Why the VC Hype Cycle Always Gets It Wrong | VC Roundtable | E2307

This Week In Startups is made possible by: CLA - www.claconnect.com/withyou Northwest Registered Agent - www.northwestregisteredagent.com/twist Agree.com - www.agree.com Today's show: Forget the triple-triple-double-double-double; the new bar for startups hoping to raise venture capital has reached the stratosphere, though our venture panel is worried that startups are focusing too much on today's problems that may not become companies tomorrow. During a lively VC roundtable, Cowboy's Aileen Lee, Floodgate's Mike Maples, and Lerer Hippeau's Ben Lerer joined Alex to dig into exiting pre-AI startups, rising valuations, token spend, why they are keeping their funds small, and whether the government just tripped OpenAI and Anthropic! Guest Links: Aileen Lee https://x.com/aileenlee Cowboy VC https://cowboy.vc Mike Maples https://x.com/m2jr Floodgate https://www.floodgate.com Bene Lerer https://www.linkedin.com/in/benjlerer Lere Hippeau https://www.lererhippeau.com Timestamps: 0:00 Aileen Lee, Mike Maples, and Ben Lerer join the show 5:13 Venture liquidity returns: what SpaceX/Stripe distributions mean for LPs 9:13 Bending Spoons prices IPO at $29/share, roughly $18.4B valuation 10:31 Agree.com - Stop chasing invoices and automate your entire contract-to-cash stack. Go to https://agree.com and tell them Jason sent you to get 50% off for life! 12:09 "Companies get bought, not sold" — Ben on taking first offers seriously 17:41 Plaud: If your work depends on conversations — interviews, meetings, calls — you need a Plaud NotePin. You can check it out at https://Plaud.ai/twist and use code TWIST for 10% off! 19:34 Mutiny's burn-the-boats AI pivot with Jaleh Rezaei 20:19 Northwest Registered Agent - Get more when you start your business with Northwest. In 10 clicks and 10 minutes, you can form your company and walk away with a real business identity — Learn more at https://www.northwestregisteredagent.com/twist 22:15 Mike's KeepSafe story: the "rule of 70" and profit-first companies 25:12 The new growth bar: 5x, 4x replaces triple-triple-double-double 28:55 Fund size is your strategy: why Floodgate and Lerer Hippeau stay small 30:11 CLA - Innovation takes balance. CLA's CPAs, consultants, and wealth advisors can help you get from startup to where you want to end up. Get started now at https://www.claconnect.com/withyou 37:39 The $100M Series A: Starcloud, General Intuition, Scale Cognition, Scout AI 40:35 King-making rounds and why mega-seeds destroy optionality 54:11 Open-weight models: the GLM-5.2 moment and going model-agnostic 55:30 Why fine-tuning open models is a treadmill, with Cursor/Kimi as an example 1:03:28 Grading the Trump administration on Mythos and Fable 1:06:33 Rising anti-AI sentiment, the wealth gap, and lessons from social media 1:11:43 Raising kids in the post-intelligence era 1:12:35 Where to find the panel and what each firm is investing in Subscribe to the TWiST500 newsletter: https://ticker.thisweekinstartups.com Check out the TWIST500: https://www.twist500.com Subscribe to This Week in Startups on Apple: https://rb.gy/v19fcp Follow Lon: X: https://x.com/lons Follow Alex: X: https://x.com/alex LinkedIn: ⁠https://www.linkedin.com/in/alexwilhelm Follow Jason: X: https://twitter.com/Jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis Check out all our partner offers: https://partners.launch.co/ Great TWIST interviews: Will Guidara, Eoghan McCabe, Steve Huffman, Brian Chesky, Bob Moesta, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland Check out Jason's suite of newsletters: https://substack.com/@calacanis Follow TWiST: Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin Instagram: https://www.instagram.com/thisweekinstartups TikTok: https://www.tiktok.com/@thisweekinstartups Substack: https://twistartups.substack.com

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

• 0:00Speaker 00

  Hello and welcome back to Twist. My name is Alex. It's Wednesday, which means it's time for yet another Venture Capital Roundtable. This time, I do have to say, we have an incredible panel. And as you can tell from the bags underneath my eyes, there's more than a little bit going on. So today, we're going to be looking into strong second quarter exits, including a number of IPOs, the return of Anthropic's Mythos and Fable models, rising demand for open weight Chinese models, including GLM 5.2, what to make of $100 million Series A rounds and even larger seed rounds, and how our panelists are navigating investing in yet another boom. This week in startups is brought to you by CLA. Innovation takes balance. CLA's CPAs, consultants, and wealth advisors can help you get from startup to where you want to end up.

• 0:43Speaker 00

  Get started now at CLAconnect.com/withyou. Northwest Registered Agent. Get more when you start your business with Northwest. In 10 clicks in 10 minutes, you can form your company and walk away with a real business identity. Learn more at northwestregisteredagent.com/twist. And agree.com. Stop chasing invoices and automate your entire contract to cash stack. Go to agree.com and tell them Jason sent you to get 50% off for life. Now, today I have with me Aileen Lee from Cowboy VC. Aileen, how are you doing?

• 1:17Speaker 01

  I'm great. I'm excited to be here.

• 1:19Speaker 00

  Now, your firm raised $230 million Fund IV and a $140 million Opportunity Fund back in 2023. You guys have backed Drata, Standard, Colonel, and Binti amongst others. How goes fundraising for Fund V?

• 1:31Speaker 01

  We're not raising for Fund V right now. We're still investing Fund IV. And it's a, I mean, we're gonna talk about it. It's a wild time right now, but a lot of exciting things to look at right now. And some, I think, founder quality is incredible right now.

• 1:43Speaker 00

  It's always good to hear. We also have Mike Maples from Floodgate. Mike, how are you doing?

• 1:47Speaker 02

  Can't complain.

• 1:48Speaker 00

  Now, you filed with the SEC to raise a $130 million Fund VIII in May. Floodgate has backed Last Energy, Hadrian, and Applied Intuition. Have you filled up that new fund?

• 1:57Speaker 02

  Well, I'm not sure I'm allowed to say, but you know, we're, we're, we're in pretty good shape.

• 2:03Speaker 00

  Good. And then finally, we have Ben Lerer from Lerer Hippo, which closed a $200 million fund nine last year. Lerer Hippo is back to ZipLine, which I've had on the show a number of times, Palmetto and Zen Business amongst others. Ben, how are you?

• 2:14Speaker 03

  I'm doing okay. I have more to complain about than Mike, I guess.

• 2:18Speaker 00

  Oh, okay. Well, do you want us to start? We can start with the therapy session and then get into the conversation.

• 2:22Speaker 03

  Let's get into it. We got time. We have time.

• 2:23Speaker 00

  Actually, before we do anything serious, I want to point out there's two of us here who tweet all the time, Mike and myself. And then there's these two people on the show today who apparently have lost access to their Twitter accounts, namely Aileen and Ben. So from Mike and I, how do you two manage to shut up when there's so much going on that both infuriates and delights us? Like, how do you not just constantly go at it?

• 2:44Speaker 01

  I mean, I definitely have become a little bit more of a lurker. I used to be a lot more of an active tweeter.

• 2:49Speaker 03

  So I actually, I was an active tweeter back in the day, and actually a pretty active social media user. And I think it was probably during COVID that I sort of felt that the trade was no longer worth it. Like, I just sort of like hit a wall and went cold turkey one day. I went to a dinner with a friend. He told me that he had sort of pulled off all social media and was living his best life. And I sort of, you know, had like a second and third drink and was like, I can do it too. And deleted, like deleted the apps and really like didn't go back at all. I have become a little bit more of a lurker of late,

• 3:32Speaker 03

  like Aileen. But, look, I just, I wasn't getting the joy out of it. I really do think that like, in general, social media is like, not great. I have young kids. I like feel the sort of FOMO that comes from it and angst that comes from it. And I just like decided to pull out. And I understand that like, there's probably some trade offs in terms of like, brand building and, you know, puffing out my chest that I lose as a result of it. But I try to put that sort of time and energy back into other productive things.

• 4:06Speaker 00

  Yeah, maybe Mike and I will eventually grow up and join you guys. But in the meantime, we're mad about everything. So I feel like, Mike-

• 4:11Speaker 03

  Well, I'm super pissed too. Don't get me wrong. I just, you know, take it out on my children and colleagues.

• 4:16Speaker 00

  Oh, that's much healthier. Sorry.

• 4:18Speaker 01

  What have you guys ranted about recently?

• 4:20Speaker 00

  Mike has ranted about, let's see, everything. California, Mom Dami, foreign policy, domestic policy, tax policy, immigration policy. I mean, Mike, you've been, I went through all your tweets, guys, before the show, and Mike's been on a bender.

• 4:33Speaker 02

  Yeah, maybe I've got a Fourth of July on the brain. But I guess, I guess some of these, normally I just stay out of it all, but I guess lately I've been thinking that there are some things that if they happen would be very, very bad. And, and I think I'd have regrets if I didn't say anything about it.

• 4:58Speaker 00

  Yeah, well, I bring this up not just to be a brat, but to point out that there's so much going on that I feel like cycles of business have been compressed dramatically in the AI era and we're seeing things become true in Q1 and then not true in Q2. So it's a, it's a very kinetic time. I think it's a good time for us to chat and figure out where we are. And from that vein, I want to start with, how much has recent venture liquidity helped you guys on the LP side of things for the last couple of years? VCs were raising less money than before. People were raging about a lack of exits. Things have gotten better lately. So I'm curious how that's manifesting in your future fundraising plans? And how you're thinking about allocating capital? And Ben, I thought we'd start with you.

• 5:35Speaker 03

  Sure. Yeah. I mean, you know, like Aileen, we're not raising right now. We, we raised our last fund last year. We're in the sort of, you know, generally early innings of deploying that. You know, I think probably like a lot of folks, we had a few years of slower liquidity following sort of like a bunch in 21 and early 22. Things have picked up, but I don't, you know, I never feel like I am, our liquidity is, is what is really important to our LPs. Most of our LPs are large institutions that have bunch of exposure to multistage and sort of, you know, gigantic funds that they have huge checks with. And I think like they need the, you know, SpaceX's and Stripes and OpenAI's and Anthropics

• 6:19Speaker 03

  to go public to sort of feed money back into their system in a large scale versus, you know, me returning five or 10 or 15 million dollars to LPs on a, you know, 150 or 130 million dollar fund or whatever it is. And so, you know, I don't get a ton of grief from LPs. I think also I'm very early stage, like people who are signing up with us and probably with Mike and Aileen, understand that this is like the best companies take a long time to mature. I understand we have this like weird, very short-term view on companies are worth a trillion dollars in 15 minutes. But I still think probably over time, we get back to some general. Sanity around the idea that building great companies takes time and I've, you know,

• 7:03Speaker 03

  I think we're lucky that we have LPs that are sort of signed up for that.

• 7:06Speaker 00

  Aileen, I'm really curious about this because Jason has been complaining for several years about a lot of liquidity. He said, you know, the venture industry was under just so much pressure. Seems like Ben's saying that maybe some LPs are just less concerned. So how does that manifest over on the cowboy side?

• 7:19Speaker 01

  Oh, I do. I think it's gonna be interesting because obviously a lot of folks are locked up still, right? But there's a lot of money that's going to get distributed with SpaceX. We have one LP that had a target venture exposure of 25%, but because there's been so much appreciation from some of the larger fund holdings, they're at 45% venture exposure. And so what will happen when they get the money back? You know, will like the percentage of it's probably, you know, they want to have diverse portfolios, but I think it will help because I think some of them have been a little hesitant to commit more to venture when they weren't getting money out. So I think it's good news for the venture business that they're going to get money back and hopefully they'll put it back into a diversity of funds, both large and small.

• 8:01Speaker 03

  This is back to the denominator effect, right? I mean, we're back to sort of like the 21 denominator effect, paper gains that hopefully turn into not paper gains and hopefully have more staying power than the 21 paper gains did.

• 8:14Speaker 00

  Mike, do you think they're going to?

• 8:15Speaker 02

  Well, I, we try really hard to have liquidity, you know, regardless of the environment. So we've, you know, we, we've returned a little over 350 million in the last two years. But, but like our, you know, that's nothing compared to what Founders Fund will get from SpaceX, but our fund is tiny compared to Founders Fund, right? Our, our fund is like 150 million. And so we're trying to, I think one of the things that seed funds can do is they have more exit optionality. And, and there are, there are times when I think that the seed funds can proactively take advantage of that in ways that the big guys can't.

• 8:59Speaker 01

  And that's why I actually, I, I think we're going to talk about this, but I'm encouraged by the Bending Spoons IPO.

• 9:04Speaker 02

  Yep.

• 9:05Speaker 01

  Because that's a vehicle that's been kind of gobbling up older companies and not necessarily AI native companies. And that's the thing we need because a lot of, I mean, Obviously, everybody for the past two years has generally been investing in AI native companies, right? But you've got a bunch of portfolio companies that were kind of pre-AI. And so a lot of us are also working with them to actually make this transition to become much more AI native. In some cases, burn the boats and like build a whole new product suite, or figure out what the exit's gonna be. But while like, you know, traditional SaaS companies are trading at such crappy multiples, they haven't been very acquisitive. So I think it's like, it's exciting that M&A is coming back. And I assume that 27 will be maybe even more active. And so there'll be more exit opportunities for what we call like pre-AI companies.

• 9:49Speaker 00

  Yeah. So just to put some notes behind that, the Bendings Spoons IPO priced last night, went out today, priced at $29 per share, up from its range of 26 to 28, worth about 18.5 billion non-diluted, last valued at 11 billion. And if you want to go read the S1, actually, it shows a company in pretty root health, frankly, doubled revenue year over year. And I think it had positive operating and net income on a GAAP basis in Q1 of this year. So doing quite well. Now, Aline, it bought AOL, it bought Evernote, and Vimeo, and I don't know, probably like Caveman Inc. These companies are so old. Do you think that's a vehicle that actually can provide real liquidity to the old unicorns from the 2000 era that are just seemingly drying out on the vine?

• 10:30Jason Calacanis?

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• 11:14Jason Calacanis?

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• 11:30Speaker 01

  Well, they're not all drying out on the vine.

• 11:32Speaker 00

  I apologize. What percentage are?

• 11:34Speaker 01

  But I mean, I think bending spoons and others, right? Like maybe bending spoons. There's a lot of PE firms, right? Who are going to do this, I think, more actively as well. But I did notice, like, I am still an Evernote user, which people give me shit for, but they just jacked up their price a ton year over year. So it'll be interesting to see how they balance being public and needing to grow revenue and keeping user bases.

• 11:55Speaker 00

  Are you going to churn?

• 11:57Speaker 01

  I don't know. I haven't decided yet.

• 11:58Speaker 00

  Okay. Well, I have to say that you probably are a little bit less price sensitive than the average Evernote user. So I think that if you're on the fence, then that's not really good news for them. Now, I was going to save this for later, but we're talking about it now. So Mike, Floodgate backed Ignite back in the day, yeah?

• 12:13Speaker 01

  Oh, that's a good one.

• 12:14Speaker 00

  Yeah. Shout out Vinit Jain, one of the nicest guys in technology. Period. Love that guy. They sold to private equity early last year, February 25, for, I think, $1.5 billion. And at the time, I was a little bit disappointed by it because I had known Vinit for a while and I really liked the company, how he ran it. It's focused on frugality and profitability and all that. But looking back, it actually seems kind of pressured, given what we've seen, as Ali mentioned, with SaaS multiples. How common are deals like that going to be? Or are we going to see more like the roll-up strategy we're seeing from bending spoons in the next couple of quarters?

• 12:47Speaker 02

  Well, I think they were a lot more common when it happened. So it was, and it was interesting, right? And I remember actually, you were at a dinner we had with Ignite one time.

• 12:58Speaker 00

  That's the one time we met.

• 12:59Speaker 02

  Yeah, yeah, yeah. Yeah, like maybe more than 10 years ago, right?

• 13:02Speaker 00

  It was before I quit drinking. So yes, it was more than 10 years ago.

• 13:05Speaker 02

  So I was on the, so I've been on the board of Ignite since 2008. And then we exited, you know, last year. And I think that Vinit really wanted to go public. But I think that the challenge for him was, you know, he's been doing this company for almost 20 years. And you miss one quarter and it's like you just get eviscerated. And so, you know, there was a lot of interest in his company and, you know, there was just, he'd put so much time and effort into it that I think that he thought that he could create more value being part of this private equity concern. And I don't think we had any idea of what was going to happen to SaaS multiples.

• 13:49Speaker 02

  I think that's just, you know, us getting lucky. But I think in hindsight, he probably made the right call.

• 13:56Speaker 00

  Yeah, I think so. Ben, I know you don't care about liquidity because your timelines are infinite.

• 14:00Speaker 03

  My God, let's, let's have that be the thing that comes out of today.

• 14:05Speaker 00

  I've just never heard a VC say, my LPs are so patient, I've literally taken a nap.

• 14:09Speaker 03

  That was really not what I said. I forget it.

• 14:12Speaker 00

  I'm so glad we're all here today.

• 14:13Speaker 03

  This is why I don't leave my house or participate in any of these things.

• 14:17Speaker 00

  You're, you're on Zoom. You didn't even have to leave your house to come here today. No, given that you're not under, let's say undue duress on the liquidity front. I'm curious how you think about private equity or non IPO exits for your portfolio companies today. Are you encouraging companies to look for them if they're not growing as quickly? Or do you think that multiples will rise in the future and therefore holding on a bit longer before trying to find a landing place? It makes more sense.

• 14:42Speaker 03

  To what Mike said earlier, we are also obviously always trying to figure out ways to create liquidity, regardless of whether or not we have people screaming at us about it. That's the job, like, that's why we're here. And my, my philosophy is that companies get bought, not sold. I think it's really hard to go out and decide that it's time to go like ship off your slightly broken company and have somebody pay you. Not even a good multiple for it, but like maybe anything for it. And so, you know, maybe and now to reference what Aileen said, like we're spending time with companies from past generations that we think are good companies with still motivated, serious founders, hopefully like unfair data advantages and lots of customers.

• 15:27Speaker 03

  But maybe that were built for a different time. Reimagine what their company needs to be. Sometimes it is burning the boat. Sometimes it's building some new products. Sometimes it's changing some talent. But I think this is a moment where if you just sit around passively and look at your old companies and say, well, I hope these, I hope they figure out AI. We're going to be very disappointed. And actually this is, there is something that I'm experiencing. I'm not sure if Mike and Aileen would agree, but we're, we are finding that as even as a seed investor, we need to go reengage with companies from, you know, eight, 10, 12 years ago in ways that I would not have expected because the later stage investors.

• 16:09Speaker 03

  Are not stepping up. And I think a lot of it is because they're at funds that have raised enormous, enormous, enormous newer funds. They are very focused on the sort of, you know, investing in the next trillion dollar company today. They've had a lot more turnover because that's what happens at big funds. The people who made the investments aren't there. And we have some sort of pretty dysfunctional boards with real companies, but a bunch of people asleep at the wheel. And so we're coming in maybe as quite small owners and not even active board members and like shaking the thing and being like, everybody, you know, there's a real company here, but if we just think we're going to hang out and grow, you know, 10%, 20% and make a little money or lose a little

• 16:50Speaker 03

  money, this company might be worth nothing. It's time to get serious. And so we're spending the time doing that. And, uh, and then maybe just a little other sort of thought on liquidity. We have, and maybe this touches on the, on Mike's company that sold last year. I tend to think that if, if you have an outsider come and make a real serious approach, uh, you should take that very, very, very, very seriously. Um, that, you know, Eric Hippo, my partner, has this philosophy, which is sort of your first offer is probably your best offer. And if somebody really wants you, um, yes, you should of course go run a process and see what else is out there.

• 17:29Speaker 03

  But, uh, there are not all that many moments for companies that are not extraordinary companies to create liquidity. And when opportunities present themselves, don't be dismissive and greedy.

• 17:41Speaker 00

  All right, we're going to get to Aileen and her response to shaking the old startup cage. But first, we have to do a quick little segment about our dear friends over at Plod. Jason and I are big fans of Plod. They are beautiful little AI note takers that I wear on my wrist. He wears on his lapel. We run tons of notes here at Twist and to not forget everything, we record it all. If you work here, you're always being recorded and that means we never forget a darn thing. If you want to be cool like us, you can get a Plod note pen S at plaud.ai/twist. Use the code TWIST to save 10%. And if you think AI hardware doesn't work, well, bad news. It actually does. Aileen, back to you. Uh, I want you on going to startups that are maybe with dysfunctional boards, shaking the cage and getting them back on track.

• 18:22Speaker 01

  I mean, I totally agree with Ben. There are definitely a lot of board members that are kind of MIA or just, I mean, there's been a lot of turnover at firms. It's hard. You've got orphaned companies where. In some cases, CEOs optimize more for valuation in years past than kind of active board members or experienced investors. And a lot of the folks who were newer and had a new checkbook aren't there anymore, which is really disappointing. But I mean, I think that's hopefully how you also build your reputation as an investor is like being there through thick and thin and being there in hard times. You know, that's what it's interesting. Actually, after kind of like Zerp and post Zerp, I definitely feel in competitive situations when

• 19:05Speaker 01

  we're talking to founders, they only when they ask to do references, they will ask founders, like, how did they handle a downturn? How did they handle things when things weren't good? Because they know that that's, you know, obviously, there's a lot of talk right now about data center financing and whether it's going to fall over and this kind of somewhat circular economy and like what's going to trigger something to fall over. And we kind of saw this with dot com. And so I think people got a little bit of the jitters. Like, I'm going to try and raise as much as I can right now, which can be, you know, is a double edged sword. It gives you a big war test to be able to hire great people and to be able to go for a long time. But going for a long time without actually a feedback loop from the market can also be a negative. We've definitely worked with and like in one case that we have a portfolio company called Mutiny that's been in the news quite a bit because

• 19:50Speaker 01

  they burned the boats. You know, Jelly had a really nice growing product, but it wasn't completely AI native. And they were like, you know, we could continue to milk this and try and tweak it. But it doesn't feel like we're really capturing the moment for customers to really give them an AI native product. And so they basically like, unfortunately, had to cut a lot of the people, went back to the drawing board, built a whole new product suite and are selling it now. And it's incredible. But I think they feel strongly that they would have not had gotten there if they hadn't burned the boats.

• 20:19Jason Calacanis?

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• 21:12Speaker 00

  Now, on the burning the boats front, I know how to type. On the burning boats front, we saw Intercom become Finn and then sell for a pretty quick number. And that was very much a, we are going to start over. We're going to become AI first. Working on, I think their own models as well, if memory serves, Owen said about that. But that was a success. Aileen, how many companies do you think that are pre-AI companies can execute a pivot like that and actually land the plane? Because to me, that sounds incredibly challenging, but I also, I don't want to be a hater and underestimate founder potential.

• 21:44Speaker 01

  A lot of it depends on who the customer is and what the problem is that you're solving. So there's some customers where they don't want like a completely AI product, right? They're not in that trust zone yet where they want everything like, and you've got, especially it depends on like the customer base and how big it is.

• 22:00Speaker 01

  But in Mutiny's case, I think it just felt like there's so much opportunity to support sellers in how they prep for like, you know, whether it's getting a lead and then building the relationship to close that would could leverage AI that they really wanted to take the time to figure out how to make it, make it work.

• 22:15Speaker 02

  One factor in some of this that I think is interesting, many years ago, I was involved with a company called Keepsafe. And, and we were doing well, but, but not set the world on fire well. And, and one day we, we all get in a room and we said, you know, maybe we should stop thinking about being growth first and become profit first. And like, what if, what if we operate this company in the rule of 70s? So if we're at break even, we've got to grow 70% a year. If we're growing 40% a year, we've got to have 30% margins. But, but that's just going to be our immutable rule. And so then what we would do is every month, we would say, whatever our profit target was, we'd put that much money in the bank.

• 22:58Speaker 02

  And whatever we had left was what we could run the business on. And it's, it's funny because a couple of weeks ago, I was having lunch at Philip Berner's Ranch in Petaluma, who's one of the founders of Keepsafe. And, and yeah, he's probably made somewhere between 10 and 20 million dollars, maybe more, just dividending out the profits, you know, over the last decade. And so I like to say that, uh, growth is a combination of ambition and acceptance. And it's like, you know, you're, you're entitled to burn venture capital money. If on the other side of it, you create enough growth and category dominance to justify that burn. But if you have no path to doing that, I think a lot of times you're better off accepting the reality that you need to be a profit-first company.

• 23:43Speaker 02

  And, uh, you know, make as much profits as you can. And, and, and that company, had they not done that, probably wouldn't exist anymore. But now they're, you know, every, every quarter, you know, we get another dividend check. So I think, I think Floodgate put in like a million and a half bucks. And I think we've gotten more than $10 million of dividends from them.

• 24:03Speaker 00

  That's a hell of a return. Slow IRR, but lovely dollar amount.

• 24:06Speaker 02

  And, and to some degree, that's really what bending spoons is doing, right? They're, they're kind of, you know, I like to say that a startup starts at zero to one. And they have to have proof they have an insight about the future. Then it's get product market fit, then it's one to X, then it's, uh, grow at a rate that's predictable, that justifies your burn. Then there's profitable growth. And then there's profitable decline. And I think part of, part of my job as a VC is to help the founder locate where they are in that sequence. And you know, where you are in that sequence has a set of laws of gravity and spacetime, right? If you're, if you're in one to X rapid growth mode, for every dollar of burn that you burn, you have to achieve a certain amount of growth to justify that burn, or you

• 24:51Speaker 02

  can't credibly claim that you're a growth-first company. And so, so I think that a lot of, a lot of people are growing not fast enough relative to their burn.

• 25:00Speaker 01

  Yeah, you know, one thing I think that's important for founders who are listening or watching is like, there was for enterprise software, this rule where one to X was like triple, triple, triple, double, double, right? That was best in class, right? You'd go one, three, nine, 25, 27, something like that, right? But that's because of what's going on in AI, the bar has really changed. So if you're a founder that wants to raise seed or ARB, you need to know that basically, I think, right now, it's probably one to five, or one to four and a half, depending on what you're doing, and then probably five to 20. So you really have to be growing in them to be able to raise venture capital from the folks who do As and Bs. The

• 25:42Speaker 01

  growth curve looks very different in 26 and 27 than it has before.

• 25:48Speaker 00

  So quintuple, quadruple, not triple, triple?

• 25:52Speaker 01

  I think that's

• 25:53Speaker 00

  That's a lot harder.

• 25:54Speaker 01

  What do you guys think?

• 25:55Speaker 03

  I agree. I don't think that it is, overall, a good thing for the ecosystem that we've moved into this sort of, like, I think, I think it is preventing capital from flowing into certain kinds of businesses that are, that want to do harder things, and that wanna, that wanna enter businesses where the moat is more difficult, or where the sales cycle's more difficult. And I think there's sort of, it's I honestly think one of the big problems is it's forcing money into companies that are solving problems for right now, like problems for the next few months. I see so many companies that are building based on what the models do today, and they're solving a problem that

• 26:39Speaker 03

  is like a problem that exists for the next 11 days, raising a bunch of money and going and chasing it and getting like very easy come, easy go revenue. And it's, I find it to be very frustrating. And, and you know, we as a fund have a little bit of a sort of bias to being gluttons for punishment and like liking things that feel a little harder. And the problem is right now, when I want to go be brave, you know, bravery is maybe not the right word, but when I want to go sort of encourage something really difficult, but if it works, there's an actual moat around that business, I have to do so into the void. I sort of fund that business, knowing that I can't take it, or there's

• 27:22Speaker 03

  a very low likelihood that Sand Hill Road is going to be interested in the next round. And that I think there's a big gap right now in where we can go take really interesting, great sort of hard things with teams that don't look like they're on the central casting for following capital. I assume you're seeing the same thing, but you know, you guys are in San Francisco and closer to the sun. And, you know, I'm here in New York and, you know, see some of what's going on and feel like, you know, I don't want to say bubble because I do think AI is the most, you know, fabulous, you know, innovation that I've seen in my career. But there's just some, you know, this idea of consensus seed rounds

• 28:04Speaker 03

  getting done at 50 and 60 and 70 million valuation. I mean, we could go into next topic, but I, you know, this is, this is why I come in grumpy today, Alex.

• 28:13Speaker 00

  No, I, I'm here for, for, you know, old man Ben's, you know, stamping on the ground.

• 28:18Speaker 03

  Okay, cool. Thank you. Yeah, it's good.

• 28:19Speaker 00

  Because, well, this is all insane to me. I love this. So Mike says rule of 70. When I was taught this by the guys who found it at HubSpot, it was rule of 40, rule of 70. Dear God. Now it's no longer triple, triple, double, double, double. Now it's 5x, 4x. And Ben, you're saying that everyone's trying to solve the problems for this minute. So are we just essentially?

• 28:37Speaker 03

  Not everybody, but I think that that's a general. I'm generalized.

• 28:40Speaker 00

  Yeah, yeah, no, I'm not trying to, I'm just trying to summarize here. So essentially, it seems that only the things that have instant takeoff today are attractive to the multi-stage funds, which is changing what you can invest in. Going back to the top of the show, I didn't think this can be that pertinent, but why don't you then raise more money, Ben? I mean, if you're not going to be able to go get Sand Hill to take the next round lead, why not do it yourself?

• 29:00Speaker 03

  I have had some of my LPs ask me that question recently. You know, I think that for me, that has to do a little bit with building, you know, each fund we've raised has been a little bigger than the one before. Our eighth fund was 145, our ninth fund's 200, we have grown. But you know, I don't know that I can solve the problem for these businesses if I have a $300 million fund. And I don't, you know, in our bones, we are an early-stage group. We are really about talent. That is sort of like what we're built for. It's what we know how to do. It's what we love doing, frankly. I'm jealous of people that manage many billions of dollars because I think that like those fees are probably super sweet.

• 29:42Speaker 03

  But that's not, that's just not like who we are or what we aspire to. I want to do early-stage. I don't suddenly want to be the like Series B lead. I think it's a different skillset.

• 29:55Speaker 01

  Yeah, but I think Mike, you're famous for saying your fund size is your strategy.

• 29:58Speaker 02

  Yeah, I guess I, that's my story and I'm sticking to it.

• 30:02Speaker 00

  Yeah, by the way, Mike, like you're, that's a huge inspiration for me and I really, I think it is, I think it's true. And it's something that we try to live by here.

• 30:11Jason Calacanis?

  One of the themes we talk about over and over again on this week in startups is making sure you do your chores. I'm no expert on these things. I have some experience. Stephen Estes from CLA is an expert. Let's talk about being cash efficient. Tell us about efficiency and what you see in the, in the top tier startups in your practice.

• 30:31Speaker 05

  We're seeing kind of an interesting trend out there where companies aren't needing to raise quite as much as they had in the past. You really have to be careful as a founder to only take on as much money as you really need. You've got to do the forecast and you've got to do the modeling and you've got it dialed in and get it right. Otherwise, you're going to end up either not raising enough capital to get to where you're going and you're going to have to go get venture debt or go back, have an extender to the round, or you're going to give up too much of the company because you just didn't recognize how much money you actually needed.

• 31:00Jason Calacanis?

  Yeah, very important to get this stuff right, folks. And that's really a bummer when startups don't do things in a button up way. Always have a great partner, a good partner to have on this adventure while things change. My friend Stephen over at CLA. So if you want a trusted advisor by your side who will navigate you through taxes, accounting and everything in between, it's time to take action. Visit CLA connect.com slash with you. And don't forget to drop a mention that your boy Jake Al sent you. That's CLA connect.com slash with you. Start today.

• 31:32Speaker 00

  Mike, same question to you. Why don't you just raise more money and solve the problem of backing outlier people and then just take on those later rounds yourselves? I'm not sure if there's a different answer than Ben, but I want to get more than one perspective on this point.

• 31:42Speaker 02

  Yeah, well, so the way, the way, so I do believe your fund size is your strategy. So, you know, and the reason is the power law is real. So to me, your fund size is a commitment to your LPs about what your largest exit will be. So let's suppose that you have a fund and your aspiration is to have a 5X fund. I believe that what you're really saying is your biggest exit will be two and a half X the size of the fund in terms of exit profit. So if you, if you have a hundred million dollar fund, your best exit needs to be 250 million if you're going to have a 5X fund. And so then it's just a function of what you own and what you get in at and what you get out at.

• 32:25Speaker 02

  But, but I guess the, in today's world, I don't know if others would agree with this. I'm really seeing two kinds of projects. One is what I would call hot projects. And hot projects are, you know, the multi-stage firms love them. And they may not necessarily have any momentum at all. It may be somebody peeling out of Anthropic or OpenAI, rock star credentials and a few good white papers and stuff. And what I believe is the non-consensus play for hot deals is the upside's even bigger than you thought it could be. And so it's not that nobody thinks it's exciting, it's that it's even more exciting than you thought it was, in spite of the fact that it's exciting. So Anthropic was

• 33:10Speaker 02

  not done at a cheap price early, but I don't think most people thought it was gonna be worth a trillion dollars. And then, and then there's what I would call weird projects, and those projects aren't even on the radar of the multi-stage firms ever. So, you know, my colleague Anne Murako invested this company called SmarterDX in 2022, and it exited for a billion dollars. And, you know, that's, that's good living for a seed fund. But I don't think it even matters if you're a multi-stage fund. I don't, I don't think even if you had that exit, it's interesting. And so, so I think that there's, there is a different strategy for each type of project,

• 33:53Speaker 02

  right? If you're gonna go after something hot, you gotta work your way in, you gotta build a relationship with a founder, you have to count on the fact that the multi-stage guys are gonna de-risk it financially. And in the weird stuff, I think you gotta be prepared to go it alone, or to get enough momentum for its own sake. But you can't count on the Silicon Valley echo chamber bailing you out, right? You've gotta, it's gotta make it a, it's, it's almost like venture capital in the 80s or something, or the 90s.

• 34:22Speaker 00

  Before we move on, Ben, I think Larry Hippo backed Board, the board, the digital board game company, which I quite like. I have a picture here of it. Oh, wait, no, I'm sorry. That's the original Microsoft Surface table. Here it is.

• 34:37Speaker 03

  Okay, I see what we're doing here.

• 34:40Speaker 00

  I did think that up before the show and thought I was brilliant.

• 34:43Speaker 03

  I knew something snarky was coming there, just.

• 34:47Speaker 00

  I am, I am a big lover, but it is my job, literally, to sprinkle some, some sprinkles on top of VC's.

• 34:52Speaker 01

  Is this a physical product?

• 34:54Speaker 03

  It's a physical product.

• 34:55Speaker 02

  It's super cool.

• 34:58Speaker 03

  It is doing extremely well, and people love it.

• 35:01Speaker 02

  Yeah, I bought one for Christmas.

• 35:02Speaker 03

  Have you been using it, Mike?

• 35:03Speaker 02

  Yeah.

• 35:04Speaker 01

  Cool.

• 35:04Speaker 03

  It's, it's Bryn Putnam, who built Mirror, the workout device that she sold to Lululemon. And it's, it's her next business, and.

• 35:17Speaker 03

  It's a very, look, you know, I love consumer. I've always loved consumer. I've done a bunch of consumer. I think, you know, so much of consumer over the last few years has just been very incremental. And so even though there was this Microsoft product from a long time ago, I think in general, this, there's a lot of novelty to the way that Bryn is building this and the way that over time, the community will be building their own games and the physical pieces and the creation of new kinds of IP. And I think there's also some big sort of tailwinds to get people and kids off of screens, or at least the screens that we are currently addicted to and move to more collaborative

• 35:58Speaker 03

  play. And so, and by the way, the usage data, which you're always terrified when you invest in something like this free product and it goes out and you start to sell and you're like, is anyone going to actually use it? Or did people click on Instagram ads? The usage data is, is pretty stunning. People use it with extreme regularity and it's a fun one, but you know, there's still plenty to go.

• 36:21Speaker 00

  When you combine board, the product with the ability of people to now make their own software, which is still a little bit nascent today. We're working on making games with Claude Code and so forth. But I can absolutely see in the future, my children, you know, thinking of a game idea or taking pictures and then having that kind of baked into it. So I think it's a really cool company. But Mike was just talking about, you know, stuff that doesn't really resonate on Sandhill. And if I was thinking about a category that's out of favor right now, it would be children's games, you know? I mean, like, it's not a gentic orchestration for the enterprise.

• 36:51Speaker 03

  USV did the last round there. It's not so wildly out of favor, you know, Mike.

• 36:59Speaker 00

  Where is USV based?

• 37:01Speaker 03

  I don't know. I'm not sure. I can't remember.

• 37:04Speaker 00

  Is it, is it, is it on the west coast or do you still?

• 37:07Speaker 03

  I think there's probably a Union Square in San Francisco as well.

• 37:10Speaker 00

  Well, there is, but I mean.

• 37:12Speaker 03

  It's definitely based in New York.

• 37:15Speaker 03

  Anyway, I will say that this is the, Bryn is the kind of founder who maybe to Mike's earlier point, Bryn has some of the qualities that I do think are very attractive to the sort of multi-stage Sand Hill vibe. And but but the product itself is definitely, you have to be sort of a creative thinker to to get your head around it.

• 37:39Speaker 00

  I'm just glad things like this are getting funded, started up. Like, I mean, and first of all, I loved the original Microsoft Surface. We had one in the old TechCrunch office, right in the entryway, and it was fantastic. And I was a longtime Surface user. So I just like that some things are a bit early, and then when the technology is a lot better, this is not the size of a couch. It can really meet its mark. All right. Now, we were talking earlier about enormous seed rounds. I also prepared some notes on what I'm calling the $100 million Series A round. So a couple of names recently, Star Cloud, 170 million Series A, General Intuition, I think that was 320, Scale Cognition, 100 million, Scout AI, 100 billion, etc. Lots of these companies going on. How should founders think about these insanely large seed and Series A rounds, and what they say about the state of the

• 38:21Speaker 00

  company and its prospects, Aileen? Because I don't even know how to describe them, because the dollar amount so does not match the stage, as I understand it. I don't even know what to tell people when I read these headlines.

• 38:32Speaker 01

  Yeah, I mean, I think they're they're calling it a seed or an A because it's their first institutional round or their second. But it's not a seed or an A in the sense of how much they're raising the valuation, who's going to do the next round, and the metrics that people are eventually going to hold you accountable to when you go out again. So if you're raising at 400, or you're raising at 800, you know, you're raising a seed at, I mean, yeah, in 2026, I can't, it's, of all the years I've been doing this, I have never seen more people who started a business three weeks ago, and have decided that they're going to raise a $20 million seed down 100 pre. It's wild. And like Ben said, a lot of them are very tuned to like this point in time. And this point in time, generally, every idea, every problem that people are facing has 15 or 20 competitors.

• 39:17Speaker 01

  And you know that, like, the ecosystem is evolving so quickly, you don't know what free tools the hyperscalers or the the frontier models are going to give out and wipe you out. And I think when you raise so much, and I think that people are also planning on spending a lot of it on tokens. Which that's also a moving puck, where I think the number of models that are coming out that are going to be like the open source models, the open weight models, like they're a lot cheaper and they're getting so much better that I think also token spend, hopefully for startups will go down. So that won't be the reason why you need to raise 20 million bucks because you won't need 10 for tokens. But it just sets you up. If you're at 120 posts after your seed, then you you and your employees and your investors want to fill a markup. So you probably want to be at 200 or 300 for your next round.

• 40:02Speaker 01

  So you're calling on people who are basically doing

• 40:07Speaker 01

  50 to 100 million dollar round sizes. And they're going to be looking for traction and customers. And I think like what Ben alluded to earlier about revenue quality versus just like everyone trying stuff. And the renewal is not looking great and a lot of people falling out because they're trying everything right now. Like you just have to really be on your game and know what you're signing up for when you raise those prices.

• 40:27Speaker 00

  Yeah, I keep seeing companies doing like agentic security, like giving agents identities and so forth. And I'm like, this is cool, but I think I've lost track of the number of companies that have raised 50 million dollars to do that.

• 40:35Speaker 03

  Well, a lot of these early rounds, Alex, this is like there's there's king making going on in a way that has never that I've never seen before. Or queen making or

• 40:43Speaker 00

  Or then or or them making.

• 40:45Speaker 03

  They making whatever you want.

• 40:48Speaker 03

  There there is there's makings happening. Where, you know, it like a company gets knighted as the, you know, the one or a big multi-stage, you know, puts in the first check and sort of likes what they're seeing, but it's a competitive category. And they they want to communicate something to the market, which is stay away, watch out, we've got this. And in some categories, you have two or three kings or queens or whatever.

• 41:15Speaker 01

  But it doesn't always work.

• 41:16Speaker 03

  No, no, no, no.

• 41:17Speaker 01

  Ladies work and whiz.

• 41:18Speaker 03

  We are still in the part of the cycle where right now people, we have, we don't have the blowups yet. We don't have the collapses of the companies that have raised the 100 million dollar series As. So everything only goes up and to the right at this moment in time. At some point in the next 12 To thirty six months, the rubber meets the road and we figure out what companies are real and what companies raised hundreds of millions of dollars. And don't have anything. And if you're going to have companies that are worth tens of billions of dollars in a year. Then you are going to have companies that are worth tens of billions of dollars that also go to zero, which traditionally like. Wouldn't happen. On the speed, you know, it has to happen.

• 41:58Speaker 02

  Yeah, yeah, you know, it's, it's interesting. If you look back at the dot com days. Where did the big exits happen? Everybody remembers Amazon, Google, companies like that. But most of the people got really rich in that era are the people who got exited. In a window of time at the end of ninety eight until early to mid two thousand. You know, if, if Mark Cuban had raised a hundred million dollars for a series A broadcast dot com, we wouldn't know who Mark Cuban is today. Right? And so I think that what a lot of the founders are missing is that great, you can raise a hundred million dollars in your seed round. Nobody that I can find in history has ever had a greater than ten billion dollar exit raising that much in their seed round.

• 42:43Speaker 02

  Like the, the biggest seed round I can find on record with the exit that size is Wiz. And it was twenty one million dollars. And so what happened in the dot com era was people raised money at these crazy prices. And then everything crashed and the venture firms are like, okay, I've got to figure out which companies are real and which aren't real. And a lot of these companies had to give the money back or pretty much had to shut down because. There's just no way that even if they executed perfectly, that they could ever be what they raised their seed round at. And, and the venture firms are like trying to figure out who the winners are, who to stick with. And so um, I think that a lot of people.

• 43:25Speaker 02

  Lose sight of the fact that you lose an amazing amount of optionality by raising rounds this way. And if your goal is to create generational wealth and you believe we're in a bubble. This is the last thing you would do, you know, you would, you would position yourself to profit in a, in a wide variety of scenarios.

• 43:45Speaker 00

  Throw in the phrase generational wealth around. It feels like it's like a TikTok theme. I don't even know why people don't realize that 10 million is generational wealth. You don't need to have 500,000 trillion billion dollars. Anyways. Aileen, you mentioned, you know, raising 20, spending 10 on tokens. That to me implies that the startups that are raising relatively outsized even series A rounds are doing so not simply because they can, but because they have a relatively high cost basis. So do you think that startups are kind of forced into raising this type of capital early? Because they have expenses they need to meet, not just humans now, you also have your token budget. Or are they just making a mistake and kind of just getting over their skis too soon?

• 44:20Speaker 01

  I think it's both. I mean, it's, it's getting better. I think, I mean, if you chat with your portfolio companies right now. Like, I think one of the interesting things is obviously like Claude cowork is amazing and tags is really fascinating. But it's really, and it's smart because it can create lock in, right? But a lot of folks know that they need to build layers so that they can switch models, right? Cause I mean, yeah, most of the frontier model CEOs will say like, you don't need to use the best, most expensive model for everything. Right? So you actually have to build things that you can swap things in and out. And meanwhile, the labs are going to try and lock you into using their model as much as, and using their tokens as much as they can.

• 44:59Speaker 01

  So I think that there is just, what is exciting for investors and founders is like, there's a lot to be built for this new ecosystem of AI. There's a lot of infrastructure, there's a lot of security. I mean, there's a reason why those are hot areas is because we need a lot of new stuff.

• 45:13Speaker 00

  Yeah. Just to throw some notes on that, H just announced that it's raised 800 million dollars for its transformer specific ASICs. Light matter is raised 850 DG matrix raised 20 million for solid state transformers, which none of us here ever thought about until like 20 minutes ago. There are even a number of companies, startups that are working on data center cooling alone. So Aileen, do you think that those companies fall under the companies for this moment?

• 45:36Speaker 01

  Yeah. My old, my old portfolio company, Bloom Energy, which I worked on at Klanner, is one of the beneficiaries of like this incredible data center because they need, people need power.

• 45:48Speaker 00

  Yeah.

• 45:48Speaker 01

  Uh, and so, yeah, there's a whole, like, yeah, you make, do a map of all the things you need in data center or for AI compute and like memory, like, look at Micron's numbers, it's incredible.

• 45:58Speaker 00

  Yeah, go, go read Micron's earnings. I'm telling people, just go look at them. It's, it'll, it'll, it'll blow your top. Now, Ben, you're slightly more consumer focused. So how much of this translates over into your world?

• 46:09Speaker 03

  Um, I mean, I am more consumer focused. As a fund, we are probably, you know, seventy five percent.

• 46:15Speaker 00

  Sure.

• 46:16Speaker 03

  Uh, I, look, I, I'm, I'm very excited about consumer right now, albeit, uh, I'm still searching for the sort of like application layer boom on the consumer side that feels really differentiated. We see a bunch of lightweight rappers that, you know, have a bunch of explanations for why they're not lightweight rappers that are still lightweight rappers. Um, and, you know, it's, it's obviously unclear what ChatGPT or Anthropic or Google or whoever will, you know, where they will sort of extend their products.

• 46:54Speaker 03

  I, I am very open for business on the consumer side. I would love to find, uh, but, but I really, to find companies, I really do think though that, uh,

• 47:05Speaker 03

  building a, you know, an, another agent to do something that is

• 47:12Speaker 03

  built on everybody else's infra is, is just like not that exciting. I, I, I keep getting to not the finish line on this.

• 47:22Speaker 00

  Yeah. Now, Aileen, you shared this back in May, uh, over on X, back to your.

• 47:27Speaker 03

  Best share of the year, Aileen.

• 47:29Speaker 01

  Oh, but it wasn't my, it wasn't my chart. I think.

• 47:32Speaker 03

  Well, then I give you credit.

• 47:33Speaker 01

  Giving you credit for reviewing.

• 47:34Speaker 03

  But I love this.

• 47:35Speaker 00

  Aileen, uh, for folks who are on the audio version, can you just quickly sportscast what this is, what it shows?

• 47:41Speaker 01

  It's like, there's this, it's funny, I would love to work with anyone who wants to build like a tech gestalt machine. Because every year there is like a hot theme, right? So twenty thirteen, it was wearables. Twenty eighteen, it was VR. Twenty nineteen, it was scooters. But then the, the best companies that are actually fatted in those years never match what the theme of the year is. So like Anthropic was when crypto was really hot and web three. Wiz was when we were talking about future of work. So, um, Yeah, you just can't. First of all, like to Ben's point, it takes, it takes, usually takes a long time for a great company to be built. And a lot of these companies, for the first three to five years, no one's heard of them. They're not cool. You know, they're kind of baking. And so you kind

• 48:25Speaker 01

  of have to have faith and take these, these leaps of these risks. On, I, we love backing, kind of to the earlier point, we love pedigreed founders. We also love what we call off Broadway founders, like people who don't have the perfect hierarchy. And when you look at the list of the companies who founded, like the founders of a lot of those companies, they are off Broadway founders. They are not perfect pedigree founders.

• 48:44Speaker 00

  The founders of Databricks were academics and open source software kids, you know, hard, hardly your-

• 48:50Speaker 01

  I think in today's world, that's considered pedigreed.

• 48:52Speaker 00

  Okay, but at the time, that was kind of a non-consensus. But I know we've raided academia and there was like three people left. Yeah.

• 48:58Speaker 01

  Yes, it's like a whole venture firm strategy is just spending time in university labs.

• 49:03Speaker 00

  Well, you've sold me on venture at last, Aileen. I volunteered. That sounds like, that sounds like a hell of a good time. So why is the conversation so wrong? And in this case, what are the categories that are hot now that are not going to manifest great companies later on? Because I know you guys place bets, but a lot of founders listen to this. And I just, if we can give people a way to not go down the wrong path, I think it'd be very helpful. So, so Mike, what do you think is the most overhyped thing to build today, apart from agents, of course, that founders probably should stay away from?

• 49:36Speaker 02

  Oh, boy. Yeah, it's, it's a tough one for me to answer because I root for all of them, you know. You know, I think that, that I would say that agents that improve productivity and the function of agentic workflows, I would stay away from. So I think that you've got to have something that's attached to it that creates some type of path to network effects or some type of cumulative, increasing returns power. So I would stay away from-

• 50:16Speaker 02

  Any type of AI productivity or workflows that doesn't embody some type of increasing returns mechanism at the core design and and most of them unfortunately don't right? You you look at it and you say that's awesome. I could totally see why I would want that. But I don't know why Sam Altman is not going to have that in his next demo. So that's that's what I would look for.

• 50:39Speaker 00

  I I just realized that I I made my agentic trust point and Alien's company firm is back to Drata. So yeah, do you want to do you want to tell people why my slander was incorrect? Sorry.

• 50:50Speaker 01

  Well, you're I know I was gonna say, well, actually, like, I mean, I think that's an example of a company that was started before LMS, but it's not that old of a company. It's grown really quickly, Drata. And but trust is really important. So I think when you have when you've got mid-market and enterprise and relationships and you are helping them with compliance and trust and visibility when because so many companies are interconnected. And you need to if you're going to poke a hole in some and pull data in or out of a company, you need to make sure that they're doing it securely. And they've got the right business processes in place like that's not a burn the boats whoops, we're replacing everything completely tomorrow because you need to have these are relationships where I think consistency and trust is really important. But Drata obviously is going to be helping

• 51:35Speaker 01

  people monitor agents and the trustworthiness of agents. So that's kind of more of an evolution of the relationships they have with customers and what their customers want. So we're really happy to see where it's that's more of an evolution than a burn the boat situation. And I think it's a smart one.

• 51:48Speaker 00

  To prevent Ben from thinking I'm only picking on him, Alien, tell me why that the either major AI labs themselves or the current owners of enterprise workflows won't do that themselves and consume what Drata is trying to build.

• 52:02Speaker 01

  I mean, I think like, I don't know, Mike is so good analogies. He'd be kind of like that's like letting the fox watch the hen house. Is that the analogy?

• 52:10Speaker 02

  Like, you want to have a That's not bad.

• 52:12Speaker 01

  You want to have a trusted third party that isn't your current vendor that's trying to Use all your data.

• 52:19Speaker 02

  Yeah. So, so I'm, it's funny because I've been work, doing a lot of thesis work lately. And Drata was one of the companies that I kind of regret missing, based on some of the work that I've been doing.

• 52:29Speaker 01

  Not too late, Mike.

• 52:30Speaker 02

  The way.

• 52:31Speaker 00

  It's only a $2 billion valuation. Get your money in now.

• 52:34Speaker 02

  So, so the way, the way I've internalized it is that AI creates abundance in terms of work products. It, it, it creates generative AI is generative. But what people are going to want to start having is what I would call acceptance AI. So like, like for example, when you have financials, you have an audit firm audit your financials. It's, it's not enough for you to just say, I'm really good at doing my financials. You, you have to have some trusted third party certify. Uh, and that, that, that credible neutrality is important. And I think what's going to happen is there's going to be a lot of AI generated slop across the board. And, uh, it's, it's no longer going to be just the work that gets outputted.

• 53:18Speaker 02

  It's going to be the work that counts. It's going to be the work that is, uh, that there's a consensus mechanism for validating. And, uh, quite often you're not going to want to trust, you know, the, the frontier labs to do that. You're going to want a credibly neutral third party. Uh, so I, I agree with Aileen. It reminds me a little bit of why we invested in Okta back in the day. We thought that, uh, you know, identity management should have a neutral trusted, uh, person, right? Yeah.

• 53:46Speaker 01

  That's a good one.

• 53:48Speaker 02

  So like, to, to me, if slop is abundant, then you start to ask, well, what's scarce? And I think what's scarce is correctness and proof of correctness. And if you can, if, if you can be seen as a credibly neutral network effects, scalable provider of that. I think that that's, uh, in many ways, that to me is where the application layer is going to come alive in a lot of these.

• 54:11Speaker 00

  So we're talking a lot about costs here, controlling them and kind of owning, um, your own data and alpha. A lot of people in the last couple of weeks have been talking about moving to open weight models, especially GLM 5.2 seems to be quite hot. And this is due to the government essentially precluding us from accessing the latest models from both. And OpenAI lately. Can we just kind of look through the headlines a little bit and tell me how prevalent is it that startups are actually either rolling their own models or simply turning to existing open weight models to either reduce costs or to ensure that their data doesn't go to training Anthropic into building what they've already put together. And Ailee, why don't we start with you, then we'll go to Ben.

• 54:51Speaker 01

  I was just thinking, I keep thinking that GL, GL1 was like the, was the new, is the new GLP. Like, you know, like this, the gestalt of this year is like the GLP1. And maybe, like, we had this DeepSeek moment, and now we have this GLM moment, right? Which is, it was, it's quite good. Like, a lot of our portfolios have been playing with it. And they're saying that they're getting equivalent results for a fraction of the cost. I think that's why they are all getting ready, if they're not, like, to be model agnostic. And to not spend as much time fine tuning, because you could spend a lot of time and money fine tuning something, and how long is that gonna buy you? A month? It's not a great use of time and money, because stuff is moving so fast.

• 55:34Speaker 00

  So unpack that for us. So essentially, if you train, if you fine tune Kimi K 2.5, as Cursor did to make Composer 2 and 2.5, by the time you're done with that, they'll have Kimi K 2.6 and then 2.7. So you're always, you're chasing a ball that's going faster in front of you. Okay. That's almost dispiriting, Ailee, because I would love it if founders were able to take the best from the open weight, open source world, and then really turn it into a weapon they can take to market. But it sounds like you have to kind of take what they offer, just the whole cloth?

• 56:03Speaker 01

  I don't know. Others should weigh in here, but from what we're hearing from portfolio companies, they're not, I think some people considered it, and they started doing it, and they're like, wait, this is not a great use of our time and money. There's a lot of other ways we can benefit customers.

• 56:13Speaker 00

  Ben, jump in here. From the firm enterprise perspective, and also, if you have any consumer notes on this particular topic, I would love to hear them.

• 56:19Speaker 03

  I don't know that I have consumer specific notes. I think in general, in the, everybody is building everything multimodal and has to, out of the box, be able to say, I am not beholden to any one model, and everyone's long-term business model is predicated on token prices going down and down and down and down and down. And so I think, you know, I mean, generalized models are going to get better and better. The fact that this conversation is happening is

• 56:48Speaker 03

  Actually, though, like the flip of it is it's why Anthropic and OpenAI and Google are so scary. Because they are aware of the quality of open source and the fact that they're not going to be able to just go and endlessly charge more and more and more, and that they're going to move further in the application layer. And like, they're going to do it too, which makes the application layer right now just like a finicky weird space to invest in, because it's not clear where infra and application layer sort of bump into each other. And, you know, I do think, though, we will move to, and actually, a colleague of mine wrote an interesting little sort of Substack yesterday.

• 57:28Speaker 00

  Yeah, I read it.

• 57:30Speaker 03

  I thought it was well-written. I was, I gave him a hug.

• 57:33Speaker 00

  You're talking about The End of Decisions by Maurice Rousseau.

• 57:35Speaker 03

  Maurice, and just the idea that we are sort of real high-level decisions are starting to be more possible with AI. And, you know, I don't know exactly, like, I think that's where we end up with like the most expensive models having a real expansive market for a kind of decision-making that I don't know is really, that we're quite yet relying on AI for.

• 58:04Speaker 00

  To summarize what we're talking about here, and if you're watching this later on, it'll be in the show notes, a link to the post, The End of Decisions. But what Maurice argues is that we've seen the effect of essentially computation in fields like chess and most recently in poker. If you play cards, you know about GTO and so forth. And he says that AI is, quote, "the first general-purpose reasoning layer that can start to function as a solver for domains that have historically been too qualitative for software." Now, if that's true, Ben, then to me, the actual incremental or marginal intelligence gain you can get from a new frontier model version is incredibly valuable, because if you can literally have the brain that runs your entire business be smarter, that's quite useful.

• 58:44Speaker 03

  That's quite useful. And that's why I think the like, that's where that business model makes more sense than doing the, you know, checking my inbox and preparing some drafts for me and, you know, whatever.

• 58:56Speaker 02

  Yeah, the way I've kind of internalized it, and I really owe this thinking to my partner, Anne Murako. So Anne's been doing all this work with companies that she calls AI-pilled. And an AI-pilled company basically thinks in terms of what processes, what decisions, what mechanisms do they have that define competitive advantage that could be thought of as an ever improving compounding loop. For that, you want to use the best models, and you're using those to gather customer feedback, come up with new product ideas, A/B tests, different things. You want the most intelligent models possible. That, I

• 59:39Speaker 02

  think, is different from what goes in the bill of materials of the product you ship. And so sometimes, you know, you can get by with not the very best model for certain func-, you know, sorting email, or like, you know, performing certain functions within a product. And so what I'm finding that once people create new knowledge with the frontier models, they capture and transfer that knowledge with the cheaper models. And so it's kind of like, how do you turn a deep work discovery into a checklist manifesto deliverable? And you know, you progress down the ladder of model expense as you do that.

• 1:00:20Speaker 00

  Do you think most startups are capable of building the routing mechanism and collecting the necessary context to actually enact something like that? Or is this only the companies that are the most AI-pilled? No one's sleeping, everyone looks frazzled, they've got Alex Karp hair going on, and they're just wizards, you know, at the top of the tower?

• 1:00:38Speaker 02

  Well, I think when you're an AI-pilled company, you're not, you're, you don't mind spending money on the frontier models because you're token maxing as a person, or as a C-level manager, as a team. To me, that's a separate issue from

• 1:00:55Speaker 02

  You know, I'm shipping an AI travel agent as a consumer app and I want to know what aspects of that travel agent need the frontier models versus what aspects of that can be adequately solved, right, with open source models. And I think that that's where, I think that's where the open source models really come in.

• 1:01:15Speaker 03

  And there'll be a bunch of interesting companies helping with routing and evals and, you know, I don't know that, I don't know that, that companies will have to build that infrastructure themselves versus buy that infrastructure and focus on like their core value prop.

• 1:01:28Speaker 00

  Then what are, what are they owning? If they don't own the routing, they didn't build the model, they're not doing the compute, they don't have the customer data, then what the are they for?

• 1:01:35Speaker 02

  Well, hopefully they have the customer data.

• 1:01:38Speaker 01

  Yeah.

• 1:01:39Speaker 00

  Woo, good job!

• 1:01:40Speaker 02

  They better have the customer data.

• 1:01:42Speaker 00

  So they're just, they're just a bucket of data that doesn't, isn't even theirs and they're just doing whiz bang stuff with it and that's the whole jam? That does not sound defensible. That sounds like.

• 1:01:49Speaker 02

  This is why the job is hard right now, dude.

• 1:01:52Speaker 00

  Okay.

• 1:01:54Speaker 03

  We're looking at so much non-defensible stuff every day that, by the way, then goes and gets done at 50 by someone who's looks pretty smart.

• 1:02:02Speaker 02

  But like, let's just take an example, right? Like, Applied Intuition, you know, they're, they have a very differentiated product and they're doing very well, but they, their AI pilled in the sense that they've created a real-time performance feedback system where, you know, they, they can get input about which managers are most effective and what's working best and things like that. And they can, they can implement these systems at enormously fine-grained detail that you could have never imagined doing in the past. And so, so they're not, they're not necessarily AI pilled in the sense that they're doing all this to make their end products different, but the, but they're.

• 1:02:46Speaker 02

  The way they do business and compete is fundamentally impacted by it because they're they're embedding AI into the just the lifeblood of how they force multiply every employee.

• 1:02:55Speaker 00

  Have you seen Bedrock Robotics?

• 1:02:57Speaker 02

  No, I haven't. Well, I've heard of them, but I haven't spent time there.

• 1:03:00Speaker 00

  We had them on the show the other week. They're doing something kind of related to this and I really love them because what they're doing does seem defensible because they're going to a very specific part of the world where there's no other companies, maybe applied intuition, and they're building essentially Waymo for diggers. And it's a great idea. What an enormous industry that no one cares about because no one in venture has ever held a shovel in their life or startups, you know, tech people. So I think it makes a lot of good sense. Now, okay, we're going a little bit long. So I want to do a couple of final questions for us. And Mike, we're going to start with you and then we're going to go around. Give the Trump administration a grade on how it handled Mythos and Fable. And do you think that the major AI labs have been actually harmed in the last couple of weeks? Or do you think this will blow over?

• 1:03:43Speaker 02

  It's hard for me to grade the the Trump administration because I just don't know all the things behind the scenes. And so I'm reluctant to I'm I I do get nervous nervous about these frontier models are so important now that they've got the attention of the government. And that's always a very mixed blessing. And so I get nervous about the government sort of backdooring its way into regulating AI in the way that I was afraid that the Biden administration was going to do. And I think that would be very bad in terms of our competitive

• 1:04:22Speaker 02

  posture with China. So I do I do hope that we can resolve this, but I it's hard for me to give a grade because I think in some ways it is a work in progress. And I don't I don't think that the hyperscalers have done themselves any favors in the discussion either. And so

• 1:04:38Speaker 00

  It's not pointing fingers at Amazon, but it was definitely Amazon.

• 1:04:41Speaker 02

  I think unfortunately, this is an example of us muddling through a situation where you're seeing the sausage be made in real time. And it's hard to it's hard to say that there's an optimal strategy, you know?

• 1:04:52Speaker 00

  Aileen, you were going to add there.

• 1:04:54Speaker 01

  I don't think I can say it better than Mike. I mean, it's hard to know. Obviously, we're not behind closed doors. We don't know what those guys know about what can be done with the models. And you know, there's, um, yeah, there's, there's a lot of history here, right? About like whether it was developing nuclear weapons and the scientists who were building them having concerns and wanting to talk to people about what should we do about this? Should we build this? Should we not build it? Right? There's, we, we obviously want the United States to, to maintain its edge, but we also have to be prepared for, there's a lot of nefarious actors who can do a lot of bad things and a lot of our companies, both our, our federal institutions and, and companies are not ready for the fact that, you know, basically we can be trying to hack into systems 24/7 with agents.

• 1:05:37Speaker 00

  Yeah. The, the struggle that I have with that, and thank you both for answering that with such clarity and honesty, is that the rest of the world isn't stopping. And so unlike the Manhattan Project, when we were very much ahead of the Soviets, of the Germans, um, China's really banging on. I mean, we all saw the GLM 5.2 headline about how they think that it's going to be roughly commensurate with maybe fable, maybe mythos. Ian, I wanted to do you next. Your question is very simple. Um, how's Crunchbase doing?

• 1:06:01Speaker 01

  I think great. We love Crunchbase. We're proud of them.

• 1:06:04Speaker 00

  Tell me more. I, I own a lot of shares of Crunchbase. So tell me about how it's doing.

• 1:06:08Speaker 01

  I'm not, they have raised quite a few rounds and we were this, we were early investors. So I am not as close to the latest and greatest, but I think like you were saying before, having data is really important. Having proprietary data is really important. Crunchbase has a lot of proprietary data and private, and a lot of private company data, which is, as you know, like it's, it's very valuable. A lot of VCs will use the models to ask for competitive intelligence and information, but private company data is one of the hardest things to find out about.

• 1:06:33Speaker 00

  I'm really hoping that comes good and that way my children can eventually, um, go to school where I went to school. It'll be good. All right. Ben, uh, to round us up here, uh, for you, I'm curious what you think we should do at the startup level, the venture level, the technology industry level, and maybe even the government level to ameliorate what I think we can all see is rising discontent amongst the populace, uh, against AI. And this is often seen in data center protests and so forth, but what are some proactive steps that the tech industry can do to get on the right side of public opinion before this becomes an electoral issue?

• 1:07:03Speaker 03

  My question is so much harder than, this is, this is like a setup.

• 1:07:08Speaker 01

  I'm like,

• 1:07:08Speaker 03

  I, I can't believe that you just laid that on me.

• 1:07:12Speaker 02

  It's like you're being punished.

• 1:07:13Speaker 03

  Like I came here, I was

• 1:07:15Speaker 01

  Fun when Ben's on the hazard.

• 1:07:17Speaker 03

  Trying to be nice.

• 1:07:18Speaker 00

  Well, the cool thing is about me is that I don't want your money, so I don't have to be nice.

• 1:07:22Speaker 03

  Okay, great, cool. So

• 1:07:23Speaker 00

  Everyone else has to kiss their ass.

• 1:07:25Speaker 03

  Look, that is a, that is a great question to which I do not have a great answer. I, I think that

• 1:07:33Speaker 03

  I am always amazed by how negatively AI is viewed by people that don't work around this business, like friends that I have that are one or two degrees removed are generally terrified. And I think, think of, by the way, there's also this narrative that somehow, like, I think people actually think anthropic is like, pretty good, but OpenAI is like, totally the, like, you know, the empire in Star Wars or something. And, you know, how, how these stories get told. I I think it's a, I think it's a big issue, maybe to touch on the, the question that, that the other two answered.

• 1:08:14Speaker 03

  I don't, I don't trust our government to know how to monitor this and to, to sit over and to, and to figure out what, how we should or shouldn't use AI models, or, or like what the rules should be. At the same time, we're in a, like, we're in a cold war and have been for a while. And, you know, even though it's not called that, and like, this is national security, but against what's best for jobs and the economy, I mean, the, the wealth gap is only getting worse by the minute in a way that is, like, I don't know how this ends anything other than terribly. It is, we're, we're set up in a, in a really unfair,

• 1:08:57Speaker 03

  awful way right now, and this is, and AI is, is not going to make this better in, in any.

• 1:09:05Speaker 03

  Shorter or medium term?

• 1:09:06Speaker 00

  Yeah. And if you're on the video version, I just pulled up a chart from our dear friends over at Fred, which shows the share of labor comp as a percentage of GDP. And if you go back to the 50s, the era that people like to kind of pine for, fairly or not, it was up in the high 60s. And it's fallen down very sharply lately all the way down to about 57, which I think is really the root of a lot of discontent. And I don't have a solution either, but I think it would also be incredibly sad if we ended up shooting our own feet or tying our own shoelaces and preventing a lot of future economic gains because we couldn't figure out a way to share the pie a bit more effectively now. That just seems to be a non-GDP accretive approach, but you guys are not.

• 1:09:42Speaker 03

  By the way, maybe, but like going and, you know, some of these, you know, I'm not in California, but the billionaire tax and some of these sort of, you know, very brute force measures feel like, you know, at best, Band-Aids or punishments, that does not feel like the solution to figuring out how we fix this problem.

• 1:10:05Speaker 00

  No, because everyone's going to leave. I'm already talking to factors who live in Nevada just across the border because they want to get away from the tax.

• 1:10:10Speaker 02

  It's interesting because like when you think about it right now, if you're a free market capitalist wanting to make a pro common sense argument for it, you have no home. You know, the left is becoming Democrat socialists. And the right is MAGA and saying we hate immigrants. And so, you know, like you can't even make a credible case for why AI is good because the people driving the discussion don't want to hear it from both ends. And so that, that part of it really bugs me is that there's no, there's no natural home for the adult in the room conversations about what the right answer is.

• 1:10:51Speaker 03

  Well, there shouldn't, you know, party for it and candidates for it at a, you know, like, I don't, let's, let's see where we get in.

• 1:10:59Speaker 01

  Although Ben, what you were saying about, I don't know if I, it's not about the trust or the effectiveness of the government, but I certainly wish, looking back, that we had had. More regulation of social media.

• 1:11:11Speaker 03

  Social media, yep.

• 1:11:12Speaker 01

  And that we have a whole generation of kids that have been so negatively impacted by the fact that there was no oversight whatsoever for social media. And obviously, the ramifications from a security perspective are so much more grave with AI.

• 1:11:26Speaker 00

  If we weren't able to keep people safe.

• 1:11:28Speaker 03

  It's a fabulous point. It's a fabulous point. And I, having young kids, you know, we've been left holding the bag to try and, you know, make them the only kid in the grade without access to Snapchat or something to punish them for the fact that nobody got in front of this.

• 1:11:43Speaker 00

  Yeah, I'm not looking forward to those days. I literally had a question in my fun section at the bottom of our notes today. That was, how are you teaching your kids to thrive in life and the post-intelligence era? And I wrote that as a joke to myself, but I really meant the post-AI era. But I think post-intelligence actually may kind of better encompass. One thing I'm really concerned about is that a lot of people just can't read and can't do math. And I don't think that giving people during their learning years, access to tools as powerful as AI is going to encourage them in a lot of cases. And I don't think parents know what the hell they're doing either. And now that I have kids that can reach for things, I see how they react to screens. And it's made me rethink my entire relationship with technology. But here's some good news. Technology historically has made things better. And I think it's going to keep doing that, even though there will be some bumps in the road. I'm a long-term optimist, and I think that this is all going

• 1:12:28Speaker 00

  to end up being very good. I just hope we don't throw a couple generations of kids into the maw as we get to that point. This is not where I thought the show was going to end. I'm not going to lie. Maybe I should have shaken up how we did things. But guys, an absolute real treat today to have you on to talk about all this stuff. Just before we go, where can people find you online? And is there a category your firm is looking to invest in? And Mike, let's start with you.

• 1:12:51Speaker 02

  Yeah, I guess you could find me on X at M2JR. And then our website is www.floodgate.com. And basically, I'm investing in companies that.

• 1:13:06Speaker 02

  Complement the abundance of generative AI. I call it acceptance AI, but it's it's the companies that ensure the correctness of the work rather than just generating more stuff. And so that's, that's what I'm looking for.

• 1:13:18Speaker 00

  All right. Aileen.

• 1:13:19Speaker 01

  I'm Aileen Lee on X and also on LinkedIn and we're cowboy.vc. And we're generalists. I'm, I'm like, these guys, we've been doing this for a while. So some of our best investments have been things that we never would have had on kind of like our shopping list. It's really what founders are have insight about. And so, open for business.

• 1:13:42Speaker 00

  And Ben, take us on.

• 1:13:43Speaker 03

  Yeah. As you mentioned earlier, I'm not very active on Twitter, but I'm Benj Lier. And I use LinkedIn a little bit more, but not a ton. And we're at lirhippo.com. But probably LinkedIn is the best place. And like Aileen, we are generalists. We're looking for great people, early.

• 1:14:03Speaker 01

  Yep.

• 1:14:04Speaker 00

  If you guys are doing the investing, I think the future will be okay. Thanks all for coming on. This has been Twis. My name is Alex. We'll see you all next time.