This Week in Startups - Is investing REALLY the hardest job in tech? A TWIST VC Roundtable (ft. Deedy Das and Jay Eum) | E2204

Starting point is 00:00:00 Didi, you were promoted recently from principal to partner, I believe. I know you probably can't tell us all of Minlo's long-term plans for succession, but I am curious how often you think about your upper trajectory at the firm, and if there is more headroom for you to grow into, do you want to become one of its core leaders down the road? Is that a possibility? Tell me what it's like from your hot seat. Honestly, I'm very thankful that they brought me in as somebody who had no real experience in venture.

Starting point is 00:00:30 Like I was really a person who just studied the craft from a distance, right? I write online. I read everything I can. I was a part of a startup glean that went really well from the very beginning to about the time I left. And it's still doing fantastically. I just don't have that approach to how I see Menlo. I mean, I joined this fantastic team very much to work as a team together and reinvigorate what the firm stood for. I mean, we've been around for 50 years.

Starting point is 00:00:57 We're on our 17th fund. a part of the old guard really in terms of how story the firm is. But with any time, I think there is a time for resurgence and rebuilding of a firm. And I don't know what the future lies, but I think every day about what we could be doing differently to be a different in venture. And if you look at like the last four people that we've sort of hired at Menlo, you have Tim Tully, who's a CTO of Splunk. You have Joff Redfern, who is the CPO of last year. And you have Matt Craneing who did a PhD from Stanford and sold a unicorn cybersecurity company. You have me.

Starting point is 00:01:36 These are people who've operated businesses. And so one of the things that we are trying really hard to do is sort of marry this set of people who have been in the weeds and sort of seen like the brutality of what it takes to run a good company with investors who get the finances who understand the long term vision as well. And we're very early on that arc. Who knows what that future holds. But right now my main focus is, hey, let's focus on getting things right as a firm. How do we invest? What are our principles? What do we stand for?

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Starting point is 00:03:06 Reliable infrastructure and expert support. Visit cruso. com slash startup to reserve your capacity for the latest GPUs today. Hey, everybody. Welcome back to this week in startups. My name is Alex and I am joined today by an illustrious venture capital panel, starting off with my co-host Jason Kalakhanis, who's currently still in Saudi Arabia. Jason, I hear the traffic is fantastic in Riyadh. Yeah, I just got caught in a little bit of

Starting point is 00:03:35 the old Riyadh traffic, but I ate at a really great traditional Saudi restaurant. We stood on the floor and, you know, used the bread to pick up the food. It was amazing. But we wrapped up our third day of Sanobul Founder University. So thank you to all my friends in the region, 60 startups all from the region and about 45 of them are from Saudi, Saudi nationals building incredible companies. And it's kind of like coming to Silicon Valley in the 60s or 70s where there's a lot of energy, a lot of great founders, but they're just starting this entrepreneurial journey. And it's very rewarding to meet with these incredible founding teams. They're doing FinTech in a major way.

Starting point is 00:04:19 They're doing construction tech in a major way. There's a lot of real estate going on here. And then, you know, every great idea like you see in founders from America. And we did a three-day intensive talking about how to build companies. These are all year-zero companies. And we're going to be doing two of these classes a year, two of these founding university classes a year. So it's really exciting for me and really proud of the work we're doing. Because Jason needed more frequent flyer miles.

Starting point is 00:04:47 We finally solved that problem. All right. Else on the panel today, we also have Jay Um from Global Frontier Technology Ventures, or as I call it GFT Ventures. Jay, how you doing? I'm doing great. Thank you guys for having me. This is really exciting.

Starting point is 00:05:02 And we have D.D. D.D. Doss, whom everyone knows from his high caffeine tweets. He's a partner, a new partner over at Menlo Ventures. D.D., how are you? I'm fantastic, guys. I'm really glad that we're all here today because there's been kind of a seismic shift in the venture capital world, We saw a changing of the guard at Sequoia with Rolloff Both us stepping back from his role as kind of chief steward of that firm, handed off the reins to Alfred Lynn and Pat Grady to well-known names. But I got to say, guys, I'm a little bit shocked.

Starting point is 00:05:32 I did not see this coming. Heard no rumors, no rumbles, no premonitions. So first, I'm kind of curious. Who knew? And if you didn't know, are you surprised by this? Let's start with Jason. He's already laughing. Well, I'm good friends with Roloff for a long time.

Starting point is 00:05:45 He brought me into the venture business. He created the Scouts program at Sequoia. I was the first person he asked to do it with the Zacoia Scouts. He was on the board of my company. He invested in Mahalo back in the day 15 years ago. And I've known him all this time. One of the great venture capitalists, somebody I learned a ton from. And I didn't know.

Starting point is 00:06:04 But I did know that the firm had some spiciness going on with Sean McGuire being very public about his feelings, about the conflicts in the Middle East, et cetera. I'm not sure if that contributed to it. I'm just catching up here on the other side of the planet, you know, and saw the Wall Street Journal say that maybe that had something to do with it. I don't know, but they have a great tradition at Sequoia with these stewards. Obviously, Don Valentine started the firm, and then he had Michael Moritz, Doug Leone, two legends as well. And they, you know, gave it over to Rulhoff and Alfred, and now Alfred and another partner are going to run it. So, you know, best of luck to Rulov.

Starting point is 00:06:48 He had one of the great runs in the history of venture capital. And that's a pretty intense thing to do to run Sequoia, the literally most legendary and successful venture capital firm in the history of venture capital. So I wish him to look. D, D, D, you work at a firm that has a number of partners and kind of generational history. It's been around for a minute. Looking at the headline, Sequoia has gone through, had to kind of divest his China. India funds, there was the FTX mess, the Sean McGuire stuff that Jason mentioned, there was the Klarna board seat scrap. To me, that didn't seem like enough an aggregate to

Starting point is 00:07:23 force a change at a firm with the stature of Sequoia. So I'm just kind of curious if you expected this and if not, what might have happened? I have no idea, to be honest with you. I mean, the few times I've met with Ruloff, I think he's a fantastic guy and I think everybody on the Sequoia team that I've interacted with has been quite fantastic. Look, when you're a firm like Sequoia, you're going to get scrutiny. I mean, you're, you're, you know, historically the number one venture firm. And so whenever something like this happens, I'm not surprised that so much scrutiny is drawn to that firm. But, um, look, I'm excited for Alfred and Pat, and they're both great guys. And I'm, uh, excited for them to take, take the helm of stewardship

Starting point is 00:08:04 at Sequoia. All right. That's two safe answers. Jay. What do you got for us? Um, well, Well, the interesting thing was I just saw Rolphe a few weeks ago at the Stanford Business School Centennial celebration. And you know, Rolloff played a big role in organizing some of the really interesting alumni panels. He talked about the stewardship. And it's always been something that I think many of us in the venture industry has admired Sequoia Capital Four.

Starting point is 00:08:36 Having that stewardship pass where you hand over the reins to the next generation before you get too stale and too crusty. And I think that's frankly been one of the reasons that they've you know really been able to ascend to the top of the hill. I remember when I started in the industry 20 plus years ago, you know, there was Sequoia, but there was also Kleiner and a few other firms. And I think it's kind of undisputed where Sequo is in terms of the hierarchy today. The great thing about this is the stewardship, part of what I had heard, because I was on a board together with Jim Gets, who was the prior steward at Sequoia, he actually told me something really interesting. He purposely tried to stay in the background and show up less at the office sometimes to make sure the leadership was handed over properly so that people would not be looking around for him asking people. questions, but they would actually make sure to ask the new leaders and the stewards to actually

Starting point is 00:09:40 make those right decisions. So maybe Roloff is in that mode as well. I think that's just to build on that, Jay. That's what I saw happen with Michael Moritz, Sir Michael Moritz and Doug Leone. You know, they said they were handing off to Alfred and Ruloff and then I would come by the office for the next five to 10 years and they would still be there. You've heard me talk so much on the pod about the importance of renewable energy. That's why I'm so excited to talk to you about Crusoe today. Most AI infrastructure is still powered by fossil fuels. But Crusoe has an innovative energy-first approach. They've actually built a high-performance AI cloud platform that's powered by wind, hydro, and geothermal energy. In Iceland, right now,

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Starting point is 00:11:06 But they had this like tradition of like, I would say a decade long transition. I suspect that's what will happen with Ruloff as well, is that, you know, he'll be hanging around doing all the boards he's on. But it's a numbers based business, Alex. And if you look at Rulov's run, over $50 billion to LPs was distributed. It was insane. And it was insane from the moment he got there. He did YouTube.

Starting point is 00:11:32 He did Instagram. At that same time, they did New Bank. They did Square, which he, I think, is still on the board of. And they did, you know, the Sequoia Fund where they hold on to their public shares and help their LPs decide what to do with those. WhatsApp. It was an amazing fund. I heard that fund was 21X.

Starting point is 00:11:54 You know, that's a 21X is a big fund. And, of course, they did the Scouts fund that I got to participate in. And so just brass tax. He put numbers on the board that we, never seen in the industry. And when they look back on it, those are some very big numbers. And it was put up during a time of increased competition, massive increased competition. And they stayed true to their knitting. They didn't get so big that they became one of these mega funds. Even the funds they just announced were pretty modest in size, given what Sequoia is capable

Starting point is 00:12:29 of. And they've never lost money for an LP. That was the other very proud thing that, you know, know they had going for them in the history of the firm. Never lost a dollar for LPs. But it's, you know, the changing guard has to happen. And then LPs do judge you on your secession plans. As a solo GP in our firm, I get that question a lot. Are you, you know, what's going on? Are you going to retire? We're going to have a fifth fund? What's going on? I have to be honest with them. Okay, I haven't decided yet. And so that works against you if you're a solo GP. And they have a lot of serious firms as LPs. So it's a big deal. Didi, you were promoted recently from principal to partner, I believe.

Starting point is 00:13:11 I know you probably can't tell us all of Minlow's long-term plans for succession, but I am curious how often you think about your upper trajectory at the firm, and if there is more headroom for you to grow into, do you want to become one of its core leaders down the road? Is that a possibility? Tell me what it's like from your hot seat. Honestly, I'm very thankful that they brought me in as somebody who had no real experience in venture. Like, I was really a person who just studied the craft from a distance, right?

Starting point is 00:13:39 I write online. I read everything I can. I was a part of a startup glean that went really well from the very beginning to about the time I left and it's still doing fantastically. I just don't have that approach to how I see Medlow. I mean, I joined this fantastic team very much to work as a team together and reinvigorate what the firm stood for. I mean, we've been around for 50 years. We're on our 17th fund. So a part of the old guard, really, in terms of how story the firm is. But with any time, I think there is a time for resurgence and rebuilding of a firm. And I don't know what the future lies, but I think every day about what we could be doing differently to be a different in venture.

Starting point is 00:14:25 And if you look at like the last four people that we've sort of hired at Menlo, you have Tim Tulli, who's a CTO of Splunk. You have Joff Redfern, who is the CPO of Atlassian. You have Matt Craning, who did a PhD from Stanford and sold a unicorn cybersecurity company. You have me. These are people who've operated businesses. And so one of the things that we are trying really hard to do is sort of marry this set of people who have been in the weeds and sort of seen the brutality of what it takes to run a good company with investors who get the finances, who understand the long-term vision as well.

Starting point is 00:15:03 And we're very early on that arc. Who knows what that future holds. But right now, my main focus is, hey, let's focus on getting things right as a firm. How do we invest? What are our principles? What do we stand for? And how do we get in and partner with the best founders, to be honest? What is the Middle of Ventures Media Training budget per year?

Starting point is 00:15:26 Whatever it is, I think it all goes to me now. You know, there was a time when venture, capitalist didn't do media. I think we just very quietly behind the scenes. I think I might have had a little bit of, I might be to blame for being the first venture capitalists to podcast. Yeah. Now everybody, if you're a venture capitalist, you have to have a podcast.

Starting point is 00:15:48 But it is a big change that DD points, D.D. points out, which is the industry went from in my lifetime being people who are professional finance people or who got into it right out of school, Steve Jervitson. You know, I just had him on the program and he did do a little time in tech, but he got into venture very early and You know, Rulhoff worked at PayPal obviously, but then got into venture very early in his career and now it's Founders expect That people in venture have some scar tissue and have been in the trenches. That's a real kind of a different vibe than it was and it's also an industry in massive transition right now like I think we all represent

Starting point is 00:16:33 represent the original boutique venture kind of model, smaller funds, you know, really handcrafted. But then you have these, you know, Indrice and Horowitz, giant platforms, you know, many different sector funds, billions of dollars under management that, you know, it's sort of trends you towards average returns or, you know, indexing the industry in most cases. So there really is two venture industries. And I think Sequoia has done a great job of staying true to. the traditional venture industry. But, you know, Roloff is still young. So the question I have is after he takes a little break, I wonder if he's going to start a firm or go work with Elon at a

Starting point is 00:17:18 company. I mean, he was an operator 20 years ago. So I wonder what's next for him. I have no idea. I haven't talked to him. I think we're all going to be waiting to see what Rolok chooses. But I want to go back to the idea, Jason, you talked about a venture capital changing. Rolov had gone on a bit of a media tour before he stepped back. And one of the things that he said that we talked about a little bit of a couple weeks ago was that throwing more money into Silicon Valley, quote, doesn't yield more great companies. Jason, we started off today with you discussing 60 companies that you're talking to in Riyadh,

Starting point is 00:17:48 45 of which are Saudi-based, not a historical hub of startup formation, let's be honest. But it seems that there's a lot of founders out there who want to build. So is Roloff kind of wrong about, you know, capital not helping build more? great companies because it feels like today, going back to Dede, talking about Glean and all the other major companies that are doing well today, that we're seeing an enormous density of great companies being built and informed. Yeah. In America and Silicon Valley, for sure, there's too much capital chasing too few really great ideas. And that means you can see it in the valuations. And, you know, people are running up valuations to points that may break the model. If you're a

Starting point is 00:18:31 seed investor. I was talking to a seed investor just today who, you know, let's say they put 250K into a company at a $40 million seed round. Okay, if the company becomes worth a billion dollars and they get diluted by half, I mean, what are they going to return to their investors? You know, they own a very small fraction of that company, less than 1% of it and like a quarter percent of it. They're going to return $2.5 million, $5 million from their fund if it's a unicorn. So it's an incredibly hard business and a lot of the math just doesn't pencil out. And I think the other thing Ruloff was saying during his tour was that it was a return-free risk venture capital at this point in time, which was very funny.

Starting point is 00:19:14 And that got a little bit of weight. But yeah, we are an industry in transition and it's unclear to a lot of LPs. It's unclear to a lot of VC firms, you know, how the returns will happen. And if we can return the amount of capital being deployed, it's a big TBD. Yeah, Jay, your first fund was 140 million if memory serves. So kind of the opposite of a multi-billion dollar fund. Are you going to be able to return all of that? And what's your take on more capital and not leading to more great companies?

Starting point is 00:19:46 Yeah, I think there's a couple of things that come to mind. So first off, innovation is everywhere. So whether it's in Riyadh or Seoul or Tokyo, there's some great companies coming out of that. The other thing to keep in mind is while the U.S. venture, capital ecosystem is primarily private capital. Listen, we meet a lot of early stage founders here at launch, my investment company, and some, they don't have a lot of traction yet. They just have an idea.

Starting point is 00:20:11 Maybe they haven't even finished their product. They've just got an MVP. But they still need investors and accelerators like ours to take them seriously. And you know what? We can't just wire money to your Gmail or your PayPal. That's not how it works, folks. We need to know that you're a legit and official business. We need to know your company is incorporated.

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Starting point is 00:21:00 And make sure you use that URL slash twist so they know that we sent you. Where the primary objective or the sole objective is really pure financial return, there's plenty of regions, as we all know, that there is actually a strategic element to funding going to venture capital, government-driven funding, which started in Israel, been adopted in parts of Asia, including South Korea, Japan, Singapore, and other locations where they want to actually build the startup ecosystem primarily to make sure that there's job creation, there's innovation.

Starting point is 00:21:43 And so a lot of these countries and a lot of the funds that are located in these countries, they don't necessarily benchmark against the S&P 500 index funds. As long as they are generating a reasonable return, they are creating jobs and they're creating innovation for those ecosystems. So that's, I think, important to keep can mine globally. I think second point is that there's a lot of venture capital firms out there.

Starting point is 00:22:11 And I think anybody that's starting a venture firm, when I started my first venture capital firm back in the day called Transcendant Capital, and I asked the same question before we started GFT Ventures, is, does the world need another venture capital firm? Right. And unless there's a clear reason for existence, it's really difficult to justify because there's so many great firms, there's so much capital out there. When my co-funding partner, Jeff Herbst and I, you know, a couple of recovering corporate ex-corporate venture capital guys, the ex-Samsom guy, the X-Midia guy teamed up to launch GFT ventures, we had a very specific agenda, GFT being global frontier tech, so we're a frontier

Starting point is 00:22:54 tech fund, but we had already been investing in AI and data science companies for over a decade. We saw the growth, the potential coming up. And we wanted to really concentrate our efforts on that specific category. And it turned out that it was very serendipitous, a year after we launched the fund and we're about to wrap up our final closing, Chachipit gets announced the whole world,

Starting point is 00:23:20 gets a sense of the impact, the massive impact that AI brings to the table. And I think that really benefited us. And I think it helps for us a little bit to be OGs, so to speak, where we've already invested in like Sound Down AI, which are now public companies three years in, you know, companies that are coming out of the entrepreneurs, the lieutenants from those companies, starting new companies, getting founder referrals and whatnot has really helped us so far. D.D., I want to go back to Glean for a second because if memory serves, the company crossed 100 million ARR in like February or March of this year. And I feel like if you go back to the era of box before box was public, if you reached 100 million ARR, it was heralded as like this really big.

Starting point is 00:24:02 moment. Like it was an accomplishment. You can go public now. Well done. You've done the thing. Now I feel like Glean's announcement was kind of forgotten because so many companies are reaching, you know, eight and nine figure ARR milestones. So that's why I say it feels like today we are seeing more great companies built because they're reaching such scale so quickly. Am I over indexing on the names that I know, D.D? Or are we actually seeing a greater number of outstanding startups actually be formed in scale today? I think there's a couple of points that I make here. Number one, I think a simple point is like, clean is a boring B2B top-down sales business. Like nobody outside venture and startups has any business caring about Gleet.

Starting point is 00:24:40 And they shouldn't, right? Like, you know, I don't expect New York Times to run a piece on Glean. It's not chat chippy T, right? So it does not meaningfully impact that many lives outside knowledge workers and certain categories of companies. So I'm not, I'm not shocked that this is not a global sensation. Number two, I would say, it is worth noting that Glean included, but sort of all companies at that growth stage are raising at valuations that are so big and so forward-looking that, you know, it does make sense that the media wants to cover those biggest companies with the biggest potential outcomes and biggest potential growth tracks. And Glean, too, maybe in a world before Glean could IPO.

Starting point is 00:25:24 But when we look at the company, we're like, okay, we could go an IPO now, but let's, you know, fortify sort of the bank balance and then try to shoot for hire. When is the right time to go? I'll give you another anecdote. I heard this recently from a growth stage company that we were trying to invest in. And these founders, you know, we sort of asked them like, hey, so what are your plans of going public? And I think they broke character for a second. And they're like, well, you know, everything's. serves us well like I don't think we need to like why why would we do and we're like well you know it's kind of important to us so that that happens and so we are seeing a shift with how big growth stage companies in that 100 million plus ARR bracket are looking at governance why would you want to go public you can raise infinite money in private markets if you continue to grow you don't

Starting point is 00:26:21 have to do all of this reporting to the SEC. It just makes your life a lot more easy and you get the liquidity that you wanted. So, you know, the sort of balance of when to go public is also changing. The private markets didn't have this kind of capital maybe at the time that Box was there to support an indefinite series of growth rounds. So that is changing. Yeah. You know, I was going to call you in to respond to that. So perfectly Well, yeah, I mean, it seems like Stripe has decided that they're going to be private forever. And, you know, speaking of like seed funds and angel funds, the Scouts fund, the first Scouts fund, I did Uber famously and then less famously, Sam Waltman did Stripe in that Scouts fund.

Starting point is 00:27:10 And that I think is the highest multiple fund on cash that Sequoia ever did. And now with secondary markets and the ability to swap investors out in years 12, 13, 14, like SpaceX and Striper doing, you know, it is creating some liquidity for venture, but you would be, you know, much better served to have it actually be public companies and distribute to your LPs, the public shares. That's what LPs really want, is to get those public shares and then make their own decision of what you do with them. And so it's an industry in transition. Great founders are coming from anywhere to Jay's point. It really is a global industry. And yeah, these industries are being jump started. But if you look at the Scandinavian countries, Sweden, specifically, Israel, obviously. And then you go to Australia with Canva and Atlassian.

Starting point is 00:28:05 Now you're starting to see decaorns come out of these regions. It's not just like the occasional unicorn and like, oh, spot. is worth a billion dollars back in the day. So now Spotify's, I believe, worth over $100 billion. 128. Yeah, so you got a $100 billion company coming out of a country of 30 million people. Atlassian is also up in that range. I don't know off the top of my head where they're on,

Starting point is 00:28:31 but then Canvas at 40 billion, I think, in the private markets. These are not small companies anymore. Talent can come from anywhere. Great founders come from everywhere specifically. They used to land on our shores. We used to welcome them here a lot more than we do at the current moment, even with the, you know, Trump saying he was going to put those green cards. I'm still going to follow up with them about that, put those green cards on the diplomas.

Starting point is 00:28:54 But yeah, these companies are being formed all around the world, and the secrets are out. You know, just being here in Saudi for the last three days, they're listening to our podcasts. They're reading our news sources. They're on the substacks. They know the techniques. They're asking me about Raul's product market fit engine blog post and the talk he gave three years ago on this podcast. Like, they're up on it. So the secrets are out and talent comes from anywhere.

Starting point is 00:29:23 So there's a very bright future here. We did have a four-year pause under Lena Khan where there was no M&A. And I think that when that indigestion gets cleared and we can kind of move some of the, companies that should have been bought and consolidated and get more DPI. I think people feel a lot different about the industry, but I know a lot of venture capitalists now who are just saying, this is too hard. This is too hard. I'm quitting. And that's not the case with Ruloff, I don't think, and they were succeeding, but we all know on this call many folks who are not going to raise their next fund. They're just like, this has been too hard. There's no DPI. In fact, if you want

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Starting point is 00:31:16 into your biggest advantage. Their funds do two or three acts. They got to chop up the, you know, funds, you know, with four partners, five partners. They're not actually bringing down as much money as you might think because they own such a small percentage of startups. You know, it used to be the Series A, the Seed Round.

Starting point is 00:31:40 They would get 15%, 20%, of a company. Now the seed round is five, six, seven percent of the company. The series A might be only 10 percent of the company. It's an industry in transition. Yeah, for sure. I mean, one thing I would add, though, is despite there's more competition, there's more challenges for sure. Some of these companies are growing at a rate that I've never seen in my 20 years. I mean, it's just the potential outcomes of some of these companies where, you know, everybody knows that Lovable hit 100 million in ARR in less than 12 months. We have other companies that are trying to beat that record right now.

Starting point is 00:32:15 And so if you extrapolate some of these companies and the growth rates that they have, and again, you know, the good news is a lot of these AI, especially AI application, AI platform companies, they're growing on existing infrastructure that has been built for decades. Connectivity is there, mobile app distribution, all of those things are in place. And on top of that, more recently, you know, there's actually a willingness to pay, shockingly, right? People understand that there is actually a cost for every inference that goes into it. And, you know, thanks to Open AI and others, they've actually been able to be trained to actually pay for the utility that they get from some of these applications. So I've never seen anything like it in my career.

Starting point is 00:33:03 I think that last point, Jay made is I've never heard anybody make it actually so crisply, but I think it's so important to think about it we all think oh cloud computing the infrastructures the rails the bammoth sure all that's set up but what's also been set up is that businesses had such a great experience paying a hundred dollars a month or five hundred dollars a month for a piece of sass software that they're like yeah this thing's as good as sales force or slack or hub spot it is so worth it yeah it's so worth it and so when all these AI tools came out and there was like 40 dollars a person to be on claude for the enterprise account. I was like, yeah. Oh, and O'Grock wants to charge us to? Bring it on. Oh, there's a $200 version? Absolutely, I'll pay for some people on the team to have the $200

Starting point is 00:33:45 version. If it makes them 1% more efficient, if a developer wants cursor and co-pilot and five versions of it and they use two a month, businesses are just very frisky about that. And they understand, I think, that making existing high performers, higher performers, is better than hiring more people. Right. So that's just to build on your exceptional point, Jay. That is also part of it that goes into why these startups are doing so well. Do we hire another designer or is there a design tool that this designer can use that makes them go faster on Figma? Do we hire the sixth developer or just give the other five another tool? Yeah. It's a pretty easy decision for management. I think Jason's talking about the B2B case here, Jay, but when I was thinking about the company you might be discussing that's

Starting point is 00:34:31 trying to race lovable to 100 million error, I was thinking of his. which recently raised and is growing quite quickly, that's B2C. So a slightly different point, I think. Are you seeing it's the same? It's not. So certainly there's a B2B customer base, B2C customer base for sure. They fall into the category of so very similar to Canada. They actually sell for short form video creation.

Starting point is 00:34:54 And this is our co-investment with Menlo, obviously. They actually sell to creators. And they do short-form video generation for social media, right? So if you think about who the major customers are, including the Mr. Beast of the world and whatnot, these are not individuals per se, right? These are actually small enterprises. Some of them are quite big. And they are looking for platforms that actually generate, you know, high quality, realistic video so that they can actually supplement their own efforts to actually have these studio setups, camera setups and whatnot.

Starting point is 00:35:30 And they've done a fantastic job. They have grown. And this is, since they tweeted themselves, public information, they've grown 60X in the last six months. I've never seen anything like it. It's crazy. 60X? One million ARR to over 70 plus in a little over six months. So, Jay, one thing Jason likes to talk about, though, is there is sampling, there is testing, people that play with things.

Starting point is 00:35:57 I'm curious if you can share anything about the revenue health at that company. Is that ARR sticking around like we would expect traditional enterprise SaaS ARR? Is it a little bit more loose? What's it like? Yeah, it's too early to say, but it's certainly somewhere in between. So it's not like in a B2C revenue where people try something out. And the minute they get a better deal or a better feature from somewhere else, they'll drop it and move on.

Starting point is 00:36:22 It's not as sticky, obviously, as enterprise revenue, but the company is actually moving into that category as well. But again, the canvas segment, of what we call prosumers is a massive segment. And they are sticky, they are loyal. If they find a platform that works, why would they switch over? So yeah, they're actually accelerating revenue

Starting point is 00:36:45 to a rate that I've never seen in my career before. DD.D., I want to get you to weigh in on the willingness to pay in the AI era, because I think this is a major tailwind for startups of all sizes. I mean, look, I think Jay said exactly what's going on. And Jason said it too. like there is immense willingness to pay and try new things. When it comes to like thinking about like growth versus retention is often like a thing that people in venture talk about.

Starting point is 00:37:09 And I think the point that's really missing here is, you know, when you can grow today in a product led motion faster than ever before. And if you actually compare those retention cohorts to enterprise businesses, you're not going to see the same kind of retention. But what you actually see in great businesses is you end up seeing a smile curve. And my favorite graph for this is, you know, I've treated this multiple multiple times, is you look at the chat ChpT retention cohorts. If you looked at, there's this great article, funnily enough, this is a great article Sequoia put out a long time ago, which is talking about generative AI Act 1, or I think it was Act 2. I'm not sure.

Starting point is 00:37:48 It's, they said, you know, the growth is here, but the retention is not. If you compare one month retention on Chat ChupTPT to any other person. product in the market, say like classic YouTube or a WhatsApp, it's far, far from that retention. It was something like a 40% maybe less, whereas other products are 80 to 90. And then if you look at the cohort retention curves over time, holy hell, have that changed? Like it has become a 90% retention product over time. So, you know, the two common things I read and I see all the time is people, they whine about retention and they wind about margins.

Starting point is 00:38:23 Growth, I think, is way, way, way harder than either fixing retention or margins. So as an investor, I am very comfortable backing companies who are able to grow and then think about how we can figure out the retention and the margin story. And we're seeing that at these companies. Like people complain about cursor margins all the time. But you know what? Like they're doing some interesting stuff. The likelihood that cursor fixes their margin structures, the likelihood that Anthropic

Starting point is 00:38:53 fixes their margin structures is far more than another company growing into tens and hundreds of billions of dollars of revenue scale. So, you know, I'll put it, put it that way. Also, I think the, the retention numbers matter a little bit less when the top of your funnel is 800 million weekly active users. I mean, you're not selling to 15 people, so you need to keep 10 of them. You have the whole world, essentially, as a potential customer. And Open AI has done a lot of work in India, D.D.D. to build out ChachyPD Go. And then they also launched a, Indian language model benchmark recently, which I felt was indicative of where we're seeing a lot of AI demand, which would be in this case, India. India is an interesting story, especially when it relates

Starting point is 00:39:33 to chatch EBT. I'm really, really curious how this plays out because, you know, I'd worked at Google prior to this and we were focused on a lot of the India efforts. And one thing that's really, really surprising was surprising to me then is the India internet view is very different from what the American view is. So for example, it was kind of like, I took it for granted that search is always the biggest Google product and then there's, you know, maybe a YouTube maps, things like that. In India, YouTube was far, far ahead of search as a product. In fact, people didn't see search as the same kind of valuable utility, even though it was a really high number as people in the West would. And so I think what's really going to be interesting for chat chbt is people are adopting it,

Starting point is 00:40:18 But language and typing out queries is not fundamentally as widespread in that market as it is in, say, an American market. And so it'll be super interesting to see how that plays out. I think video, audio, these sorts of multiple languages are going to be a really interesting phenomenon when it comes to AI in India. And also, you know, willingness to pay for software in India is far, far less than in America. Well, I mean, that'll change with time. But I do have the chart you were talking about. Here is the smile curve from Chad G. And DD, just be a VC for me for a second.

Starting point is 00:40:50 When you see this, what's the first thing you notice and talk to people as if they can't see the chart? Because a lot of folks are on audio as they hear this. Okay. So let me try to describe this. When I had tweeted this out a while ago, I called this the product manager's wet dream. I think this is absolutely, when you're a product manager, you look at things like cohort retention charts. What a cohort retention chart is, and I'm not going to put all the caveats in here, is if I have 100% of users on day zero for a given How many of those users return to pay me or return to the product? There's two kinds on week two, three, four, and down the line.

Starting point is 00:41:27 Now, when you look at those weeks stacked up over time, what you're really looking for both as a PM and as an investor is you want the curves to look like they're going up. You want more retention. So from month one, if you're looking at this graph, it used to be a 60% at month one. And you see this go up over time for every incremental level. week and now it's about 90%. And this entire graph, not only does it sort of decay over time,

Starting point is 00:41:55 but then you see what's called a smile curve, which is people actually come back and pay more. So after they may have churned, they may have canceled, they come back and they go like the same user comes back and maybe month 10 and goes like, you know what, I miss that. I need chat. GPT again. I'm going to go and pay more. And a smile curve is the most beautiful one line description of I have product market fit. People will churn and go like, nah, just kidding. I'm back. And that's what's beautiful about that graph.

Starting point is 00:42:26 It goes up into the right, up into the left in this case, actually. And that was for Gemini's product? This was for chat GPT. We have a Gemini chart here, Jason. No, that's fine. It's just impressive to see that the brand is so strong. This would go back to the sampling thing we were talking about earlier. People like will start using a product.

Starting point is 00:42:46 and then they forget they used it. And then six months later, a year later, they go to it. And it's like, oh, you already have an account. Oh, yeah, there was the project I worked on. Yet now I'm ready to pay for it because the product has proven itself. That is the one strange thing about this moment in time and this technology wave is that so many of the products are providing so much value that people will pay for them. And to think, like, you know, prosumer.

Starting point is 00:43:16 you know, content creators are willing to just buy 10 tools a month for $15 to $150 each. Like it's just 10 years ago, it was like pulling teeth to get them to pay for anything. They were just like so cheap. They, you know, I'll just figure out a way to do it for free. I'll use open source software if I have to, whatever. And now they're just like, yeah, I'm making money. I need to, I need the best possible tool. I'm not trying to save money.

Starting point is 00:43:39 I'm trying to make better product. I want to bring up something that we're hearing from a lot of launch founders in the accelerator or at founder you, there's a lot of reports that the bar for preseat is just getting higher and higher and higher. And so people are kind of curious for you guys to answer what is a reasonable set of venture expectations for pre-seat companies? And people are particularly asking why is there so much of a revenue expectation for companies that used to be at that stage, a couple of founders and an idea. And Jay, I want to start with you on this one. Current expectations and why things have changed. Yeah, it's interesting. I think

Starting point is 00:44:33 this whole AI boom has masked the fact that it's actually a tough, tough environment out there for everybody else. And so if you think about kind of a lot of the capital that kind of rushed in into the industry, and these include non-traditional sources from private equity firms to sovereign wealth funds and whatnot that we're trying to get into the act. And that kind of culminated at the peak of the bubble in 2021. A lot of that money has actually kind of gone away. And so there's actually, as Jason pointed out earlier, a lot of the seed funds or pre-seed funds that were actually funding those kind of opportunities, they're having trouble raising their funds. Right. So they're having their challenges. Not a lot of pre-seeds, seed funds are actually actively investing as they

Starting point is 00:45:23 were just two or three years ago. And so obviously the funding environment for those startups that are just coming out and precede is obviously very, very challenging. And so, you know, even for us when we launched in 2021, the quality of the companies that we're seeing then versus what we're seeing today and the quality of the deals in terms of Bank for the Buck valuations that we can get, it's so much better now. I mean, we have invested alongside with, you know, you guys at launch. Yeah. In a profitable 1 million AR company at sub 20 million post money evaluation, right? And this company has grown 5x in the last, you know, several months. So there's some really, really good companies out there. And so if you're an investor and you have the capital,

Starting point is 00:46:09 you're going to be picky. You're going to pick and choose the companies that have great product market fit, great background of the founders that are actually showing traction. And I don't necessarily have to take the risk of free revenue opportunities because I can actually validate. My due diligence, basically, the market does for me. And I love it. Yeah. It's like there's, zero to one and then there's zero to one million. Exactly. These are like two different proof points like zero to one, you know, you got one customer or whatever or you launch the product, like zero to one million.

Starting point is 00:46:39 You can't really fake, right? And you are a function of your opportunities. So if there's no companies, you know, in the C stage knocking on your door with a million dollars in revenue, well, by definition, you're going to invest in them to help them get to a million. But if there's 20 who've knocked on your door this one, week and they all have between a half million and two million. Well, now you're going to make the best choice out of that group. And I've been trying to explain this to founders who were lolly

Starting point is 00:47:06 yagging, who were taking their time, who didn't have a sense of urgency. And then they met reality. And they said, well, I don't understand. Like, I was able to raise money for my last startup and I'm further along this time. And I'm like, you are assuming that you're competing against your former self. You're competing against another group of founders who are coming, who have a company that went to 60 million in revenue in this amount of time. Sure, the valuation is much higher, but they've eliminated a ton of risk. So it's very much like the public markets today. If you've got a company that has very low margins and very slow growth,

Starting point is 00:47:47 and you're up against Uber or Coinbase or Google or Facebook or Google or Amazon, and people are looking at those companies go, wow, these companies are growing revenue on big numbers, with great products, and they have incredible margins, and they have momentum and network effects, there's a flight to quality. That same kind of thing has happened, even as early as Seed now and Series A. Yeah, I want to jump in here and maybe say,

Starting point is 00:48:12 like, there's almost like there's two stories of founders, really, and if you look at the data, it becomes super clear, which is the volume of capital deployed in venture is at the highest it's ever been, but the number of deals that that capital is chasing is actually shrinking. right now. I don't know the exact number, but on one hand, you have founders who are like, holy shit, stop knocking down my door trying to fund me. And on the other hand, especially at

Starting point is 00:48:39 the earlier stage where the metrics are fewer and far between, where founders are like, no, I think I'm awesome. I think this product is working. Why is nobody taking my call? So yeah, I think the data does support that as well. All right. Just backing up D.D. really quick here with some data. Here's a chart from the KPMG Q3 Venture Pulse. And as you can see here, I'll just sports costs a little bit. It's a chart showing how much money VCs invest and then the deal count over time. And deal count peaked in late 21, early 22, and it's been kind of a secular decline since then, even though capital has returned to the market. So we're seeing a return of dollars, D.D., but not a return of deals, which I presume that means you're

Starting point is 00:49:19 no percentage is going up over at Minlow. Yeah. I mean, look, Menlo specifically is, there was another beautiful graph Peter Walker put out on like, you know, fund returns based on the strategy, whether it's a spray or prey or a select fund and a selective fund. And I think Menlo is still very traditional that way. Like we like to pick. We like to do lower volume. We like to work and spend time with our founders. This is why we do lower volume deals.

Starting point is 00:49:47 The reality as like basic eighth graders in math will tell you is if you do a more concentrated strategy, the variance is much higher. If you do a spray and prey strategy, the variance is lower. What is not so obvious is typically I believe that what that chart said too is a spray and prey strategy has a lower median return than a concentrated strategy. So obviously at Menlo, we hope that we're not at that median. We hope like we're definitely an outlier when we're doing those select deals. But man, it's not easy, right? Like everyone is chasing those select founders.

Starting point is 00:50:20 So how do you go and actually prove that this, this, this is not easy? prove that you can find them and then add values, I think still very tough. And I think, Jay, you have to make sure you don't overpay. Absolutely. Just to, you know, explain to founders who are listening here exactly how hard our job is, then founders want to break the record for their accelerator and get the highest. They want to get one million more than the last founder, you know, set at the poker game they got and they're in a competition,

Starting point is 00:50:50 which means then we own a smaller amount, which means that on the exit, we get less to return. And so the game becomes harder and harder in terms of eventually getting a return for your LPs. So it's, I would say perhaps the hardest job in the ecosystem is being an investor. I think it actually is. Now, you can't cry for them because they get paid huge salaries, you know, and it's, it is a pretty great job when you have the diversification of 10 bets or 30 bets in your fund, whatever it is. but you don't have to sit there grinding your teeth at night, but this is the best time possible to be an entrepreneur

Starting point is 00:51:28 who can execute and whose revenue focused. If you can grow your company, you know, I was telling the founders in, you know, when I was out here on my trip, they said, who gets funded? I said, the person who's growing 20% a month, person who's growing 5% a month, today, because there's so many deals to look at

Starting point is 00:51:46 that people are starting, you have a choice between, which high growth company you want to invest in. That's a very different world than it was, you know, 10, 20 years ago. But Jason, explain to me how you said earlier that we're seeing VCs kind of give up and walk away because maybe this isn't the place for them. And then, you know, ever since we've had that point from you, we've talked about how there's so many great companies to invest in, they're growing faster, AI payment tailwinds.

Starting point is 00:52:10 Explain the disconnect between those two points for me. You know, it's just classic supply demand. There were far, far too many VCs. And we saw that break when the private equity folks, as Jay referenced earlier, came down and they started competing and they didn't do due diligence. They just said, oh, if any of these firms do a deal, we'll just do, we'll assume that that company's been successful and we'll do their next round. Just think about how crazy that is. That assumes that, you know, if our firm has a good track record or DD or J's have good track records, there's a person coming in and just blindly betting on that when we all know that we make mistakes, that we are. far from perfect in our decision-making.

Starting point is 00:52:52 We, in fact, if you ask most VCs, which company did you think in your portfolio was gonna be the breakout? And then which one actually broke out? They wouldn't be able to tell you at that time in the first year. So there was just far too much supply of capital. And there's still a large number of companies.

Starting point is 00:53:11 That's true as well. But if you're going to put larger amounts into the winners, that means there's less left over for the rest of the, the kids in the class which if you think about it in darwinian sense if this was you know like an ecosystem and these are all different species um what we're now seeing is the the species of founders who can generate revenue um are going to get a lot more of the calories in the ecosystem they're there are the sharks in this they're the apex predators so if you can't get revenue

Starting point is 00:53:46 you know you just may not be able to get the calories i mean one way to think think about it is remember we had this unprecedented bull market leading up to 2021. Right. And if you were, let's say, an entrepreneur turned angel investor that was betting on YC companies that were almost guaranteed to raise the next round of financing and you would have automatic write-ups, it was a good time to play. And those results culminated in launching a micro VC fund, right? And life was great. Life was easy. Just continue betting on those companies, right? And now the world has changed. We're living in a different world.

Starting point is 00:54:24 You know, there was a time where, you know, the tide would raise old boats, it's become a lot more difficult now. And so the ones that actually have experience, have the data, pattern recognition, have a reputation with the entrepreneurs are still going to be able to find those opportunities. But if not, and you've been part of that crowd,

Starting point is 00:54:43 and you've just been kind of riding that wave, it's a lot harder. So those are the folks, Jason, I think, refers to that are not, refers to that are not going to be able to raise their next fund because they haven't returned capital. Yeah. And they weren't doing, they were blind betting in a lot of cases. They just had a network. They bet. They thought they were experts at this because the markups happened. Exactly. But then the fundamentals weren't there. And then they did all of their bets if they're a

Starting point is 00:55:09 microfund because I was LPs and some of them. They might have done all their bets in an 18 month window when the mark, the valuations were peaking. So there was no time. Um, diversification, yeah. No time diversification. Thank you, Jay. And so that was one of the things I learned from Ruloff and Doug Leone and Bill Gurley, the people who kind of mentored me when I was coming up is like, hey, take your time. You don't have to put it all to work in 18 months. You take, if you, if you deploy over three or four years, which is typically how funds used to work, four years, not two or 18 months or some people would deploy it in a year, well, you would have, you know, some, you know, time diversification as well. And they didn't have that.

Starting point is 00:55:47 And so here we are, folks. This game is not easy. One of the primary drivers of venture capital return is really timing, right? You have to be in the game at the right vintage so that you can exit at the peak and go in low. And it's just the way it is. Yeah. Jared, I wanted to talk to you about entry prices because everything that I'm seeing from data sources indicates that we're seeing essentially median pre-money evaluations get back towards

Starting point is 00:56:15 where we were in 2021. But we've also discussed quite a lot about how companies have more revenue. They're growing more quickly. So does it kind of net out, okay, that we're seeing higher prices today because the companies are of higher value and therefore just going to be more durable to grow into those prices? I think it is. I think, you know, it's become a little bit easier, quite frankly, in terms of discussing

Starting point is 00:56:36 valuation because now we can actually base the valuation on a revenue multiple, right? And as we mentioned earlier, we're more than have to wait to actually see some early traction and give a fair valuation based upon kind of what the, you know, generated revenue or ARR at that particular point in time is, or at least what the expected one would be 12 months from now, and have a reasonable conversation about what the appropriate multiple is instead of just trying to draw numbers out of thin air. So while I believe medium valuations are kind of normalized somewhat, the underlying revenue growth is actually much better these days. And so thus we're getting more better, I would say, better priced opportunities. Maybe I'll add some color to that. Oh, dude, please. Like, I think the median valuations, I agree with Jay's point.

Starting point is 00:57:26 But, you know, what's interesting is if you look at the 95th percentile, that's a whole different story, right? Like, the median valuations look like it's kind of reasonable. Oh, yeah, look, a little uptick this year. That's nice, but things are growing. I agree. On the extremes, I mean, it's crazy out there, right? Like, you have multiple companies with no revenue.

Starting point is 00:57:45 raising at a billion dollars. You have, you know, I've had in this past week multiple people say, we're AI guys, so I need $100 million because here's this cool result. No business, no nothing. And I'm like, this is a recurring phenomenon. So, you know, and some of them are going to raise those rounds, whether I say yes or no. So I do think there is also a bit of a story there as well. At the median, I think, yeah, it's fine.

Starting point is 00:58:12 I mean, like, if we're growing so fast, if you're, you look at Anthropic, right? Like, Anthropic is literally the fastest growing software company of all time. Zero, 100 million, a billion, and then this year tracking to 10 billion. These are made up numbers. Like, you can't tell people. You got to show this chart. I mean, this is my boy. I've seen it.

Starting point is 00:58:33 It's crazy. Here is the chart from our dear friends over at the information, giving them some credit of revenue growth from both open AI and Anthropics. This comes from a story, guys, that came out this week, indicating that Anthropic has raised its revenue projections. And as you can see here, it's grown from incredibly little to quite a lot. One billion error at the start of the year to $7 billion at the last thing that I heard. Though, D.D. sounds like $10 billion might be the new number. I mean, around that amount. I mean, I'm following the information leaks.

Starting point is 00:59:02 These are not investor comments. This is how much information I get about Anthropic. But look, I mean, the reality is Anthropic has... has always underestimated their own numbers. So this projection is not as wild as it might seem. If you know the history of how often they have undershot their actual goal, which is every single time, every single year they've undershot their own goals. So, you know, I think, I think it's just insane how much growth there actually is for the absolute top companies.

Starting point is 00:59:36 One last thing I want to say with Jason said the hardest job is, is an investor's. That's absolutely not true. the hardest job is definitely a founders. I think maybe he was saying, like, chance of success is... Yeah, I'm talking more about, like, the compensation, but yeah. This is going to get a clip to put on VC brags, I can tell. No, no, no, there's two different things. So if you really want to make the big money, be a founder, for sure.

Starting point is 01:00:02 And then joining these great companies is a clearer path to compensation. But VCs don't have to work 996. And they're not. I mean, yeah, that's very true, I think. What are VCRs? If engineers have to work 996 today, what was it like that? I mean, I would say I probably work 60, 70 hours a week. And people on my team work 50 to 70.

Starting point is 01:00:26 D.D., how much do you work? I don't not work. Like, I think I work all the time. I don't think the work is as intense as it was that maybe when I was at a startup. But, I mean, you know, look, like, I'll be just candid. Like, I'm new in this industry. And I think the only thing that I have to add is hours. That's like the only thing I can control is how much information I'm ingesting.

Starting point is 01:00:47 I'm able to process and then helping the people that I'm trying to help. And so, you know, that means that that frankly, like I will return text at 1 a.m. I am up working all the time. I don't have a family yet. And so at some point maybe that will change. But right now, like this is my life. All right. Jay, just because we're doing this apparently, how much do you work?

Starting point is 01:01:08 And are you working the 10 to 4 that I hear VCs love to rock? Well, I think, I think because, you know, Jason alluded to, I think, you know, all of us have to be constantly on, right? So if you actually count the hours that you're off, you know, you're sleeping, you know, bathroom breaks and whatnot, maybe you have some, you know, private hobbies that you enjoy. I love to watch movies. I'll play some games once in a while. But excluding it, all of that, like I'm,

Starting point is 01:01:38 constantly on. And you know, everybody knows this, but I have this kind of bad habit. Like I have a zero inbox habit. So I will have to clear my inbox before going to bed. And the first thing I do when I wake up, grab my phone and go through my emails and texts and messages and whatnot. And so I think most functioning VCs are basically trained to work like that because that's the expectation. You know, you kind of have to keep pace with your founders. You have to keep pace with the founders. And then you have to the deals are getting done so quickly now that, you know, if you need time to do diligence, well, that's on you.

Starting point is 01:02:15 You better move quick because a founder can just say like, yeah, you know, we don't have time to wait. We'll talk to you in the next round. And if you are able to get in the next round. So you really do need to. The diligence I can share. Yeah, go ahead. There was an interesting anecdote.

Starting point is 01:02:31 I'm obviously not going to name the people involved, but, you know, there was a close friend founder of mine who was raising this round. And, you know, at some point he was like, hey, can you look through my data room? Like, tell me if I'm doing things right. This is kind of my first rodeo doing this kind of round. And I look through it and I give him some feedback at the end of the day. And he goes like, hey, man, we already have term sheets. I'm like, dude, you didn't have a data room.

Starting point is 01:02:57 Like, what do you mean? Like, you didn't have your financials on there. What do you mean you have a term sheet? He's like, dude, I'm just telling you what happened, man. Like, I don't know how. I don't know what I did, but it is actually true that because of the speed of these deals and speed is a differentiating factor in order for many people to win deals that, look, there are some cases where diligence is just not happening. That's the reality. We just went through a lesson in 2021 about not doing diligence, investing too quickly and assigning unicorn evaluations to revenue-free companies. What the f are we doing now?

Starting point is 01:03:32 FTCX. I mean, you're speaking of Sequoia and other firms. A lot of them. just drafted on each other's supposed diligence. And it is when the market gets hot, and I've lived through now a couple of bubbles, like three, I think, four. And I always see the same thing. People lack discipline, so they don't do diligence, right? So they suspend disbelief. Okay.

Starting point is 01:03:58 Number two, they get really greedy, so they don't take the opportunity to liquidate positions when they maybe have the opportunity on. They hold on too long, et cetera. And then I see people actually acting, I see people acting unethically. And that happens in a bubble as well. And you'll see this, ZD, like, you'll start to see people who retrade deals on either side. It could be founders. It could be entrepreneurs.

Starting point is 01:04:23 You know, you'll have a founder sign, a term sheet for a convertible note at one valuation. And then another VC pays at a different valuation. They're in the same round. One person has MFN. Another person has a side letter. Nobody knows the complete picture of what's going on. And so we've had to unravel some of these things that have occurred. I don't recommend anybody do anything other than standard documents and being up front with everybody.

Starting point is 01:04:47 Because when people find out that you gave a special deal to one firm or that somebody had some special side letter or whatever it is, and they might have MFN in their documents, you may have to go correct that in the next round and the valuation's gone up now, yeah, just always standard documents and don't play any games. You know, and just best advice. People get very weird. And then the other thing that happens is people, you know, sometimes they forget who helped get them here. You know, we'll have, you know, and you see this every time there's a bubble.

Starting point is 01:05:18 People will be like, oh, you got an amazing deal. You have to give up your board seat. You have to give up your pro rata. You have to give up your information rights. We invested in you three years ago and nobody else believed in you. Why are you asking us to give up all of these rights? And the founder will say, oh, the VC who was doing this round is. saying if you don't give them up, they're not going to do the round.

Starting point is 01:05:37 And they're not, you know, all kinds of shenanigans occur. Just being standard and being up front. And like, you can really see people maybe start playing short-term games instead of long-term games. I'm a long-term game guy. Like, really like the long-term game of everybody just being respectful and not trying to get over on people. I saw, there was somebody talking things. Jason Lemkin said he saw, like, a couple of founders just abscond with the money. So when we get these peak moments and then people don't do diligence, you could have interlopers come into the industry.

Starting point is 01:06:08 And everybody knows those stories as well. D-D-D, are you seeing, I'm sorry, Jay, are you seeing similar levels of malfeasance and poor behavior as we are in, let's say, a hot market? I mean, fortunately, I haven't directly experienced as much, but I'm sure it's out there. We've heard, you know, stories from our colleagues out there. I do think that the level of FOMO is getting to kind of bubble levels, for sure. I've heard stories now of high growth founders being chased at airport security lines, people showing up unannounced at doorsteps with term sheets. I mean, things are getting pretty frothy again.

Starting point is 01:06:52 And so, you know, again, understandably, nobody wants to miss out on the next, you know, Open AI, Anthropic, lovable, whatever that is. But it's getting out of control. All right. So one way that founders create FOMO, and I actually have a tweet here from DEDE is by doing intelligent work on social media. This is a tweet from DEDA saying, this is the ultimate TikTok growth marketing guide every Gen C founder is using.

Starting point is 01:07:18 And one thing I'm really bored of is expensively, selectly produced launch videos, DD. But it seems that because everyone knows you can now go from zero to 100 million error faster, they're more desperate to grow revenue from kind of day zero versus maybe a little bit later when they have better fundamentals, economics. And you're kind of tongue and cheek playing into this here. But is it healthy for the startup land to index so heavily on, I would say, like, in group virality over on X or TikTok? I actually, like, don't mind it. I don't think it matters. I think the problem really is when the product does not follow that marketing.

Starting point is 01:07:53 Right. Like the fact that you're doing like viral distribution campaigns is, is immaterial to me. Look, X is a pretty terrible place to do viral distribution campaigns in terms of the volume and audience you reach. So I think founders doing it on X are maybe more clout chasing than business chasing. Look, the real audience is probably on the other like Instagram and TikTok and Reddit and things like that. And I think that's fair. Look, like if you're trying to grow your product really fast, like absolutely you should be employing all the tricks of the trade to do that. that if you do that and your product is absolutely shit,

Starting point is 01:08:27 then you're gonna have a hard time, right? Like it's just gonna, you're gonna try to run behind something that you can't keep up with. So that's not great. And on the flip side of this, what's super fascinating to me is what's fascinating to me in the last couple of weeks actually is I've been doing this all the time. I suggest you guys do it if you have a lot of free time,

Starting point is 01:08:43 but do you know how, we know that LLMs and chat GPT, often when you ask it a question, it will summarize from a bunch of web results, right? A lot of those web results happen to be Reddit results. And so there are entire companies built on spamming Reddit with high quality content that's completely AI generated, where they sneak your company that they're trying to sell in there in ways that trust me, like most humans, including myself, would not know that this is fake at Facebook.

Starting point is 01:09:17 And so what's happening is like it's not just the TikTok and Instagram stuff. It is also this insidious nature in LinkedIn and in Reddit where there's these not only sponsored content, but is automatically algorithmically generated content from basically bot farms of anonymous accounts that are influencing people's behavior. And Slop is an interesting terminology. I actually had this interesting conversation the other day where the real question is it is only slop when we know it's AI generated. But the reality is, in most cases, people don't know. It could just be a stupid person or just an unsophisticated person reading it, not realizing it's slop. Well, it's not only that, though.

Starting point is 01:09:56 The quality of some of these short-from video creation is mind-blowing. I challenge you to notice a difference just a year ago, two years ago. You could tell, right? Everybody's, everything is still in, just the mouth is moving. Nowadays, it's so sophisticated, multiple camera angles. I mean, look, the point that was made earlier about, you know, viral growth generation, Some of the smartest guys are using these AI tools to do it. Think about the fact that instead of having to record these short-form videos multiple times a day,

Starting point is 01:10:26 you can actually create a video likeness, virtual likeness of yourself, using AI, having scripts that are auto-generated using generative AI, and just having them automatically posted to a specific targeted audience, that again, you use Agentic AI to specifically target. We just closed an investment in a company, and I've never done this before, this before. They are a AI chatbot company. And again, why would you invest in the AI chat about company? Because they're changing the game. And the way they fundraise, they actually found investors all using their own tools. The due diligence, the pitch deck, and even all the due diligence

Starting point is 01:11:04 questions, you would come to their website and you would be able to actually utilize their own chatbot to generate the engines. I love that. And so, you know, there are so many AI tools these days that are making every step of the startup business process so much more efficient, you know, if you're not taking advantage of that, I don't think you're doing your job right. What's the company that you just made an investment into? This is a company called Lyser. Shout out to Lizer. L-I-Z?

Starting point is 01:11:32 L-Y-ZR. If you want to look it up, it's L-Y-ZR.A-I if you're listening in to this live. I have not heard of this company. You'll be hearing about it. Okay. But I just love the ESOS that they were basically eating their own dog food in their fundraising process. And they have a little bit of a shout out on a LinkedIn post to announce to other founders to utilize their own service to be able to actually raise your series seeds, series A. I want to loop back to what D.D. you said about insidiously, basically SpawnCon being put into human forums.

Starting point is 01:12:10 This is kind of the dead internet theory, D.D. are we at risk of reaching a tipping point? in which we've automated so much content generation that we wind up in the world when it's just bots watching bots and humans are just left by the way I said and I asked because I was expecting a more negative reaction to the the Cluley style hype videos from you all but instead very much a different response which is good to why you ask questions but it makes me worry that if you guys are this positive on it we're going to see so much of it that it could become a preponderance I think look it's it's just not our our position to say right like if I was I was at Google or at Reddit, I would want to tamp down on this.

Starting point is 01:12:48 Absolutely, right? I don't want my platform to be spammed with AI-generated content. But on the founder side, like, look, if that is an avenue that is generating engagement for you, I can't complain if they want to use that to grow their business. So I really do think that it, like, I hate the internet theory. I hate the fact that this exists. At a philosophical level, I don't think that. should happen you know there's this there's this great graph called what people are

Starting point is 01:13:19 calling the new Flippening I don't know exactly how they got this data but it shows how much of the internet's content is human-generated versus AI rated over time and and what does that mean like for the future of how even like these great products like chat GPT work like it's just gonna be a loop of eating its own slop and and then and turning out stuff that is not human generated at all. It means an opportunity, the opportunity for us as humans to in some way, you know, authenticate that the content we're making is in fact us and not AI. And I think what you're going to see is like in Star Wars when they say, hey, we don't want your kind in here on

Starting point is 01:14:02 Moss Isley and they don't let the droids into the bar. That's happening now. No AI. So people are now putting on their movies or, you know, on their stories, no AI. This includes, no AI. There's no AI edit to this. So it's going to be kind of like acoustic or organic food. People are going to start labeling things human only or 100% human as a reaction to this. Now, I love the storytelling. Like so clearly, I'm not sure if their business will be successful or not. We've had the founder on here. He's super spicy. But they know how to storytell. And storytelling is important because you, the ability to tell a story is something that Elon does exceptionally well when he runs his companies. Steve Jobs does exceptionally well when he does his stories. Travis and Uber

Starting point is 01:14:48 did this exceptionally well. They told the story of why this needs to exist and to do it in a short form video and make it punchy because today's tools allow you to do that. If that explains your value proposition to users faster than tool tips in the app or word of mouth, great. We have a company Howie where investors in, we seated the company and they just did like their own launch video about about like doing meetings and a lot of VC's use is how we software to do meetings and book them. They've got human in the loop to make sure it does what it does correctly. That add just added like a lot of brand value to them.

Starting point is 01:15:28 It added like a vibe of like this isn't just a regular service. This is like we actually care enough about the service to tell the story in a really interesting way. I kind of like it actually. It's kind of the difference between somebody who makes like a, cheap $3 t-shirt merch that nobody's ever going to wear. And then somebody makes some really interesting, great piece of merch that you actually use in the world. It's kind of like that.

Starting point is 01:15:57 But I love some of these launch videos. I go watch them all day if they're done well. All right. Well, color be wrong on that one. Guys, I have to take us to a conclusion here. We could talk for the next three days. I know. But I do want to get each of you a chance to shout out a portfolio company, tradition that I do these.

Starting point is 01:16:11 So, Jay, who is your current favorite child and why? Oh, no, no. All of our babies are cute and beautiful. But I do want to give a shout out since we've talked about Higgsfield already to Abacus. And Jason, I hope they're on your favorite list as well. But I just love the fact that this entrepreneur bootstrapped his way to a million-dollar error. And as we all know, while every consumer out there has now tried some form of AI agents, whether it's chat GPT or whatever, there are certain enterprises and certain industries where you're literally banned from using it, right?

Starting point is 01:16:49 And so I think the fact that in the financial industry or the healthcare industry where your data cannot leave the print, you have companies like Abacus that come from the industry, know these pain points, and they've built a model where they basically have created kind of, I would say, a AI foundry service in a way, where they enable the enterprise customer, to basically train on your own data. They provide all the tools and the infrastructure using open source models. And they are able to even provide an application generation platform where you can build your own in-house version of chat TPT to be used for in-house compliance, rule lookup, policies, and all of these things that, you know, would be great to have on your fingertips. They've screened out for hallucinations and whatnot to make sure it's 100% accurate.

Starting point is 01:17:40 And once it's been proven and tested in an internal environment, guess what? They're going to try it with partners and customers. Yeah. And so it's just a great, great model and just love the greed of the entrepreneur to actually start this from scratch, bootstrap it all the way to a million dollar ARR and now they're off to the races. GoAdvocus.co is the URL if you want to check it out. D.D., who is your favorite port co? And why is it OpenRouter? Well, I don't think OpenRouter needs another shout for me, given that

Starting point is 01:18:10 Elon tweets about it like five times a day. But I mean, it's got the best charts online, man. I love it. I'll talk a little bit about open router. I'll maybe do an actual shout that I think deserves it needs it more maybe. Open router, look, fantastic business. It's part of my thesis that if you are a, if you can be a product-led growth company, you must be a product-led growth company.

Starting point is 01:18:35 There's various versions of an open router that could have gone and sold B2B to enterprises, But they are absolutely going to be steamrolled by this massive thing that has awareness in the broader world. And they are. So love that company. It's fantastic. We're going to live in a multi-model world. People want to know what's happening. There's 20 plus great models and hundreds of other models.

Starting point is 01:18:56 Sure. With different providers. And people want to know which providers are doing what and how can I access the different models. But the company you love even more is. I love open rudder. They don't need my love anymore. They're, they're kings. Goodfire is the company I would love to show out.

Starting point is 01:19:12 Ah, yes. And the reason, a little bit of the backstory on Goodfire is, look, it's a mechanistic interpretability company. That's a fancy way of saying brain surgery for AI models. We don't really understand how AI models work. We don't understand how they think. We rely on them to give us thinking traces, which are poor proxies for what's actually going on inside their head.

Starting point is 01:19:36 And these are the top mechanistic interpretability researchers who started teams at anthropic, deep mind, open AI, who've come together to set out on this mission to really understand what's going on in AI models as it becomes ubiquitous. I think it's absolutely fundamental for society for us to understand this because we cannot trust black boxes with, you know, huge decisions. And I think they have tremendously cruel scientific breakthroughs that they will announce at some point that are going to be extremely valuable. I was excited about Goodfire if we got into deep tech because I know that Jay's made some investments into robotics companies. And when I saw that they were an AI interpretability research

Starting point is 01:20:12 company, I was like, yes, that. But we got to move on. Jason, last question is for you. Who is your favorite port coat or at least the one you want to shout out on the show? Well, I mean, I could have done advocates, but I'll do a different one and spread the love. Next visit, AI. This is an AI powered, you know, clinical note taker, except it works in a very specific vertical, which is psychiatry. and that has very specific note-taking details, as you could imagine. And this is a great co-founding team with a psychiatrist and an AI specialist, and they very quickly got this to work. And you can imagine psychiatrists who are doing counseling or just sessions

Starting point is 01:20:55 and prescribing drugs and a lot of other modalities. They spend like half their time, a third of their time just doing paperwork. And this stuff is just nailed it, the fiducian. fidelity, when you go after something narrow as a startup and you get it right, it can really pay off. And so this is one of the things we try to teach people in the accelerator. They're concerned, oh, VCs are not going to be impressed because it's such a small idea. Like, trading a stock for free is a very small idea called Robin Hood. Like watching your taxi come to you on a Google map and paying for it is a very small idea, but it's a profound idea that then, you, you know,

Starting point is 01:21:36 things were built on top of like Robin Hood is not just trading a stock for free now. You can get margin loans. You can do crypto. You can do prediction markets, right? Mortgage, Jason. They do mortgages now. Okay. I didn't know. I wasn't even aware of that one. But, you know, it's, I always like this laser focus. I tell people like you can turn on a flashlight and just like kind of point in the forest and like, yeah, we're going to do something out there. When you take the laser pointer, you're like, we're going to do that. See that thing right there? Right there. That's what we're doing. that laser. We're going to do it really, really well and make it perfect. So the customer

Starting point is 01:22:10 has no choice but to use this product and they love it more than anything they've ever had. That's kind of the magic in that year zero or year one. Just do one thing better than everybody in the world that makes that customer just so delighted they won't shut up about it. And that's when you're at PS score. It's like nine or ten. And so everybody wants to do, you know, the co-pilot that transcribes what you're saying. But man, just getting in there and knowing that this person is taking this ADHD on this level, and it's this code, and it's this type of ADHD medicine. It's not the generic.

Starting point is 01:22:44 It's a specific one with a specific one. Like, you've got to get that right. You can't get that wrong, right? Or else it's just not worth using. It's not like a hallucination when you're trying to figure out what movie to watch this weekend. Favorite Paul Thomas Anderson, Jay, your favorite Paul Thomas Anderson? Speaking of movies, you say, like movies?

Starting point is 01:23:00 You have a Paul Thomas Anderson guy? Yeah, the most recent one, What is it? One battle after another. Yes. Oh, my God. Is that crazy? I was on the edge of my seat the whole freaking time.

Starting point is 01:23:12 That was crazy. It is like a three hour like. Oh yeah. It's an explosion. It's a marathon and a sprint. It's crazy. But it's, you know, my Paul Thomas Anderson favorite still remains the master. Oh, of course.

Starting point is 01:23:26 Oh, that movie was. The masters. That's the next level. Dee Dee is looking at us like, how do you guys have time for this? We're from a different generation. different generation we cared about cinema all right everybody see you next time all right bye everybody this has been twist we'll see you all soon this was so much fun guys thanks great times thanks for doing it jay likes dd

This Week in Startups - Is investing REALLY the hardest job in tech? A TWIST VC Roundtable (ft. Deedy Das and Jay Eum) | E2204

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