20VC: Mercor: From $1M to $500M in 17 Months: The Fastest Growing Company in the World | How to Think About Margins and Revenue Sustainability in AI | Why Evaluation Benchmarks in AI are BS Today with Brendan Foody

28:55He gave us the term shoot and we were at a little over $2 million in revenue run rate so over a hundred X multiple on revenue the P250. That's the valuation. I'm sure the benchmark partnership thought that was insane at the time. At the Series B, when Flesis gave us the term sheet, we were at 20 million in revenue run rate. So it was 100x multiple on the revenue. But what they saw in talking to customers was the phenomenal experiences that we were creating and that growth that we had was going to continue. And so now we're 25 times larger in revenue scale than we were at the Series B. But in a spot where the business is so profitable that we don't need to go out for financing or spend too much time thinking about financing while we get a lot of offers and interest.

29:41That is hilarious because I obviously met a dorshan. He very kindly let me put in a small check. I have no idea you're 20 million. I thought you were way bigger. I think we let you put in a small check a little bit later because the company, keep in mind we were growing over 50 % month over month. Like we average 54 % month over month growth for a while at that time period. And so it wouldn't shock me. You know, it was a couple months after the route and we were at a beatically higher revenue scale. Dude, I'm thrilled otherwise, I was massively off to my partnership. And I was like, yeah, yeah, yeah, yeah, that way, positive.

30:17Yeah, where they'll be looking at this again. What? Do you need to raise more money then? Again, I am direct to a fault. The rumors of a $10 billion valuation. You're like, if you're a 500 million dude, that's only 20X and given your growth rate, that would be cheap. Definitely what I think that keep at too. We honestly haven't given it much thought. We have gotten a bunch of offers from existing investors. We haven't really shared any materials on the business. There's just been outside indulgence and offers based on that. Is it a nice feeling or is it a hey, let me just focus and do my work?

30:53I think there's parts of both. There's parts of it feeling validating, but also parts of it feeling distracting, in that we just want to focus on creating phenomenal experiences for our customers and for the experts in our marketplace. But I think that it's likely we'll do a financing soon to answer your question with low dilution largely because there's a lot of benefits to signaling ourselves as the market leader in our environments and all of the high complexity data that we produce. And so we'll keep you updated, Harry. Do you think a big financing will do it? If you think about it, I'm just intrigued.

31:32Like, as you said, search. They have big revenue numbers. They're over a billion now in revenue. Is it the financing that will do it? Obviously, the financing will, it's so -called do it. But I think it can definitely play a part from a signaling standpoint, making a little bit more noise about that and what we do and how we see the market developing over time could be interesting. If you had truly unlimited resources, what would you do differently? This is a tricky question because I feel like we're at a point where we're trying to invest as aggressively as possible but the business is still profitable and we're not trying to be profitable.

32:07And so I don't think that having another few hundred million in cash would meaningfully change the way that we're investing but I do think that having a fortress balance sheet has its benefits, having sort of like the new mark of the company, et cetera. And so I don't think it would change the way we're investing too dramatically. You're gonna go, whoa, how are you? What are you talking about? But at 500 million and growing at the rate you are, you'll soon be at a scale where an IPO is very possible. Given public pricing now being better than private pricing in a lot of markets, do you wanna go public sooner rather It's not something I've given too much thought to because it's sort of surreal considering we started the company in January of 2023 And all of my college classmates just graduated in May, but there's a lot of benefits to staying private It's funny like I remember when I was talking with Jack Dorsey before he invested one piece of advice he gave me was that we should stay private as long as possible What was his reasoning for that?

33:08Super interesting. It allows you to stay very long term oriented like public companies got so caught up, even though founder -led companies tend to be more resistant to it, I think public companies still get more caught up in the quarterly numbers and aren't as focused as they maybe should be on all of the long -term drivers of value and votes. So I think that that is one of the core reasons allowing us to stay very long -term oriented, especially when there's also so much access to capital in the private markets. Do you think there's too much cash in the private markets today? I mean, I don't know, because it's sort of like a supply and demand question.

33:50If I were an investor, I would definitely think that there's too much cash at the markets, right? But you could say there's a load of shit competitors who are getting funded to the tune of hundreds of millions that shouldn't be getting funded. I think that's definitely the case. My heuristic for this is the age old saying of how... or ties the idea of it at least, that it's probably overestimated in the short term and underestimate the long term. If we're evaluating things on a three -year time horizon, it wouldn't shock me if we feel like things are frothy and it's a crazy time, but if we're evaluating things on a 10 -year time horizon, all of these extraordinary businesses that are being built will look like a discount.

34:32And the challenge right now is just saying, You know, are we in 1996, 1997 or some other time? Did you want born, then, so you can't talk about that? That's when I was born, okay? I have a FIFA game that was when you were born. That really made me feel old. Did you see the MIT study or release? What did you make of that? I think it ties the exact point you were making earlier about how e -vails are bullshit, right? It's like when we start showing that we have a limpiad gold medals or PhD level reasoning, that doesn't mean that it's going to be useful to enterprises. In fact, in 95 % of cases, we're seeing these failure cases.

35:11And the answer is that we'll need eVals for every one of those implementations and examples, because eVals are the way that we measure the truth, that we have a stasis point of understanding what the models are capable of. And if we think about the model as the product, then the eVal is the PRD. And so many people have been vibe spending on AI without actually writing the PRD of what do they want to implement and how do they measure that it's going to be successful. Did I need your help? You said vibe spending on AI. The revenue numbers that we see from some players in the application layer, but just awe inspiring, like in scaling in a way that we've never seen before in my history anyway.

35:54How do you think about the sustainability of revenue for the majority of AI companies? and how would you advise me a friend and investor? I think the most important thing is looking at the numbers in anecdotes around retention to see the revenue health and whether there's real value, right? If you meet an application layer company, where 95 % of their pilots are failing, it's probably not gonna be a good investment, but if you meet a business that has extraordinary, unparalleled retention numbers and you talk to those customers and you hear about how much they love the product, then of course it's a really exciting opportunity.

36:27And so I think that those signs of true market fit are the most important when there's sort of a lower friction to accessing initial pilots or contracts. The other element is margin. And the margins are pretty terrible in a lot of cases, especially when you take into account free user giveaways, which there's a lot of. Should we give a shit about margin structures given how early we are in the cycle? Or yes, we should. It's always fundamental. The answer is yes, like both of those matter and it's very contextual. On one hand, I am a huge believer in capital efficiency. Like we have very positive growth in net margins unlike most AI companies.

37:07But on the other hand, like I also see the case that if you're able to distill models and make them in order of magnitude more efficient in 12 months, then it could make sense to run really aggressive margins on serving models. It really comes down to the stickiness and whether those subsidies today are driving large alt -v's that makes sense long -term. But I think the case where I would be hesitant is when there is very competitive markets with low switching costs, so that people are pumping hundreds of millions and subsidies, maybe billions and subsidies, and then all of a sudden the customers are switching over to a competitor if those subsidies dry up.

37:50Often banking concern that the level of CapEx is concerning because of the requirement on revenue generations required to make up that CapEx. Do you share that concern or do you think this is a super cycle? Of course the investment is required and the revenue will show itself like Massa

38:32song believes it will. What is segment do you think is most overhyped over its ubran, not company, just segment? Nothing jumps out to me on that because obviously I think the things with the most hype are code and foundation models and maybe starting to be use cases and finance. And I feel like the value being created is also very real. The amount of utility that our engineers get from cursor and cloud code and cognition is incredible. Do you use all three internally? Yeah, we let people choose. And so various people use different products. What is the distribution? I think it's a lot, especially the most cursor usage, closely followed by cloud code.

39:18But it's hard because it's very dynamic. Like the market is changing so fast, the products are improving so quickly that I think some of that distribution will change over time. Do you think that's switching costs between those? there are surprisingly low switching costs. Definitely, some of these products are moving the direction of adding more switching costs, with understanding how you interact with the platform and having data flywheels around that or custom models for your code base. But I think a lot of those sources of defensibility are taking more time to develop. And right now the market is very competitive, which has framed a lot of the sort of negative gross margins that we've seen companies have in the coding space.

39:58In five years time, will you have more or less engineers? I think more. The reason is that engineering is such an elastic role, right? Where if we could build 100 times more software, or say we make engineers 10 times more efficient, we would probably build 100 times more software, right? And so far as maybe not unique platforms, but the amount of features those people would chip and the iterations on every ranking algorithm, etc. And so I'm a huge believer in the fact that AI, especially in domains like software engineering, will be an amplifier and making people more productive and making people more valuable rather than diminishing their value.

40:42You mentioned code that being one, you mentioned models being another. Do you think the biggest model providers have been created already? Or do you think some of the biggest in the future yet to be created. The largest model creators already exist, but I'm not 100 % sure about that. Like, I definitely have some air bars about it. My expectation for why the largest model builders exist is just, obviously, the extraordinary catbex in terms of both data and compute investments that go into that, as well as building out all the teams of researchers that has quickly become phenomenally expensive. But at the same time, I think that there may be other breakthroughs that help to enable more model progress and Those could play a role coming from startups.

41:30I love the kind of dual -sided mindset there You mentioned the expense of talent Is the expense and the economic surround talent today in AI in SF just nuts? It definitely is. I mean and certainly also beyond my wildest imaginations a couple of years ago. But I think what it's really amplifying is the importance of having a really strong purpose more so than just paying people well because lots of companies can pay people well. And I think that... I really like you, Brandon. You're awesome. But like come on, dude, when Zuck puts a hundred million down, you're like, Okay, yep, I agree. I'm not a hit.

42:11Look, I agree. you still need to obviously reach parity with respect to like the economics of things and of course giving people a lot of upside in the business. But part of purpose isn't only the mission of the company, but also the economic upside associated with that mission and not sure startups can't pay someone $100 million in liquid cash, but we can give people equity grants that are appreciating extraordinary quickly as part of the vision of the company to help people capture upside in this purpose. And so I do think that that is increasingly important in having an employee base of missionaries, not mercenaries, and people that are in it for the long haul.

42:55Will Zucker spend work, do you think? He's got all the mercenaries together, which have very talented brilliant people. Does that work? I think so. I think that there's an extraordinary team there. And so it'll be fun to see what they build, but these things are always, always hard to say. Which team do you think is underappreciated that doesn't get the love that it deserves? It's interesting, because if I get a lot of the love of like, Chatchuby team being the brand that everyone talks about, I feel like, Anthropic gets a lot of the love around code and, and Cloud Code. XAI definitely much more so on the consumer side as well.

43:33I definitely feel like a lot of the Gemini flash models are also extraordinary and underappreciated on uneven levels, especially their small models. I'm always amazed with. So if I had to choose maybe not a company, but especially some of the models I think the DeepMine team did a really phenomenal job on a lot of those smaller models. Totally agree with you, though. I think Google's massively underestimated. Do you think we live in a world of many unbundled specialized models or fewer monolithic generalized models like the providers you mentioned? I used to be more in the camp of a lot of specialized model, very much in the camp of a lot of specialized models.

44:10Now I think it'll be a lot of both. Or change to cause that change of mindset. The amount of generalization that we're seeing, especially like, 03 blew my mind and just how phenomenal a model was and how well it generalized. And GP5 as well as a phenomenal model. And so I think that when there's still so much headroom and these foundational capabilities, it feels structurally more efficient to have those as individual investments to improve model capabilities. We're just in the first inning of model customization of every enterprise wanting models to know how to use their own set of tools of knowing how to use all of their own like knowledge bases, etc.

44:50And the processes that they've codified and that'll be another huge area of investment over the coming decade. Do you buy sovereignty as a reason why a model provider wins? You know, we've got Mistral in Europe, you have coherent Canada, is sovereignty a reason why a model provider wins? Maybe wins and scoped part of the market. Like, I could see why, for example, there would be a lot of benefits to having me straw be an expert in European law that might have nuances from other kinds of law, and they've just invested far more or having the best model there where it doesn't make sense to use other models.

45:29But I don't think that the largest companies per se are gonna be those that invest in a specific geography. I think it's gonna be a broader set of capabilities and the general purpose models that people use every day to code or to build products or do their day to day work. I don't know if you know this but I'm particularly disliked in Europe because of my affiliation or affection towards the 996 work culture. Not really, my DMs are basically a war zone nowadays. 996 is a model that you very much espoused too. Can you talk to me about why you are 996 bullish first? Well, not exactly. I need to offer a key clarification, which is that we've actually never mandated hours.

46:17It was more so when we were talking about 996, it was a description of how the early team worked. In fact, the reason we talked about 9 .06 was because people were working so much more than that that we wanted people to go home a little bit early so that they could be well rested, etc. That intensity is, of course, extremely important in building a generational business. But at the same time, I think we've become less focused on the in -person elements of that intensity and recognizing that it can be expressed through outputs. because when the market for talent is so competitive, it especially makes us to just optimize for working with the best people, less so than optimizing for FaceTime.

47:01Fascinating. So now you're at the stage where you need to bring in execs, where you need to make the language with which you speak more conservative. Well, I don't know exactly. I love it. I work with so many companies, where they're 996, 996, 996, and then suddenly it's like, shit, we need to bring in that CPO and he's never going to be 996 because he's like Stella CPO from big company and you're like, wow, no, no, no, no, we're talking about impact, it's about impact and the language changes to be a lot more neutral. My lesson is that you need to do that. The thing is, when we were all, you know, there was like 20 of us in a room working with our R &D team as well, it was just like everyone loved what they do and if people left to like go home for dinner or had something else going on like we wouldn't bat an eye.

47:51No, you just just just five. Give some more books. Say out of the bell. You don't need to come in tomorrow. I think the truth is that all along it's been much more about hiring people that like give a shit and love what they do and are obsessed with it and the way that we are rather than specific hours and early on those were highly correlated. But I think that as the company expands, they're not always as perfectly correlated, and there's definitely exceptions. I just want to ask one final one before we do a quick fire. I got asked this brilliant question the other day. It's pretty just stuck in my head.

48:26What would you do if you weren't scared? An example for me, so you have a framing, it would be, I'd move to Silicon Valley, I'd compete in the colosseum of technology rather than sitting in London, being happy, being a big -fascioner, small pond. What would you do if you weren't scared? It's an interesting question because I feel like I live in a very like risk -on way of always trying to, you know, make big bets. Maybe one ties to capital efficiency and maybe it's for better or for worse, right? Part of the reason that we've run the business in a very capital -efficient way is that I've always been very thoughtful about, you know, how will markets develop over time and how do we we ensure that we're building a super durable, sustainable business that will be around in 10 years.

49:14But I often wonder if maybe we should just start burning hundreds of millions of dollars a year. But my question to you is like, could you? I think we could find a way. But how do they spend it on talent? On subsidizing either supplier demands out of the marketplace of how do we get great people on the supply side or how do we subsidize customer projects? I think the business certainly doesn't need to do these things. And we have the demand to double overnight if we can meet capacity. And we have a supply base that loves us and is growing phenomenally quickly. But at the same time, I do think that if I were trying to burn $100 million, I could figure out a way to do that.

49:57We can go away for a weekend. I'll show you how to burn on the back. No, sir. Everybody think, as an investor, how would you handle that? Would you be scared and capital efficient or would you be maximally aggressive about burning money? I don't live the competitive landscape that you do. If I'm feeling continuous pressure from competitors that I feel are good and I have an ability to undercut them in a way that they don't undercut me, I would absolutely leverage cash reserves to subsidize it, be a lost leader until I can bluntly strangle them out of market. Interesting. But it depends if you don't feel like competitive pressure, which is clearly not showing in your numbers, I would not.

50:37Cash can actually be a bit of a problem at certain stages. When you look at large companies, you need to make your cash work for you, and you really have to buy the growth in a lot of cases. You just don't want to get to that stage. I totally agree. And I think that's why we've always erred on the side of capital efficiency and fundamentals. What does Peter say? I think Peter is more on the side of capital efficiency. He's seen how these things play out in the ups and downs of markets. So yeah, he's been more in that camp and don't get me wrong. I'm still like incredibly bullish on the market in AI.

51:12I think we're much more like 96 or 97, but focusing on fundamentals, at least, does buy you a lot of durability and long term just having the right values and culture, that it can be easy to lose sight of in this one way door of not being efficient. Final, final one. I promise, Dan the Quaver. You said you could like, there was double the demand than the supply. It's that much of a constraint supply that if you had the resources or reserves on the supply side of data, you could double the business. Definitely. We turn down projects every day. The reason is we're very focused and disciplined about working with the best customers in the world and doing phenomenal work for them.

51:52The capacity is how do we scale up our ability to do that? That's my biggest focus right I know. Dude, what does your mom say? It's evolved over time. When I dropped out, she was a very upset. Now I think she's come around. Have you done secondaries? Very small amount. Do you advise founders to take them, not take them? I think the most important thing is like making sure it's not distracting, right? Because ultimately, the vision that we're selling the company, you know, selling everyone is that we are fully committed and I want to demonstrate that in every aspect of the word, that this is our life's work and the thing that we plan to spend the next decades on, showing that on every dimension.

52:36I want to do a quick fire round. So I'm going to say a short statement. You're going to give me your immediate thoughts. Does that sound okay? Sounds great. What's one widely held belief about AI that you're like, God, that's so wrong. Just please stop. That will have super intelligence in three years. That's better than humans and everything. I think it's totally wrong. You can be the CEO of OpenAI for a day. What would you do that they're not doing? I think model customization is a really exciting opportunity because API will have low switching costs, not much pricing power, it's not a good business, and focusing more on model customization is a really exciting opportunity.

53:15Do you think OpenAI, when the consumer have chat, ebt, etc., and anthropic win business an enterprise and have claw code and win that segment. Certainly, seems like that. What question should every AI company be asking themselves that they aren't? I really like the thing Sam Altman says of, will models being dramatically better in one to two years improve your business or worse than it? I think that that is in so many ways the most important question to see if you're building a business that's durable and well positioned for the future. He said it first on our show. Oh really? Yeah, and that was the show where he took a 20 VC jumper and he put it on.

53:56Brandon, I was like, yes, this is like unbelievable brand. We'll say more of our Bacor jackets the other week, which I was over the moon about. Yeah, I was too. Okay. And then he gets on camera, Brandon. And you know what he says? What do you say? Start -ups. We're going to steam roll you. And I am a startup investor. Okay. My job is to inspire entrepreneurs. I'm like, oh no, oh no. But yes, what have you changed your mind on in the last 12 months? You know how I talked about how I thought there would be, it's a little contradictory. I thought there would be a lot of model customization. I think I've indexed more on a lot of generalization and just like foundation models will be huge, huge businesses.

54:40Well, I still think they should invest more in the customization as well. What investor do you not have that you would most like to have? It doesn't need to be a fund, it could be a person, it could be anyone. I think Jeff Bezos, I've admired Amazon so much and just like the early clarity of thought in the business and long -term focus. And I think there's a lot of analogs, so I'd love to learn from him. Why do you not have him when the cap table you have getting him would not be impossible at all? I haven't met him, I'll have to, I haven't for too much time at all, I've been meaning to. You can give yourself one piece of advice going back to January 2023 starting Macau.

55:18What do you know now that you wish you would told yourself that then? I would say focus on foundation model labs. I didn't understand the scale of the opportunity with foundation model labs in January of 2023 and I think being the first company to realize that, especially in how our marketplace fit into it was one of the most impactful things. and if I'd realized that nine or 12 months sooner, that would have been even more exciting. How penetrated into their spend, are we? Now, when you look at them, they are absolutely destroying a lot of their economics to win this race. They can only do that for so long.

55:54How penetrated are we into their spend? So there's different buckets within their human data spend, like there's the RLHF buckets, which we don't do as much of, like Surge is the largest player in RLHF, but then there's the new data types that everyone's moving towards called oral environments, where we're called it rough estimate is like 50 to 60 % of the market and so doing quite well on that and expanding market share quickly. And do you think like market share is still continuous expanding? But how much room does the market itself that have left to expand? I've talked to multiple executives, CEOs, leading labs that believe that oral environments will subsume the entire economy because it doesn't make sense that humans would be doing binoteness, redundant work, redundantly researching different companies each week or guests for your podcast.

56:45It makes way more sense for humans to build the framework of how to do that so that models can then learn how to do it and do it for us. And so I think that that is going to be a ridiculously exciting transition. Dude, I've so enjoyed having you on the show. This is why I don't send questions. We have all this at a head of time. And none of it has been covered because this was way more interesting. Thank you so much for being so flexible with my questions. And you've been fantastic, dude. No, I love it. Thanks for having me on, Harry. Honestly, I think I just have the best job in the world. I get to sit down and learn from incredibly talented leaders in the space and just follow my curiosities and interests.

57:26I hope you like the show. So please let me know how I can make it better for you. You can email me Harry at 20bc .com. But before we leave you today, I love seeing the team come together to make this show happen. What I don't love is trying to keep track of all the information, the data and the projects that we're working on across dozens of platform products and tools. That's why we use Coda, the all in one collaborative workspace that's helped 50 ,000 teams all over the world get on the same page, offering the flexibility of docs with the structure of spreadsheets, Coda facilitates deeper teamwork and quicker creativity, and their turnkey AI solution, the intelligence of Coda Brain, is a game changer.

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