeting, right? When Gamma can do that, Gamma's part of our team. It's not that far away.

• 23:34Speaker 00

  Not just make me PowerPoint, not just, you know, oh, Gamma's the PowerPoint for AI. That's not so interesting. Microsoft will figure that out. Canva actually has a Gamma clone now that's not bad. I mean, a lot's changed, AI so fast. When Cliff was on the show, I accidentally was a little triggering on Gamma. I didn't even really think of them as competitors, but that was the only time Cliff got a little thoughtful. I mean, he was always thoughtful, but now, like, that wasn't even that long ago, was it? Now, like, their version of Gamma is pretty good.

• 24:02Speaker 01

  Yes, which is why Gamma's got to keep swimming and add all that other functionality.

• 24:05Speaker 00

  That also goes back to the beginning of the Sequoia, so that's why investing is so stressful today.

• 24:09Speaker 01

  I think that's the real answer, because I'm glad you said that, Jason, because I'm sitting on, we were talking last weekend in the partnership about, technically, what you really need to understand is what the improvements in the last 12 months, I think it's what you're saying, and the changes in the model in the next 12 months means in terms of what can be done that wasn't doable even 12 months ago. And that requires a quantum of time to just get your head around it, right? And it is so stressful because just finding that time, you've got to make the priority to find that time to know where it's going, because the pace of evolution is so fast. If you decide, well, what I knew six months ago is still useful, you're probably going to be wrong very quickly, right? That's what I find the most stressful about right now. Making sure you actually know where the technology is right now versus your opinion 12 months ago.

• 24:54Speaker 01

  You look back at what things people said 12, 24 months ago, and they're laughably wrong. The whole co-pilot thing, I mean, that was like, thank you for sharing, but no. And that's just so done. And just trying to have clarity on the next 12 months, just to be able to play. Because without it, you're betting blind and you're going to get it wrong.

• 25:13Speaker 00

  There's that. What I think is even more stressful for seed, maybe by B, it's a positive. Maybe Andreessen investing in Gamma 100 was the smartest play of all, or at Replit, right? Later, they did early too, but is like, I think the quality of clones is only going up. When we all started in this industry, you'd laugh, you'd be like, well, Salesforce, or forget HubSpot, pick whoever you want, whatever leader. Yeah, it'll take them like a year and a half to decide if it's worth cloning. Then they'll launch something and like, it'll be okay because they have smart engineers, but it won't actually do anything the first six months. It'll be so feature poor. Then after two years, they'll decide, well, should I put 100 people on this or should I put 100 people on the? So you had like three years until the big guys would really compete with you.

• 25:52Speaker 00

  I'm not kidding. I can think of one investment I've made that has had five clones, like in the first 30 days, including one from a cloud leader. Now, the same thing will be true. Will they sustain it? Will it just be a feature? But the ability of AI to enable us to clone better stuff faster, the fact that Canva is borderline competitive with Gamma. Wasn't when Cliff was on the show. It just disrupts what the hell does seed investing mean? When anything even with progress, you might see 10 better versions in 30 days. What does that mean you do then? Like, I'm a student of this business.

• 26:24Speaker 01

  Yeah, what do you do?

• 26:25Speaker 00

  For seed? I think, I don't know. We should ask the new benchmark guy who's smarter than me. But for me, I think the answer is, is the old one. I just, I'm worried it won't hold. Innovation plus the best founders, get there. You've got to still bet on the best founders. You just can't take that early first month explosion as seriously as you used to. It's not as defensible, that innovation. But if you have the best founders, what else are you going to bet on?

• 26:50Speaker 01

  The interesting question is, to your point on, you know, doing gamma at 2 billion. Do you think that same statement is true? So fast forward, you're now gamma, you're doing 100 million in ARR. Do you think the next clone who starts at zero can catch up? Or do you think over time, the distribution mote, the market brand leader mote? Do you think some kind of motes accrue over time with scale? Or do you think everything's up for grabs all the time?

• 27:17Speaker 00

  No, what I think is there is a plane of stability that is later than it used to be. That is still fragile. I'll give you an example. So at Replit, whatever, I don't have the actual numbers. Let's say they go 1 to 250 this year. It's going to be less than lovable, Harry. We'll stipulate it's not as good as lovable, okay? Here's the thing, what I found, what has happened in Replit is, most of the competition can't build the AI agent they can. So even Bolt, which was the early leader, they're now just in number three. They don't even have an AI agent anymore. They've outsourced it to Claude. And so these products that are really, really good are building a deep layer of sophistication. But if you don't get there fast enough, and we could argue whether Gamma is there or not. If it's sophisticated enough, and if you guys, if anybody on this hasn't used Gamma, I tell everyone to use it. What you do is go into a Google Doc, write 10 points about this show,

• 28:01Speaker 00

  and then just give it to Gamma and say, make me an amazing deck. And your jaw will drop what it does when it's coding this deck in real time. Just give it 10 bullet points. It does so much, but you sure better be working, you sure better be working that 996, right? Because Cliff's got a few good folks. It used to take Cliff three years, now it takes Cliff 90 days. That's why I think 100 million, 250 million, these gamma Start to build a moat. I do believe Replit has a moat, maybe not versus lovable, but versus all the rest. But man, you used to get a moat earlier, didn't you?

• 28:29Harry Stebbings?

  But that's where I think vertical specialization does accrue benefits with scale. An example is, you know, I did a deal in Solve Intelligence's AI for patent law. The more patents that go through their algorithms, the better they are at writing, editing, predicting. And it's a very specific use case that gets better with more and more data ingested. You don't get that with horizontal products.

• 28:54Speaker 00

  No, and data is going to be defensible in the age of AI. Data is going to be defensible. But those patents are public, right? They can still be ingested by other people, can't they?

• 29:01Speaker 01

  Yes, they can. I don't know if it's true that you don't get it with horizontal. I'm thinking aloud. I think you probably do. I mean, I think that, you know, would you do, let's take cursor as a horizontal product. Would you fund another company now from scratch to do exactly the same thing? I think not. I think there does come a point when you do pull away. I don't think it will remain unstable forever, in the sense of, I don't think you'll have these 200, 300 million dollars companies and then someone else doing roughly the same thing, come and displace them. I just, I think there's this uncertainty period at the start, but I could be wrong. I'm processing in real time here.

• 29:35Speaker 00

  Well, I think that Harry's point about the patent one, let's step away from it. That I think is interesting is the classic question in B2B, maybe all venture, but certainly B2B venture since we all started is, how important is it for something to be defensible in the early days, right? And we've debated this for years, right, since the inception. And we've all known deep down, no product that can be built in 60 days can be all that defensible. But we told ourselves the team had domain expertise or this or that. The question is today, has the bar gone up? Should we either give up on defensibility for seed investing? Just give up that that is a criterion? Or should we radically raise the bar, forcing us to go into verticals, corners of the market, areas where there aren't 11 agents, already 100 agents? Harry tweeted about support the other day.

• 30:19Speaker 00

  I can tell you when I invested in support in the early days, Talkdesk, Gorgeous, Front, no one wanted to do support in the early days. Everyone thought this was the dumbest category. So go find, now it's trendy, don't do that, right? Maybe go find something the cool kids aren't in.

• 30:31Speaker 01

  It's simple. I don't think you can have a major defensibility team in any of these horizontal or verticals at the seed or even frankly, the stage we're investing at, right? The defensibility theorem emerges at scale, right? In other words, I do believe what's true in most enterprise businesses. Once you become the anointed winner, once a market coalesces and there's two or three people, at that point in time, it's yours to lose. You can still screw it up. But provided you have great engineering and stay on top of the trends and top of the technology, you should be okay. I think the idea that at the seed stage, you're going to find a defensible way to do code gen or code testing or is absurd, right?

• 31:12Speaker 01

  And you just have to internalize the game you're in, which is for most of these deals, unlike deep tech, you're just going to have to awesome team, run fast, be superlative on technology, get your distribution early. And then as you scale up, then you just you become the winner. You can't be anointed the winner up front. Get over it, everybody. It's a high risk game.

• 31:33Speaker 00

  But is that okay at 50 post for a seed round or a pre-seed round? Do the outcomes justify it? That's the thing. Sure, Rory, if the deal is at three posts or five posts and I can spread my 500K checks around, I get it. If I have got to spread $5 million checks around at 50 posts, it's tougher.

• 31:47Speaker 01

  That's a much better question because now we're gone from the abstract of is defensible to the actual nuts and bolts of money. We've recognized the game we're playing has more variance, we think, than the last time and has to run fast. And there's probably also more competitors. Are you getting paid for the risk? Yeah, I wrestle with the same thing around later at 100 or 200 million, pray. And we have this constant dialogue. If I look at, you know, we do As and Bs. And the early product market fit, A, you probably still don't know who the winner is. And the B, when you know who the winner is, it's going to cost you a fortune. And which of those is the better bet?

• 32:17Harry Stebbings?

  But do you think at the B, you even do know the winner? We look at the B, you mentioned my customer support tweet, most of those companies had rated Bs. I've got no idea who the winner is in that category and I don't think anyone does.

• 32:28Speaker 01

  No, I'm going to push on that. And I think you can have somewhere between the A and B, you can have a much better hypothesis. Put it this way, you can know a lot more than you know at the seed or the early A.

• 32:38Harry Stebbings?

  Do you, when the Bs are preemptive on three to four million of ARR, which they are for hot companies today, do you?

• 32:44Speaker 01

  It's interesting because this is absolutely what we have to know to do our business. Right? Because at C, Jason can't know. He can just believe, right? But somewhere between the A and the C, you have to know. Otherwise, we're all ludicrously overpaying. And I think if you look at all these markets, like I think, for example, you mentioned your patent company. I think, you know, without naming it, I think we have a rough sense of where all the companies are. I think your company is doing very well, Harry. You should be glad to know. And that doesn't mean I know where the market is going to end up 10 years from now. Once the horses are running and once they round the first furlong, you can actually see the rank order of where they're running. In a way, you can't at the early A. Two, $3 million in revenue. You know, you're drawing on small pieces of information,

• 33:27Speaker 01

  but you can see rate of change and, you know, differences emerge pretty quickly. So I disagree. I think you can have a pretty good idea. Look, it's hard, but...

• 33:34Harry Stebbings?

  What, I mean, genuinely, I don't want to be rude, but can you give me an example of why you think at the B, you have had a clear understanding of a winner?

• 33:43Speaker 01

  Take Cogen. There was a bunch of people doing, there was 10 to 15 companies at the A or earlier. I think it emerged Cursor. I think it emerged, you know, kind of Windsurf and then to a difference extent, Cognition by the B. And it was obvious that those were the names.

• 34:01Harry Stebbings?

  But I would push back on you there and say that I don't think we know at all. I think Codax is making incredible ground. I think Claw Code is making incredible ground. Cursor is very good. But then, as you said, you've got Cognition. You've got the Ratlets and Loveballs kind of coming from the kind of prosumer, less developer-centric. I think that's still an entirely up for grabs.

• 34:19Speaker 00

  I think also, we didn't, if we look back, because we've talked about it earlier in the show. I think looking back and know nothing but kudos to the team, right? But I think when Windsurf sold, whatever happened, it wasn't clear it had a sustainable motive any sort. It wasn't clear it truly had. It was a darling of a slightly more enterprise version of Cursor. People did love it. But ultimately, it wasn't clear it was it was a winner then. It wasn't clear that brand was enduring. It what looking back on it, it wasn't what would we don't know if it would even survived as a standalone company.

• 34:47Speaker 01

  True, but at the same time, what was clear is over the prior six months. It was that if anyone is going to be the perceived company worth acquiring, there was only two or three names in that space. And the other seven or eight names that had been around weren't. So I understand what you're saying. The reason they took the deal, it wasn't clear they could go from where they were to, you know, a billion in revenue in an IPO. But what my point is this, going back, we're dealing with probabilities here. At the seed, you know nothing but the people at the early A, when there's five or six of these companies doing a million plus or minus in revenue. All you know is you got a one in 10 shot somewhere at the B. I think you get down to being able to say it's a one in three shot. It's still a one in three shot with a huge amount of variability, but the odds have narrowed.

• 35:31Speaker 01

  Let's take, I mean, you guys keep talking about lovable and replish, right? You would say implicit, what you're saying is those are the two names you implicitly said. I don't know the space as well. Bolt is not as has shot its bolt, as it were, pun intended. That's a piece of information you have when you're making a bet at this stage. You can probably say something like there's two clear winners here, probably less likely to be another raw startup. There is adjacent competition from, you know, the Wix has bought someone. So you at least.

• 35:59Harry Stebbings?

  I'm so sorry, John, but again, I would just say you need to expand it significantly. It's not one in three. You've got Versel and you've got Claude Code who are eating their lunch coming down. You've got, as we mentioned, Rapid and Bolt, but then you've got, you know, Salesforce who have their competitor at last, you know, their competitor. Figma Make is doing very well. It's one.

• 36:17Speaker 01

  You're right. So the adjacent competitors, let's talk about the, because I always think the horse, there's a two step horse race in all these deals, right? And by the way, I'm going to argue what you just said is proof of success. Let me tell you what I mean by that. In any startup, you start off a day one and you're like, there's three other startups doing just, or maybe 10 other startups doing just what we're doing. I wonder which of us will win. And my experience is when you go to the first board meeting where you suddenly realize you're scared of the big company adjacent competition. It probably means you've graduated from the baby class. You're one of the two or three winners in the startup land. And now you got to worry about the adjacent guy next door. You might say you're not sure if your lovable bet's going to be the winner yet. But do you believe you've within the class of venture bets on this space? You've got one of the one, you're in one of the one or two winners.

• 37:01Harry Stebbings?

  Yes, but that doesn't generate any price. But that means shit. It doesn't matter if it's one of the venture bets. If one of the venture bets doesn't win and Salesforce or Atlassian or Canva does, I don't care.

• 37:14Speaker 01

  Obviously, you're correct, but you've got to think about it just like incremental information, updating your priors. When someone did the seed there, they were like, this is a good idea. It might not even work. Then you do the, oh, my God, vibe coding is a thing. There's five companies doing it. We're one of the five. And now you can say vibe coding is a thing. We're one of the five doing it and we're one of the two winners. Huge amount of risk reduction. Now, you still have the other risk, which is the big companies might do it. Something might disrupt you. There's a lot of risk still left because it turns out that startups are risky. But you've got to admit that there's been, you know, there's been a massive amount of information gleaned, risk reduced from going back to what Jason said. Is the five on 50 bet where you don't even know if it's a space?

• 37:59Speaker 01

  And you don't even know if you're going to be a viable player in that. Is that a better or worse risk than doing two billion pre? When you know both those things, you are the winner. There is a space, you are the winner, and there's still a whole ton of competition to come, which is the level of bet you made. Which of those two bets are riskier? I don't know.

• 38:16Harry Stebbings?

  No, I think about this, which is, you know, about, I'm again butchering, but four to five million in revenue. It was done at 200 when we first did it. And then when it was about 80 to 100 in revenue, it was done at 2 billion. You can choose your entry price.

• 38:32Speaker 01

  Totally. What that says to me is consensus, rightly or wrongly, has said there has been a massive risk reduction. And now unfortunately, what's happened and always happens in the bull market is valuation has expanded to fill the risk that was reduced operationally. In other words, at four to five million, there's still a ton of risk. Fast forward when you're doing 50, 150 million. I'm just going to say it, you can't deny there's been a huge amount of operational risk reduced. Now, the problem is at 2 billion pre, is there enough upside left in the separate question? The point I'm making is it's gone from being a, is this a category? Are they the winner? It's gone to the third and last question, which is always, is the TAM big enough to support a $2 billion valuation?

• 39:15Harry Stebbings?

  Which I think in this case it absolutely is. I just want to go back to the like, we kind of know the winner at the B. And if we don't, and if that has reduced or got less, are we overpaying was an interesting addition. My statement is, we dramatically know less, and that one in threes move to one in seven to 10 significantly across categories. In which case, surely the suggestion is we are dramatically overpaying.

• 39:40Speaker 01

  There's some level of truth in what you're saying, but I think the variance in these companies is a lot more than the 15 boring years of SaaS is obvious and you know what to do for the next 10 or 15 years. Jason and I would both say, we both had to play, Jason as a leader and a founder, I just as a humble investor, in an e-signature company. When we did those deals in 08 or 09, it was e-signature, and fast forward 10 years, it's still e-signature. That was a simple world. We would both agree, I think, that there's way more change in this market in a year than in some of those older markets in five years. So we'd agree that. So you are right, there's more risk, Harry. But I still do believe, all these investments, I think, are riskier than they were in SaaS land, and they're astonishingly priced higher. But I still think there is some significant risk

• 40:24Speaker 01

  reduction in going from a one in five, one in 10, will it even work, to a one in three, you know, I know who the competitors are.

• 40:31Harry Stebbings?

  If that's the case, should our B portfolios be more diversified? Jason put as a great question, do seeds need to be diversified?

• 40:37Speaker 00

  Well, how big a fund you do, right? Or if seed checks are $5 million, how big a seed fund do you need just to make the minimum diversification work? How big does a seed fund work with $5 million seed check?

• 40:48Harry Stebbings?

  Well, it depends. If you think outcome sizes are expanding with the movement from technology.

• 40:52Speaker 00

  Does it matter? Like, it's just some basic math. How many first checks do you want to make? Do you need to make in that fund for it to work? So if you traditionally needed 20 or 30 checks to work, but risk has gone up, to Harry's point, maybe you need 40. And what reserves you mean? You might need a $500 million seed fund to have sufficient reserves, because I need to do 40 deals at 5 million now. That's 200 million. 200 million for reserves, that's 400 million. 100 million for fees and times and backup. I need at least 500 million for my little seed fund to make the math work.

• 41:24Harry Stebbings?

  What you're missing on the masses, if you think that the outcomes are going to expand, you can have a smaller ownership on entry. And so you don't need to increase check size if you assume.

• 41:33Speaker 00

  Four million out of 50, does it really matter? These are not massive owners, four million, who cares? One million on 50 isn't going to work, Harry, in my seed fund, is it? It's not going to be enough ownership, is it?

• 41:41Speaker 01

  I'm just trying to disaggregate Harry's response because there was something, first of all, I agree with Jason's framing. And then your response was interesting because you could have said one of two things. You could have said, you know, you don't need to go from 20 deals to 40 because the winners are so much bigger that even if you have less winners, you're fine. That would have been one thing. But he didn't say that. Interestingly, you said implicitly, you said, go to 40, but just take less ownership. The mere fact that you made that answer says you are embracing a more diversification story in the face of risk, which, you know, is math 101, which is a super interesting concept because we had it down on the agenda to talk about. And some folks are even pulling it off. These highly focused seed stage bets, which I find awe inspiring because all other things being

• 42:23Speaker 01

  equal, with the amount of variability you're seeing, I would have expected people's deal count to have to creep up slightly. But, you know, we had Roger on who was very much a concentrated better. You have the hummingbird story in Europe, which is astonishing and impressive. Everything in logic says to me, with the increase in time to exit and with the concomitant increase in risk, logically, you should be increasing your diversification slightly, probably reasonably, which probably means either smaller checks and more deals or a bigger fund size to maintain the same ownership.

• 42:56Harry Stebbings?

  Well, I think, I think both work. I mean, one fund is an LP and it has 100, 150 positions with 100 to 150 K checks. It's a 7X fund. And it goes to my point of the outcome sizes being so much bigger. And so the ability to have lower ownership. Jason, to your point, 1 million on 50 does work if it's a $100 billion company, not the $3 to $5 billion enterprise outcomes that we've been playing with for the last 10 years.

• 43:21Speaker 00

  Yeah, works even better if you own 10% of that company, though.

• 43:26Speaker 01

  Would you want that?

• 43:27Speaker 00

  Yes. The thing, the 100 to 200 fund, here's, I mean, I'm not that human. I don't want to meet 500 founders a year. To do 200 deals between your team, you've got to meet 500, 600, 700 founders a year. Even with your AI agent helping you, I can barely tolerate doing a couple of meetings a week. I can do stuff by email, but God, I got to carve out an hour for a deal I might not do. I want to blow my brains out after that meeting. That's the, I didn't, I sold my companies and not do those meetings anymore.

• 43:51Harry Stebbings?

  Right? I mean, so I can tell you, our partnership does 20 meetings per partner per week. And so now with my four investing partners, we have 80 net new companies that we meet in person per week.

• 44:02Speaker 00

  80 in person?

• 44:03Harry Stebbings?

  Yeah.

• 44:03Speaker 00

  Yeah. I would resign. I would give you all my carry back. Thank you for hiring me, Harry. I'm eternally part of the 20 VC team. You make me do 20 in person. Like I sold my companies because I didn't want to spend my life in meetings. I'll do one a week.

• 44:17Harry Stebbings?

  You do the math, we'll do over three and a half thousand company meetings a year.

• 44:21Speaker 00

  Honestly, I think it's great, right? For the LPs and others, I think that is a great playbook. It's just not to get distracted. You've got to match the strategy to who you are as an investor, where you get your leads, where you get your deals, how you go, what your brand is. You can do that, right? For a variety of reasons, but, um, but it's a lot of meetings, man.

• 44:38Harry Stebbings?

  It's a lot of meetings, a hundred percent.

• 44:41Speaker 00

  It's a lot of meetings. Can I get you guys a coffee or a drink? You want sparkling or still? Which one would you like? Do you have DVI on the Mac here? Sit here. Harry's running late. He, Harry's doing the 20 VC of sports. He's running a little late. He'll be here soon.

• 44:55Speaker 01

  No, I love taking meetings. That's how I learn. I'm a meeting junkie. My partners laugh at me. I'll take a meeting with anything, right? Because you can always learn something from it. So I have a bias to meet, in fact, probably an over bias.

• 45:07Speaker 00

  Listen, I think when I meet a truly great founder, like truly great, I always learn a lot. Don't get me wrong. Anyone below that, I don't think I learn enough to be worth the time. I do my homework. Rory, you're the best homemaker of the team. You could do so much homework on an investor. Harry's the most prepared and the most charismatic, but Rory's the best homemaker. Okay. You really going to, if they're not great, you really learn anything in that meeting? If you've spent an hour researching the company? I learned nothing. I read, listen, I read your deck and then I said, send me more. Then I say, send me your last five investor updates, right? Send me your financials and I'll research you on the internet. Now we have AI, Claude will help me. I'm going to know like a lot of stuff unless you're really great. Now, if you're great, you're going to blow my mind, right?

• 45:50Speaker 00

  But if you're not, I'm going to start yawning about 15 minutes into this meeting.

• 45:53Speaker 01

  I don't know. I find sometimes you get an insight. Even I think, and I could be wrong. It's like you make, again, the beauty of doing this is you make me think, should I do things differently? Because you do it so differently. As I do find, even on a okay deal, you learn nuances about a specific market from the one on one and the dialogue to and fro that you wouldn't get from the presentation. Now, it does mean I have a, as people who've pitched me know, a horrible interrupt driven style whereby if you have 20 slides, I'll be like, we can skip 17 of them and these three I care about can be annoying at times. I think in any business, no matter how much you think you know from the outside, the person inside living it every day has a crucial kernel of knowledge that you just can't access any other way.

• 46:37Speaker 01

  And I believe most meetings I get something from it. It's a little like your knowledge, living AI agents versus anyone using those words is step function different.

• 46:46Speaker 00

  It is, but you've got to meet me to learn that. If you meet all the other ones, it's a waste of your time.

• 46:51Speaker 01

  Yep, agreed, but you have to meet them to get that experience. So I buy us to meetings. We've come a long way from fund construction, but that's okay.

• 47:00Harry Stebbings?

  Well, this is fantastic. This is what founders like, again, the amount of founders that do not get to hear this that actually wonder how VCs think is in the hundreds of thousands.

• 47:10Speaker 00

  Yeah. Well, you know what's related to it? It is the question a lot of founders have is how important is it to just get in the room? Just get my foot into the door, just get the coffee meeting. And I think it varies. I think Rory's saying, listen, get in the room at scale. There's some value to that. I'm saying I have no interest. Don't get in the door with me. Just send me a great deck and a great email. I will read it. I will slow down. I will spend time. If it looks good, I'll take the meeting, but don't, no need to get in the door with me. There's no value in getting to know me, coffee meeting. They're like, well, just take the meeting, Jason. I'm like, dude, I have so much respect for you, but there's 0% chance I'm going to invest. Don't try to get the meeting. It's not going to help you.

• 47:46Speaker 01

  I think that's a fair comment is that, yeah, you do want to, yes. I don't think someone who's doing something I totally not going to do, yes, but I'm not a huge fan of coffee meetings. I'm like, you're here to get money. I'm here to give money. Can we just talk about the business rather than, you know, a bunch of getting to know you? But I am always interested in hearing people talk about their business.

• 48:04Speaker 00

  That's why you're enduring in the business. That's why you're enduring because you enjoy the meetings.

• 48:09Harry Stebbings?

  Roy, how do you feel when you hear people say, no, no, no, I'm not going to meet and waiting to run a process? And I'll run a process on the 19th of November. I'll email you then. Because for me, I found this really abrasive. I'm just opening up here. I said to the founder, listen, if you're running a process, you're either optimizing for price or partner selection. I'm giving you a great price today, a price that you want, you said you wanted, which means that you're not optimizing for price with this process because I've given you what you said you want, which is just saying that you think you can get better than me, which may be the case, in which case just tell me straight. You think you want Sequoia or Benchmark, in which case no harm, no foul, but fine. And they're like, no, no, no, I just want to run the process. How do you react to, I want to run the process?

• 48:51Speaker 01

  I think from their side, they're correct. I don't have to like it. But I think from their side, because I think I see more failed financings because they didn't run a process than they did. You're basically saying, Mr. Founder, you don't have to run a process because I'm going to give you a term sheet right now. That's a good price and you like me. Let's do it. Right? That's not an unreasonable offer, but typically what happens when people quote, don't run a process is someone comes in and says, I'm really interested and they share and they give information serially to someone who's not yet ready to commit on an investor side. So they've run, they've run an accidental process. That's a mistake.

• 49:30Harry Stebbings?

  But if I'm saying, Mr. Founder, here's your term sheet. There's nothing to be done.

• 49:34Speaker 01

  That's different. I mean, at that point, it's not crazy. If I was on the board of a company that had that happen, I would take it seriously and I would think, should I hit the bid? Conversely, if I was on the board of a company where the founder said, "Hey, I'm meeting with Joe at MegaFirm. They ask, can we share some data? They're not, you know, they just want to get a sense of it." I would shut that down and I would say, "You share with everyone or you share with no one because giving your data to one or two people where they're not in is just starting a process without meaning to start a process. And then if they don't move forward, you've kind of had a failed process already without ever doing a process." I'm 100% certain that that's a mistake. Even though on my side of the table, you know, again, I don't love that, right?

• 50:17Speaker 01

  But you're raising something, which is why a lot of times we, you know, you wrestle as investors, this is my aha, you wrestle as investors with, "I want to be able to do what Harry just said. I want to be able to come in and commit." Because it's the only way to get them off that process. They have to have a good enough relationship with them. They want to do business with you. And on top of that, you have to bid with probably sparse information. And my big aha on that is the only way you can conceivably do that, no amount of pre-work can do it because you don't know the actual information. If you've seen the prior round, it's probably your best chance. Because if you've seen the prior round, you have some sense of what's going on. You know what they underwrote. You had a mental model at the last round. You can probably in a dialogue get one or two pieces of information,

• 51:01Speaker 01

  calibrate how they're doing and maybe do that process.

• 51:04Speaker 00

  I have a slightly nuanced view in the middle for what it's worth, just for, maybe for advice to folks that watch, not to Harry. But when that happens, that Harry said, I think it's a slight founder fail, a slight own goal. Not a total one, because obviously he's got a good company, right? Harry is in essence, ready to do the deal now. The founder says, "I want to run the process." I think what many of the best founders do, not all, there's all different types of founders, extroverts, introverts, great fundraisers. But what many of the best do is they're able to cultivate enough interest with enough good VCs that if they hit the number, they just send an email. They just send an email and they don't have to play games. Harry, I'm thinking about raising around before the end of the year. And Harry can say, I'll give you a term sheet today. And the right answer is, I love you, Harry.

• 51:48Speaker 00

  Especially love the one with Rory, but I'm not ready today. Honestly, I'm not ready today. I will be ready at the end of the year. That is the perfect way to handle this situation. You don't risk losing Harry's term sheet. You don't risk accidentally founders do overplay their hand, not as often as you might think, but they do overplay their hand. They can say the wrong things. And so the best founders, one way or another, build relationships over months. They copy them on their investor updates, they update it, and then three or four folks are just in when you're ready. It's so casual with so many founders. They're just in as long as the deal is reasonably fair. Just tell me, tell me where to write the check and how much I can buy.

• 52:29Speaker 00

  And I think the reason this happens, the Harry scenario is so many seed investors and so many accelerators hammer into founders, you have to run a process. That is classic top three bits of advice. I think it misses some nuance on the optimal way to run it. The optimal way to run it is for everyone already to want to invest for real without games before you open your data room. And the super optimal way doesn't even require a data room. You don't even need a data room because they already want to invest. They need diligence. The best run process, I know this might be slightly controversial out of context, but the best run processes don't require our data room, not a traditional one, not a traditional one, only one for diligence. They only require a file that says box-diligence-investment-122125. They don't need any other data room. It's just for diligence.

• 53:14Speaker 01

  I'm going to rephrase that. I think what you're actually saying is the best run processes don't feel like a process, but they are. And I think you're exactly right is that if a founder is smartly nurturing relationships, keeping people broadly informed, but then tries to time the interest such that when he's ready to put his or her hand up, there's three people who are primed and ready to go, that is the best outcome, as I say. So it is a process, but it doesn't feel like one. And that is perfection itself. I agree with you. Now, you have to have a very attractive and high performing company to be able to do that, but.

• 53:47Speaker 00

  Maybe, but I also think those are the only ones getting funded in this environment. We talk about all the gammas and the schmamas, but everyone below that ain't getting funded anyway, so you might as well run this version of the process.

• 53:56Speaker 01

  He may have.

• 53:58Speaker 00

  Maybe Harry thinks a lot of BB folks are getting funded today, but I ain't seeing it. It's the most binary fundraising environment in our lifetimes, isn't it?

• 54:06Harry Stebbings?

  Expand on that, Jason.

• 54:07Speaker 00

  You're either, you know, you're either YC Neo, South Park Commons, got something, get funded, or who the hell's gonna find you in your pre-seed round, right? You better be, whatever the hell AI native is, I mean, we know what it means. You better be hot AI native with top quartile venture growth, or you ain't getting funded. It's pretty simple. It's just not, there's not a lot of gray zone anymore.

• 54:27Harry Stebbings?

  But I do think even with that, you know, you say YC Neo, fine, but they have a huge amount of companies per batch in YC. If you want to stick to the religious, we're gonna run a process, that does work only if you have stellar numbers. Because if you haven't built relationships before and you start on Monday the 19th, to expect that you're gonna come in, hit the ground running with first meetings on Monday the 19th, and get term sheets super frickin' fast with average to net no numbers.

• 54:53Speaker 00

  No, of course, of course. I was making an assumption in the story you told me, the anecdote of the term sheet, that it had top, top decile venture numbers. The very fact that they were flippant assumed it. Now, if they didn't...

• 55:04Harry Stebbings?

  Zero to a millionaire R in seven months?

• 55:07Speaker 00

  I would take that offer. I would sign the term sheet and send it right back and ask if you wanted to meet itself rages over all the holidays to see the Disney exhibit or something like we're doing with our team trip. I would say, "Thank you, Harry."

• 55:20Speaker 01

  Guys, because I think you were saying the same thing, because Jason's troll away comment, but it's worth pausing on. He was basically saying you should run this kind of, let's call it the, this light process, which is very kind of FOMO driven. His comment, and I had said, "Hey, you can only do that if you're a good company." And then his comment was... Only the amazing ones are getting funded. So implicitly, what he's saying is if there's 100 companies and only 20 of them have these kind of numbers, they should run that kind of process and the other 80 are screwed no matter what. So he doesn't even, he's not even invest. So, so 100% of successful deals will be this kind of FOMO-driven, non-processed process. That was the implicit statement in what you're saying, Jason, right?

• 55:58Speaker 00

  I mean, Harry's right. There's, there's some non-truth to it, but I think there's a lot of truth to it, that it, that we're in, we're in the captain obvious era of investing. And it only takes one term sheet and spend your time, going to Harry's point of don't, don't, don't be careful. But man, I'm not, I'm just, Harry sees the most of any of us, but I'm, I'm just not seeing the non-obvious ones get funded. I just don't see it, right? And then the most brutal one is, again, the classic SaaS company, triple, triple, double, double, which has been discussed ad nauseam on every 20 VC channel, right? Including 20 VC cricket and 20 VC sales. Those ones, you could always find someone to fund if you met enough people back in the day. Now you can do better than that and only 20% of people want to take a meeting and they still might not do it. And I think every month that goes by, those deals are harder to do.

• 56:43Speaker 00

  Every, every podcast, everything makes them harder. Harry's disagreeing with me?

• 56:47Harry Stebbings?

  No, I'm 100% with you. We have a, and I like tangible examples because people don't actually take it away. We had a company that went from 400K to 3 million in AR, classic enterprise SaaS business, bread and butter enterprise SaaS that would have had five term sheets from five good firms, 120 meetings, one term sheet, and it was 10 million round on a 40 post, 12x revenue for a 10x grower.

• 57:11Speaker 00

  But have you seen the market comps, Harry? Have you seen what the average public company is trading for? That's still a fine valuation.

• 57:17Speaker 01

  Yeah, but they're not growing 10x as Harry's point, but the real truth implicitly in that is it's some, it's, I think I've said this before, it's a combination of some element of it's just not fashionable, but also the implicit statement is that growth rate is going to attenuate because, you know, I might have two or three years further on that same investment, you know, we might have a company doing 25 million in revenues, we investor was doing five, but its growth rate is now down to 60%. It's still only burning $10 million, but those are incredibly hard deals to get funded.

• 57:47Harry Stebbings?

  Okay.

• 57:48Speaker 01

  There is actually no value there, but they're hard to find.

• 57:51Harry Stebbings?

  We're gonna switch tack slightly, but I wanna discuss two kind of crazy results in the last few days. One good, one bad. Datadog absolutely freaking crushed. Stock up 23%, $15 million plus AI native customers. Wow. How did we think about Datadog?

• 58:09Speaker 01

  Jason has covered this so well last time. His basic comment was, even if you're not AI first, co-attach to the AI trend and you'll be fine. These guys co-attach to the AI trend and they're fine. Sell shit to the people who are making AI and if they grow, you'll sell more shit too. And they did it.

• 58:26Speaker 00

  No, no, it's true. The irony is we go into next year. The AI leaders, the hyperscalers and the hyper this and the hyper that. They're starting to buy like classic B2B companies. And in fact, they're recycling the same people in procurement and the same people in GDM and they're buying the same stuff. If you have attached to AI budget and you're a Datadog era and you're in that, you're actually gonna have a great 2026. Because these are normal B2B companies. Like OpenAI is buying like an Adobe or a Microsoft now. But if you're not in that, man, you're just dead, right? And the other one was Clio, which raised it $5 billion in legal tech. It attached to AI in a different way. This is a company founded in 2008 that found its way in the AI era, right? It added fintech, payments, got up to $3 billion, now at $5 billion.

• 59:10Speaker 00

  So find your way, right? Datadog, it helps the Datadog, even though it got expensive, it was the darling, right? It was the darling product, but man, they captured that revenue. Go find it.

• 59:19Speaker 01

  They did, because, you know, I'm gonna leave Clio out because I think it's just so different. I think Datadog is a core piece of compute infrastructure. And these hyperscalers are the most compute-intensive companies that have ever been known. So if you're selling compute stuff, you should be having, as Jason said, a great quarter. If you're selling routers, if you're selling switches, if you're selling little interconnects. Whatever takes to stand up Stargate. And observability is a key part of that. You're gonna be golden, because there's more compute than you've ever seen. Which I think is a very different dynamic than some of the others.

• 59:50Speaker 00

  Fair enough. If you're not attaching to that compute, something's off. If you're compute-adjacent, you better be growing quickly if you're compute-adjacent.

• 59:56Speaker 01

  Yes.

• 59:57Harry Stebbings?

  I'm a Duo shareholder, down 25%. Rory, you know, the age-old thing, which I just love that you describe me with is, that's great, but what about me?

• 1:00:08Speaker 01

  Yes, Harry, Harry, that's you.

• 1:00:10Harry Stebbings?

  Duo plunges 25%. I'm going, why? What the fuck happened to make it plunge 25%?

• 1:00:15Speaker 01

  I think you're over, I think, I don't think there's a mega story here. I think that, I mean, there's still 80% up on the IPO four or five years ago. They had a period when it was, oh, my God, AI is going to kill them. Then the CEO very wisely got ahead of that and said, we're using AI. So then the stock got way ahead of itself. And now it's like, AI is not going to kill you. Now is it going to make you enormously red? You just guided down for next quarter slightly for business fundamental reasons. And the stock was overvalued and went down. I don't think there's a big story here. It's like, you know, the graph is it's still, as I say, up in the five years. It just, it's still significantly up on its lows. It just got ahead of itself. They had a good quarter. The revenue guidance was slightly less. Life goes on.

• 1:00:53Speaker 00

  I'd say it has the wrong kind of AI. And what I mean is Duolingo is using AI to make its product better, right? Hooray. Every single portfolio company better be using AI by this point to make your product better. This is not 2023. You don't get any kudos for sprinkling AI dust on your product. Going to Rohr's point, what you get kudos is, is attaching to that compute budget. That's the only kudos you get, and Duolingo didn't earn any.

• 1:01:16Speaker 01

  Well, I couldn't because, to be fair, I mean, I'm just going to, as an apps investor, I'm going to step up and defend the Portland apps companies, right? If you're an infrastructure company, you can coattach to compute. If you're a new AI apps companies, you are using that compute and using that AI. If you are like Duolingo and a lot of our companies, companies have been around since pre-AI. The question is, you know, I don't think you're going to coattach to the spec, but what you can do is co-adopt the technology. And I'm going to give Duolingo credit. They've done a decent job of saying, we're going to be AI forward, you're going to be AI leaning. But in the end, this is my zoom out point. In the end, you're still selling a subscription product to help people, you know, at a very modest level, learn another language. There's no AI compute to attach to there, Jason.

• 1:01:56Speaker 00

  Well, there is. They have to find a way. I mean, listen, I'm not a total Duolingo expert, okay? But Duolingo took money from, I mean, it's, it does a lot of things, but in some sense, it took money from Berlitz and all these language schools and stuff online, right? Hooray, you did that. Now where are you going to disrupt humans? This is your job. Like, you already disrupted those humans, unfortunately. They're gone, right? Where's the next level of human disruption?

• 1:02:18Speaker 01

  Zooming out, I will give you that, that is true. I do think the next generation of companies that are going to be, quote, "teaching a foreign language" will obviously be LLM-based, and there's a lot you can do. You know, we've seen some of those companies, what I call more professional, more interactive teaching using LLMs. And I do believe there's a whole ton to be done in terms of one-on-one instruction in language and a whole bunch of other things. And Duolingo should be getting on its skates to do more of that versus just using the thing they got into a little bit of trouble for the CEOs, using AI to obviate the need for humans. The real question is, can you build a more compelling set of products using AI to do more immersive learning? And I think as companies like Speak and companies we've talked to, I think there's a whole bunch

• 1:03:02Speaker 01

  to be done in AI-enabled learning, and it's actually a super interesting space, including language learning.

• 1:03:07Harry Stebbings?

  Really interesting question to ask for all investors, which is like, if you are not removing humans from the equation, you are going to be heavily discounted.

• 1:03:15Speaker 00

  Rory's got a good point. You're either getting money from compute, right? This massive spend, or you're getting money because you're using AI to replace humans. Otherwise, you're not going to grow. Otherwise, hooray, congratulations on your 14% growth. Where are you replacing humans for real? Whatever vertical, whatever industry, where are you going to go in and reduce the head count that vendor needs by half?

• 1:03:35Speaker 01

  Most of the time, I'm in the, yeah, replacing humans is the story. Interestingly enough, in education, I actually think it's actually doing it better. I think the data, the stunning data shows that a bunch of these education that, in fact, if the human today is someone in a class with 20 people, there's a whole bunch of examples that says LLM learning is equivalent to one-on-one human learning, tutoring one-on-one. Let me say it more positive. What you should be doing with AI in education is allowing everyone to get something they haven't had, which is one-on-one learning instead of group-based learning, because all the data says one-on-one-based learning, constructed specifically to your needs, is far more efficient way of teaching anyone a foreign language, and frankly, most concepts.

• 1:04:15Speaker 00

  I admit, I'm not a total expert in education, but where does the budget come from for that software? If it's not, if it's not replacing humans, then you better steal it from a legacy inventor, which is fine, but Duolingo's a legacy platform now. Like, you gotta steal it. You got to steal or you end up Chegg. At least Harry didn't do Chegg.

• 1:04:32Harry Stebbings?

  I didn't do Chegg.

• 1:04:33Speaker 00

  No, what I mean is, listen, you can use, okay, so let's say your AI does not replace humans or attach to compute. You have a third option. It's Captain Obvious. Your third option is to use AI to massively displace an incumbent and steal all their revenue. In fact, that's the history of B2B software mostly, right, is stealing the revenue. I just don't know how many of our public leaders are in a place to steal their own revenue, right? They're in a tough spot with it, with all their seats, right? And we can fund those deals as investors, but I think the first two categories are much, are much easier. Attached to the compute or replace humans rather than just steal, I mean, there's like 400 AI CRM startups out there all saying they're going to eat Hubspots and Salesforce lunch. That's not

• 1:05:15Speaker 00

  exciting to me as an investment. I'm going to go disrupt. I mean, maybe you will, but that's much less exciting than truly replacing 90% of your GTM team, right?

• 1:05:24Harry Stebbings?

  It's almost like doing customer support to me.

• 1:05:26Speaker 01

  Jay, that was a really good framing, you know, the fact that, you know, getting the new budget just so much better than trying to slug it out with the existing provider and say, our new thing is better. It's not to say you can't in those spaces, but yeah, so I'm trying to.

• 1:05:40Speaker 00

  I just would have to think education's got to be, it is an interesting market, right? It's large, but getting incremental budget has to be close to impossible. That, you know, the public school district's not going to come up with another 10 million for your software. It's impossible.

• 1:05:52Speaker 01

  Sadly, this is not a public school comment, right? But you're right. Is that, I think the positive some comment is, I mean, I think dual learning goes actually what I call light learning. You know, you're learning another language, you're just learning a few words. I think a really interesting space we've seen with LLMs is replacing the spend that an adult wanting to learn a second language typically for business purposes, where hitherto fore they would do it with a one-on-one coach, right? So you're replacing that human coach with a very intensive immersive LLM-enabled learning program is actually quite a compelling market. But you're right, it's education, but it's not, you have to find an existing spend and the existing spend is pretty niche, which is people who can afford, you know, to spend money on a one-on-one tutor to learn a foreign language. There's not a whole ton

• 1:06:37Speaker 01

  of budget, unfortunately, in K-12 to give every kid a, you know, one-on-one customized tutor.

• 1:06:43Harry Stebbings?

  I love the way Jason's just getting better and better with every show.

• 1:06:47Speaker 01

  Just get him out.

• 1:06:49Harry Stebbings?

  Aren't you, Rory, you're like, geez, he was here for the entertainment and now he's become so

• 1:06:53Speaker 01

  He's getting hard and mean.

• 1:06:55Harry Stebbings?

  He's so wise.

• 1:06:56Speaker 00

  No, I'm not, I'm not mean. I just don't want to live in the past. Here's the thing, if you're in software today, B2B software, wherever you are in an org chart or investor, honestly, if this isn't the most exciting time of your lifetime, going back to start this conversation, you're doing it wrong. It should be one of the most stressful of your lifetime, and we've talked about this, but if you're not truly excited, like truly excited, I mean, this is the first time software has gotten better since the three of us met. It hasn't gotten any better since all of us met. It's the same crap. So if you're not, if you're not incredibly excited, again, going to the beginning of the Sequoia, I would retire, retire from your VC fund, retire from your company, no shame in that.

• 1:07:38Speaker 00

  You had a great run, right? And just put the rest into NASDAQ and you're going to make more than most VC funds anyway, right?

• 1:07:45Speaker 01

  I think it's a great point because as I think, you know, starting in the 90s were X in client server and the last two decades were effective. I would say Salesforce was rebuild Siebel in the cloud and it was fun and we made a lot of money, but you're right, somewhat boring. What is really exciting now is you're not just talking about rebuild Salesforce exactly the same, but with a slightly modern UI. You are talking about something much more fundamental here in terms of eating, eating the work and doing a lot more with the app. So yes, it is exciting, but looping right back to the first conversation about Sequoia, it is also clearly stressful for even the best of firms.

• 1:08:20Harry Stebbings?

  Boys, is there any other topic that we haven't covered that you think we should cover? I think one thing that is not in schedule that I just think is incredible is fricking Hummingbird. Hummingbird, the fund that does not get credit, is not talked about in the same way that many other great firms are, does their first bio deal in billion to one. They have an $800 million position on the IPO. You want fricking great venture returns in whatever $150 million fund that is. Credit due. Amazing.

• 1:08:52Speaker 01

  Agreed. Good for them.

• 1:08:54Speaker 00

  What I didn't know, what I haven't, I was obviously Incredible to see all the success. What I would like to know, and maybe we're out of time, and I should have done my research. How did they collect the capital as traditionally a seed manager, right, to deploy enough to maintain the ownership? I'm just obsessed with ownership now. It took me a long time to be obsessed with it, and now I've given up. But I don't see how I'll ever own 18% of something at IPO ever again, right?

• 1:09:20Speaker 01

  I think they were fairly capital efficient.

• 1:09:22Speaker 00

  It could be that answer. It could be the Viva of biotech where they were one and done. I'm looking for that dream.

• 1:09:27Harry Stebbings?

  They definitely did put in subsequent checks, but I think it was a combination of doing subsequent checks and concentrating cash and being a capital efficient business.

• 1:09:34Speaker 00

  Yeah, I'm impressed with the deals they've gotten into. Maintaining the ownership with nine figures of AUM, I don't know the exact numbers, that to me is just as S tier, right? Figuring that out. And whether it's a bunch of side funds and SBVs and VPSs or VPNs, just how you do that is, I think, the elite game today. It's hard enough to get into the deals, but with a nine-figure or eight-figure fund maintaining ownership is god tier, I think.

• 1:10:03Speaker 01

  There's always the option of accepting, provided the follow-on rounds are at a high enough price, just accepting some dilution and optimizing, as you do for multiple rather than ownership. You can say, look, I've established a 20% ownership as a seed fund. I mean, those early funds those guys had were several hundred million dollars. Okay, I'll get diluted from 20% to maybe 12% by the time we exit, but I put in $4 million. I'm a hero.

• 1:10:28Speaker 00

  Yes, but this was a YC fund. I don't think they started with 20, did they? But keep going.

• 1:10:32Speaker 01

  But fundamentally, the way they've been able to produce 8 and 10x funds has been in part by, I mean, keeping it at 40, 60, 100 million dollar funds. It's hard to simultaneously keep your ownership and keep your multiple. You can decide which one you want to do. I mean, we talked last week is that, you know, if you're Hummingbird, they've kept their multiple and gotten a 10, 20x, whatever it is. If you talk about someone like Lightspeed, they've kept their ownership in the van and gotten a 5x, but not 250 million dollars. You know, both of them are great outcomes. They're just different ways to play the game. The interesting thing is both of our different outcomes have great outcomes for the GP. The most important LP fact, if you only have $1 to play with, then obviously you want to do the one in the small fund that's going to give you the 10x because, you know,

• 1:11:16Speaker 01

  if you have to deploy $100, then obviously you have to do the big fund. But to some extent, the high MOIC, small fund, accept the follow-on dilution, but just make a marvelous return is the compelling product for the marginal dollar.

• 1:11:30Harry Stebbings?

  I think also the outcome sizes are interesting there. Navan at four and a half now public and Billion to one at five. The power of capital efficiency and bluntly running lean and not raising huge, huge amounts of money. And you see the difference as an investor. The benefits of investing in capital efficient businesses. Obvious statement.

• 1:11:48Speaker 01

  Yeah, it's what Captain Albe is today.

• 1:11:50Harry Stebbings?

  Yeah. Guys, I'm glad. It's nice to finish on a positive note, huh? And like a venture outlier that actually returns a huge amount of money to investors.

• 1:11:58Speaker 01

  Yeah.

• 1:11:58Harry Stebbings?

  How nice. Thank you so much for joining me. I'm glad that you both approve of my shirt. This is, it's not going to...

• 1:12:03Speaker 00

  I am struggling with it, but I approve of it. And listen, how long are the pants?

• 1:12:08Speaker 01

  He's got pants on. He hasn't got shorts on.

• 1:12:10Speaker 00

  Well, they are jeans. They are jeans.

• 1:12:11Speaker 01

  But let's not, let's not push too hard. I mean, at least he's covering his knees. We'll take it as a win.

• 1:12:17Harry Stebbings?

  Fantastic. You guys are stars.

• 1:12:20Harry Stebbings?

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