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

24:39So it's different here because we're talking not about the motivations of a founder person, but the motivations of an engineer person who was like an engineer, academic, then Reminder spent 14 years or something like that at Meta, went to OpenAI for less than a year, and was at Thinking Machines for less than a year, and then went back to Meta. As a career trajectory for an engineer, that's not crazy. I was this long-time engineer, place A. I bounced out to this other place, left with them, and then decided, I just want to go back to the original place I was. It's kind of not an unusual pattern of behavior.

25:12What is unusual in this case is, because of the technical nature of these bets, how much reliance we're putting on the behavior of an engineering slash academic talent pool, which probably responds fairly differently than the, I'm a founder, I want to be the CEO. But Rory, that last thing to me is the bit. This isn't just job hopping and then, oh, eventually going back to the place where you kind of earned your stripes. It's found a responsibility. And I think that's what's lacking here is that notion of if I am taking on this mission with a group of people, with a set of capital partners, that conveys a measure of responsibility that I'm discharging.

25:53And the minute that I say, you know what? Screw that. My responsibility is to me and my not optimal. I wouldn't even say it's the optimal outcome, the maximal outcome, the near term max. Like, who knows whether or not this is better? This may well not be better. But the fact is, the people that they left behind are kind of screwed. Agreed, but I'm going to go back. And first of all, I'm going to do the money because I've known you for years and you're a financially astute person. Question, Roger, would you prefer$2 billion in thinking machines, unlisted stock with the chance to be amazing or the chance to go burst or$3.5 billion of liquid Facebook stock over the next five years, just as a pure financial call?

26:35Obviously. Yes, thank you. So let's not pretend that they're equivalent. I mean, you know, it's such an obvious. No, I'm not saying, I'm not saying. 10 to one? 10 to one better? Maybe. You know, but there's obviously way more option value in thinking machines. That could be a$500 billion company. No, you're exactly right. You've embedded option value versus probably highly fixed$3.5 billion plus or minus 50 % versus$2 billion could be zero, could be 10. I do also think, right, the context of who gets it and when they get it, the dude was at Facebook for 14 years before. I don't think he was exactly desperate for cash.

27:08Agreed. And I said 14. I'm doing that from memory, but it was circa 10 at least, right? But it makes a difference. The dude has got 100 already. True, again. But again, back to, I wonder, and I could be wrong on this next sentence. I'm just, don't love the behavior, but just advocating both sides. Jason, you made a comment, and Roger made a comment, you know, quote, unquote, this person made a commitment, right? I wonder, when I look at the due diligence process for that deal, where you have a very charismatic CEO in Miriam Moratti, right? I wonder how many of the VCs met him. Was there any emotional connection?

27:39I'm just wondering here, did any of them even meet him in person? He made emotional commitment to his colleagues, to his co-founders, yes. But as a VC, I mean, I'm not going to lie and say, if you were due diligence in that deal, obviously, you've got to spend your hour with the founder. You didn't get to know what the product is because they're not telling you that. Did you spend an hour with this guy or not? I don't know. As a VC, you should be fired if you write a hundred million dollar plus check and you don't meet the co-founders. But Roy's point is, how deep do you go on the org chart, right?

28:08And I'm positing in the context of a transaction that came together where you didn't even get to know what the product is, I wouldn't assume a whole bunch of emotion. I'm just pushing on the bullshit. I wouldn't assume a whole bunch of emotional connections on either side. The big picture thing is you thrust a bunch of money at people, some of whom you met once or twice, some of whom you maybe didn't meet at all. And less than 12 months later, one of those folks, you went back. Oh, well. So what I'm hearing Rory say is essentially reduce it all to fuck the big VCs. They're playing the momentum game.

28:39If shit happens, shit happens. They can handle it, this is life. Exactly. Big boy's rules. People who have a billion dollars shouldn't give out to other people who decide to grab it. And you might think it's bad behavior. You might think you wouldn't back him again. But let me give you a clue. It's the prisoner's dilemma. Once you're not playing a multi-period game, and when someone offers you$3.5 billion, you're no longer playing a multi-period game. You're playing a one and done. You're going to get bad human behavior. Frankly, the real thing is you as a person managing money should be thinking about how to deal with those corner cases.

29:14And I don't know how you can is the hard thing. If you're paying 10 billion pre for a raw startup where there's proven evidence that the asset, which is those seven mines, will be pursued by someone who's willing to offer them a billion dollars, it makes it real how risky those investments are. And I'm not sure what the answer to that is. It's quite terrifying, really. The answer is a bigger fund. That way you can have a few of these. Diversification, got it. You don't want to be too concentrated with these deals. But Rory, the way you said that, that was a really astute way of putting it. You're right.

29:46It's like what used to be a series of multi-turn games, when one looked at their career, if somebody acted badly and burned bridges, that might be their last company. They might not found another company. here. If you reduce everything because of the scale to a single turn game, then that wildly increases the volatility of potential outcomes. You're exactly right. Roger and I lost money together in a deal. And I would say everyone on the management team in that deal behaved well. And every one of them is referenceable by us and, you know, would give the money again, depending on the deal and have talked to them about other deals.

30:24It felt like a multi-period game, everyone will stand up and did the right thing. I think you're right, Roger. These kind of sums just change the calculus and you can't all rely then on people doing the right thing. Roger, rule number one, we don't admit that Rory's right, even when he is. Rule number one. To be fair, that was very astute. No, no, no, no, no. We don't say this. No. Harry, I haven't worked together with Rory in a while, so I forgot that rule. My apologies. It will not happen again. Rory's cheating on you with Arthur Rock, don't worry. It's okay. Okay. We said he left OpenAI. SoftBank reportedly securing a$5 billion margin loan secured by ArmShares to invest in OpenAI.

31:11How did we analyze this? And if they're getting loans to invest in OpenAI backed by Arm Securities, what did you think of it? Masa rules. Nothing new to see here. This is what he does. For better, for worse, when he has a feeling, he goes all in. All chips, max risk, personal, financial, everything. This is Masa being Masa. 100%. This man is full risk on all the time, just wants to get the bed on the table and has been spectacularly right at times and spectacularly wrong at times, but spectacularly willing to play, which on behalf of the audience, we should be eternally grateful. And he's not even that levered.

31:51I mean, I checked actually, he owns 90 % of Arm still in SoftBank and Arm is trading 90 odd billion. So he's got 80 billion of equitable equity there. He can lever up some more. If he can, he will. And I think it does tie into the story of where the hell are we going to get all this money to fund the tokens that I burn every day as a vibe coder? Like we still don't have the answer, but reflecting on it when I thought more about it, and it's actually a smart use of leverage. If you have a$90 billion,$100 billion position, if you're an individual, you certainly don't want to pay capital gains on it.

32:21A$5 million margin loan at an acceptable interest rate is probably a smart position, right? That loan's not going to get called, right, under any scenario, probably, right? But it is kind of weird. It still feels like part of this whole, we're all believing in Sam, which I do believe now, but we're all believing in Sam. That trillion in revenue is coming. For the record, let us remind ourselves that in 2002, the Nasdaq, you did see individual stocks go down 90 % from the peak. So it is possible the loan will get called. It's just unlikely. Yeah, the question is, again, just for ease of analysis, let's say that Arm is$100 billion.

32:57That's leverageable pretty much to$50 billion. Yeah. But it very easily could see him back in the news with an incremental$20 billion. He could leverage this. He could take$25 billion against the Arm position easily. And then Torori's point, and we saw this, like the thing about Masa, I'm old enough to have seen the NASDAQ run up, the NASDAQ crash, Masa being Masa. I mean, he has had so many existential moments where he's waking up in the middle of the night, sweat pouring down his face, wondering if this is it. But he's held tight and he didn't go over the line. He went right to the line and he's come out.

33:34And then his macro theses have been have been proven out. This is like a relatively low octane master move. Exactly. Exactly about that, yes. That's a great visual for the show. Masses are surrounded by fires with low octane just around it. That's exactly right. The thing that I find hard is when we said about where does the money come from and then the speed of just what we're seeing, we're now building more data centers than office buildings. We're seeing demand for compute be the single biggest constraint. And I'm looking at this going, really? The bubble that everyone's saying in comparison to we're building more data centers and office buildings and demand for consumer computers just off the charts.

34:16Is this not fundamentally different? There's a lot in that. I mean, the counterpoint between building data centers and building offices, it sounds clever, but it's to some extent trivial because who the hell is going to be building offices because there's no one in them. All right. The reason we're building computer data centers is because we want to put computers in out of the rain. And the reason we're not building office buildings is people are staying at home. So it's pretty obvious what you'd build. But I think stepping back, I mean, the wider comment is we go around this is it a bubble, AI, CapEx spend for a while and over and over again.

34:45I was reading over the weekend that there's this new Stripe Press, how this is a Dworkesh Patel's scaling AI and oral history of scaling. And I kind of read it over the weekend. Really good. And the thing that impressed upon me was the matter-of-fact way that a number of the people just reiterated. It was just interesting to hear it. Like, reiterated, one, that the scaling law has been proven to hold for six, seven years now at a high degree of accuracy. And a couple of them blightly said, you know, it wasn't a question of when. It was like, they're literally saying, how long does it take? Of course, it was kind of, of course, we'll need 1 % of GDP to invest in computers, but then we'll be fine because we'll have AGI.

35:23My point is, what I find fantastical, because that's a shit ton of investment, they were like, well, that's just what it's going to take. And of course, we're going to get to that. It was the matter-of-fact way in which the smartest people of our generation thinking about scaling AI accepted that this was kind of the to-do list. That's a long-winded way of saying it's not just, frankly, Sam spiffing out of his butt. It's like a whole bunch of these folks are like, yep, this is the task we've embarked on ourselves for the next five years. and it's going to take around 1 % of GDP to build a compute cluster big enough to get the flops, to get the outcome we want.

35:56They're going for it, right? And then the only question is, you know, how does the capital get fined and can it earn a return? But if the capital is provided, this is going down. These data centers are going to be built. You can see these guys going, this is just hell for six or seven years. It's totally predictable. The loss function is predictable. It was kind of like 10 ,000 computers worked. So we're going to buy 100 ,000 and then we're going to buy a million and somewhere along the line, we'll get AGI. And what's your point? and why are you even questioning it? I can tell you just one thing for what it's worth for me, for we have the macro stuff.

36:24So I've, as Mr. Vibe Coder on the group, I Vibe Coded eight apps. I haven't built a piece of software, I've been part of building a piece of software in 2012. I Vibe Coded eight apps in a hundred days. And we have 12 AI agents working at Sastra now, replaced almost all of our sales team and our whole content team. What I can tell you from that, and folks have been saying this, I wouldn't have believed this 90 days ago, but folks like Omjad or Replit are saying, you've got it backwards. everyone will consume every available token. And what I know is today, just what we're doing today with 12 agents and eight apps, I could use a hundred X the tokens.

36:56Even now, like I got to wait like 20 minutes to build one feature. I mean, vibe coding is cool, but it don't work at Google speed. Our agents could all do more. So if everyone today could use a hundred X the tokens and think how early we are on the journey, right? You know, as we record this, it's dream force week, right? Harry's going to be there, I think this week. And as Mark points out, like point only point 1 % of Salesforce customers are really using AI yet. So it's like 100 times 100 times of something. I can see it myself. We're not remotely servicing the demand that exists today. So how it gets paid for is a different question.

37:27But I think this is so different than the prior waves where we just can't even service this demand. The only thing I would actually question because I'd love to hear your thoughts on it is my mental model of this is from a technical and demand perspective, it's all going to happen because the people who are building it want to build it and Jason at the margin wants to use it. So if anything's going to constrain this, it's going to be economics. And my big picture model here is you've got the technical trends and then you've got the economic trends. And the question is, I think if it's slowed down, if it's wrong, it won't be because the technology direction is incorrect.

37:58It won't because the demand isn't insatiable. It will be purely and simply at the margin. The marginal capital provider says, oh my God, people, even though the scaling law is holding, the economic return from that investment isn't holding. And the scaling law might be log linear, but every economic phenomenon tends to be diminishing marginal utility. And at some point, capitalism is going to say, I don't know how to tell you this, guys, but you can't have your $1 trillion dream because we just can't afford it. And we're going to have to slow down a little here. And that's what I'm trying to figure out is, are we going to get the economic return quickly enough to warrant the investment?

38:33And back in the day, you were a financially astute investor. What do you think? Put on your trading and thinking hat here. No, I think you've nailed the dynamics. Yes, economics will dictate that not everything that people want to build will be built because the capacity won't exist once diminishing marginal returns reaches a point where the value of the capital is not met. I guess, you know, one vector that I'm not clear on is if there are step change advances in processing efficiency or simplification of code such that the amount of processing required per unit, it declines in a way that people don't expect.

39:13Is that going to relieve some of the pressure on the magnitude of infrastructure that's being built? I don't think so. I think we burn more tokens. You know, every company is like 30%, 50 % of my company is built with AI, our engineers, right? Hooray, our engineers came back, 50 % is built with cursor. Does that mean they take the rest of the day off? No, what it should mean is they're shipping more features. Because instead of spending an hour on Stack Overflow trying to find a library that was stolen or pseudo open source, I can do it in 60 seconds. So I just go build another feature. It's just, and you'll just, so you'll just, the better that gets, the more tokens you'll consume.

39:46I don't think there's this great efficiency coming. We'll just build more and more stuff faster and faster. That's why it's actually so stressful at Seed today because so many of these companies are born almost instantly today. So, you know, it's tough doing the A and the B and the C and the D and the E, but seed is really hard today because that company probably didn't exist seven days ago or being less facetious. And when we all started, even when Harry started, startups were never good 30 days in. They were terrible. I mean, once in a while, like an off the chart CTO would build demo where 30 days that your jaw would drop.

40:18But if you picked at it, it didn't work, right? But it's just crazy what you can build so quickly today. It makes it so competitive. It's complicated. Lovable had their first year anniversary today. Oh, the other day. And I thought that was insane. First year anniversary, over 170 million in error. Wow. It's great, but it also makes that pre-seed inception phase harder, I think, because you can't intuit differentiation in the way you used to be able to with a little bit of software. Oh, my God. Aaron and Dylan built a folder you could put a file in. I'm in. Yes. Those days are long gone. How did they do that?

40:55You mean it's stores on the internet? Get me Rory. Yeah, no, it's moving a lot quicker. You make a comment here. It makes it hard to be seed. You're right because you don't know. It makes it also harder to be A and B because you have to pay up. And let's be frank. We're all looking for this really, I mean, it's pathetic when you say it from the entrepreneur's perspective. of what we're really looking for is that wonderful period where you know, but it's not obvious and you can invest, right? And it turns out that period may have declined to like a half an hour, right? You have the preceded lovable.

41:26Then you have like day three, it's exploding in revenue, and suddenly you're at two billion pre. It's an exaggeration, but not by a lot. Six months ago, they were raising it a couple of billion. So the time period from we haven't launched yet to, oh my God, it's so obvious, has, as Jason said, compressed. That sweet spot is vanishingly small. And therefore, you're left with the choice of do you invest into acute uncertainty or do you invest into two billion pre? Acute uncertainty or businesses that aren't specifically disrupted by this phenomenon, which generally have like legal and regulatory challenges that make it not simply do I have better or faster or cleaner code?

42:03It's there's a bunch of these other issues to address. And is that your thinking? Because, you know, we didn't say it at the start, but Roger's getting back on the field, proving his timing is always brilliant. And is that your thinking when you're back on the field as a seed investor? I mean, it's part of it. The stuff that we're doing definitely is less resistant to the phenomena that we're talking about on this call. As you well know, acute uncertainty does not trouble me in the least when that acute uncertainty is expressing a deeply held, well-researched thesis that I have. And that's just the nature of very early stage venture.

42:41But I do think that the issues of legal and regulatory complexity, whether it's financial infrastructure or it's media rights, copyright patent IP, it makes it more nuanced than am I able to develop the next base model or a great platform for developing applications of work speed. I think that's fair. I think, you know, actually, we had Aaron talking to some of our LPs. I'll maybe come back to that later. But one of the concepts he introduced was something I've been thinking about at the apps layer. And Aaron from Box is always so crisp. And he talked about the diffusion rate of this technology across enterprise as a whole.

43:22And there's going to be different diffusion rates. The diffusion rate for a lovable will be very different than the diffusion rate of AI for complex medical prognostication. And setting your expectations accordingly and your investing thesis accordingly and varying it by virtue of the diffusion rate, I think, will be one of the key skills here. Recognizing that some markets, it's going to be done and dusted in six months. And you're right, Roger, other markets where there's regular constraints, you might be two years in before you get your first big lighthouse, vertically focused enterprise customers, but then it's bowling pin and you get the other five and six months.

43:57And there's going to be very different adoption patterns by industry. Harry, I'm not going to say it. Somebody might have said some relatively smart things right there. I was paraphrasing someone else. Aaron Levy, he's a smart guy. What you don't know is that I prep Rory before the show and I sit down, I share my thoughts. I know he's parroting you. Yes. You said about value in regulated markets, maybe where it's more difficult to be disrupted. rory we and jason we had this great chat last week on the ability to king make and how capital can be used as a moat we discussed jason you very well and eloquently discussed polymarket raising two billion at nine billion and then this week cal sheep the direct comp raises from andresen and excel at five billion dollars right after polymarkets raising at nine billion dollars how did you think about this king making not possible what was the thoughts let's be honest what's going on here.

44:55This is the purest regulatory arbitrage play of all time. You can look at the cumulative market cap of regulated sports betting and look at how it has dropped in response to the rise of Polymarket and Calci, who are not subject to the same rules and regulations that they are. Literally, it's we're going to take value here and we're going to place it over here. And the combination of, at least in the United States, the current administration being extremely predisposed towards the prediction markets companies. And now, Kalshi's announced that they're going to India as part of their 140-country coverage.

45:34If there was a level regulatory playing field, this would not be happening. But for now, this is one of those circumstances. So you talk about kingmaking. I think to an extent, they are trying to run as quickly as they can to get so big and so powerful that they will not face parallel regulatory scrutiny that the legacy companies have suffered through since PASPA. That was in my FDX investment memo was to just get to that scale where we could push through some of these issues. I feel like we just came up just a little short. If we could have just waited for our buddy David Sachs to get in, then I think we would have really had a fund returner on that one.

46:12It's a good point. Listen, you're obsessed with kingmakers, and I think it's a good topic, Harry. I think it's right. The only thing that fascinates me on this kingmaking topic was that literally Polymarket was founded by a solo founder in his toilet during lockdown. a solo founder in his picture on Twitter, in his bathroom, that was the only place he had to work during the worst lockdown of March, 2020, he founded this. It gives me inspiration that founders will come out of everywhere. Right. And so kingmaking works. It is a real, it is a real issue to talk about. But if you can, if you can solo found Polymarket out of your toilet in March, 2020, who knows where the next one's going to come from?

46:48A couple of things. One is, I actually think this is an example of kingmaking not mattering, right? I think Roger nailed it correctly on what's going on here. This is two non-sports betting companies who are doing prediction markets where all we talk about is the 10 % of the revenue that's political and 90 % of their business is sports betting, but we're not calling it that. And they're just killing it because we all love to sports bet. And the number of people who give a shit about who's going to win the Nobel Prize or whatever else they're betting on that's not sport betting is low, but everyone in America wants to bet on the NFL and they're cleaning up, right?

47:19And good luck to them and Godspeed. That's just what's happening. Roger is totally correct. Separate comment on the kingmaking, the implied just tracking back to last week, because my short-term retention from memory is actually longer than a week, Harry. We were basically saying that money can pick a king. And I think this is an example, and I've been thinking about it since we talked last week. And I think this is an example where it can't. There's two good companies. They're both getting a ton of money. They're going to slug it out. They're going to get relative market share. They both need capital.

47:46But I don't think there's kingmaking going on here because there's two reasons kingmaking work. One is if you give one company so much money that they can overwhelm the other, then maybe that's kingmaking. And then the other is where getting money from brand name perceived VC makes the customers default to you. And that actually happens at enterprise software. If you're an awesome CEO and then you get three awesome VCs and you're selling mainly to tech companies in the valley, you probably have a herding effect. I mean, I think Brett Taylor is an example of someone at the high end. Those are perceived, oh, Sierra is amazing.

48:17Would you want to take them on? Kind of vibe. I don't think that's true for a second. I don't think anyone betting on Polly or Calci gives a damn how much money they have, provided they can pay their bet, and gives a damn who that money came from. So I think this is an example of non-kingmaking, to be very clear. I think it's just making the bet. I think it's, but it's definitional. Like, what does kingmaking really mean? I think, to me, kingmaking means something different. And to me, kingmaking doesn't need to be one company. Call it an oligopoly, right? a small group of companies that receive an exceptional amount of funding relative to everybody else.

48:53Here, what I would refer to as the king making is more money to spend on marketing, distribution and team. And that because at the end of the day, bonusing like that's what makes these companies go around is the ability to spend money in marketing. Exactly. As long as LTV to cap makes sense. And that's exactly what they're doing. So to me, that's the money. But but you're right. Customers don't give a shit. They don't care how much money Kalshi's raised or Polymark has raised. I'm probably allowed to say this because I'm outside the borders and we're not going to go into a political, but am I the only one to also realize that Eric Trump is on the board of one, another Trump is investing in the other, Howard Lutnick's son happens to run the fastest growing investment bank.

49:33My word, that seems like an awful lot of coincidences in one go. I wish I was as good at picking as the Lutnicks and the Trumps. What a great deal, huh? For a regulatory arbitrage play, Roger. It was like the old days when you could work at YC and have your own fund at the side. You didn't have to invest through YC. It's a great deal. A hundred percent. If you're in crypto, energy, gaming, prediction markets, right, there's those handful of things which this administration has very tight connectivity to. And if you want help and support and you're in one of those industries, it's extremely clear what the playbook is.

50:09Which is why an intellectually coherent political philosophy is to say, regulate as few things as possible because the more things you regulate, the more of this kind of behavior you see. And that kind of behavior you tend to see from every party, because the minute something is regulated, people have an economic incentive to incentivize the regulators, right? I think the only real objection people have is the current generation appears to know how to do it at scale. We're not going to do trivial little jobs where, oh, I get a nice job when I leave my regulatory position and I get a nice$500 ,000 a year job.

50:39No, we're just going to go wholesale here. Just give me 5 % of the company. It's just so much quicker. So the efficiency of the regulatory arbitrage has definitely gone up. But I think the zoom out comment is whenever you have regulation, there are economic incentives to get close to the regulators. And I think that's why, as I say, you should have a bias to regulating as little as possible, especially on economics, if at all possible. And I think this space is actually particularly interesting because you also have this issue of structural budget deficits in a lot of states, states that regulate gaming.

51:16And there are differential tax rates depending on the jurisdiction. Then you have these massive offshore operations of things like Bovada and Crypto.com and Stake. And these companies make billions and billions and billions and billions of dollars. And the more that, you know, Illinois jacks up rates in state, A, the regulated sports books that are subject to these rates, reduce investment in the state, handle those down, tax revenue goes down. And those customers that are now getting poorer service are going to trade offshore in unregulated markets. So Rory's right. Again, Harry, sorry. But, you know, in this case, this is such a clear example of you can see how as levers move, it has these effects in other parts of the market.

52:08And generally where it's heading is the unregulated part of the market. Something that you said, don't piss off. I always think don't piss off Peter Thiel. And Peter Thiel's made a very concerted concentration play in terms of AI bets. And it just struck me because it kind of was a piece announced this week where they shift from caution to concentrated AI bets, meaning they were out of the market and now they're obviously very in the market, but with few players. What struck me though was, you know, I've interviewed Hem on to GC. I've interviewed the team at Lightspeed. I know the team at DST and they've taken the completely opposite approach of we don't really know the winners.

52:44So let's be in Mistral. Let's be in Anthropic. Let's be in OpenAI and let's just index this wave of the best companies. Given the venture brains and Rory, phenomenal wisdom, may I add, that we have thanks to experience if you didn't know with Arthur Rock guys, Rory does.

53:07I wanted to hear your thoughts. How do you think about these two opposing plays in this new world and where you would sit? I'll tell you my guess. I want to hear what Rory has to say. My guess is being too diversified from investing in AI today is biding time. It's not knowing, not having the conviction, not knowing. And I think it's better to bide time than to completely stay out. There's plenty of reasons to do a check into leaders, even if it's not going to 10x the fund rather than to be grouchy or sit it out or criticize these rounds. But I think if you're Peter Thiel sitting on what he has, you want to go concentrate.

53:44I mean, he's like 40 % of the capital in Founders Fund plus his own capital. Making little teeny bets, little playchecks doesn't get you there, does it? But if you don't know, I would do 100 if you don't know. You might as well do if you don't know. This world is so different than nine months ago. I think plan B is to make a lot of bets. I think that's actually right. There's a lot to unpack in this, so we'll take a little while, right? One is, look, diversification reduces your upside. That's the nature of it. It also reduces your downside, right? I mean, it just is. It's the central limit theorem.

54:13It's not a great insight here, people. You will have a wider variance of returns positively and negatively if you have 10 deals in your fund than 30. Literally, the math is clear. So logically, the more certain you are that you can call the shots, the more focused you should be. founders fund both has the evidence that they can call the shots because they've done so, and frankly, the confidence to call the shots because they got it, that I totally understand why they're going to try and be more focused. I actually looked at the article and I was honestly surprised at how diversified they actually, the information shared founders one, the growth fund had 31 investments, founders two had mid high teens and founders three is aiming to have 10.

54:55To me, I was actually surprised at how diversified Founders 1 was. It just didn't feel in sync with what we've seen from these guys in general. I mean, if you look at their SpaceX non-diversification, these guys strike me as the most likely to be most concentrated. So there was nothing surprising to me in that announcement. The only surprising thing was they weren't there already. Roger, how are you thinking about concentration with your new fund? You're back in the game. You want to do 100 investments out of your new fund, or you want to just do five big ones and go big and go home? No, to me, over a three to four year initial investment period, obviously fund ones tend to go a little bit faster, more like two, two and a half years.

55:33I tend to be 20 to 25 portfolio constituents, create the farm team, but with significant ownership from each of those checks. But then where I've tended to get very concentrated is on the second and third checks and where we've gotten deep, deep conviction in a team, their execution in the market, and the fact that if they continue to execute with that skill and at that speed, that the market opportunity is massive. So we end up historically, and I'm following a similar playbook of three to five companies out of the 20 to 25 companies constituting 75 % of the capital deployed. Roger, is your fund big enough then?

56:12If we run through that, 20 average 3 million checks today. They're not average 3 million. They're not average 3. Our initial check is way less. Are you going to get ownership if it's going to be a smaller check size to that given? It is in the spaces I'm investing in. And they still exist. I mean, we just wrote a 1.5 check at a 10 post, so 15 % ownership in a really cool analytics company that, yeah, is disrupting a seriously stodgy and screwed up sector that I think is generalizability outside of that space. So, yes, I do think it's possible to write those kinds of checks. And then assuming they do a great job, then we'd love to write a three to five million dollar second check into that company.

56:57Maybe more. I'm switching to Rogers Fund. I want to find these deals like it's been a few years for me since I've gotten enough of those. If you're listening to this podcast and you can see people's eyes, what you're seeing in Harry's eyes is the wide eyed look as if can such things even exist? a 10 million post for a company with a product? Can such things exist? And yes, they can. And multiple six-figure ACV clients. Five on 50. I'll do it. Five on 50. I'll do it. And Roger? Roger, and therein lies the danger to your model for that follow-on check, which is the existence of people like Harry who'll just snatch it away from you at a high price.

57:39Coming back to the concentration. I actually think, Roger, again, at the risk of being nice, that's exactly the right strategy, which is, it would be easy to say, oh, we're going to be concentrated. But I think what you're saying is correct, which is you have to start off with a significant element of diversification and then concentrate down. And in fact, this is top of mind for me. We just had our LP meeting, and we would typically be at least a turn later than you, Roger. But my big picture comment was, we've moved from a world where an exit is 200 million in ARR to a world where an exit is 400 million in ARR at an IPO.

58:11You're just doing your thing here, but way over there at the finish line, the finish line has receded another two or three years, which means logically you've got more risk and more upside. You just got to hold these things longer. So when you think about that, at the margin, that should have some impact on your portfolio strategy. And for us, we typically been at our stage under 20 deals per fund. And we kind of said, you probably need to aim to close at 25, just given this dynamic. Nothing's changing at the stage we're at, but success is further away. Now, and then, like you say, trying to concentrate back down, because in the end, I mean, it's no insight, but just to say it again, concentration, diversification is the enemy of upside.

58:55Concentration gives you more potential, more variance. You have to do that via aggressively on your follow-ons, right? And that's a very different strategy, just to call it out, Harry, back to your thing, than what Founders Fund articulated, but it's worth pointing out they're articulating that strategy for a growth fund. And the big aha here is how bifurcated and different, different stages this business are. When you're still at the will this thing even work stage, which is Roger, or will it scale, which is where we are, or maybe Jason's somewhere in the middle, you probably need some significant diversification and then concentrate.

59:24When you're effectively investing in what should be public companies, but are just private, then the growth fund strategy should be 10 or 11 or 12 deal concentration. So it doesn't lend itself to a one-dimensional answer on that. And I think that this question of how to handle portfolio concentration and what should you be aiming for is just going to be a key part of making the math work. My challenge here is that I've done the portfolio reviews. And when I look back on like Fun1, where there's like a meaningful timeline to actually look back on the six years now, the best performers, your linears of the world, were not obvious early.

59:59And the early out performers did not signify enterprise value in the long term. Clubhouse, hop in, be real. And so if you think you can pick your winners early, I think you are wrong. Am I wrong? Yes and no. I think one of the aspects of the strategy articulated is this temporal many turns in order to be able to see progress. And yes, it may affect your ownership if in fact you don't have that high degree of confidence of the earliest days and you're leading or writing massive checks into every round. And I've got like these very, very different ways of getting to multiple fund returners. It was not, they did not all look the same.

1:00:44TTD, multiple near-death experiences, multiple exit opportunities, bridging multiple times, didn't have a product in market for more than a year and a half. So that's one all the way over here. And then once it hit, then it hit. Then you had something like Wise, which was chugging along, chugging along, chugging along, chugging along. Not that they didn't have hiccups along the way, but fundamentally, that was as close to an up into the right company that I've ever been involved with. My first check in Wise was$750 at a five and a half post. Okay. Yeah. Oh, yeah. But then, you know, Velar came in and then we piled in with Velar to 20 and then we piled in with Velar to 160.

1:01:24And we just kept going. And we were 17 % of TTT at IPO and we were 13 % of wise at IPO out of a little shitty seed fund. But then Datadog's a great example of one that ended up being a fund returner, but we had 2.2 % at IPO because we were in there at pre-seed and then RTP led the seed and then index led the A. We were not comfortable in that, just being honest, to back up the truck at either the seed. The A we wanted to, but at sharp elbows, we couldn't get what we wanted in there. We were able to write a check, but not as much as we wanted, but we ended up having 2.2 % at IPA. But that still was incredibly valuable because that was a$40 billion company.

1:02:07I'm just saying there's multiple paths, but the thing is you want, you're playing a multi to going all the way back to the beginning of this because this is a multi-turn game. Yeah. And just bringing it back to this point, I think what Roger's doing, he's rejecting the absolutism of your statement, which is that you just don't know earlier on. And he's giving something more, there's a nuance, which is you don't always know, but you know more than someone coming in from the outside. So at the margin, you can tilt it your way. And that's all you can do. They're not going to put a big sign saying, I swear to God, I promise you this one's going to be a$10 million outcome.

1:02:38But as long as you have a differential information advantage and the willingness to use it, what you're saying, I think, Rod, is you can tilt the thing slightly in your favor, which is all you can do, which is all concentration is. I do think, by the way, after you get in revenue, it's much more. I mean, the stage we invest at, I do, with about a 70 % confidence level, once you have a year or two of revenue, you know, right? And in fact, I can say that exactly because we did the math. If you get the first two years that we underwrote in terms of revenue from the moment of our investment, if you get the first two years correctly, your probability of getting greater than a 5x, goes from 30 % to mid-70s.

1:03:11In other words, once you're in revenue and you have product market fit, you do have a lot of information and you ought to yourself to use that. So therefore, at the seed stage, it's by definition less than that information, but it's not zero. It's not flip of a coin is my point. And I think Roger's point. So if you think back on yours, there probably was signal there, if you're close enough to it, to be able to just tilt the allocation slightly and it can make a huge difference. A hundred percent. I've realized as a comment on that, it's interesting to talk about it because I've realized even at our stage, you've got to be trying to do that more and more because the journey from our stage is still 10 years now, whereas before it was six or seven.

1:03:48Jason, what do you think at Seed? You can get a relatively high degree of certainty at Seed. Not the certainty you get late stage. You can get it. But what it means is you're going to end up with a pretty small box. You're going to have to hunt strange things outside there. You're going to have to be a founder, attractor, magnet. You're going to have to do something because you're going to turn away a lot of the deal. You're going to do the wise's, but you're not going to do the other one that Roger said. Maybe you won't do the trade desk or something. I don't know, or whatever. You're just going to turn away some of them and you're not going to do the clubhouses because it's wacky, but it might be great, right?

1:04:22But you can still do wise. That's my error because I'm concentrated from first check, right? And so I have to turn away something where I don't have certainty, even if it's cool, because the risk is too high. there. I'm doing 8 % of my fund into almost every deal. So I have to have such a high hit rate at seed. Now there's exceptions. I'll do some small checks, but that's really where it ends up being. A check and a half is 8%. Like half of them have to work, right? So it's a stupid model because you have to turn away clubhouse and hop in and maybe even data dog, but you got to just find the wises and go all in, but there's a, it's a big trade-off, but I do believe that you could, you could just cut those ones out of fund one and still have a decent fund.

1:05:03That's so interesting. Yeah. I mean, for me, the one to 2 % of the fund at entry, that's what we do. And then it's that next check that could be for 5 % of the fund or 7 % of the fund. When we did DigitalOcean, our first check was three. And then when Andreessen came in and led the$37 million series A, we wrote a seven. So we had 10 million in two checks in Datadog. We ended up having 9 million over four checks in WISE. But that was a much smoother function. But in the case of DigitalOcean, we could just see it taking off and then as reflected in Andreessen's leadership. And we're like, you know what?

1:05:45This is going to be one of our best companies. But what are you going to do today when you got in at 8 million posts, like the one you talked about, but the next round's at 300 because the AI kids come in or 500. This happens all the time today. How much of your fund can you really put? Is it even worth writing that second check? It depends. We are hyper, hyper, hyper disciplined. We look at every check independent of the check prior, period. That's the rubric. So if I look at that and say, ah, the information I've got about this being a 300 million or a 3 billion, right, is I think this could be a hundred billion dollar company.

1:06:17then I will write a very meaningful check into that company up to about 10 % of the fund, which is exactly what we did with Trade Desk when by the time we had written four checks, pre-seed, bridge, bridge, and then a check into the series A, which is barely a series A, was at a 16 post. We just crawled to that point. Then it was whoosh. Then there was an air gap And there was nothing until the$20 million Series A, which was 15 primary, five, secondary at a 280 post. And we wrote a$3 million check out of a$50 million fund into that at a 280 post after having cumulatively written a little over 2 million over those first four checks.

1:07:03But that 3 million ended up turning into 40 million. And that was a great investment. Sometimes I wonder today if that math works as well, right? Because let's say you did the seed at the one that you did at eight and you own 15%. And how big is your fund today? 150 million or something like that? Maybe 100. Okay. The next round's at 400. Okay. Now, listen, you could put in, you could go to 10 % of the fund, but the impact on your ownership is, it's irrelevant. Like you're not, you're going from 15%. Who cares about ownership? It's a cash on cash business. Fair enough. but it won't change your carry or your personal economics all that much to go from 15 to 15.1.

1:07:42Like, it's just not. That's not the issue. The issue is if it goes from 300 to 10 billion and that checks at 30x, that certainly impacts my personal economics. I think, can I try here? I think there's an embedded concern in what Jason's saying is not articulating, but when you articulate, I think it's okay. It's like, what you're saying is if all the follow-on rounds are priced incorrectly relative to ultimate exit value, does your strategy work? And it's a fair question. And it's the question you would ask if you're living in Silicon Valley in 2025. But to save Rods... Then I don't invest in those rounds.

1:08:14I was going to say, to save Rods with the trouble of making the point, I'll say that then if the worst thing that happens is my initial check gets marked up and on the follow on, I don't need to chase the money, then I'm money good on the check I've written. Every check I've written is money good. And provided every check you write is money good, in the end, you'll die rich. It's just one of those things, right? I actually feel the need at this stage to remember that I was on a board with Roger for years. And for the longest time, because he'd worked in finance before this, and this is a compliment, really, Roger, for the longest time, I actually thought he'd been an options trader, because no one I know understands option value better than Roger.

1:08:50And I think halfway through, you explained to me, you'd actually worked in risk management, core and IT in, I think, Bloomberg or Goldman or someone like that. But I do think you've got a very good understanding of option value here. and it's just showing true, right? What Jason is saying is a fair comment, which is sometimes all those options expire useless because other people are paying too high a price. But over time, it's a good model and all that happens is you don't write checks at silly prices, right? And you don't get quite as much ownership. Yeah, if the rounds trade up to the point where the follow-on round doesn't have the return, so be it, is your point, Roger, correct?

1:09:26A hundred percent. The odd thing, the reason I'm kind of so focused on this is my big sum is as the exit bar has gone from 200 to 400 to 900 or whatever it is, right? More of those dynamics are going to even pervade the business we're in. Because if you back into it from exit, this is what you're dealing with. For me, I think of like the next check is the opportunity cost of cash, which is like that cash can be deployed elsewhere in a new option, so to speak. And as you see the price inflate, and I get it what you say, the exit potential inflate too. But as you see the price inflate, the multiple does compress to some extent.

1:10:03And to me, I'm always like, shit, I think the opportunity goes to that time. What is the risk adjusted value of that capital? That's the question. Every time, whether you're writing a check at a 10 or at a billion, that's it. So you take into account all of those variables in order to make a decision. Everything in life, you can price as an option. Rory's heard this spiel. I walk through life. Everything looks like the Greeks. Everything looks like options theory because that's life. And what he's saying is you have information there. Yeah. And it's also worth the Peter Thiel quote at this point, which is the big learning he had is, and it is true, is when you do a deal and then a big reputable outside investor does a follow-on round that what feels like a high price, do everything you can in it because there's a lot of signal in that.

1:10:55And it's not always true. and I could cite examples of it where it's not true, but risk adjusted, information adjusted, that next round in the deal that you've been in that's performing well, provided the follow-on price is contemplatable, the advice would be adjust your scales upward. Don't be guilty of anchoring on what you did. You got to find a way to take into account the information since then, both operational and the outside round. One nerdy thought, and maybe Roger, you can educate me offline sometimes. When I started investing, I learned from Founders Fund. I came up with that 10 % threshold to put 10 % of the fund into your winners.

1:11:29I've done it since I was able to do it myself. The mathematical problem I've had is imagine you have three or four potential winners in your fund. You do exhaust a lot of your capital relatively early. Listen, I'm not as good an investor as you and I never will be, but I have come to regret some of my third checks because I just wish I had more flexibility in the midlife. I just, I wish because yeah, you know, but you can back, you can get up to that 10 % limit pretty damn fast if you have more than one breakout. And you could be super disciplined and say it has to be open AI or better, but you could exhaust, if your fund's 100, you could exhaust 30 or 40, a million of it if you have four breakouts in today's world.

1:12:06You could even do it in a year potentially, right? And maybe it's okay, but you run out of reserves. You run out of capital. You're right. And I think what Roger is saying is he wants that to happen. No, I know. I just think if you're on the board and you're not checking out, if you're going to be on the board for 10 years, you have, even though the founders are now allowed to quit whenever they want, tying the start to the end. They can check out any day they want today. I think if you're going to own double digits, my view ethically is you got to be there till the end. Otherwise you're dead weight on the cap table.

1:12:32You don't get to check out after 24 months and say, great job guys, and show up once a year as an observer. You got to show up. And sometimes that means writing more checks, right? Sure, but that's one of your core investments. But the other thing is you can always write small support checks after that, just like I'm participating in the round. but I'm obviously driving it because I've already invested 10 million out of my$100 million fund. That's one thing. But obviously, in terms of stewardship, it's one of your core investments, and you will be with it until the day you're done. The second thing, and this is something that's a whole other set of conversations, which we could potentially have another time.

1:13:09And one of the ways that I very intentionally structured IA as we move through time is parallel LPs to be able to do cross-fund investing. And that's a very hard thing to do. But if you can do it, do it. Because create that title line. For people that don't understand that, you're saying have the same LPs across funds. And so you're able to have cross-fund investing without conflicts. That's exactly right. So it does not become this existential issue. And by the way, we dealt with this with a portfolio company in IA1, where IA1 and IA2 did not exactly have matching LPs. And it was a conversation like the, you know, the LPAC was like, yes, I would show them the analysis, whatever.

1:13:53If you want to do it, go do it. Just understand, like, if this doesn't work, you got some splaining to do. So it was the risk of that check was not simply financial, it was reputational. Ultimately, we ended up deciding not to write that check. In the case with later companies, Fund 2 and 3, when we had parallel LPs, then all of a sudden, we weren't investing out of a$100 million fund. We were investing out of a$260 million fund. I think that's true. And we do cross funds, too. The only comment I'll make is actually it doesn't directly address Jason's comment. It can be really direct. Any cross fund you do is going to be a good deal.

1:14:34Otherwise, you're an idiot and you're not an idiot, right? So I think good deals, you can find follow-on checks where you can cross-fund, even if the LPs aren't fully aligned between funds, provided you want to process, because it's a good deal. And in the end, what I think the separate comment Jason was making is, I mean, bluntly put, how much do you keep back for your marginal deals if you're stuck in them for 10 years and you want to be supportive versus playing early in your best deals at the risk of not being able to follow-on checks later? Right. And, you know, I heard your answer, Roger.

1:15:07You're basically cold-bloodedly allocating to the very best deals and you're willing to have 100 grand. Hey, I'll try my best with 100 grand. I don't have a million bucks left in my pocket. Correct. And at some point, obviously, we try to get to between 110 % to 120 % invested through recycling. Recycling dollars can be used for those purposes, but I'm not going to optimize my asset allocation because of the potential of uncomfortable conversations down the road. Yes. I remember one of those uncomfortable conversations and you didn't optimize your allocation for it. He said, just keeping score, Roger.

1:15:41Not that I forget. It's only been 10 years. Yes. Wow. Wow. And I remember what the other larger investor said to you at that point in time, vividly. I might remember that as well. This is great. This is fun, Harry. Thank you for inviting me. I do. I told, listen, Arthur was busy doing the board work that Rory should have done. Guys, this has been so much fun to do. Thank you so much for joining me. I've loved having you all. Thanks so much, guys. All right. everybody but before we leave you today now most people who get scammed never talk about it and if it can happen to tech savvy professionals ceos and investors it can happen to anyone but the problem isn't just losing money it's that today's scams they're built differently for a very new world one where ai can generate convincing messages in seconds and fake sites look more like real sites than the real thing.

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