Transcription Chat with AI FAQs Transcription Summary 16034 Words, 88475 Characters
The first mode is data mode, second is the workflow mode, third one is regulatory mode, fourth mode is a distribution mode. We're on number five. Ecosystem mode, sixth one is a network mode, seventh one is the thing you mentioned, physical infrastructure, right? And the eighth one, I would say scale mode, you cannot be a single product company. I think vertical products, you've got to really own full stack. I think it's harder otherwise to be a 10 plus million dollar company. This is 20 VC with me, Harry Stappings. And I'm so excited for the show today. I'm thrilled to welcome one of the best operated turned investors of the last two decades, Gokku Rajram. He works with some of the best founders of our time, serving on the boards of three public companies, including Quinn base, Pinterest and the trade desk. He's also one of the most successful angel investors of the last few decades, with early investments in air table, Figma, Vacell, super base and many more. 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And if your big end prizes, Vanta is your AI powered hub for compliance and risk. Bring together data from across your business and automating workflows so you can prove trust at any moment. Vanta scales with you at every stage. That's why top companies from startups like Cursor to enterprises like Snowflake choose Vanta. Do security and compliance right? My listeners can get $1,000 off Vanta by going to Vanta.com/2ZeroVseatsday to see for $1,000 off Vanta. You have now arrived at your destination. I wanted to do this for years and you have, I mean, you've clearly played hard to get. Let's put it mildly. After my continuous WhatsApp messages. But thank you so much for joining me, Stéman. It's my pleasure to be here, my friend. Thank you again. Now I wanted to start with how some of your prior companies that you've worked out of shaped your investing mind specifically. And I wanted to start with Google. When you reflect on your time with Google, how did that shape your mindset for the types of companies that you like today? I think the best way to think about the Google experiences, Google taught me that ultimately the best companies have a remarkable product at their core. Google was definitely a philosophy of build it remarkably and they will come. GTM was not Google's specialty, but what Google was really good at was building amazing products. Sometimes they go to market work, sometimes it didn't work. But at the core was a remarkable product. So ultimately my core investing thesis is that if there is not a remarkable product, all the go-to-marketing distribution in the world will not save you. I look for what the remarkable is in the core product or value proposition of the company. Is it 10X, 100X better than the alternative? I'll tell you a story at Google. When I joined in 2003, there was a project going on called Caribou internally. I was like, what the hell is this? This was web email which gave one gigabyte free storage and back then Yahoo Mail offered 10 megabytes of storage. So it was 100X. I was like, there's no way it's possible. And turns out it was. I was like, if you remember April 1st, 2003, and that people called us in April Fool's Show, but that was Google literally taking something that was unbelievable and making it reality. And so that's a kind of products I like, something remarkable, something unique, something powerful. I like it. It reminds me of actually Neil Meiter who talks about kind of jaw-dropping customer experience as one of his core monarchs for thinking about companies and investments. Now as we have Facebook, how did Facebook impact the types of companies that you like? What is interesting is that even if you have a remarkable product, you still need distribution. Facebook taught me the power of distribution. Mark, I think, is the best distribution genius in the world. He would look at a product and say, this is how this product is not going to work. And it taught me the power of multiplayer products in particular. Most software products are single-player. And as soon as you make the multiplayer, there is a uniqueness in switching distribution etc. That comes about Facebook by nature. You can't use it if you only have one person on Facebook. And so when I saw Figma, the power of Figma I felt was it was not just that a person produced it, but it was much easier to share with other people in your company. And I think the best PLD software companies are those that you can use, multi-dublic and use, and it increases defensibility. So the power of distribution and multiplayer products. What about a square? What did you learn from a square that you've taken to your investing? The power of a multi-product portfolio. I think at Square, when I joined, we were a single-product company, payments and payments only. When I left, we had, I think, 11 products each doing more than 50 million in revenue. And one of the interesting metrics was our key not-star metric went to median number of products used by a seller by a merchant. Turns out that the more products that a merchant uses, the more attentive they are, the more sticky they get. So this is the other thesis I have. I mean, this is obviously very clear now. You cannot be a single-product company. And most importantly, your product number two needs to emanate very naturally. It can't be like this completely separate product. It has to be very adjacent for Square, it was a product called Square Capital, which was basically a cash advance product that really came from the fact that Square controlled the payment flows and knew exactly the merchant's credit history and could underwrite based on basically money going in and out. It was a beautiful product. The interesting thing about having a multi-product portfolio is that not every product needs to generate profit. So I was like, "Oh, it's not making money." Square Capital didn't make much money, but it was very good for retention. Some products are good for making money. They're part of the profit pool and some are good for retention companies. They do very clear which are the profit pool products and which are the retention products. If you confuse it to, your teams don't know and they build for the wrong outcomes. But the power of a multi-product portfolio and being able to have products with different goals, retention versus profits. I love that in terms of it doesn't need to be profitable. I also just see so many investors stay being relatively inelastic in terms of their mindset on margin. Whereas the margins are shit. Where did negative growth margins for the first year? I think negative growth margins. I don't think Dordash had great growth margins for the first years either. I think it didn't need to deliver who did. Obviously Dordash acquired. It's just funny that we repeat the same mental cycles that other margins are shit. It's like, "Yeah, so were the best companies margins Spotify. Didn't have great margins for a very long time." Their margin increase has been amazing actually. What is the lesson from Dordash? It was the most operational of all four companies. I thought I was a good operator. When I got to Dordash, I really realized what operations means. And so a lot of my philosophies around how to truly operate in a hard mode have been shaped by it. It really was the epithelioses or the epitome of how I think how product and operations can work together in the physical world. So how it shaped my investing philosophy is the kinds of people that came out of Dordash I just think they are excellent and I try to get them. It's really around hiring. It's around talent. It's around taking really hard problems and so on. And I'll never forget when COVID hit, as you know, most restaurants were shut down for the first couple of weeks. And so Dordash had to make a very hard call around what to do, how to get these restaurants open. And ultimately we decided to not take any revenue share from these restaurants for a month, even though we were a private company. We had some kind of cash on the balance sheet. And that really hurt. It was the right thing to do in the long term, but it was a good thing.
extremely being fluent in the short term. - You spoke about kind of the skill of operators to work both in a physical and in a software-based environment that would door dash even with Project Europe, which we've had about before. We're seeing all of our hardware companies be so freaking popular right now because everyone's just terrified that bluntly anthropic's gonna eat their lunch as we keep seeing with anthropic doing security and security stocks plunge. I wanna talk about the SaaS apocalypse. Is the volatility that we're seeing justified? What are we in a manic hype over sale environment with emotional volatility? - Well, as all of our software portfolio is a deep red, all of us have some software stocks and the reality is public market has decided that since code is becoming free at the low end and becoming much easier to generate and create at the high end, the market decided that every software company is going to zero. I think this is 100% overreaction because not all software companies are created equal and I actually, I mean, both you and I think about this a lot. What are the characteristics of a durable software company and I think there's a few that we can talk about? But yeah, I think it's absolutely, I think everything has been painted with the same brush at this point. It is absolutely a no-reaction. - You're gonna leave me with a cliffhound, Goku. You're like, that's some very durable characteristics. We can talk about them if you want. I would love it if we could talk about them. Can you please help me understand? - It's basically a play on Hamilton Helmer 7 parts but it's slightly different. I call it the eight modes. The first mode is data mode, which we all talk about but it's really has you proprietary. It has you data that nobody else has access to. I think Spotify is a good example. If you look at their discover product, it uses a decade of listing behavior across hundreds of billions of people. You can't create that listing product, that discover product easily. Second is the workflow mode, which a lot of people argue it's a weak mode, I agree by itself, it's a weak mode but the deeper you're embedded in the company, running their operations, moving their money, the deeper the workflow mode is. Just by itself, I don't think it's enough in perpetuity but the deeper you're embedding is, for example, Net Suite is an ERP that runs your business. They have a much, much deeper mode than say ZenDesk, which is a lighter workflow mode. So that is a mode, you can say it's one, maybe ZenDesk is 0.5, next week is a one. Third one is reculatory mode. So licenses, capital require multi-approach and contract coin base, where I'm on the board, is a great example. They have MTL's money transmission licenses, state-by-state, they raise with a finny CN, all of those things. It makes it impossible for a company to use anybody else and coin base to custody the crypto, because of that reason. Fourth mode is a distribution mode, where you have proprietor exclusive distribution. Intuit is a great example. Anybody wants to build an accounting system? I remember when I started a company, was after Google, I basically tried to use this company called Zero XERO and I was like, let's use zero, it's like the new, it had just started, it seems like a cooler interface. My accountant said, no, I'm sorry, I don't use zero. You shut it down, I had to cancel zero and go to QuickBooks. What a great distribution mode, where you've trained a network of CPAs to only on a QuickBooks, I don't know if they have a commission or what they get, but that's a proprietary distribution channel that these guys have, very hard to display to them. Fifth one, ecosystem mode. If you have a platform or ecosystem where many third parties are built on and rely on, you have a mode, Shopify is a great example. You can wipe code and e-commerce hosting platform, no problem, but can you wipe code the 100,000 of developers and third parties who build all these application and Shopify? Every Shopify merchant I know uses like at least five or six out of third party apps. That's a huge part of the Shopify ecosystem. That's a mode. Sixth one is a network mode. That's classic door dash. I think door dash is many other modes, but AI can wipe code a, be able to access restaurants, but you can't wipe code liquidity, career density, reputation history, all of those things. So marketplace density is a network effect, which is structural. Seventh one is the thing you mentioned, physical infrastructure, right? Atoms, wherever you have atoms, it makes for a mode that's hard to displace. Again, I think humanoid robots will maybe at some points are taking, but it's probably a few years away. And the eighth one I would say, scale mode. If by virtue of your scale, your costs are so low that it's hard to replicate. I think Amazon is a great example. TSMC in semiconductors, scale mode. So those are the eight modes basically. Data, workflow, regulatory distribution, ecosystem, network, physical and scale. And so what you do, I think any one of these modes is not enough, but what you want to do is you want to take a company and score it across them, maybe assign one point to each mode they have. And I think anything four or more, you're pretty damn secure. But if you have a two or three, it's a weak mode. And if you're one or less, you probably need to really build some more modes, or you're not need to do something to make up for. If you have zero, you're screwed basically. I'm just thinking that the thought I saw, so we have Atlassian and we have Monday. They're both down kind of 75%. I've had both their CEOs on the show. If you look at them and you put them across this eight kind of rules, you would probably say that Atlassian is being massively oversold and that Monday as awful as it sounds is maybe being rightly priced in this environment. I agree with that. I think Atlassian has proprietary data. Now they need to use the data to build products. They have unique proponents on all the code out there because it's being checked in. There's a lot of stuff they have which they need to use for better. They have a workflow mode. They don't have a regulatory mode. I don't know about distribution mode. Need to think of where they have something there. Ecosystem mode, I think there's a lot of third party things that are built around them. So they at least have a score of three here. They have a network mode. You could have a network or no. I don't think they're not a network effects company. The way you think about it, they don't have a physical mode and they don't have a scale mode. So they have a score of three. Monday probably has a score of one, I think. I'm not sure if they have the other modes. So your right Monday in theory has a much weaker score, I guess, than Benatlasean on this. This is so unfair of me. How would you think about Clavio in this way? Like when you look at Bluntney, the ability for public companies to build good agent products, it would seem very obvious that Shopify will bluntly build Clavio now in the need to re-exaggerate. How would they rate? I don't think Shopify will build it. Shopify is an investor and Shopify, I think, has decided, at least in my opinion, that this is-- Shopify has these things called missions, and I think they decide this is not part of the mission to build this product. So I don't think their risk is Shopify. It has become easier to build Clavio now than it was a year ago. So it's easy to build Clavio. I haven't talked about brand. I think brand is no longer a strong mode. I explicitly excluded brand. I don't know how strong Shopify's promotion of Clavio is. I think a lot of it depends on whether the proprietary distribution they get from Shopify, how strong and tight it is. If Shopify is actually going to promote them as a-- when you search for messaging or communications, Google has a more fit Apple. When you use Apple-ly, basically, Apple products, you get Google search engine. If Clavio is a preferred product, and they have a relationship that makes it work, I think it's very hard to displace them. It's hard to at least displace that part of their business. Did you just throw a grenade in? And don't expect me to pick up on that. I think brand mode is not so relevant anymore. I just actually had Lena Werner, who's the head of growth at Loveable on our 20-growth show. And she said that actually brand is the most important thing, is you commoditize technology, and it's easier and easier to create. How people resonate with a brand is the most important. Why do you think brand mode is not as important? Business is much more rational in thinking about it, less irrational. And the alternatives are going to be much stronger. I think on the consumer side, consumers are much more, like, dollars-- and there is dollars and cents, but there is a natural inclination to just trust brands. I think on the business side, it is going to get weaker. I think I actually disagree a little bit, because switching costs are so much lower. At one of the Hamilton Helmer 7 powers is switching costs. I think switching costs is less going to go to essentially zero, because over the next one or two years, ability to report data, your data, as a business are consumer from any ecosystem, is going to be very easy. And then people are going to be able to replicate almost pixel by pixel the experience you have with one product in a different products. You'll have clones popping up left, right, and center, and data portability is going to be easy. In that case, what is that brand really? It's like in professional sports, do you cheer for the player or the team when they switch teams? I need your help, because the one that I continuously oscillate on is Salesforce. When you say about data portability being increasingly easy, we had SAP from Kronor on the show. He said agents would make data migration from systems were a record increasingly easy, so they wouldn't have the lock in that we think will produce the switching costs. But then I look at your eight factors, and I'm like, well, they have workflow, they have distribution, they have ecosystem, they have scale. Well, they don't have scale. Their scale means that it is cheaper for them to produce. I think they have a score of three, because that's the thing software earlier was a scale game, where because you had produced a lot of software, it was cheaper for you to produce a lot of the guess what now. Everybody can produce software as cheaply as anybody else. If they had their own data centers, like I think hyper-scalers are the ones that basically are able to say confidently that they have scale of people in the physical world, a pure software company can't get that scale more. But yes, they are very similar to Atlassian, where they have a score of three, I would say. So do you think Salesforce and Assistums of record light Salesforce are inherently attractive or less attractive given the data portability increasing? They are more attractive than most companies, most software companies, but if they don't build a genetic workflows and commoditize a complement by figuring out where the profit pool is. I think they have to figure out as a profit pool in the data or the workflows. If in the workflows, they need to make data storage free and basically change pricing to an out-composed model based on workflows. If they feel the profit pool is in the data, then they need to give away these workflows for free. And so they need to really commoditize all the agentic companies that you and I know, that are trying to build on top of
them and charge for that. They need to be better products using their data and make it free. And I think that's the way that a net suite or a sales for the system needs to operate. They have to commoditize their complement. They can't just wait around for other people to build them up with them. We're seeing buybacks like, like, never before, for your work days and your sales forces of the world. Is that truly indicative, do you think, of like, internal company confidence? Or do you think it's a necessity to externally show the world that we are confident? It's both. They are confident internally, but they need a signal to show that they are confident. I think the founder buyback is the most, the strongest signal, it's not just a company, but also the founder. Did you see sort of his now CEO? It's 3 million buyback. And then they saw that his garage of the classic cars was like three times as much. I was just like, oh, that's a bad cons, mate. Yeah, I think there are buybacks and there are buybacks with the capital B. You want the capital B one. You want the CEO of a large company to do a $20, $50 million buyback to show confidence. I completely agree. We've seen, we've mentioned Monday, we see companies like Notion, like Amplitude and mixing publics and privates, but kind of growth stage companies and even privates do bolt-on strategies. Hey, a core product with a bolt-on of AI. How do we determine bolt-on AI strategies that work versus bolt-on AI that doesn't? It's an interesting thing. The bolt-on AI strategy by itself has a real ceiling, but I think the companies where the bolt-on really works are the ones that reframe what the product does, not just add the capabilities. So I think if you just add AI search, as there's one thing you just add AI search, or you build search as an experience with new UX primitives. One is just an upgrade. The other is doing completely something completely different. So Notion, for example, I think very highly of them. I think Notion is adding AI. You mentioned they're adding a lot of AI agents. I am hoping that the way they added it, I actually played around with the product. I think it's pretty good. But the AI just need to now get better based on how the user interacted with it. And they need to tune the model for their customer base. Most bolt-on players are not doing it. They're simply using a GPT or an anthropic model adding a thin layer. You have to rebuild the entire experience end-to-end. Do you do that by identifying something where AI doesn't just improve the margin, it changes the experience and the economics. Document processing was a good example. I think ultimately, you couldn't actually extract structured information from the unstructured documents till about six or nine months ago. Now, you can reliably read dense legal contracts. Your experience around documents needs to be fundamentally different. If you're just getting someone to upload a document in the flow, you need to instantly give them immediate insight from the document while they're uploading it versus the same document upload thing. That's crazy because now you should be able to infer any document that enters what the hell is going on instantly. So you need to re-value it every single interaction and say, what has changed? That's the biggest difference in product development today. Model capabilities are improving every six months. Because if you have too long a product roadmap, you're going through any program and the model comes and just blows it out of the water. So you've got to really understand what the capabilities are of each new generation. You can't have too long a roadmap because your roadmap is going to be blown out by the next model iteration. Speaking of being blown out by the next model iteration, how do you as an ambassador educate me? How do you ascertain safety from model intrusion versus in the way of models and you will be eaten with the next update? If you have some of the other ones that you're physical and so on, it becomes easier. If you're a pure software company, which of those applied to you, I think Fintech is a good one. I think a Fintech goes to these cycles. I think Fintech, especially in marathon, we invest a lot in Fintech. We actually think, oh my god, Fintech is another best one. If you're moving money, you're generally in a good place. So anything touches money, we feel there's a very strong more defensible. And so data and workflow modes are the two things you're really hanging your hat on as a software investor because if you're not doing Fintech and then I think it early stage is too hard to know what a distribution mode is unless you have some hack and these hacks never really stand the test of time. Ecosystem too early to say, network effects too early to say, so you're really physical infrastructure. They don't have any software company, scale, they don't have any. It's really about, okay, go deep into what is the data as it you're creating? Does it get better with time? Do I believe it get better with time? Are you building your own model over time? Are you fine tuning a model and improving it over time? And then how deeply are you truly embedded in the workflow? Are you just a lightweight thing that the underlying system of record could create? So these are the two things that you have to hang your hat on. A data asset that gets better with every interaction and then a workflow. It's hard, man. I think pure software companies are hard. I think application is hard. You've got to really believe that the founders can ship with great velocity to basically build that and see proof of that compounding. I got in trouble in the partnership the other day. I'm quite grumpy generally speaking. You? No, no, no. No, my Twitter is getting grumpy and grumpy. I know. But I've met support agents who have voice agents for auto manufacturers, for dentists, for chiropractors, for the, and I'm like, guys, this is like open AI, 11 labs, four, and then all of these different verticals. Would you say, Harry, no, no, no, you're wrong. They're building verticalized data over time. They're able to fine tune their own. They are deeply embedded in workflows. They might have distributionary, like, yeah, the kind of like dentist cool agent is a little bit plaster on top of the wound. I do think these are viable businesses. I don't think they're going to be big businesses. As soon as you do vertical, I don't think you can do one function within a vertical. I think what you want to see there is the ambition and ability to truly own the full stack build the whole product for the vertical. Service Titan, for example, is a canonical example. It went public last year, great outcome. It's still a sub 10 billion dollar company or something like that. And they own like 30, they have, if you look at the S1, they have 32 different products. And even after selling 30 different products and really being at least in the US, for any service field services company, they are the canonical company. They still are a 10 billion dollar company. You know what's astonishing when you compare that to a Robinhood? Is Robinhood has 13 product lines now doing over 100 million revenue? 13. And Coinbase has 12 doing 100 million revenue. Exactly. You're a horizontal product. You're serving a broad base. I think vertical products you've got to really own full stack. I think it's harder otherwise to be a 10 plus billion dollar company. I'm going for spice in a world of 2026. Can we as venture investors do vertical SaaS given the fun sizes that we have? I think you can, maybe the mega funds might say, look, it might not be 100 billion dollar outcome. But I think if you're a 200, 300, 400 million dollar fund, you can absolutely create a 10 billion dollar company. Because remember, one of the big changes is that vertical SaaS does take over labor. And so vertical software, right? It's no longer SaaS. It's basically, I did software as a service, but it is services. So you're going after the services spend. So one of the interesting things as you know is that verticals, mostly, especially if you're selling small businesses, they spend some amount of tooling, but they spend a tremendous amount on both BPO, as well as some human capital, human labor. You need to basically target those two spends. And I think if you do that, and you're committed to building the whole product, you can absolutely. You very kindly said before the show that you like, the show that we do with Jason and Rory. It's very humbling when I do the show for 10 years, and then I find out that it's actually much more popular when I actually bring other people on to do it instead of me. Always good for the ego. But Rory always says to me with AI, very simple, we need to see the transition of spend from software budgets to human labor budgets. And if we do, the term obviously opens up immensely. Do you think we will realistically see that? And maybe you're seeing it already, or do you think we will actually remain in software budgets as we have been in some categories? - I know we are seeing that. We are seeing that I think the first one, most businesses don't want to lay off people. So the way we are seeing it, the first thing that's happening is businesses are outsourcing to third-party BPO's, many of them in India, Philippines, et cetera. That spend is the easiest to cut because now you can offer the same service, higher quality, faster, and 20, 30% cheaper. The second thing they do is when somebody leaves, they don't replace that person. And the third thing they do is lay off. So I think lay off is still maybe a little bit of a while away, but you're seeing absolutely BPO spend all the call center companies that you mentioned, all the next generation AI customers service companies are going after BPO budgets. I was shocked when I was doing work in this space, how many different verticals, doctors, offices, et cetera, use call centers outside the US, they already have budget clearly allocated, and there's a better service. So I think it's BPO spent first, don't replace the person second, and then potentially think about laying off. Do you know Goldman Sachs and Barclays, both financial institutions, both have over 30,000 people in India? I didn't know 30,000. I thought there were like a few thousand, I didn't know 30,000. Isn't that nuts? I was so shocked when I heard about that. I want to understand two different types of company profiles and what happens to them. We've got private companies, and I don't want to pick on them, but it is helpful to give us examples. I'm sorry, they're my friends as well, so I can kind of do it and they'll love me, hopefully, regardless. But like you know, you're sneaks. Amazing security business that's got great customers who love it, but it was valued at $7 billion, and it's now 300 million AI are growing 15%. What happens to that cohort, which is a great business, serving great customers, but 15% growth, 300 million AI are, and you've got a very high price. What happens to that private cohort? There are two outcomes for these companies. All of us have those companies in our portfolio. A bunch of them are going to become zombie companies. They're going to try to add AI features as a last resort, not succeed, and be sold to PE. The problem is even that may not be a good outcome, because PE itself is struggling to digest the companies they bought a couple of years ago, and the price that we set.
They do have good assets. I am seeing in some verticals there are companies merging with each other. I think we'll see if that happens just to create more scale, but it'll be interesting. But hopefully the better outcome that many of them go to is with strong leadership, you basically can burn the bridges and create a completely new AI native product. I think you had the intercom CEO, right? Finn, great example, podium, another great example, both of them with the new products have gone to 100 plus million in a couple of years and basically just burn the bridges. This is legacy software. I think the more you fix it on how do we fix the business, the less you're going to focus on how do we create a new business. You've got to create a new business from scratch. You have customers, you almost got to say, I'm going to be ruthless about migrating the customers from the current business to the new product. Even if it's lower price, it's a bright thing to do and you've got to abandon some cost fallacy. - Help me on podium, 100 million agent revenue. Okay, it triples, 300 million and then it triples again, 900 million. If the price today is five billion that I'm paying, I'm paying for two years of travel, travel ahead of time for that asset, for that's what it would be priced in public markets. For this business to work, we need the multiples in public to be way more than they are now. Do we not? - I think you need to assume that they will take over huge parts of the service budget in the businesses and that they will not just be a billion dollar company. I believe that they'll be a multi billion dollar company because earlier I think they were limited to one part of the stack and they were on top of a bunch of systems now that take over the entire software stack and that's the thing I like about you want founders who are ambitious enough to go after the entire stack not just the earlier piece of the stack they were in. You want to be the only product that the company uses and you want to replace as much of the digital labor as you can possible. That's the ambition. So what you want to say is what's your market size here in all your customers, how many people do they have that are doing digital work and do you have the ability to replace all of that payroll over time and all of the other things they're doing and take apart of the payment and transaction revenue and if you think that's a big enough opportunity that's when you invest. - Do we see the total death of seat pricing, my friend? I hear you completely in terms of that movement in services. Does seat pricing die and we actually have consumption based pricing as the primary pricing mechanism? - Seat pricing doesn't die. You know why? If you look at chat GPT enterprise, chat GPT enterprises are priced based on seats because seats provide predictability for enterprise buyers but they don't drive expansion revenue by themselves. So you basically have to bundle a lot more into each seat. So chat GPT Open AI sells seats based on different tiers where they have different functionality. I think Figma sells three different types of seats. You're going to see different kinds of seats. Now the big challenge is seedless pricing which you're related to is it breaks when the product score value is not about access but it's about something doing the work on your behalf. So at that point charging per user doesn't make sense because user isn't the constraint anymore. It's the work output. So at that point you've got to go to outcome based pricing. So for example, if I'm something like Harvey, I don't know how Harvey prices. I bet that they priced based purely on how many contracts they process versus how many people are using it. For example, even if a hundred people are using it and they process zero contracts in theory, they should get zero. So I think your two kinds of products, you have access products and you have work products. Access products is basically seed based. Like I think Charge-DVDN for as a good example and then work products like Harvey are probably more outcome based and not seed based. You mentioned Harvey there. We are seeing increasing competition within certain categories. If I think about law, it's Harvey and LaGoura. If I think about customer support, Sierra and Daccon and there are dominant funded players, how do you think about the ability for firms to king-make? Is king-making complete bullshit? Is it not? I'm just intrigued to get your thoughts on that. - King-making is a thing. I think it is a thing. You see earlier in earlier companies are getting these rounds that are valuing them at valuations which really are eye-opening. That said, I think it won't work unless the company executes on the promise. I think other firms can take it as a signal and decide to pile on or not, but ultimately the company has to execute on the vision. If it doesn't then it's just a bad bet. So yes, it is there, but it by itself just because the king-make doesn't mean they are the king. They still have to execute and justify it. I think the reality is everyone's doing different games. I do and I know being venture catalyst now that somebody with a $10 billion fund is playing a fundamentally different game and somebody with a $400 million fund. And if you try to play the same game they are, you're gonna lose. You've got to play the game that you're best equipped to play benchmark plays a different game than the Andreessen Hallowitz, but what are the different games and what are they gonna do when they're their game? - We mentioned Podium earlier and going to a $100 million with their agent first product. The growth is incredible. And the growth across this cohort of companies is, dude, we were doing this eight years ago when you went from one to 10 at Slack and it was like, holy shit, that's amazing. Now as I one to 10 is still great, but there's quite a few who've done one to 10. How does your mindset change around growth expectations for the companies that you invest in as a world of triple, triple, double, double dad? - It's not dead, but it's no longer elicits the jaw-dropping that it used to a few years ago. As you said, I mean, you know, the one to 10 is becoming more and more common and those numbers will basically get you, I mean, lowerable critical public with that kind of trajectory. Now, the bigger question for me is durability and it's not even quality, it's durability because like you and I discussed, margins can improve over time and will improve over time. So it's not about margins, it's about is this revenue durable and so retention is basically very important for me to understand. Are people using it as, I think we saw, in the first way away, I saw many chat GPT like there was a company called Jasper not to become them, but they went from one to 40 and then they came back from 40 to 10 or something like they went from one to 140 with a very quick time frame. So there's a lot of tire kickers out there, especially in prosumer products who test the product and then move on to something else. So what you want to look under the hood beyond behind all these numbers is two things, which I think are the fundamental indicators of business quality, customer retention or gross retention and then net revenue retention. Those two I think are the biggest indicators of quality. I would always take a company that's just, as you say, just as crazy, during a triple, triple double with excellent gross and excellent net revenue retention, then a company that's growing 10x in a year with really bad customer retention and less than 100% or less than 90% net revenue retention. - How do we think about ceilings on those markets? And I'm specifically thinking about one that haunts me which is Grenola. I was one of the first ambassadors to meet Chris and clearly Grenola has crushed it and it's an amazing product. But customer retention, sky high, revenue retention, sky high. Honestly, if anthropic or open AI did an enterprise product that's not taking and it's connected to all of the different suite of products that they have, I think that heavily threatens the market size that Grenola is able to expand into a large enterprise. How do you think about the worthiness of those retention numbers if there are alternative factors like that that could impact it? - Yeah, I think you want to basically weigh the retention in the light of what they have encountered. You're absolutely right. I think just like you want to weigh the growth of a company in light of how you've gone through any seismic events. If they're not gone through any seismic events, you've got to then take you to the grain of salt. What competitive threats have you faced as a single competitor come out? Have you been able to ward off that? Has your retention stayed strong in light of that? So these products like Grenola, et cetera, will see if they are the case, but there are these unique products that really open up non-consumption markets, which means that I would never have actually bought a note-taker before a separate note-taker outside of Zoom or something. A Zoom comes with its own note-taker. GMIT comes with a note-taker. But Grenola is so powerful that it basically caught me to consume a separate note-taking product. It's probably true for many of us. And I think that just changed the market opportunity for them. I think Uber and so on are great examples where they just saw non-consumption markets. - Oh, is it a gamma? You've got Google slides built in there. - Exactly. - Great. The very good parallel, non-consumption market. You would never assume, why would you ever buy a PowerPoint thing or a presentation thing separately? It's a non-consumption market, a zero market, but the product is so good, so remarkable that it gets people to bite separately as a separate SKU. I think we need more of these standalone remarkable products. - In two, there's a great example, as you know, Microsoft tried to crush Intuit again and again and again, back in the 80s and 90s with bundling everything into office, but Intuit overtax survived and thrived. - Okay, but does that go against what you said earlier about the need to be multi-product? You know what you've done with gamma is you've taken slides out of Google's juice suite and made it on steroids, amazing, very deep. - You will need to multi-product. They can't just be a single product and go, they will need to have a second product. I'm so sure that they will need to have a second product. Intuit has multiple products. - Okay, but what's Chronoidone Gamma's multi-product? - I don't know. I don't know why Gamma would not create, just like they've taken their riff on PowerPoint, why can't they have their own take on documents or slides the same way? I have to assume it's basically the different kinds of content that people create, are you on websites? - Hard to see. - We'll see. - Both of them are in a way of incredibly hot, attractive companies which have lower margins than we are used to in traditional SaaS mines. How is your mindset changed or stayed the same around margins? How should I think about margin assessment when looking at companies today? - Yeah, I think inference costs are dropping. So you automatically assume that margins in theory should go up. But I think it's not about margins in year one or two. The more defensibility or leverage you have in some ways over your customers and what choices they have,
more pricing leverage you have. I would rather see margins go up with price increases than cost decreases. A good example is PayPal. Roll off both hours on our board at Square and he told us that PayPal back in the day, race prices five times in three years because they're such stickiness. They knew their customers really couldn't do anything. And you see, I mean, those are, I mean, Uber, I have to say, I don't know how, if they have race prices or not, but I know that they've basically changed the economics of how much they paid drivers over time so that their margins are just expanded continuously and they've also raised prices in different ways. So I think you have two ways of increasing margins. So first of all, you and I both, we don't look at margins in year one and two. I mean, it doesn't make sense. Even years four and five. But you want to have on one side the ability to increase prices. On the second side, you want to update it to cost to get lower. I think that second thing is happening by nature. What you want to see is in addition, the ability to have such a good product and ideally multi product a story which makes switching really hard and you can race prices. Can I be blunt, dude? In the environment that we're in today, the two things that you said that ability to increase prices and margins in years three, four and five, did the world is changing so much? I have no idea about their margin structure in years three, four and five. I said, you don't, you don't look at margins. You look, you look to see whether or not they have, they have a product that is compelling enough. For example, I think obviously Disney plus for every year, I think they increase prices on me. Like they've gone from $20, $30, 40 or something like that. Amazon Prime is another one. But this takes many years. But you want the potential, you want to evaluate the potential. Do they have the potential? Do they have the ability to increase prices in the future? It's not something I worry about. I think durable and defensibility is much more of a worry. I think good companies, if they are defensible, they will have the ability to increase margin. That's what I was saying actually. Have we ever shopped in Chanel, Gaukho? I think they do have stores of mini stores. Yes, I've never shopped myself for life. Yes. I buy my mother every year. Chanel handbag for Christmas and birthday. Do you know what they do every six months? Prices up 10% every six months. 10% for the same product? I used to buy a handbag and it was 500 pounds. Now it's 10,000. Holy cow. My question is how do we should invest in LVMH? Clearly. A durable, defensible, 100 plus years, right? 100% and dude, in the world of increasing wealth inequality, actually, awful statement. Can you have your businesses selling to non-wealthy people? You've worked in FinTech before. I think Robinhood is a good example. I think you've got to have massive scale. I'm an investment chemical atlas which sells to billionaires as you opposite. It's a great business. You need massive scale. You need a veg product that is almost cheap or free up in Robinhood. You have to have free, canonically in your thing. Robinhood obviously offered free stock trading for a long time and that was a core pitch and that allowed them to basically get a lot of people. You need to have something free or some hook that is really low cost that allows you to expand. But it is a harder business because you can't make the RPU or the average revenue per user is low enough that you need millions, if not tens of millions, hundreds of millions of people. When you sell to very rich people or wealthy people or large enterprises, look at Palantir which is the business equivalent of selling to wealthy people, they have, I think, what, less than a thousand customers, maybe even less, and each customer pays them 20 million or 30 million or 100 million or billion. It's an easier business to, obviously, it's a very hard business but you can say, I like those businesses. I mean, it's, look at Viva. They sell they went public with four customers, four customers. Do you bother to do market sizing today, given the transients of markets? As you said there, some of the best companies make you pay for things you never thought you'd pay for. Do you bother to do market sizing? I think non-consumption is the biggest challenge but yes, you can't knock to market sizing. I do bottoms up with the specific segment and I always know I think any customer base that has more than 10,000 customers or a few thousand customers, you've got to segment them. There'll be a few different segments so you want to understand what the needs segment, what the bottoms up propensity to pace, what's the problem you're trying to solve with them. Then you've got to talk to them to understand what the budget is. You've got to do the work. That said, I have misread non-consumption markets many, many times because you just don't know how big it's going to be. It's very hard. Kudos to those who've been able to bet on Uber every time, when Uber hit a billion, buy billion, 10 billion. I was like, hang on. Then you see your own behavior. Sometimes your own behavior is the proxy for how it's expanding but with non-consumption markets are the hardest. What's your biggest misread on market size and how do you shop? I remember seeing shop fair to billion and I was like, how many e-commerce merchants are there really? Maybe even before the early rounds, the time felt really consumed. I think what I missed was that shop if I was not just selling e-commerce, it was basically allowing anybody to sell. It basically changed any entrepreneur on the planet. Anybody who wants to sell something went. It wasn't just existing e-commerce merchants. That's what you want platforms to do. They literally make it possible for every person, every person, I think of the possibility of selling or renting their home out or taking a ride which they never would have thought before or installing a buying a new presentation app or a note-taking app. They are the biggest hits. They're also the biggest misses. If the bet doesn't play out, they're screwed. The bet plays out, they could be bigger than anything else. Google, Longconz, any of them are non-consumption markets. They're new behaviors that didn't exist before. That's in some ways what wrenches are all about. It's not about existing. It's about new behaviors and betting on them. Facebook, non-consumption market, I mean, I think of all of these iconic companies. The thing that's amazing with Facebook is the ease for you to dismiss it for being the 50-second social network. I mean, we forget now that France, the and my space and everything before it had been so many. But the biggest difference was identity. And French and my space, you didn't know who the people were. They didn't have the real photo thing. I remember when Facebook tried to go into Japan. Japanese cultural norms were that all the Japanese social networks backed them in Cognito. You couldn't, for some reason, maybe saving face to something. You could not share your real name or your photo. So everyone said Facebook, you've got to adhere to Japanese cultural norms. You've got to change Facebook and make it similar. Mark said absolutely not. In reality, it takes us longer and they succeeded. How do you prevent prior wins or losses impacting future decision making? My biggest mistake is I lose all my money in a market and it inherently makes me attracted or not attracted to it in a way that could subvert decision making. Well, this is very hard. I think it's a mental thing where you've got to take every opportunity at first principles. We all struggle with it. I think the best venture capital, I, someone asked me what's the best venture capital bets, I talk about a paradoxical one. I think it's Mike Moritz betting on Instacart. Why? Because he lost 370 million on web ban less than a decade ago. He burned it through. Same space, Apurra comes to him. He bets on it. He bets on it after losing hundreds of millions of dollars. It is not all the core money but the whole thing went to the ground and think about the first principles he was thinking needed and the college needed to make that bet. I think it's brilliant. You've got a lot of things in Sequoia partner. You're going to not this shit again. Come on Mike. Really? We're going to have so curious to see how he like just incredible. You're like, we know you did Google and like we love you. But come on, not for you delivery again. I'm like grocery shopping exactly. Market is one way we trip ourselves up. Oh, markets too small, markets too small. The other one that I always make mistakes on his price. How do you think about when you reflect on you've done so many good deals? Are the best deals the most expensive in your experience? I think there are two ways I've now realized after many years of doing this. At sea then a price almost doesn't matter if you're right about the company. So I think you just invested whatever the price is. For example, I invested in the sea round of fare back in the December 8, 9 years ago, 20 million. It is very expensive for a sea round that it is the highest price YCD at that point. I think it's been a hundred or 200x for me. So I think you invest in a company which is great. You have conviction, you invest. Now I think the B I think B plus that's when Stites price starts destroying returns. I think by then you've got real revenue, real traction. You can pick a generally good company and still get crushed. For example, one of my friends invested in this security company and they had a hundred billion revenue. He invested in them at four billion. I think they've gotten to five hundred million in revenue, but guess what? They're still at four billion. And so basically they will not make one X the capital they invested. And so that's a challenge I think. But guess what? Even in V work, benchmark made money. Enchmark made money at V work because they invested early enough. So I think at sub hundred million, maybe that's an arbitrary number. You can if the company is good, you'll make money regardless. You mentioned we were there. We'll get to the selling because I used it in an as an example in a show we did with Mars, comments from Excel. But I just want to touch on the A market there and you say about pricing kind of where it matters where it doesn't. I'm with you 100%. But we're seeing a hundred X AirRs for three million revenue companies and they're being priced at three four hundred million dollars in this new environment. How do you advise me as a series a lead investor to operate in a market where a is a not 10 to 20 now on a hundred to 150. They're actually three hundred to five hundred and thirty to 50 million rounds. I don't think an A investor can do. There are two kinds of deals that investors have to do. One is I think where there is less legibility on the company where you're betting on there's some early product market fit. There's not three million revenue. There's half a million revenue and that's like you said when you get it basically for 50 or sub hundred million a million or so. But then as soon as it gets to three or four it gets you maybe you can do a couple of deals like that but I don't think you can build a CVJ fund doing
deals at three or 400 million because it's not going to be in a ownership. These some of these are going to fail, etc. So I don't think I think you can probably all of us, you know, I think even benchmark I think on your part or one of the parts I think you had to mention this where they've done a few few of those deals where they have single zero-nation percentages in high valuation companies like a Merck or something like that. But most deals I think you've got to you've got to have double zero-nation you've got to invest slightly earlier. It's a tough game but gotta be patient. I think the good uses concentration is your friend in some ways. It can be your energy is also your friend. Can be your enemy if you're picking wrong in some ways but it can be your friend because then you don't feel that you've got to do 10 deals a year. You can do 40 deals a year and the 15 companies in the portfolio. Dude, you've got 250 million bucks in the fund. You've got 200 million when you actually look at investable cash. If you don't have any reserves, you've got to say 10, 20 million dollar series A checks. If you're wanting to get ownership double digits that we will say that we want. Is that enough? I'm not being cynical. I'm asking for my own advice. Well, you have 30% reserves. We have 35% reserves. So you have to have a mix of. Oh, no, that's not cool. Come on, we need a bigger fund. This doesn't work. You've got to have a mix of you've got to have a mix of seed and incubation bets and a mix of CDZ bets. I don't think you can do purely CDZs out of a fund that's like 200 or 250 million. You've got to have a mix of bets. So the incubation bets are bets you take on founders who are basically the best in the world at what they've done. A good example, I think, was invested in a company. This was before Marathon, but with my Marathon partners, were part of the Marathon. They led the round with Vinod Kostler and Mickey Malke at Ribbit and a company called Lead Bank, which was my colleague, Jackie Rieses. Yeah, I interviewed her. She's amazing. Yeah, so that was an inception down at like some crazy value. I mean, very strong valuation. Not a crazy valuation, but a strong valuation because Jackie was Jackie and she had built the bank at square. She built this bank again. So you want somebody in a industry where they know the inner workings are better than anybody else in the world. And you say you back those people. And that's a much, much better risk reward there. So you want to do a few of those in addition to, you want to do a few incubation seed in addition to in addition to CDZs. You're doing that right in some ways. I think every early stage from I think you've got to have proprietary founder access and access to founders and they're your first call when they go to start a company. And then you meet founders. You don't know them before you're kind of betting on traction and so on. You've got to have a mix of both kinds. Debuy the proprietary founders. Again, this is where I get grumpy as far. But I've done 3000 shows, dude. You know, at some point you have to get cranky like every venture investor sells the brand. Not necessarily for your access. What is proprietary is your ability to add value. And I think founders, you basically have to I think build. If you're just capital and assuming founders will come to you, you're not going to win. But what you have to offer them is something. What you offer them is something very different and unique. What I offer them is something very different and unique. We all have I think you got to hone as investors. What is it that we're offering? Is it council? Yes, that's free. Is it is a distribution? You offer incredible distribution. Is it a network of customers that you can get them access to? Is it like talent hiring? What is is they going to do? One of the most interesting firms I think which are like a lot is a firm called the GP. The GP basically they work with companies to help them place their first few hires. I've been impressed, very impressed Dan Portillo founded it. His job was sweat equity. He basically worked alongside you to place your first five engineers to face your first business people and he would take equity instead of cash in exchange. The creator fund alongside that. That's true value add I think for example, very differentiated. To the best founders need you. Keith Roboil always says the best founders do not need a venture investors help. You've worked with the best. How do you feel? They may not need it. I generally agree with Keith that on the margins investors don't add value and the value they add gets less and less as the company grows. But I do think there are a few points where a few things you can do on the margin. For example, helping them choose between this candidate or that when they're hiring, helping them think about go to market that could make a difference between the company being a mediocre exit or an outcome or being a generation company. You don't need to do everything for them. But just those one or two things that you can help on on the margins can hopefully be the difference. What would be your advice to LPs when they are consistently sold by GPs like me and you proprietary founder access? Oh, I have the best network. I'm a super smart FinTech expert. So I know it better than anywhere. What would you advise them on manager selection? When everyone says proprietary founder access? Very simple. Go and talk to the founders. Go and talk to the founders and see why they chose, especially the earliest date founders. Go to the seed founders that they invested in and the inception stage founders and ask them, what is different? Why did you choose them? What are the options that you have? I think you've got to use the data. You're right. Most VC pictures look the same. What you want to do is dig one level deeper and talk to the founders themselves and understand for each of the last five companies that they're invested in, why did this founder pick this firm? Can I push back on the model that you have and just pretend that we're a hypothetical partner? Okay. You have 35% reserves. Why is that optimal over just having more lines in the portfolio? When you hear about the 100x, 200x multiple on fact, I'm like focus on ownership, have more increased diversification and take away the reserves. Why do you push? I do push. I'll give you an example. Trade desk where I'm on the board had two seed investors. IA Ventures, Roger Rennenberg, who's absolutely a goat and then founder collective, again, goat firm. So they have two completely different philosophies. Founder collective only does first checks. They never do any prerada afterwards. Period. Roger on the other hand doubles down again and again and again. So trade desk raised, I think two or three rounds of financing. That's it. And when public, very early, it was very hard for them to raise financing. So the multiple that founder collective generated was incredible because they only invested at the seed round and they got it at five billion or something like that. Even more, I think they helped for longer. Well, Roger generated a huge dollar return even though his multiple was different. So there are two philosophies. My philosophy is more, if you look at Founder's fund, which I think is another best performing funds, a huge part of their success is basically doubling down on the companies that matter. The unsung hero founder fund is a guy called Napoleon Tau, who leads a growth practice. And Napoleon basically is the one who decides which of the companies should we double down on. And I think if you double down properly, it changes the complexion of the fund because you have much more insight. I would argue that if you work closely with these founders, you have much more insight into these companies and how they're going to do and even how they think about the future opportunity because you've thought about it with them than a random company you meet. Now, there is a balance there. You don't want to be over concentrated, but I would argue that if you have X number of bets and you work with the founder and you think highly of them, that's why each Founder's fund fund is named after the company that makes it like in colloquial terms. There's the annual fund. There's a SpaceX fund, etc. Why? Because that one company is the one that makes it. And that's a reality. Harry, I mean literally, you have one company most likely. One or two companies that will drive most of the turns of any given fund. The question is, you just want to have the initial stake. You want to increase your probability of finding the initial company. There is a exploit thing, right? Where do you stop exploring and when do you stop exploiting? So different people are different points of you there. My fund one could have been, wish you were an Alpine. And I'm very grateful. She for supporting you. You know, 1819, but it could have been at one point the Hoppin fund. It could have been the Clubhouse fund. And it turns out that it will most likely be the linear fund. I think, I think, I think, linear is a great business. And we were very early that. But my point being with the transitions in name, it wasn't obvious. And so my question to you is, with preemptive rounds coming so fast, how accurate do you think you can be in predicting the winners? Because it definitely wasn't obvious to me. A lot of pieces during first and foremost. I think what we are, is we think about what is the thesis. In other words, you've got to have a good sense of who the other companies are and players of in the space. And you've got to understand why this company is better than every other company. What on what dimensions is it better and is that is that durable enough over a venture timeframe, which is seven to 10 years or even, you know, maybe 10 to 12 years now. So you've got to do work. You've got to be thoughtful and patient. Remember what being considered as does, it gives you more time. It gives you more time to meet companies. It gives you more time to think. It gives you no time to be helpful to companies. But you don't feel the pressure to deploy on a monthly basis. If you look at a 30 portfolio fund over three years, which is the initial department period, you're basically almost investing one company a month. And so that's incredible. I almost feel there's pressure on the folks who are 30 to 40 to do basically one company as a partnership per month. If you're doing green hooks, I think it's a few of us who's one of my favorite Neil, you mentioned Neil, was on the show. Six, there's seven funds have what 65 companies, or what all are six funds are 65 companies, 11 companies, but fund. He's an absolute beast. He's got 10 companies that have returned over two billion dollars. The shit thing about my life got cool, is I hang out with these people and I just leave feeling like a total loser. He was just like, you leave Mickey Mark when you were in sight. Yeah, no, I didn't do the wrong thing. Yeah, I mean, she has gotten better with every one of those interviews. I've seen just your style and just your investing. Who do you learn from entrepreneurs? Most of people in the arena, I think, for me, since I'm so trend driven and we really care about what is the thesis, what's the market. The best way is I think you can talk to investors, but they're always one click away. You've got to talk to people who are in the trenches building products. You've got to
understand what's changing in their lives, how they're thinking about the customer. Today's world, you've got to take close to the model companies, for example. So I have people that I meet with at each of the model companies to understand what's coming down the pike, how they're thinking over the world, et cetera. Because like you said, you got to also understand, I ve all this is a joke, this joke, like this was 10 years ago. If you're a startup, which is directly in Google's roadmap, like directly, you should not be building it. Because Google is very good when something is directly in roadmap, they're like a tank, they'll just roll over you. Slowly, but doesn't matter. They were implacable, they were roll. But if you're even 10 degrees to the side, it's very hard for them to like move like that. So you're generally safe because it's just not. They're just rolling in one direction. I think you just want to know what direction, the turrets or the guns are pointed at for each of these models. There's one part of this is what the labs are going to, the second part is what the customer is going to do and what customer behaviors there are. And so you want to talk to, you do learn from entrepreneurs a little bit to better understand who are the companies, but then you want to go and talk to the companies themselves and you want to understand, you talk to three or four companies in the same space, you very quickly, I think I'll never forget. I think people who met Tony at DoorDash and many of the other folks who are fundraising at the same time, they always felt Tony had a deeper understanding of the same market than others globally. That's why I think my biggest regret is, one of my biggest regret is actually passing on Vanta because I met Christina, but I had already committed. I was like, this person is going to win the market, but I had already committed to another company in the space and sadly, I believe in like once you invest in a company, as an angel, I didn't have the time to scan the landscape and meet with all the companies in the space and that's what I do now, I have time, but Vanta is definitely part of my antipod folio. I think it's part of yours too, if I remember correctly. - Oh, don't elad sent me and he was like, dude, this is amazing, this is amazing. Every time elad sent me something, he said it's amazing, just fucking do it. Do not think your smarter, it might take away that. There are other people when they do it, and it's like, do you think you're smarter? (laughing) I will leave them out of it, but there's some friends where I'm like, you've consistently sent me this, it is shit. Anyway, we mentioned we work earlier, I use we work as an example with Miles Clemens about selling. I'd love to hear your thoughts on, how do you think about Vanta's sell? Obviously, we have a Master's, you have LP's stake, they care about DPI's stay more than ever. How do you think about liquidity and when's the right time to take chips off the table? Yeah, as an angel, I used to hold till IPO, so Figma had many liquidity opportunities during the years, but I kept holding it for 13 years till it went public. I think at the IPO, it was actually price-way nicely, unfortunately, after the IPO, it has been more challenging, price-wise. But I think as a fund investor, it becomes interesting. I think there are two situations. One of the things I think most early-stage firms get wrong is they just focus on Mike, they don't focus on IRR, and Mike is multiple-invested capital. I think IRR matters a lot, as you know. An LP told us about a firm that gave them a 7x moik over 20 years, and that was a team's IRR. And that is like, okay, there's something crazy here. I mean, that is an adventure, adventure, adventure firm. And so you've got to look at Go Forward IRR and your projection. If you go forward IRR at every liquidity opportunity, it's lower than what you're basically promising your LP's over what you think your fund should have. I think you should sell. I think you have an obligation to your LP's to at least sell. I like Fred Wilson's strategy around selling, which is sell a third, hold a third, and trade a third. This is when the asset is completely liquid. But in this case, I think you want to sell at least part of it, especially if the asset is a company that'll return a chunk of your fund. So if you're going to return 20, 30, 40% of your fund, you owe it your LP's to sell a piece of it, especially if the Go Forward IRR is not compelling. On top of that, you then have the whole period of the IPO where you have obviously your stock. Exactly, and you don't have exactly, and that's another uncertainty. So I do think the secondary markets have been one of the best or most interesting developments over the last few years. And so now all these great companies have pretty liquid secondary markets where you can sell, sell, sell, sell, obviously there's rofer and so on. The company has, I do think there are these hyper liquid periods in the market. Now is one of them. So I do think one should be very careful and thoughtful about what the Go Forward IRR is for any asset one owns and really think carefully about whether one should sell or not. Can I ask you, when you look back at the angel portfolio, what's the biggest regret? Pattern matching too much. I think a good example is, Quince recently raised a 10 billion. I saw Quince four years ago, when is there 100 million valuation? And I was like a D2C company. D2C companies are kind of on the downswing. How good can this company be? What do you, I literally just dismissed it. I didn't even look deeper into the company. What's the takeaway from that, then? The takeaway is that you can't just take an industry and say it's good or bad within every category. There are great companies and there are mediocre companies. And you've got to understand each company's remarkably different differentiation. Quince, for example, had an incredible 35% to 40% repeat purchase rate, which was like higher retention than most consumer apps. And so I should have paid more attention to that versus just missing it. It was literally in the blurb and I was like, okay, you know, so what? How big can this get? What I didn't like respectfully when you said about kind of your trend style of investing is actually some of the biggest misses I also have is when there's an amazing founder. It's clearly amazing, but operating in a bad space. And they pivot three months later into a good space. But I turn them down when they're in a bad space. And I'm like, I don't care what they're building. I don't care what trend it is. Gockel, you're amazing. If you're selling pillows, I'm in. If you're a seed investor, if you're a pure seed investor, I think you have to do that. I think that's what YC does, right? I think that's actually the right way to do pure seed investing. First down capital, I think is one of the best seed firms. Guess how many companies they have in the port? Each fund, 80 companies. Why? Because you've got to take 80 debts, which means that some of them and YC of course, best seed investor all time or pre-seed. I mean, you've got to take hundreds of bets because most companies will pivot. But I think as a concentrated portfolio, you've got to basically understand the business and you've got to bet on both the business and the founder. Unless the founder is an end of one founder in a space. I think there are two categories of actually, there is three categories of founders in some. They're repeat founders who know a space exceptionally well, who've done it before. You're betting on them again and again to do it. The security is a great example. Security is full of repeat founders. They know the market. They know the customers, all of that. But then there are consumer companies. Consumer internet is full of first-time extraordinary founders, Mark Zuckerberg, Larry Page. All of these are just first-time founders. So those are two-architives. The third-architive that has come up is AI Labs researchers. And so I think that one is a more interesting bag where you have, of course, Dario and the Open Air folks. But then you have a bunch of other labs that came up and ultimately didn't turn out to be anything. So you want to, for these kinds of folks, you, as a seed investor, you just want to blindly write a check into them, a brilliant young person who's done something extraordinary, a repeat founder, or maybe an AI lab researcher. Will you do a front-end model, a near lab, a periodic labs, inathable, where they're clearly fucking amazing people, pedigree to the hills, but the price is in the billions. Not possible. I don't think with our fund it's possible. I think the ownership is just literally the first round for these companies. It's like you said, a billion dollars. So I think it's just too high a-- The risk of what is just not worth it. Are you seeing the megafunds cannibalize the business model of our series, eh? They're playing a different game. I think very highly of the megafunds. They've basically gone and they deploy $15 million checks, almost as an option and a lead generation for the next round. And the strategy is obviously to have an index at the A of every single good A company and then double down on the ones that truly matter and triple down and quadruple down and do SPVs in them and do specialized funds in them and so on. It works. It works for LPs in some way. It's a different asset class than the funds that the early stage funds. But it's different. I think smart founders, good founders, have started to look beyond just the fact that they can get $10 million very quickly from a megafund and say, what am I getting here? We see many examples actually in megafunds of partners leaving the fund and the company's orphaned within the megafund because their partner has left and now they don't have a single person to advocate for them in any way, shape or form and there are drift. And anybody who's so repeat founders actually, what is interesting is repeat founders are most likely to essentially know and see behind just the glitz of a megafund in some ways because many of them have gone through especially the ones that have started a company in the last five or six years. We hear many stories where the mid-level partner at a megafund has left who was their partner and then they're like, OK, shit, I basically don't have an advocate in the fund and I now am left with a person who I don't know and they don't know me and they're joining the board, my board. And that's a tough one. You've seen Nico Bonat, so you've seen Max Kazo, you've seen Ariffian Mohammed. We're just seeing the start of this continuing wave and there will be a huge amount more spin-offs which you think we're going to see that could tell. I think we're going to see more spin-offs. I do think there is a limit. You're going to see these megafunds train again more waves of investors and these investors are going to realize that being a mid-level partner at a megafund is not all it's cracked out to be. So they're going to spin out and go back to the way of doing things that venture used to be 20, 30 years ago, which is a small group of partners building deep relations with entrepreneurs. We're going to need a quick find. So what have you changed your mind on in the last 12 months? I usually think pure remote would scale for early stage companies if you had the right culture, but I don't think that anymore. I think you've got to be in person at least a few days a week. What made you change your mind now? I think just seeing a few companies where literally the companies died because the founders were unable to agree. They had everything going but the founders were just. not in the same place and they were just not able to move fast enough and agree on a line on the strategy and change things. So, iteration speed just suffers massively if you're a pure remote. It doesn't need you five days a week, but at least three days a week. Biggest advice to a young person leaving a university today? I know it feels exciting to start a company. Everyone's doing a startup, AI is a new way, but my strong advice is to first get two to three years of work experience at a company, at a good company. You won't regret it. You learn a lot. Experience and the network of people will be invaluable for you. So just two or three years, don't be impatient, life is long, work gets a work experience of a starting a company. You've got to answer none for our one. You've got to invest in three different types of funds, a seed fund, a series A fund and a growth fund, which three are you choosing? First-time capital in benchmark, when I win an LP in both and then green nooks. First-time would be the seed, then try to do the CZ and green nooks would be the growth. Well, I wasn't a hard one. You thought about that? Most people were like, "Oh, I can't do it." You know what? LBs asked us this question. They basically said, "I don't know whether they were asking us for it. They literally asked us, "Okay." So I've actually answered this question, LB before. That's fantastic. What has been the hardest decision that you've made in your career? You've left amazing companies? What has been the hardest decision? Leaving Google. Leaving Google, I think, there was a saying, "You leave Google only once." So leaving Google to start a company. I was on a pretty incredible trajectory there. I was learning a lot, really enjoying it. That was really tough to leave Google. I don't regret it, but it was very, very hard to leave Google. Here's the past CEO you've ever worked with. I think they're all different. I would say all four of them, Larry, Mark, Jack and Tony, and now Brian Armstrong, Bill and Bennett Pinterest. It's at hard one. I think all four of them are different superpowers. I would say the best technical CEO, Larry Page, the best growth centric CEO, Mark Zuckerberg, the best design centric CEO, Jack Dorsey, and the best physical world operational CEO, the most likely with Jeff Bezos next, Tony Shoe. What's the biggest mess? We've said banter. Is it banter? Quinn's Quinn's, man. Most recently, Quinn's, but to be honest, even bigger mess than that in some ways, is not a mess in terms of investing. He said, "I couldn't predict the face who could be a $2 trillion company. When our company was going to be acquired by Facebook, I was arguing with the corporate FDM at Facebook, and we were arguing with the terminal value of Facebook. And we had to put China into the mixing. In the digital-centric China, we'll get us to $40 billion in market cap. And we were arguing that it was $20 billion and $40 billion in several years. And then this was in like 2010 and turns out in less than 10 years, 11 years, it was a trillion dollar company. So when these things work, they work in a skill that is unimaginable. Even at Google, I remember very well after the IPO. I was there doing the IPO, and we were sitting around at the bunch of PMs. They were saying, man, the company's added a $30 billion. It's too expensive, too expensive. And so these things compound, it's just incredible to see these things become trillion dollar companies. So Facebook and Google in some ways, the biggest misses in terms of not being able to predict that they were going to be multi trillion dollar companies. Which angel investment is the highest multiple? Figma. What was multiple? Five of, between 500 and 1,000X at the time of IPO, but it has sadly gone down since then. Oh, 500 to 1,000X, Jesus Christ. Tell me, final one, what most excites you about the next 10 years? I like to be optimistic. I think we have too much pessimism. What are you like? I'm really freaking pumped about this. The most ambitious entrepreneurs are finally tackling the hardest problems. The ambition with AI, especially as unlocked, is just incredible. The ambition of entrepreneurs tackling the hardest problem facing humanity in society is just absolutely incredible. How can you not be optimistic when you have Elon going? I mean, I think we have now these entrepreneurs who are role models, or not just building these small companies, but they're truly taking on humanity problems. So the answer to Peter Thiel's question of, we were looking for flying cars, and we got 140 character apps. I think it's finally coming into focus. I've got to ask one more, but you said about Peter Thiel. Obviously he has a telephallot ship and an preference for young and ambitious founders. We're seeing this massive movement towards very, very young founders. We mentioned Macquarie, who are brilliant. Are you in line with the shift to the earliest, youngest founders? And how do you feel about that shift to super young founders? I actually am a huge fan of it. I feel even at companies, I feel some, the companies that are not hiring young people, they're making a huge mistake. Because young people are more AI-maxed, as it could call, like looks-maxing, AI-maxing, than anybody else. The younger people are adopting tools better, and they just live and breathe differently than others. So I am a huge fan. I've actually invested in more dropouts as an angel now, the last few months, than I have invested in by rest of the last 15 years I've been investing. So I don't think it's the right thing to be honest for many of them to be dropping out. And starting, I do think they could benefit socially, emotionally, et cetera, but some of them are just exceptional. I don't think all of them are, but I do think this crop is going to produce some incredible founders. - God, cool, dude. I so appreciate you. I've got so many notes that I have to go on different sides. This has been fantastic. So thank you so much for being so amazing, dude. - My pleasure, my friend. Look forward to doing stuff together. (air whooshing) But before we leave you today, as an investor, I'm always on the lookout for tools that really transform how I work. Tools that don't just save time, but fundamentally change how I uncover insights. That's exactly what AlfaSense does. With the acquisition of Tegas, AlfaSense is now the ultimate research platform built for professionals who need insights they can trust, fast. But now with AlfaSense leading the way, it combines those insights with premium content, top broker research, and cutting edge generative AI. AlfaSense has completely reimagined fundamental research, helping you uncover opportunities. From perspectives, you didn't even know how they existed. 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Key Points: The speaker outlines eight "modes" for evaluating durable software companies These modes are derived from experiences at major tech companies The current market volatility in SaaS is seen as an overreaction; durable companies possess multiple strong modes, while weaker ones may have only one or two. Brand is explicitly excluded as a strong mode in the current rational business environment, where proprietary advantages are more critical. Summary: The discussion centers on frameworks for building and investing in durable technology companies. The speaker, drawing from experiences at Google, Facebook, Square, and DoorDash, emphasizes core principles: a remarkable product (Google), effective distribution and multiplayer dynamics (Facebook), a multi-product portfolio for retention and profit (Square), and operational excellence (DoorDash). To assess company durability, he proposes eight "modes": proprietary data, embedded workflow, regulatory licenses, exclusive distribution, third-party ecosystems, network effects, physical infrastructure, and cost advantages from scale.
He argues the current SaaS market downturn is an overreaction, as not all software is equal; strong companies score highly across these modes. Notably, he contends that brand alone is no longer a sufficient moat in today's rational business climate, where tangible, structural advantages are paramount for long-term defensibility.
FAQs What are the eight modes that define a durable software company according to Gokul Rajaram? › The eight modes are: data mode, workflow mode, regulatory mode, distribution mode, ecosystem mode, network mode, physical infrastructure mode, and scale mode. Each represents a structural advantage that makes a company hard to displace.
Why does Gokul Rajaram believe a remarkable product is essential for a successful company? › He learned from Google that a remarkable product at the core is critical; without it, even excellent go-to-market and distribution strategies won't ensure success. The product should be 10X or 100X better than alternatives.
What did Gokul Rajaram learn about distribution from his experience at Facebook? › Facebook taught him the power of distribution and multiplayer products. Multiplayer products, like Figma, enhance defensibility and create unique switching costs, as their value increases with more users.
How did Square influence Gokul Rajaram's view on multi-product portfolios? › At Square, he saw that a multi-product portfolio increases customer stickiness and retention. Not every product needs to be profitable; some can focus on retention while others drive profits, as long as goals are clear.
What operational insights did Gokul Rajaram gain from his time at DoorDash? › DoorDash shaped his understanding of hard-mode operations, blending product and physical logistics. It emphasized hiring resilient talent and making tough, long-term decisions, like forgoing revenue to support partners during crises.
How does Gokul Rajaram assess the durability of a software company using the eight modes? › He scores a company across the eight modes, assigning points for each mode present. A score of four or more indicates strong durability, while a score of one or less suggests vulnerability and a need to build more modes.
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