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

24:28And that requires a quantum of time to just get your head around it, right? And it is so stressful because just finding that time, you've got to make the priority to find that time to know where it's going, because the pace of evolution is so fast. If you decide, well, what I knew six months ago is still useful, you're probably going to be wrong very quickly, right? That's what I find the most stressful about right now. Making sure you actually know where the technology is right now versus your opinion 12 months ago. You're right. You look back on what things people said 12, 24 months ago, and they're laughably wrong.

25:00The whole co-pilot thing, I mean, that was like, thank you for sharing, but no. And that's just so done. And just trying to have clarity on the next 12 months just to be able to play. Because without it, you're just betting blind and you're going to get it wrong. There's that. What I think is even more stressful for seed, maybe by B, it's a positive. Maybe Andreessen investing at Gamut 100 was the smartest play of all. Or at Replit, right? Well, they did early too. But it's like, I think the quality of clones is only going up. When we all started in this industry, you'd laugh. You'd be like, well, Salesforce or forget a HubSpot, pick whoever you want, whatever leader.

25:34Yeah. It'll take them like a year and a half to decide if it's worth cloning. Then they'll launch something and like, it'll be okay. Cause they have smart engineers, but it won't actually do anything the first six months. It'll be so feature poor that after two years of the side, well, should I put a hundred people on this or should I put a hundred people on the, so you had like three years until the big guys would really compete with you. I'm not kidding. I can think of one investment I've made that has had five clones, like in the first 30 days, including one from a cloud leader. Now the same thing will be true.

26:01Will they sustain it? Will it just be a feature? But the ability of AI to enable us to clone better stuff faster, the fact that Canva is borderline competitive with Gamma and wasn't when Cliff was on the show, it just disrupts what the hell does seed investing mean? When anything, even with progress, you might see 10 better versions in 30 days. What does that mean you do then? Like I'm a student of this business. Yeah. What do you do? For seed? I think, I don't know. we should ask the new benchmark guy who's smarter than me. But for me, I think the answer is the old one. I'm worried it won't hold.

26:36Innovation plus the best founders, get there. You've got to still bet on the best founders. You just can't take that early first month explosion as seriously as you used to. It's not as defensible, that innovation. But if you have the best founders, what else are you going to bet on? The interesting question is, to your point on doing Gamma at$2 billion, Do you think that same statement is true? So fast forward, you're now Gamma, you're doing 100 million in ARR. Do you think the next clone who starts at zero can catch up? Or do you think over time, the distribution moat, the market brand leader moat, do you think some kind of moats accrue over time with scale?

27:14Or do you think everything's up for grabs all the time? No, what I think is there is a plane of stability that is later than it used to be that is still fragile. I'll give you an example. So at Replit, whatever, I don't have the actual number. Let's say they go one to 250 this year. It's going to be less than lovable, Harry. We'll stipulate it's not as good as lovable, okay? Here's the thing what has happened in Replit is most of the competition can't build the AI agent they can. So even Bolt, which was the early leader, they're now just in number three. They don't even have an AI agent anymore.

27:42They've outsourced it to Claude. And so these products that are really, really good are building a deep layer of sophistication. But if you don't get there fast enough, and we can argue whether Gamma is there or not, If it's sophisticated enough, and if you guys, if anybody on this hasn't used Gamma, I tell everyone to use it. What you do is go into a Google Doc, write 10 points about this show, and then just give it to Gamma and say, make me an amazing deck. And your jaw will drop what it does when it's coding this deck in real time. Just give it 10 bullet points. It does so much, but you sure better be working.

28:11You sure better be working that 996, right? Because Cliff's got a few good folks. It used to take Cliff three years. Now it takes Cliff 90 days. That's why I think 100 million, 250 million, these gammas start to build a moat. I do believe Replit has a moat, maybe not versus lovable, but versus all the rest. But man, you used to get a moat earlier, didn't you? But that's where I think vertical specialization does accrue benefits with scale. An example is, you know, I did a deal in Solve Intelligence's AI for patent law. The more patents that go through their algorithms, the better they are at writing, editing, predicting.

28:46And it's a very specific use case that gets better with more and more data ingested. You don't get that with horizontal products. No, and data is going to be defensible in the age of AI. Data is going to be defensible. But those patents are public, right? They can still be ingested by other people, can't they? Yes, they can. I don't know if it's true that you don't get it with horizontal products. I'm thinking aloud. I think you probably do. I mean, I think that, you know, would you do, let's take Cursor as a horizontal product. Would you fund another company now from scratch to do exactly the same thing?

29:15I think not. I think there does come a point when you do pull away. I don't think it will remain unstable forever, right? In the sense of, I don't think you'll have these 200, 300 million dollar companies and then someone else doing roughly the same thing come and displace them. I just, I think there's this uncertainty period at the start, but I could be wrong. I'm processing in real time here. Well, I think that Kerry's point about the patent one, let's step away for a minute. Yeah. That I think is interesting is the classic question in B2B, maybe all venture, but certainly B2B venture since we all started is how important is it for something to be defensible in the early days, right?

29:48And we've debated this for years, right? Since the inception. And we've all known deep down, no product that can be built in 60 days can be all that defensible. But we told ourselves the team had domain expertise or this or that. The question is today, has the bar gone up? Should we either give up on defensibility for seed investing, just give up that that is a criterion, or should we radically raise the bar, forcing us to go into verticals, corners of the market, areas where there aren't 11 agents already, 100 agents. Harry tweeted about support the other day. I can tell you when I invested in support in the early days, talk desk, gorgeous, front, no one wanted to do support in the early days.

30:24Everyone thought this was the dumbest category. So go find, now it's trendy. Don't do that, right? Maybe go find something the cool kids aren't in. I think it's simple. I don't think you can have a major defensibility team in any of these horizontal or verticals at the seat or even front of the stage we're investing at, right? The defensibility theorem emerges at scale. In other words, I do believe what's true in most enterprise businesses, once you become the anointed winner, once a market coalesces and there's two or three people, at that point in time, it's yours to lose. You can still screw it up.

30:55But provided you have great engineering and stay on top of the trends and top of the technology, you should be OK. I think the idea that at the seed stage, you're going to find a defensible way to do co-gen or co-testing is absurd, right? And you just have to internalize the game you're in, which is for most of these deals, unlike deep tech, you're just going to have to awesome team, run fast, be superlative on technology, get your distribution early. And then as you scale up, then you just, you become the winner. You can't be anointed the winner upfront. Get over it, everybody. It's a high risk game.

31:32But is that okay at 50 post for a seed round or a pre-seed round? Do the outcomes justify it? That's the thing. Sure, Rory. If the deal's at three posts or five posts and I can spread my 500K checks around, I get it. If I have got to spread$5 million checks around at 50 posts, it's tougher. That's a much better question because now we're gone from the abstract of is defensible to the actual nuts and bolts of money. We've recognized the game we're playing has more variance, we think, than the last time and has to run fast. And there's probably also more competitors. Are you getting paid for the risk?

32:01Yeah, I wrestle with the same thing around later at$100 or$200 million, pray. And we have this constant dialogue. If I look at, you know, we do A's and B's and the early product market fit A, you probably still don't know who the winner is. And the B, when you know who the winner is, it's going to cost you a fortune. And which of those is the better bet? But do you think at the B, you even do know the winner? We look at the B, you mentioned my customer support tweet. Most of those companies had raised B's. I got no idea who the winner is in that category, and I don't think anyone does. No, I'm going to push on that.

32:30And I think you can have somewhere in the A and B, you can have a much better hypothesis. You can know a lot more than you know at the seat of the early A. Do you, when the B's are preemptive on three to four million of ARR, which they are for hot companies today, do you? It's interesting because this is absolutely what we have to know to do our business, right? Because at C, Jason can't know. He can just believe, right? But somewhere between the A and the C, you have to know. Otherwise, we're all ludicrously overpaying. And I think if you look at all these markets, like I think, for example, you mentioned your patent company.

33:02I think, you know, without naming it, I think we have a rough sense of where all the companies are. I think your company is doing very well, Harry. You should be glad to know. And that doesn't mean I know where the market's going to end up 10 years from now. Once the horses are running and once they round the first furlong, you can actually see the rank order of where they're running. In a way, you can't at the early A. Two, three million dollars in revenue. You know, you're drawing on small pieces of information, but you can see rate of change and your differences emerge pretty quickly. So I disagree.

33:31I think you can have a pretty good idea. Look, it's hard. Well, I mean, genuinely, I don't want to be rude, but can you give me an example of where you think at the B, you have had a clear understanding of a winner? Take Cogen. There was a bunch of people doing, there was 10 to 15 companies at the A or earlier. I think it emerged Cursor. I think it emerged, you know, kind of Winsurf and then to a different extent Cognition by the B. And it was obvious that those were the names. But I would push back on you there and say that I don't think we know at all. I think Codex is making incredible ground.

34:07I think Claw Code's making incredible ground. Claw Codex is very good. But then, as you said, you've got Cognition. You've got the replets and lovables kind of coming from the kind of prosumer, less developer-centric. I think that's still entirely up for grabs. I think also, if we look back, because we've talked about it earlier on the show, I think looking back and nothing but kudos to the team, right? But I think when Winsurf sold, whatever happened, it wasn't clear it had a sustainable mode of any sort. It wasn't clear it truly had. It was a darling of a slightly more enterprise version of Cursor.

34:36People did love it. But ultimately, it wasn't clear it was a winner then. It wasn't clear that brand was enduring. Looking back on it, it wasn't. We don't know if it would have even survived as a standalone company. I think that's true. But at the same time, what was clear is over the prior six months, It was that if anyone was going to be the perceived company worth acquiring, there was only two or three names in that space, and the other seven or eight names that had been around weren't. So I understand what you're saying. The reason they took the deal, it wasn't clear they could go from where they were to a billion in revenue and an IPO.

35:08But my point is this. Going back, we're dealing with probabilities here. At the seed, you know nothing but the people. At the early A, when there's five or six of these companies doing a million plus or minus in revenue, all you know is you got a one in 10 shot. Somewhere at the B, I think you get down to being able to say it's a one-in-three shot. It's still a one-in-three shot with a huge amount of variability, but the odds have narrowed. You guys keep talking about lovable and replet, right? You would say implicitly what you're saying is those are the two names. You implicitly said, I don't know the space as well.

35:40Bolt has shot its bolt, as it were, pun intended. That's a piece of information you have. When you're making a bet at this stage, you can probably say something like, there's two clear winners here probably less likely to be another raw startup there is adjacent competition from you know the wicks have bought someone so you at least i'm so sorry to interrupt again i would just say you need to expand it significantly it's not one in three you've got versell and you've got claw code who are eating their lunch coming down you've got as we mentioned replet and bolt but then you've got you know salesforce who have their competitor at last you know have their competitor Figma make is doing very well.

36:16It's one. You're right. So the adjacent competitors, let's talk about that. Cause I always think the horse, there's a two-step horse race in all these deals. Right. And by the way, I'm going to argue what you just said is proof of success. Let me tell you what I mean by that. In any startup, you start off on day one and you're like, there's three other startups doing just, or maybe 10 other startups doing just what we're doing. I wonder which of us will win. And my experience is when you go to the first board meeting where you suddenly realize you're scared of the big company adjacent competition, it probably means you've graduated from the baby class.

36:45You're one of the two or three winners in the startup land. And now you got to worry about the adjacent guy next door. You might say you're not sure if your lovable bet's going to be the winner yet. But do you believe you've within the class of venture bets on this space, you've got one of the one, you're in one or two winners? Yes, but that doesn't generate enterprise. But that means shit. It doesn't matter if it's one of the venture bets. If one of the venture bets doesn't win and Salesforce or Atlassian or Canva does, I don't care. Obviously, you're correct. But you got to think about it just like incremental information, updating your priors.

37:20When someone did the seed there, they were like, this is a good idea. It might not even work. Then you do the, oh, my God, vibe coding is a thing. There's five companies doing it. We're one of the five. And now you can say vibe coding is a thing. We're one of the five doing it. And we're one of the two winners. A huge amount of risk reduction. Now, you still have the other risk, which is the big companies might do it. is something might disrupt you? There's a lot of risk still left because it turns out that startups are risky. But you've got to admit that there's been, you know, there's been a massive amount of information gleaned, risk reduced from going back to what Jason said, is the five on 50 bet where you don't even know if it's a space and you don't even know if you're going to be a viable player in that.

38:02Is that a better or worse risk than doing 2 billion pre when you know both those things, you are the winner. There is a space, you are the winner and there's still a whole ton of competition to come, which is the lovable bet you made. Which of those two bets are riskier? I don't know. No, I think about this, which is, you know, about, I'm again, butchering, but four to five million in revenue. It was done at 200 when we first did it. And then when it was about 80 to 100 in revenue, it was done at 2 billion. You can choose your entry price. Totally. What that says to me is consensus, rightly or wrongly, has said there has been a massive risk reduction.

38:38And now, unfortunately, what's happened and always happens in the bull market is valuation has expanded to fill the risk that was reduced operationally. In other words, at$4 to$5 million, there's still a ton of risk. Fast forward when you're doing$50 million,$150 million, I'm just going to say it. You can't deny there's been a huge amount of operational risk reduced. Now, the problem is at$2 billion pre, is there enough upside left in the separate question? the point i'm making is it's gone from being a is this a category are they the winner it's gone to the third and last question which is always is the time big enough to support a two billion dollar valuation which i think in this case it absolutely is i just want to go back to the like we kind of know the winner at the b and if we don't and if that has reduced or got less are we overpaying was an interesting addition my statement is we dramatically know less and that one in threes moved to one in seven to 10 significantly across categories, in which case, surely the suggestion is we are dramatically overpaying.

39:40There's some level of truth in what you're saying, but I think the variance in these companies is a lot more than the 15 boring years of SaaS is obvious and you know what to do for the next 10 or 15 years. Jason and I would both say, we both had a play, Jason as a leader and a founder, I just as a humble investor in an e-signature company. When we did those deals in 08 or 09, it was a signature. And fast forward 10 years, it's still an e-signature. That was a simple world. We would both agree, I think, that there's way more change in this market in a year than in some of those older markets in five years.

40:12So we'd agree that. So you are right, there's more risk, Harry. But I still do believe all these investments, I think, are riskier than they were in Fastland. And they're astonishingly priced higher. But I still think there is some significant risk reduction in going from a 1 in 5, 1 in 10, will it even work to a one in three? You know, I know who the competitors are. If that's the case, should our B portfolios be more diversified? Jason put it as a great question. Do seeds need to be diversified? Well, how big a fund do you do, right? Or seed checks are 5 million. How big a seed fund do you need just to make the minimum diversification work?

40:46How big does a seed fund work with$5 million seed check? Well, it depends if you think outcome sizes are expanding with the movement from technology. Does it matter? you like it's just some basic math how many first checks do you want to make do you need to make in that fund for it to work so if you traditionally needed 20 or 30 checks to work but risk has gone up to harry's point maybe you need 40 and what reserves you mean you might need a 500 million dollar seed fund to have sufficient reserves because i need to do 40 deals at 5 million now that's 200 million 200 million for reserves that's 400 million 100 million for fees and times and backup.

41:20I need at least 500 million for my little seed fund to make the math work. What you're missing on the math is if you think that the outcomes are going to expand, you can have a smaller ownership on entry. And so you don't need to increase check size if you assume - 4 million out of 50. Does it really matter? These are not massive owners, 4 million, who cares? 1 million on 50 isn't going to work, Harry, in my seed fund, is it? It's not going to be enough ownership, is it? I'm just trying to disaggregate Harry's response because there was something. First of all, I agree with Jason's framing. And then your response was interesting because you could have said one of two things.

41:51You could have said, you know, you don't need to go from 20 deals to 40 because the winners are so much bigger that even if you have less winners, you're fine. That would have been one. But you didn't say that. Interestingly, you said implicitly, you said, go to 40, but just take less ownership. The mere fact that you made that answer says, you are embracing a more diversification story in the face of risk, which, you know, is math 101, which is a super interesting concept because we had it down on the agenda to talk about. And some folks are even pulling it off. These highly focused seed stage bets, which I find awe-inspiring, because all other things being equal, with the amount of variability you're seeing, I would have expected people's deal count to have to creep up slightly.

42:29But we had Roger on, who was very much a concentrated bettor. You have the hummingbird story in Europe, which is astonishing and impressive. Everything in logic says to me, with the increase in time to exit and with the concomitant increase in risk, logically, you should be increasing your diversification slightly, probably reasonably, which probably means either smaller checks and more deals are a bigger fund size to maintain the same ownership. Well, I think both work. I mean, one fund is an LP, and it has 100 to 150 positions with 100 to 150K checks. It's a 7x fund. And it goes to my point of the outcome sizes being so much bigger.

43:10And so the ability to have lower ownership, Jason, to your point, 1 million on 50 does work if it's a$100 billion company, not the$3 to$5 billion enterprise outcomes that we've been playing with for the last 10 years. Yeah. Works even better if you own 10 % of that company though. Would you want that? Yes. The thing, the 100 to 200 fund here's, I mean, I'm not that human. I don't want to meet 500 founders a year. To do 200 deals between your team, you've got to meet 500, 600, 700 founders a year. Even with your AI agent helping you, I can barely tolerate doing a couple meetings a week. I can do stuff by email, but God, I got to carve out an hour for a deal I might not do.

43:46I want to blow my brains out after that meeting. I sold my companies and not do those meetings anymore, right? I mean, so I can tell you our partnership does 20 meetings per partner per week. And so now with my four investing partners, we have 80 net new companies that we meet in person per week. 80 in person. Yeah. I would resign. I would give you all my carry back. Thank you for hiring me, Harry. I'm eternally part of the 20 VC team. You make me do 20 in person. Like I sold my companies because I didn't want to spend my life in meetings. I'll do one a week. You do the math. We'll do over three and a half thousand company meetings a year.

44:21Honestly, I think it's great, right? For the LPs and others. I think that is a great playbook. It's just not to get distracted. You've got to match the strategy to who you are as an investor, where you get your leads, where you get your deals, how you go, what your brand is. You can do that, right? For a variety of reasons. But, um, but it's a lot of meetings, man. It's a lot of meetings. A hundred percent. It's a lot of meetings. Can I get you guys a coffee or a drink? You want sparkling or still? Which one would you like? Do you have DVI on the Mac? Here, sit here. Harry's running late. Harry's doing the 20 VC of sports.

44:53He's running a little late. He'll be here soon. No, I love taking meetings. That's how I learn. I'm a meeting junkie. My partners laugh at me. I'll take a meeting with anything, right? Because you can always learn something from it. So I have a bias to meet. In fact, probably an over bias. Listen, I think when I meet a truly great founder, like truly great. I always learn a lot. Don't get me wrong. Anyone below that, I don't think I learn enough to be worth the time. I do my homework. Rory, you're the best homeworker of the team. You could do so much homework on an event. Harry's the most prepared and the most charismatic, but Rory's the best homeworker.

45:27Okay. You really going to, if they're not great, you really learn anything in that meeting. If you've spent an hour researching the company, I learned nothing. I read, listen, I read your deck and then I said, send me more. Then I say, send me your last five investor updates, right? Send me your financials and I'll research you on the internet. Now we have AI. Claude will help me. I'm going to know like a lot of stuff unless you're really great. Now, if you're great, you're going to blow my mind, right? But if you're not, I'm going to start yawning about 15 minutes into this meeting. I don't know.

45:54I find sometimes you get an insight. I think, and I could be wrong, you make, again, the beauty of doing this is you make me think, should I do things differently? Because you do it so differently. I do find, And even on an okay deal, you learn nuances about a specific market from the one-on-one and the dialogue to and fro that you wouldn't get from the presentation. Now, it does mean I have, as people who've pitched me know, a horrible interrupt-driven style whereby if you have 20 slides, I'll be like, we can skip 17 of them. And these three I care about can be annoying at times. I think in any business, no matter how much you think you know from the outside, the person inside living it every day has a crucial kernel of knowledge that you just can't access any other way.

46:36And I believe most meetings, I get something from it. It's a little like your knowledge, living AI agents versus anyone using those words is step function different. It is. But you got to meet me to learn that. If you meet all the other ones, it's a waste of your time. Yeah, agreed. But you have to meet them to get that experience. So I bias to meetings. We've come a long way from fund construction, but that's okay. Well, this is fantastic. This is what founders are. Again, the amount of founders that do not get to hear this, that actually wonder how VCs think, is in the hundreds of thousands.

47:10Yeah. Well, you know what's related to it? It is. The question a lot of founders have is, how important is it to just get in the room? Just get my foot into the door. Just get the coffee meeting. And I think it varies. I think Rory's saying, listen, get in the room at scale. There's some value to that. I'm saying I have no interest. Don't get in the door with me. Just send me a great deck and a great email. I will read it. I will slow down. I will spend time. If it looks good, I'll take the meeting, but don't, there's no need to get in the door with me. There's no value in getting to know me. Coffee meeting.

47:38They're like, well, just take the meeting, Jason. I'm like, dude, I have so much respect for you, but there's 0 % chance I'm going to invest. Don't try to get the meeting. It's not going to help you. I think that's a fair comment is that, yeah, you do want to fit. Yes. I don't think someone who's doing something I totally not going to do. Yes, but I'm not a huge fan of coffee meetings. I'm like, you're here to get money. I'm here to give money. Can we just talk about the business rather than, you know, a bunch of getting to know you? But I am always interested in hearing people talk about their business.

48:04That's why you're enduring in the business. That's why you're enduring because you enjoy the meetings. Right. How do you feel when you hear people say, no, no, no, I'm not going to meet. I'm waiting to run a process and I'll run a process on the 19th of November. I'll email you then. Because for me, I found this really abrasive. I'm just opening up here. I said to the founder, listen, if you're running a process, you're either optimizing for price or partner selection. I'm giving you a great price today, a price that you want, you said you wanted, which means that you're not optimizing for price with this process because I've given you what you said you want, which is just saying that you think you can get better than me, which may be the case, in which case, just tell me straight.

48:42You think you want Sequoia or Benchmark, in which case, no harm, no foul, but fine. And they're like, no, no, no, I just want to run the process. How do you react to I want to run the process? I think from their side, they're correct. I don't have to like it. But I think from their side, because I think I see more failed financings because they didn't run a process than they did. You're basically saying, Mr. Founder, you don't have to run a process because I'm going to give you a term sheet right now that's a good price and you like me. Let's do it. Right. That's not an unreasonable offer. But typically what happens when people, quote, don't run a process is someone comes in and says, I'm really interested.

49:20And they share and they give information serially to someone who's not yet ready to commit on an investor side. So they've run an accidental process. That's a mistake. But if I'm saying, Mr. Founder, here's your time sheet, there's nothing to be done. That's different. I mean, at that point, it's not crazy. If I was on the board of a company that had that happen, I would take it seriously. And I would think, should I hit the bid. Conversely, if I was on the board of a company where the founder said, hey, I'm meeting with Joe at MegaFirm. They ask, can we share some data? They just want to get a sense of it.

49:56I would shut that down and I would say, you share with everyone or you share with no one because giving your data to one or two people where they're not in is just starting a process without meaning to start a process. Then if they don't move forward, you've had a failed process already without ever doing a process. I'm 100 % certain that that's a mistake. Even though on my side of the table, you know, again, I don't love that, right? But you're raising something, which is why a lot of times we, you know, you wrestle as investors. This is my aha. You wrestle as investors with, I want to be able to do what Harry just said.

50:27I want to be able to come in and commit because it's the only way to get them off that process. They have to have a good enough relationship with them. They want to do business with you. And on top of that, you have to bid but probably sparse information. And my big aha on that is the only way you can conceivably do that, no amount of pre-work can do it because you don't know the actual information. If you've seen the prior round, it's probably your best chance because if you've seen the prior round, you have some sense of what's going on. You know what they underwrote. You had a mental model at the last round.

50:57You can probably in a dialogue get one or two pieces of information, calibrate how they're doing and maybe do that process. I have a slightly nuanced view in the middle for what it's worth just for maybe for advice to folks that watch, not to Harry. But when that happens that Harry said, I think it's a slight founder fail, a slight own goal, not a total one, because obviously he's got a good company, right? Harry is in essence ready to do the deal. Now, the founder says, I want to run the process. I think what many of the best founders do, not all, there's all different types of founders, extroverts, introverts, great fundraisers.

51:27But what many of the best do is they're able to cultivate enough interest with enough good VCs that if they hit the number, they just send an email. They just send an email and they don't have to play games. Harry, I'm thinking about raising around before the end of the year. And Harry can say, I'll give you a term sheet today. And the right answer is, I love you, Harry. Especially love the one with Rory. But I'm not ready today. Honestly, I'm not ready today. I will be ready at the end of the year. That is the perfect way to handle this situation. You don't risk losing Harry's term sheet. You don't risk accidentally.

52:03Generally, founders do overplay their hand, not as often as you might think, but they do overplay their hand. They can say the wrong things. And so the best founders, one way or another, build relationships over months. They copy them on their investor updates. They update it. And then three or four folks are just in when you're ready. It's so casual with so many founders. They're just in. As long as the deal is reasonably fair, just tell me where to write the check and how much I can buy. And I think the reason this happens, the Harry scenario is so many seed investors and so many accelerators hammer into founders.

52:36You have to run a process that is classic top three bits of advice. I think it misses some nuance on the optimal way to run it. The optimal way to run it is for everyone already to want to invest for real without games before you open your data room. And the super optimal way doesn't even require a data room. You don't even need a data room because they already want to invest. They need diligence. the best run process i know this might be slightly controversial out of context but the best run processes don't require our data room not a traditional one not a traditional only one for diligence they only require a file that says box dash diligence investment 12 21 25 they don't need any other data room it's just for diligence i'm going to rephrase that i think what you're actually saying is the best run processes don't feel like a process but they are and i think you're exactly right, is that if a founder is smartly nurturing relationships, keeping people broadly informed, but then tries to time the interest such that when he's ready to put his or her hand up, there's three people who are primed and ready to go.

53:35That is the best outcome, as I say. So it is a process, but it doesn't feel like one. And that is perfection itself. I agree with you. Now, you have to have a very attractive and high-performing company to be able to do that. Maybe, but I also think those are the only ones getting funded in this environment we talk about all the the gammas and the shmamas but everyone below that ain't getting funded anyway so you might as well run this version of the process maybe harry thinks a lot of bb folks are getting funded today but i ain't seeing it it's the most binary fundraising environment in our lifetimes isn't it expand on that jason you're either you know you're either yc neo south park commons got something get funded or who the hell is going to find you in your pre-seed round right you better be whatever the hell AI native is.

54:18I mean, we know what it means. You better be hot AI native with top quartile venture growth or you ain't getting funded. It's pretty simple. It's just not, there's not a lot of gray zone anymore. But I do think even with that, you know, you say YC and Neo, fine, but they have a huge amount of companies per batch in YC. If you want to stick to the religious, we're going to run a process. That does work only if you have stellar numbers. Because if you haven't built relationships before and you start on Monday the 19th to expect that you're going to come in, hit the ground running with first meetings on Monday the 19th and get term sheets super freaking fast with average to no numbers.

54:53No, of course, of course. I was making an assumption in the story you told me, the anecdote of the term sheet, that it had top, top decile venture numbers. The very fact that they were flippant assumed it. Now, if they didn't - Zero to a millionaire RR in seven months. I would take that offer. I would sign the term sheet and send it right back and ask if you wanted to meet at Selfridges over on the holidays to see the Disney exhibit or something like we're doing with our team trip. I would say thank you, Harry. Guys, because I think you were saying the same thing because Jason's throwaway comment, but it's worth pausing on.

55:25He was basically saying you should run this kind of, let's call it the, this light process, which is very kind of FOMO driven. His comment, you should, and I had said, hey, you can only do that if you're a good company. And then his comment was only the amazing ones are getting funded. So implicitly what he's saying is if there's 100 companies and only 20 of them have these kind of numbers, they should run that kind of process. And the other 80 are screwed no matter what. So he doesn't even, he's not even vest. So 100 % of successful deals will be this kind of four more driven non-process process.

55:56That was the implicit statement of what you're saying, Jason, right? I mean, Harry's right. There's some non-truth to it, but I think there's a lot of truth to it that we're in the Captain Obvious era of investing. and it only takes one term sheet and spend your time going to Harry's point and don't don't don't be careful but man I'm not I'm just Harry sees the most of any of us but I'm I'm just not seeing the non-obvious ones get funded I just don't see it right and the most brutal one is again the classic SaaS company triple triple double double which has been discussed ad nauseum on every 20 VC channel right including 20 VC cricket and 20 VC sales those ones you could always find someone to fund if you met enough people back in the day.

56:35Now you can do better than that. And only 20 % of people want to take a meeting and they still might not do it. And I think every month that goes by, those deals are harder to do. Every podcast, everything makes them harder. Terry, who's disagreeing with me? No, I'm 100 % with you. And I like tangible examples because people don't actually take it away. We had a company that went from 400K to 3 million Naira, classic enterprise SaaS business, bread and butter enterprise SaaS that would have had five term sheets from five good firms, 120 meetings, one term sheet, and it was 10 million round on a 40 post, 12x revenue for a 10x grower.

57:11But have you seen the market comps, Harry? Have you seen what the average public company is trading for? That's still a fine valuation. Yeah, but they're not growing 10x, as Harry's point. But the real truth implicitly in that is, I think I've said this before, it's a combination of some element of it's just not fashionable. But also the implicit statement is that growth rate's going to attenuate because I might have two or three years further on that same investment. We might have a company doing 25 million in revenues. We invested was doing five, but its growth rate's now down to 60%. It's still only burning$10 million, but those are incredibly hard deals to get funded.

57:47There is a value there, but they're hard to fund. We're going to switch tax slightly, but I want to discuss two crazy results in the last few days. One good, one bad. Datadog absolutely freaking crushed. Stock up 23%,$15 million plus AI native customers. Wow. How did we think about Datadog? Jason has covered this so well last time. His basic comment was, even if you're not AI first, co-attach to the AI trend and you'll be fine. These guys co-attach to the AI trend and they're fine. Sell shit to the people who are making AI and if they grow, you'll sell more shit too. And they did it. No, no, it's true.

58:26The irony is we go into next year, the AI leaders, the hyperscalers and the hyper this and the hyper that, they're starting to buy like classic B2B companies. And in fact, they're recycling the same people in procurement and the same people in GDM and they're buying the same stuff. If you have attached to AI budget and you're a data dog era and you're in that, you're actually gonna have a great 2026 because these are normal B2B companies. Like OpenAI is buying like a normal, buying like an Adobe or a Microsoft now. But if you're not in that, man, you're just dead, right? And the other one was Clio, which raised it 5 billion in legal tech.

59:01It attached to AI in a different way. This is a company founded in 2008 that found its way in the AI era, right? It added FinTech payments, got up to 3 billion now at 5 billion. So find your way, right? Datadog, it helps the Datadog, even though it got expensive, it was the Darling, right? It was the Darling product, but man, they captured that revenue. Go find it. He did, because I'm going to leave Cleo out because I think it's so different. I think Datadog is a core piece of compute infrastructure. And these hyperscalers are the most compute-intensive companies that have ever been known. So if you're selling compute stuff, you should be having, as Jason said, a great quarter.

59:36If you're selling routers, if you're selling switches, if you're selling little interconnects, whatever it takes to stand up Stargate, and observability is a key part of that, you're going to be golden because there's more compute than you've ever seen, which I think is a very different dynamic than some of the others. Fair enough. If you're not attaching to that compute, something's off. If you're compute adjacent, you better be growing quickly if you're compute adjacent. Yes. I'm a duo shareholder, down 25%. Rory, you know, the age old thing, which I just love that you described me with is, that's great, but what about me?

1:00:08Yes, Harry, that's you. Duo plunges 25%. I'm going, why? What the fuck happened to make it plunge 25 %? I don't think there's a mega story here. I think that, I mean, there's still 80 % up on the IPO four or five years ago. They had a period when it was, oh, my God, AI is going to kill them. Then the CEO very wisely got ahead of that and said, we're using AI. So then the stock got way ahead of itself. And now it's like, AI is not going to kill you. Now is it going to make you enormously rich? You just guide it down for next quarter slightly for business fundamental reasons. And the stock was overvalued and went down.

1:00:40I don't think there's a big story here. It's like, you know, the graph is it still, as I say, up in the five years. is it just, it's still significantly up on its lows. It just got ahead of itself. They had a good quarter. The revenue guidance was slightly less. Life goes on. I'd say it has the wrong kind of AI. And what I mean is Duolingo is using AI to make its product better, right? Hooray. Every single portfolio company better be using AI by this point to make your product better. This is not 2023. You don't get any kudos for sprinkling AI dust on your product. Going to Rohr's point, what you get kudos is, is attaching to that compute budget.

1:01:13That's the only kudos you get. And Duolingo didn't earn any. Well, I couldn't because to be fair, I mean, I'm just going to, as an apps investor, I'm going to step up and defend the poor little apps companies, right? If you're an infrastructure company, you can co-attach to compute. If you're a new AI apps companies, you are using that compute and using that AI. If you are like Duolingo and a lot of our companies, companies have been around since pre-AI, the question is, you know, I don't think you're going to co-attach to the spend, but what you can do is co-adopt the technology. And I'm going to give Duolingo credit.

1:01:42that they've done a decent job of saying, we're gonna be AI forward, you're gonna be AI leaning. But in the end, this is my zoom out point. In the end, you're still selling a subscription product to help people at a very modest level learn another language. There's no AI compute to attach to there, Jason. Well, there is, they have to find a way. I mean, listen, I'm not a total Duolingo expert, okay? But Duolingo took money from, I mean, it does a lot of things, but in some sense it took money from Berlitz and all these language schools and stuff online, right? Hooray, you did that. Now, where are you going to disrupt humans?

1:02:12This is your job. Like you already disrupted those humans, unfortunately. They're gone, right? Where's the next level of human disruption? Zooming out, I will give you that. That is true. I do think the next generation of companies that are going to be, quote, teaching a foreign language will obviously be LLM based. And there's a lot you can do. We've seen some of those companies, what I call more professional, more interactive teaching using LLMs. And I do believe there's a whole ton to be done in terms of one-on-one instruction in language and a whole bunch of other things. And Duolingo should be getting on its skates to do more of that versus just using the thing that got into a little bit of trouble for the CEO, using AI to obviate the need for humans.

1:02:52The real question is, can you build a more compelling set of products using AI to do more immersive learning? And I think it's companies like Speak and companies we've talked to. I think there's a whole bunch to be done in AI-enabled learning. And it's actually a super interesting space, including language learning. It's a really interesting question to ask for all investors, which is like, if you are not removing humans from the equation, you are going to be heavily discounted. I've always got a good point. You're either getting money from compute, right, this massive spend, or you're getting money because you're using AI to replace humans.

1:03:22Otherwise, you're not going to grow. Otherwise, hooray, congratulations on your 14 % growth. Where are you replacing humans for real? Whatever vertical, whatever industry, where are you going to go in and reduce the headcount that vendor needs by half? Most of the time I'm in the, yeah, replacing humans is a story. Interestingly enough, in education, I actually think it's actually doing it better. I think the data, the stunning data shows that a bunch of these education that, in fact, if the human today is someone in a class with 20 people, there's a whole bunch of examples that says LLM learning is equivalent to one-on-one human learning, tutoring one-on-one.

1:03:55Let me say it more positive. What you should be doing with AI in education is allowing everyone to get something they haven't had, which is one-on-one learning instead of group-based learning, because all the data says one-on-one based learning constructed specifically to your needs is far more efficient way of teaching anyone a foreign language. And frankly, most concepts. I admit, I'm not a total expert in education, but where does the budget come from for that software? If it's not, if it's not replacing humans, then you better steal it from a legacy inventor, which is fine. But Duolingo is a legacy platform now.

1:04:27Like you got to steal it. You got to steal it or you end up Chegg. At least Harry didn't do Chegg. I didn't do Chegg. No, what I mean is, listen, you can use, okay, so let's say your AI does not replace humans or attach to compute. You have a third option. It's Captain Obvious. Your third option is to use AI to massively displace an incumbent and steal all the revenue. In fact, that's the history of B2B software mostly, right, is stealing the revenue. I just don't know how many of our public leaders are in a place to steal their own revenue, right? They're in a tough spot with it, with all their seats, right?

1:04:58And we can fund those deals as investors but i think the first two categories are much are much easier attached to the compute or replace humans rather than just steal i mean there's like a 400 ai crm startups out there all saying they're going to eat hub spots and salesforce lunch that's not exciting to me as an investment i'm going to go disrupt i mean maybe you will but that's much less exciting than truly replacing 90 of your gtm team right it's almost like doing customer support to me jay that was a really good framing, you know, the fact that, you know, getting the new budget just so much better than trying to slug it out with the existing provider and say, our new thing is better.

1:05:36It's not to say you can't in those spaces, but yeah. So I'm trying to think education's got to be, it is an interesting market, right? It's large, but getting incremental budget has to be close to impossible that, you know, the public school district's not going to come up with another 10 million for your software. It's impossible. Sadly, this is not a public school comment, right? But you're right. I think the positive sum comment is, I mean, I think dual learning is actually what I call light learning. You're learning another language, but you're just learning a few words. I think a really interesting space we've seen with LLMs is replacing the spend that an adult wanting to learn a second language, typically for business purposes, where hittity forward, they would do it with a one-on-one coach, right?

1:06:16So you're replacing that human coach with a very intensive, immersive, LLM-enabled learning program is actually quite a compelling market. But you're right, it's education, but it's not. You have to find an existing spend, and the existing spend is pretty niche, which is people who can afford to spend money on a one-on-one tutor to learn a foreign language. There's not a whole ton of budget, unfortunately, in K-12 to give every kid a one-on-one customized tutor. I love the way Jason's just getting better and better with every show. Just get him out. Aren't you, Rory? You're like, geez, he was here for the entertainment and now he's become so wise.

1:06:54He's getting hard and mean. He's so wise. What is going on? No, I'm not mean. I just don't want to live in the past. Here's the thing. If you're in software today, B2B software, wherever you are in an org chart or an investor, honestly, if this isn't the most exciting time of your lifetime, going back to start this conversation, you're doing it wrong. It should be one of the most stressful of your lifetime. And we've talked about this, but if you're not truly excited, like truly excited, I mean, this is the first time software has gotten better since the three of us met. It hasn't gotten any better since all of us met.

1:07:27It's the same crap. So if you're not, if you're not incredibly excited, again, going to the beginning of the Sequoia, I would retire, retire from your VC fund, retire from your company. No shame in that you had a great run, right? And just put the rest into NASDAQ and you're going to make more than most VC funds anyway. I think it's a great point because as I think, the 90s were X in client server, and the last two decades were effective. I always say Salesforce was rebuild Siebel in the cloud, and it was fun and we made a lot of money. But you're right, somewhat boring. What is really exciting now is you're not just talking about rebuild Salesforce exactly the same, but with a slightly modern UI.

1:08:07You are talking about something much more fundamental here in terms of eating the work and doing a lot more with the app. So, yes, it is exciting. But looping right back to the first conversation about Sequoia, it is also clearly stressful for even the best of firms. Boys, is there any other topic that we haven't covered that you think we should cover? I think one thing that is not in schedule that I just think is incredible is frickin' Hummingbird. Hummingbird, the fund that does not get credit, is not talked about in the same way that many other great firms are, does their first bio deal in billion to one.

1:08:39They have an$800 million position on the IPO. You want freaking great venture returns in whatever$150 million fund that is. Credit you. Amazing. Agreed. Good for them. What I didn't know, what I haven't, I was obviously incredible to see all the success. What I would like to know, and maybe we're out of time and I should have done my research, how did they collect the capital as traditionally a seed manager, right? to deploy enough to maintain the ownership. I'm just obsessed with ownership now. It took me a long time to be obsessed with it. And now I've given up, but I don't see how I'll ever own 18 % of something at IPO ever again, right?

1:09:20I think they were fairly capital efficient. It could be that answer. It could be the Viva of biotech where they were one and done. I'm looking for that dream. They definitely did put in subsequent checks, but I think it was a combination of doing subsequent checks and concentrating cash and being a capital efficient business. Yeah, I'm impressed with the deals they've gotten into maintaining the ownership with nine figures of AUM. I don't know the exact numbers. That to me is just as S tier, right? Figuring that out. And whether it's a bunch of side funds and SBVs and VPSs or VPNs, just how you do that is, I think, the elite game today.

1:09:56It's hard enough to get into the deals, but with a nine figure or eight figure fund maintaining ownership is God tier, I think. There's always the option of accepting and provided the follow one rounds or the high enough price, just accepting some dilution and optimizing as you do for multiple rather than ownership. You can say, look, I've established a 20 % ownership as a seed fund. I mean, those early funds, those guys had with sub$100 million. Okay, I'll get diluted from 20 % to maybe 12 % by the time we exit. But I put in$4 million. I'm a hero. Yes. But this was a YC fund. I don't think they started with 20, did they?

1:10:31But keep going. but fundamentally the way they've been able to produce 8 and 10x funds has been in part by I mean keeping it at 40 60 100 million dollar funds it's hard to simultaneously keep your ownership and keep your multiple you can decide which one you want to do I mean we talked last week is that you know if you have hummingbird they've kept their multiple and gotten a 10 20x whatever it is if you talk about someone like light speed they've kept their ownership in the van and gotten a 5x but on 250 million dollars you know both of them are great outcomes they're just different ways to play the game.

1:11:02The interesting thing is both of our different outcomes have great outcomes for the GP, the most important LP fact. If you only have$1 to play with, then obviously you want to do the one in the small fund that's going to give you the 10X because if you have to deploy$100, then obviously you have to do the big fund. But to some extent, the high MOIC, small fund, accept the follow-on dilution, but just make a marvelous return is the compelling product for the marginal dollar. I think also the outcome sizes are interesting that Navan at four and a half now public and billion to one at five, the power of capital efficiency and bluntly running lean and not raising huge, huge amounts of money.

1:11:42And you see the difference as an investor, the benefits of investing in capital efficient businesses. Obvious statement. Yeah, it's what Captain Obvious today. Yeah. Guys, I'm glad. It's nice to finish on a positive note, huh? And like a venture outlier that actually returns a huge amount of money to investors. Yeah. How nice. Thank you so much for joining me. I'm glad that you both approve of my shirt. This is not good. I am struggling with it, but I approve of it. And listen, how long are the pants? He's got pants on. He hasn't got shorts on. Well, they are jeans. They are jeans. Let's not push too hard.

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