VC 1: Inside the New Exit Economy: IPOs, Secondaries & AI with Meritech’s Alex Clayton

Episode Transcript
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SPEAKER_03 (00:00):
The only thing I would say that really matters at
the end of the day is what isyour gap revenue and cash per.
If those two metrics make sense,you can create an incredible
business.
In the early 2000s, it wascalled software.
We're an on-demand company,we're a SaaS company, we're a
cloud company, now we're an AIcompany.
It's probably just going to becalled software yet.
I think it's the race to thebest product.
I don't think it's the race tothe bottom.

SPEAKER_02 (00:20):
All right, last question.
I don't even want to know theanswer.
Welcome to the GTM Now podcast.
We've got a very special episodefor you.
It's part of a new series thatwe're doing.
I'm Max Outchuler.
This is Paul Urban.
And we get a ton of amazingfeedback from our GTM leader LPs
that tell us that they reallyenjoy learning about all the

(00:40):
kind of intimate details that weprovide in investing.
And that we should be sharing itmore publicly.
And so what we wanted to do withthis series of podcast episodes
is provide a little commentaryon the markets, but also bring
on some of our VC friends togive a little bit of insights
into how they think aboutinvesting, how we think about

(01:02):
investing, and how you shouldthink about investing in your
careers, whether it's sizing upan opportunity for a company to
work for or make an investmentof your own.
So thanks for joining us today.
We're really excited about thisum slate of guests that we have
coming up.
And uh we'll kick it off with meand Paul, and then we'll get
right into the show with Alex.
This week's episode, we had AlexClayton on, a partner at

(01:25):
Meritech, uh, old friend ofmine.
So uh I think you'll see alittle bit of the rapport there,
but also the king of the S1s.
Yep, right?
So both of us have admired Alexfor a long time.
One of the things that he's ledis the S1 teardowns.
So I think he's done 60 or 70 ofthese IPO S1 teardowns, where he
essentially uh when a company isIPOing, they follow their S1.

(01:48):
It's a detailed report of allthe information that you need to
decide if you're going to investin this company or not as a
retail investor.
And uh Alex does a fantastic jobon his deep dives.
Uh year the episode.
Yeah.

SPEAKER_01 (01:59):
So what do you think?
It's a good one.
Well, it's great to have Alexback on S1 teardowns.
Uh it felt like he had a hiatuswhen the public markets were not
really participating in theexercise that he is so good at.
Yeah.
Um, but he's had a few to dothis year, which was great.
Uh Alex was, you know, I I'mgonna break the cardinal sin
here and uh overpromise uhinstead of underpromising and
over-deliver.

(02:19):
But we got a great set of guestsuh coming up, really excited for
the series, and Alex was theperfect person to kick it off
with.
Not only because um, you know,we get into some of the metrics
that are really important, getinto, you know, the AI investing
era and how they're looking atit, the growth stage, uh, but
also diving into a couple of therecent IPOs.
It's been apt.
He's you know, the the wholeteam at Meritech's been busy.

SPEAKER_02 (02:40):
Yeah, it's you know an interesting season in in tech
right now.
I think we're starting to seehonestly the IPO window open
back up with Figma, Bigger,NetScope.
There's a couple more.
Clarona, I think, was the otherone.
Hinch Health, Hinge Health.
So we're starting to see thatopen back up.
Obviously, MA activity has beenpretty crazy with Wiz and um
Windsurf and you know some ofthe other ones that have been in

(03:02):
the the news lately.
But um also secondaries.
Uh I think that was a big partof the episode is secondaries
have never been um more on firethan they are today.
It's a huge shift that nobody'scaught about.

SPEAKER_01 (03:16):
Yeah, we we talked about it a bit over AGM in June,
but it feels like of those threethings, which of course it's
fantastic to have the IPO windowback up, are open at least to
the best of the best companies.
Uh the real sign of its back toits full roar would be that your
median IPOable company is ableto go out, file, um, go through
the process, raise capital inthe public markets, and trade

(03:39):
um, hopefully up after they endup going public.
The the underappreciated orprobably uh under talked about
aspect of the exit economy, ifyou want to call that, or the
exit market would be thesecondary transactions.
So, you know, we looked at somedata that industry ventures have
put together um at our AGM inJune, secondaries as a vintage.

(03:59):
So just how much capital is thatuh available every single year
in the secondary markets.
Five X growth over the lastdecade.
Wow.
Um and then Alex mentions it inthe episode, which is even more
fascinating.
Uh, we're on track right now,even though it's been a pretty
good IPO year, especiallycompared to the last few, to
have more transaction volume onsecondaries uh than you will
have in the IPO primary for uhwhich I think it does a couple

(04:23):
of things.
I'd be really curious, Kate YourTake fund is as well.
I think it changes seedinvesting and pre-seed
investing, even some Series Ainvesting.
Um Alex talks about thechallenge of a 10-year fund life
cycle, which is the typical fundlife.
Companies are staying privatelonger.
Uh, if you invest in a companyearly, they might be building
and compounding in the publicprivate markets for 12, 15, 16

(04:47):
years, 17 years and um someiconic cases like Stripe and and
uh SpaceX.
But if you're an early investor,there's now an available pool of
capital that only seems to begrowing.
And I would say a growingacceptance among investors that
are around the cap table, andthen I think even some founding
and early team members of hey,there's going to be people that
need to get liquidity beforeGail, the company reaches full

(05:09):
maturity.

SPEAKER_00 (05:10):
Yeah.

SPEAKER_01 (05:10):
And now it's open to everybody.

SPEAKER_02 (05:12):
Now that the question is, is there a need to
go public?
So what do we see with Stripeand Canva and uh Databricks,
SpaceX, OpenAI?
So this was another part of theconversation with Alex.
He had some free input on, butum, I think, you know, you and I
have interesting takes on thisin terms of like, I I don't know
if there is uh a reason to gopublic anymore.

(05:34):
Um uh Alex seems to think thereis, and so you'll have to listen
to the rest of the episode.
He's an optimist, he's anoptimist, but uh yeah, it'll be
interesting to see how thiscontinues.
Um, I think it's great for earlyinvestors like us in the the
seed stage and the pre-cedstages where you know we'll get
opportunities to do secondariesand some of our best company to

(05:55):
decide.
You know, do we take some offthe table, return some to our
investors?
EPI is always nice.
Do you ride, you know, with thefull way?
I don't think there's necessarythat like um, okay, it's IPO,
it's six months later, thelockup ends.
Uh, you know, you you you giveeverybody a stock, you know,
some some funds do that, right?

(06:17):
Where it's like, okay, now it'sup to the individuals to decide
if they want to sell.
So um, I think there's kind of alot of different ways to do it,
but we're gonna see.

SPEAKER_01 (06:24):
I I think you're just getting optionality, which
is great.
It's the maturity of the ventureecosystem or the private market
ecosystem more generally, isthat there's multiple pathways.
There's not one way to do this,there's not one way to build it
correctly, there's not one wayto manage liquidity, whether
you're an angel investor or aninstitutional investor, a fund
investor, or if you're anemployee.
And that was something I wasactually curious to get your

(06:44):
take on.
You've been an operator at someiconic companies, uh, some that
have IPO'd.
Uh I wonder, does that change ifyou're an operator at an
earlier, early growth stagecompany?
Do you change the risk rewardprofile about joining a startup
now that you could get liquidityon some of the shares that
you're besting over the courseof your time as an ex executive

(07:06):
or an operator at that company?
Like, does that change the mathat all for you?
Or do you think people are stillgonna make a pretty similar
calculation, which is, you know,you get a chance to work at
great companies.
That's the highest upsay versionof company building from an
operator perspective.
When it hits, there's nothingbetter, but not every single one
of them is gonna hit.
It seems like there's moreopportunity uh to cash in.

SPEAKER_02 (07:26):
Well, I think data absolutely changes the math.
And I s I think what you'reseeing with open AI and and some
of these other companies thatare creating millionaires,
decamillionaires in two, threeyears, maybe even less, uh and
allowing people to actuallyparticipate in liquidity, yes, I
think it changes it changes themath quite a bit.

(07:48):
Um some other topics that wetalked about with Alex, uh his
two favorite metrics.
Uh yeah, what do you think on onhis two favorite metrics?
So two favorite metrics hadpre-seed and seed.
Uh we asked him for one, he gaveus two.
He said can't have one withoutthe other.
So if you have these two, it'suh gap revenue and cash burn.

SPEAKER_01 (08:10):
Gap revenue and cash burn.
No, it's I I will say what I dolike about it, uh, which which I
do agree with, Alex.
It's it's it's the idea is ifyou get those two right, there's
a lot of other metrics whichpeople focus on to talk about
that will fall into place.
So gap revenue being how muchrevenue do you actually bring in
the door, not contracted, notfuture-looking ARR, but what is

(08:33):
the revenue that went in thedoor?
Uh, how are you performingsales, you know, from from a
customer perspective and howmuch cash do they generate?
And then how much cash do youburn to get there?
So it's the you know, archetypeof an efficient business.
You need to have one in ahealthy place and hopefully you
do it as efficiently aspossible.
The thing that I really likeabout it is it seems like the
archetype of a business in an AInative world is taking more

(08:55):
forms than it ever has before.
And the playbook of, you know,what's the typical range that
you would see for NRR, for grossmargin, uh, for growth in a
software company uh five, 10years ago is now a much broader
spectra.
You have companies growingfaster than they ever have
before.
You have margins that maybedon't look like traditional

(09:17):
software margins for some ofthese companies.
And so what I like about Alex'sframework is it does simplify it
in the sense that if you reallyboil it down, what matters?
Cash in the door, cash out thedoor.
Are you building an efficientbusiness?
And in a world where theaperture of what does a typical
venture backed business looklike is getting broader and
broader, it's nice to havesomething that anchors anchors

(09:38):
the conversation for anexecutive team or an investor.

SPEAKER_02 (09:41):
Yeah, well, right now we're seeing I think two
different metrics matter a lotmore, which is growth rate and
uh growth rate.

SPEAKER_01 (09:49):
It turns out growth rate still matters.

SPEAKER_02 (09:51):
Yeah, exactly.
Well, the thing is like cashburn, um, you know, with a lot
of these companies that aregoing in a unprecedented zero to
a hundred, zero to two hundred,or whatever it is, million in
ARR in what, under two years?
Uh in some cases under a year.
That's insane.
Um and it's different thantraditional SaaS metrics uh have
ever been.

(10:11):
So uh I do think though, youknow, what you're seeing is a
lot of these companies raising alot of money, and it's uh, you
know, a dollar in, but it's twoout the other way.
So they're paying, you know, themodel companies a lot of money,
and that revenue keeps climbing,but the burn is is tough here.

(10:31):
I think what everybody'sthinking is okay, we'll right
size that at some point, andthen we'll have you know, the
revenue coming in.
The margins will get better, theyou know, the credits will be
quite become more costeffective.
So uh we'll see where that netsout.
Uh I and again, like gap revenueand cash burn.
Uh, you know, I wonder if thatis a relic of SaaS days, and now
we're in the AI days, and we'llsee what the the the new metric

(10:54):
or the metrics to look at.

SPEAKER_01 (10:56):
We we talk to investors about this all the
time.
We have you know GTM fundportfolio companies where we're
investing in the early stages,and great companies are breaking
out and growing and raisingfuture capital.
I am hearing more flexibilityfrom later stage investors than
we ever have heard before on youknow, uh a certain level of
churn being previouslycompletely unacceptable for a
B2B software company.

(11:18):
There seems to be a little bitmore flexibility because the
growth rate is also 5, 10x,anything they'd ever see before.
And so I I think there'sseemingly a wider scope of what
could be acceptable, with thecornerstone of it all being what
you mentioned at the top.
If you're growing fast enough,um, there seems to be appetite
from a capital perspective,hiring great talents, and

(11:39):
hopefully building an economicproduct along the way.

SPEAKER_02 (11:41):
And then there's the uh the new age-old ERR which ARR
debate uh which is happening.
So uh we'll see where thatreconciles too.
Uh that was not a standard SaaSuh I'd say topic uh that we
talked about.
You had you had POCs, you hadpaid pilots, but and now you're

(12:03):
starting to see um experimentalrevenue calculated as ARR.
You're starting to see even insome cases, you see like people
computing uh calculating GMV asARR.
I mean, it's just a crazy wildless time right now with AR.

SPEAKER_01 (12:19):
So Yeah, you at the MIT did a study earlier in the
summer, near the end of thesummer, uh talking about how you
know something close to uh upnorth of 90% of a lot of these
experimental AI budget uh toolsthat were purchased and revenue
that was generated by companieson the other side isn't
delivering ROI.
Now, there's a lot of, I think,debate to be had of how they're

(12:39):
defining that, where you drawthe lines, what that means.
Uh, but I agree with you.
What you have is a lot ofcompanies that are growing
quickly.
You don't know exactly how muchof that is experimental revenue.
You don't know how much of it ispermanent budget that the
company intends to have in thefuture.
Uh the thing that you do havedriving some of that, and the
real question is how much endsup sticking, and then how are

(13:01):
startups reporting it?
But we are seeing more demandfrom a customer standpoint than
I feel like we've seen in years.
People want to try things,they're open, they're moving
procurement cycles faster,they're creating budget that
didn't exist before.
It does make it hard tounderwrite that long term.
Um, because you you do have tobe discerning on what's going to

(13:22):
stick and what's not.
But the demand is there.

SPEAKER_02 (13:26):
Well, you'll have to tune into the episode that's
coming right now.
Uh, we talk more about uh powerlaws, we talk about a little bit
of rationality in the markets,talk about which IPOs we think
are gonna happen or not happenin the next few years.
Uh, we go deep on founderownership and what he likes to
see in an S1, especially in thefounder letter.
Uh pricing models, coststructures, uh legacy companies

(13:50):
are re-accelerating with uh, youknow, Oracle's up 6X of 2022.
Okay.
Um just incredible.
And then breaking down the S1and so much more.
Um it's an action-packedepisode, and you'll have to stay
till the end to find out howmany maxes or too many maxes to
have in one person's life.
Um, all right, let's kick itover to the interview with Alex.

(14:13):
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(14:34):
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(14:55):
That's Angelist.com slashGTMfund.
You are.
It's just such good qualitystuff for anybody who's
interested in both private andpublic markets.
Um I find myself just kind ofgoing into rabbit holes on a lot
of the things you're talkingabout, especially the S1 deep
dives.

(15:15):
But yeah, every time there's anIPO coming, which finally feels
like we're uh we're back.
What do we got?
Klarna, we got NetScope, ohyeah, Figma.

SPEAKER_03 (15:24):
Figma, circle, chime, sailpoint, service titing
was last year, late last year.
So your job I heard Devon orTrip Actions might be uh coming
out soon as well.

SPEAKER_02 (15:34):
As the uh as the S1 guy, you're feeling like you've
got a whole new boatload of workcoming your way?

SPEAKER_03 (15:39):
Yeah, uh fortunately, uh we have a small
but great team at Meritech whohelps with a lot of that stuff.
So I gotta give uh uh a shoutout to my colleagues uh Tanner
and Kathy and Austin Anthonywho's into that because they're
so robust.

SPEAKER_02 (15:53):
I mean, they're they're like fancy.

SPEAKER_03 (15:54):
Yeah, I mean, I'll give you some of the history.
I my first job out of college, Iworked at in investment banking
at Goldman Sachs.
And the first day I was staffedon the Yelp IPO.
That was in 2011.
That ended up being nine monthsof my life.
So all I did was pretty muchwork on that.
Uh, it was a ton of work, and westarted from nothing.
And so we essentially, back inthose days, companies, while

(16:18):
they were sophisticated, not assophisticated or as scaled as
they are today, Yelp was under100 million in revenue.
So to ask a sub 100 milliondollar revenue company to come
up with all these metrics and doall this writing is a little bit
of a foreign concept at the timewhere companies today are so
much larger going public, somuch more sophisticated across
accounting, strategic finance,you know, sort of uh in terms of

(16:39):
the lingo of the metrics.
And so at that time, it wasreally the, it was really the
banker's job to do a lot of thatwork.
So I ended up doing that.
After that, when I got to, Iwere I ended up working on three
IPOs from Lead Left to Finish,Rin Software and Gigamon.
And when I was at Redpoint, Iwould always do write-ups for
the partners around new IPOs.

(17:00):
And people really uh enjoyed it.
Uh, and then when I was leavingRedpoint, I used to work a lot
with Tomash Tungus, who was avery prolific blogger.
And he told me, he said, Hey,Alex, why don't you post some of
those things in there?
That wasn't really mypersonality um at the time.
And uh I took his advice and sosort of had had been doing that
ever since.
I think I've done like 60 or 70of those by now.

SPEAKER_02 (17:22):
Yeah, they're incredible.
And uh, you know, you go prettydeep into, you know, the kind of
the background of these IPOs.
Like, what what are you lookingfor, I guess, as an investor,
you know, when you're digginginto those?
What are the most importantmethods to look for?
What are the most importantacronyms that people should know
and should be watching out for?
And there's obviously, you know,rule of 40 and things like that.

(17:43):
Is that still a thing?
Is 40 the number?
What, you know, what are youseeing these days?

SPEAKER_03 (17:47):
I'll get to that in a moment.
Yeah.
Um, if 40 is the right number,because I think that's changing,
particularly uh in AI prettydramatically.
Um, but I the first thing I dois I look at the, I go to these
quarterly PL and I download thetable and look at the non-gap
metrics.
Because I think that's the mostimportant thing where
irrespective of what your uniteconomics look like, your net
dollar retention, your customergrowth, your, you know, CAC or

(18:11):
sales efficiency, everything ispretty much going to be
consolidated into that non-gapPNL just on revenue growth and
then your margins and sort ofoperating margins.
And so I think that's everythingkind of comes to that, um, even
though it's often overlooked andit's usually on page like, you
know, 150 or something of theS1.
They have the annuals up frontand the prospective summary, but
I like to look at the quarterover quarter.

(18:33):
Um, so that's really what I'mlooking for.
I'm looking at the risk factors,I'm looking for customer
concentration, I'm looking for,or I really like to read the CEO
letter, which I find is reallyinteresting.
Um, the way the founder talksabout the business.
I also want to know is itfounder led?
I think that's really important.
Um a lot of times I've had thebenefit of spending time with

(18:54):
these businesses in the privatemarkets.
And so I do have context, butwhen I write, I just use things
from DS1 or like their pricingpage, et cetera.
I don't sort of induce any um ofmy own uh sort of prior, you
know, knowledge of the companyin these.
Um, and you know, themanagement's discussion analysis

(19:14):
is an area where sort ofeverything is laid out in more
detail.
That's where all the non-getmetrics are when you think about
things like net dollar retentionor gross dollar retention or
customer counts or customersover$10,000 or$100,000.
Um, and there's a lot of nuance.
Like, I think there's like 40 or50 different ways that companies
calculate net dollar retention.

(19:35):
So it's pretty complex.
Everyone just thinks about, oh,it must be 125.
Well, it there's obviously anaspect to it, like most things,
where some companies onlycalculate net dollar retention
based on customers over acertain threshold.
Interesting.
And while that might make up 90%of your revenue, it could
theoretically be overstatedagainst other companies.
Yeah.
For example.

(19:55):
But overall, um, it does kind ofthere are some goalposts to it.
So I'm just looking at the finerdetails, sort of the fine print.
Um, and with that, I generallyhave a pretty good understanding
of where these things will bevalued.
There's no projections in S1s.
It's only what you've done inthe past.
Um, and there's no valuationinformation that's posted

(20:17):
initially.
So um the range usually comesout a few weeks later.
So I like to kind of think aboutwhat that might be when I look
at the company.

SPEAKER_02 (20:23):
It's interesting to hear you say actually one thing
I want to pull out of that or,you know, uh pull thread on is
listening to how the CEO talksabout their business.
Yeah.
Um, I spend time in the reallyearly stages of, you know, most
of our time at GTM fund is in,you know, precede and seed.
And so um sure, you need to makesure that this is their baby.

(20:44):
This is like really the onlything in their lives that they
want to work on.
They're gonna give their all toit and they're gonna take it the
distance, and you know, there'snothing, nothing else to really
think about.
They're not thinking about exitstrategy or anything like that.
They're thinking about buildinga business, building a company.
When you read these ones thatare happening in a in an IPO
situation, what are you tryingto deduce or parse out in there?

(21:04):
Because you know, I'll speak toactually uh just yesterday spoke
to CEO, public company, and he'sbeen with the company almost 20
years now uh since founding it.
And the way he talks about thecompany is very um much like
it's his baby still, veryemotional about the company.
And I'm not necessarily surelike if I'm a shareholder in

(21:26):
that business.
I like that.
I want to know that uh, youknow, if somebody gives you an
offer you can't refuse, you'renot gonna refuse it, right?
For you know, your shareholders,uh, your fiduciary duty, your
shareholders.
So at a certain point, it's kindof like, okay, on one hand, you
really want them to have thatpassion and that like it's my
baby feeling around it, I think,at the IPO stage and beyond.
But on the other hand, it's uhthey're going to do the right

(21:46):
thing for the shareholders, andit's not just them anymore, you
know, it's retail investors,it's institutions, it's a much
bigger game now, right?
So what are you looking for inthose, in those messages?

SPEAKER_03 (21:58):
I think there's also some huge selection bias in
companies that are actuallygoing public.
If you think about the type offounder, the quality of
business, the tailwinds in theend market, the market timing,
et cetera, the companies thatare filing are like
extraordinary.
They're the best of the best.
So generally speaking, thosefounders are in it for the long

(22:18):
term.
Because I guarantee you, like atleast we know from the companies
that we've been in from up untilgetting public, they could have
sold the company long before,done extraordinarily well
financially, as well as theentire company, but they chose
to go public for variousreasons.
And I think that's a reallyimportant fact pattern in a lot
of these businesses,particularly the ones that are

(22:38):
founder led.
And you can also see how muchdoes the founder own of the
business in the principalshareholder section.
So I think that's alwaysinteresting.
Is there a number you like tosee there?
Um more is better.

SPEAKER_02 (22:50):
Yes.

SPEAKER_03 (22:50):
And I think it also shows just the capital
efficiency of the business.
Like Clavio, a couple, you know,Andrew, I'd spent some time with
them in the private markets intheir first equity round.
And, you know, they they burned15 million bucks to get to
almost 700 million of run ratein SMB and mid-marking market
automation, right?

(23:11):
Which is incredible.
Um, so clearly the way he wasrunning the business, and he
owned a significant amount uh attime of IPO, the way he was
running the business was his ownperspectives were deeply
ingrained across the entirecompany culture.
So there's not a specificnumber.
More is generally better.
Um, but it also depends like,did you have a tough fundraising

(23:33):
history?
Were the tailwinds there foryour business?
They might not have been.
There's no straight line tosuccess.
Even though when a company goespublic, it's like, oh, they must
have always been an incrediblecompany.

SPEAKER_02 (23:43):
Yeah.
Most of the time they were.
But Intercom is such a goodexample.
Yeah, right.
Look at what Intercom is doing.
Yeah, it went, you know,straight up and then kind of was
like, uh oh.
Yeah.
They found figured out a secondact.

SPEAKER_03 (23:53):
Yeah, they figured out a second act with AI.
Um Owen came back as CEO, right?
I think a year or two ago, andthe company's doing great.
And so um, you know, I thinkthere's there's many stories
like that.
Or look at um, you know, look atNetscope, who just filed a few
weeks ago.
Um, I remember spending timewith Sanjay when I was at

(24:14):
Redpoint in the Series B andSeries C, and it was just a CASB
cloud access broker at the time.
It was a fairly small market.
Most of the companies wereacquired.
Sanjay has willed the company,starting in their initial web in
Casby and moving up to be sortof a broad security and
networking platform.
And it's probably going to be aneight to ten billion dollar

(24:36):
company.
And what he's done is absolutelyincredible.
Um, they've raised a ton ofmoney.
They've needed it.
It's been really expensive to dowhat they've done.
But look at the way they'vechanged the business in six
quarters and durable revenuegrowth, dramatic increases in
efficiency.
Um, so I think those are kind ofthe things that I triangulate
around around where where didthe business come from?

(24:58):
What are the headwinds that theysaw?
How did they get out of them?
And how do they win a market?

SPEAKER_00 (25:01):
Yeah.

SPEAKER_03 (25:02):
Uh, I think that tells you a good story around
how the CEO is going to behaveas a public company.

SPEAKER_02 (25:06):
Yeah.
And then also, um, do you careabout scrappiness?
You know, the is that going totranslate as a public company?
And I think one of the thingsthat's even part of that now is
like leveraging AI early in thecycle.
Uh, you're seeing, you know, uhprivate companies get bigger,
faster with less headcount,which means less dilution.

(25:27):
Now you're seeing publiccompanies kind of do the same
thing.
Robin Hood recently uh is agreat example of that,
unbelievably.
That was able to write, like doa big buyback, uh, you know, uh
create a lot less dilution forthe company, hire a lot less
people to get to um, you know, apoint of future growth that is,
yeah, I guess unheard of orunthought of before that, right?

(25:49):
Using AI.
So you know what are you seeingin public and private markets
around that?
And do you are you looking forthat when you're investing as a
private market investor?
And then when you're doing theseS1s, is that something you're
digging into?

SPEAKER_03 (26:01):
It's interesting.
On the last point on the S1s,look at the evolution of how
people talked about software.
In the early 90s or the early2000s, it was called software,
it was mostly licensed on-premmodels.
Salesforce IPO 2004, it wascalled on people called it
on-demand software before SaaS.

SPEAKER_02 (26:19):
Yeah.

SPEAKER_03 (26:20):
Then it was called SaaS.
In kind of the late teens,everyone has called it cloud.
And then now it's called AI.
It's probably just going to becalled software again.
And so everything is evolving inthat way.
But how are people using AItechnology?
Not just what you say in thefirst sentence of your S1, um,
used to say we're an on-demandcompany, we're a SaaS company,
we're a cloud company, now we'rean AI company.

(26:42):
Uh and I think the, I mean, AIis undeniable.
It's sort of coming at a pace noone really expected.
It will be infused into thefabric of every piece of
software over the next five toten years, although it will
happen unevenly across sectors.
And it's also going to create alot of new companies.
A lot of the new businessesbeing started aren't even what
you would describe as kind ofclassic workflow companies.

(27:04):
They're actually creating newmarkets.
And I think that's the mostexciting thing about new
platform shifts, also thescariest.
But for any cloud 1.0 or SaaScompany, I think those the best
businesses are not reinventingthemselves per se, but evolving
with having AI infused intotheir software.
So um and the markets at a verysimple level are pretty

(27:28):
distinctly different, where alot of the best AI companies are
sort of replacing manual laboror knowledge work in some cases,
where workflow software wasbuilt for users to do work or
systems of record.
So I think it's um the marketsare different.
They're converging in someareas, not yet converging in
others.

(27:48):
And look at what Oracle'sthough.

SPEAKER_02 (27:50):
Yeah.

SPEAKER_03 (27:50):
They're up 40% today.

SPEAKER_02 (27:53):
Larry passed Elon for Larry passed Elon as well.

SPEAKER_03 (27:57):
Yeah, yeah.
Um and everyone thought Oraclewas left for dead years ago.
I mean, it was an EPS company,like EPS focused company.
It wasn't a growth company.

SPEAKER_02 (28:06):
Could have put a bunch of money into that in
2022.

SPEAKER_03 (28:08):
Yeah, they're up uh they're up uh 6X since 2022.
Yeah.
Which is and now they're one ofthe preeminent AI infrastructure
providers.
And so legacy companies willreinvent themselves.
Um, AI native companies will dothe same.
I think it's gonna be reallyinteresting to see how it all
plays out.
A funny stat, um I looked at ofall mid to large cap companies

(28:30):
over the past five years,Salesforce has the most mentions
of AI in the earningstranscripts, which is kind of
interesting, even abovemarketing company.
No, I know.
Yeah.
Marketing company, but um youcan't accept it.
Everyone's talking about it.
I think we're gonna see a ton ofum, it's gonna be cool to see
how I'm most excited, obviously,about all the new companies, but
how are the kind of quote legacyor cloud 1.0 companies that are

(28:54):
currently public going toreinvent themselves for the AI
world?
Look what Palantir's done.
Um, look at Oracle.
There's a there's a few otherexamples, but there aren't a ton
yet.

SPEAKER_02 (29:04):
Well, there's you know the marketing side of that,
there's the sales side of that,there's the product side of
that.
What I'm most interested in, andyou know, it's kind of goes in
line with our investment in ourfriend Manny Medina made.
But what's gonna happen withpricing and packaging?
Yeah, are we gonna be stilldoing C pricing like Salesforce
has been doing for a very longtime?
Uh or are we gonna move intokind of that workflow-based,

(29:26):
outcome-based pricing,especially as this moves into
kind of replacing um, you know,you're no longer going into and
saying, well, what what pro whattech products or SaaS products
are you ripping out to buy thisone?
It's well, which headcount areyou gonna be able to replace or
not need to hire?
Um, and now you have the budget,you know, for this piece of

(29:46):
software or uh or this AI, youknow, product.
So Yeah.
What are you seeing there?

SPEAKER_03 (29:51):
I mean, I think there's a couple areas, customer
support as well as coding.
There's been undeniable changes.
In higher inters because of AIso far.
That is likely only toaccelerate across industries as
the products get more advanced.
Think about it's alreadyhappening, but foundational

(30:12):
model companies, whether it'syou know, OpenAI, Claude,
ChatGPT, they can't even loginto applications and do work on
your behalf yet.
That's not, we're not yet thereyet.
And we're already seeing higherimpacts on customer support and
coding.
That's all it's it's only gonnagrow.
So I think the seat model willlikely slowly die out, but

(30:33):
again, it's gonna be uneven andhappen at different times, but
it will die out.
We're gonna move towardsprobably like platform fees and
consumption, some combination ofthat.
I actually don't think it's abad thing for software companies
because you're more closelyaligning value with the
customer.
Yeah.
Where the seat model, thinkabout it, like in any software,

(30:56):
there's gonna be power users.
There's it's asymmetric in termsof the usage.
Some of the seats aren't evenbeing used at all.
You've seen, I mean, there's alot of companies out there that
help businesses do audits ofsoftware that's not used.
And a lot of software is notbeing used.
So I actually think aligning thepricing models with the customer
is actually gonna be better forthe industry over the long term.

(31:17):
It will create more uhalignment.
So I think that aspect in AI isa really positive thing.

SPEAKER_02 (31:23):
Yeah.
It's a really good segue intosomething that's been on my mind
that we haven't had to cross thebridge on necessarily yet, but
you are on what number fundright now?

SPEAKER_03 (31:35):
We are on fund eight.

SPEAKER_02 (31:36):
So fund eight.
In let's say the last 20 years,maybe in the early 2010s, uh the
technology innovation cycleswere like seven to ten year
cycles.
So you'd do a Series C in acompany, that company would IPO,
you'd realize the value of thatcompany, and then you'd be able

(31:56):
to invest in a new fund, maybetwo funds later, in a company
that was maybe in the samespace.
Yep.
Now those cycles are shorteningto maybe three years, two years,
one year.
So how do you invest in acompany in a space?
And then a fund later, you mightsee another company that's in
that space that may bepotentially competitive to that

(32:16):
company invested in a fund ago,but you're realizing like, wow,
I don't want to miss out on thiskind of like new version of
this, right?
Um, and maybe the new version isis an AI play and it's
outcome-based pricing, and theold one was a seat-based pricing
uh company.
Yep.
How do you manage that at acompany where you have multiple
funds and you're investingacross, I guess, multiple stages

(32:39):
of growth and uh across multipleyears and you don't want to miss
out on the latest and greatest,right?
But you still want to be founderfriendly and whatever else.

SPEAKER_03 (32:49):
Yeah, a few things on that.
First of all, um we don't wantto be investing with conflicting
dollars.
Yeah.
Right?
It just doesn't make sense froma fun perspective.
We keep it pretty simple.
We just take a founder firstmentality to this.
If something is too close forcomfort, we for the founders,
we're not gonna press it.
Um and so particularly if we'reyou know on the board of some of

(33:12):
two companies, that's notsomething we would want to do.
Um I would say the lines areblurring on that a little bit in
this day and age as the ventureindustry is becoming much more
industrialized.
Yeah.
Where some firms are of thescale of which, you know, a
partner might be working at thesame firm but in a different
fund that doesn't even haveinformation rights.
It's almost like two, it's it'sthe same name of the firm, but

(33:36):
it's two different entities.
And so I think there's a lot ofnuance to it now.
Um, but yeah, we we do not tryto invest in competing
companies.
And the interesting part, a lotof these new technologies,
they're new markets.
Or it's a completely differentway to solve the same problem.
So in that case, there might bea new buyer, there's a new
pricing model, and you're notactually competing with the

(33:58):
current.
At the same time, any companythat we're in, we're encouraging
them, if there are upstartstartup competitors in the AI
world, we want them toaggressively build out those
features and functionality tocompete too.
So um, but we yeah, we don't wewon't invest in uh competitors
generally speaking.

SPEAKER_02 (34:16):
Well, now more than ever, it's a power law game.
Yeah.
Right.
So I think that's probablysomething that's got to be on
your minds all the time.
So I wonder, you know, in a uhagain, we're we don't invest at
the same stage as you, we're infund, you know, going on to fund
three.
Yeah, a little bit different.
We haven't experienced thisproblem.
I can imagine, you know, there'scertainly situations where, you

(34:37):
know, this is gonna be thewinner.
Do we have to do an audit of the20 years of companies that we've
invested in previously andunderstand, okay, can we make
this investment?
Do we don't want to miss out onthis one company as a flight to
quality and there's you know,it's power law more than more
than ever before.
So how are you thinking aboutyou know the power law game

(34:58):
right now and the state ofventure capital that we're in?

SPEAKER_03 (35:01):
Yeah, I think there's so many um trends going
on, just to kind of name a few.
There's more capital than everin the private markets.
That's one.
And so a company that used to gopublic at five billion dollars
in market cap or even onebillion dollars in market cap.
When I was working on IPOs atGoldman, we would spend nine

(35:21):
months, a two-week roadshow toraise a hundred million dollars.
That's now could be a seed roundfor a private company.
So capital has shifted.
Companies are then stayingprivate longer.
You look at sort of the age ofcompanies before they go public
because they're getting largerand larger.
The thought that there could bea company like Databricks, you

(35:42):
know, raising money to$100billion in the private markets
10 years ago, people would sayyou're crazy.

SPEAKER_02 (35:47):
Yeah.

SPEAKER_03 (35:48):
Honestly, I think.

SPEAKER_02 (35:49):
Um so that's changed to M.

SPEAKER_03 (35:51):
It's the stripe, it's uh I mean the market Amazon
went public at, you know, Ithink a few hundred million in
market cap.
Yeah.
Now it's trillions of dollars.
So a lot of that valueappreciation is now happening in
the private markets.
So if you're a capitalallocator, you want to be a part
of that.
What where does the most valueaccrue to any what is the single
most important value uh factorin value creation?

(36:13):
Growth.
AI and private technology is thefastest growth sector of the
world, broadly speaking.
So all those dollars are flowingin.
Fund lifes are gonna extenddramatically.
The idea of the 10-year fund isbecoming less likely given how
long companies are choosing tostay private.
Although liquidity instead of anIPO is more and more happening

(36:36):
through secondary transactions.

SPEAKER_02 (36:37):
Well, why don't you ask about that?
Maybe we'll go into that next,but how you're participating in
secondaries.
Yeah, there's both the buyingand the selling side of that.
Being aware of, you know, is myuh investment wildly overvalued
on the secondary markets and Ishould be selling now.
Or um, hey, can we get into thisat a really good deal and buy
more of this company onsecondary markets?

SPEAKER_03 (36:57):
But continue to that.
I'll cover the power lawdynamic.
Um, we're actually just lookingat some of this because last
year at our annual meeting, wetalked a lot about this factor
of there's like 1,500 unicorns.
The vast majority of them won'tcreate value, unfortunately.
Yeah, but the very few that arethe largest will create more
value than industry has everseen.

(37:18):
We talked about this conceptlast year at our annual meeting
that has only radicallyaccelerated, where you have
companies like OpenAI,Anthropic, Stripe raising my
Databricks at like hundreds ofbillions of dollars in
valuation.
And they're consuming more andmore of the venture funding.
Uh OpenAI had the, you know, Ithink OpenAI raised 40 billion,

(37:40):
and that was like more capitalthan all of the largest
companies' rounds in a singleyear for like 10 years.
Yeah.
So it's just, you know, it'sit's astounding.
Um, and the opportunity is huge.
And so it's not that no onecares about the average company
anymore.
It's just there's no real publicmarket sentiment for it right

(38:01):
now.
Or I guess, you know, if no onecares, it implies that.
But um, that's just not whatpeople are shooting for.
They're shooting for grandslams.
Base hits don't matter anymorein this end market.
And so back to your point on thesecondary markets, would we
consider selling?
We tend to be later stageinvestors.
So we're coming in host productmarket fit.
Companies are in the in revenue,they're generally doing in the

(38:23):
low millions of revenue, andthat's our entry point.
And because of this outliereffect, when we're in a winner,
we want to keep investing moreand more versus pairing back.
So um we're willing to take therisk with exceptional founders,
exceptional end markets, wherewe're in a market leader to hold

(38:44):
on until the appropriate exit,generally speaking.

SPEAKER_02 (38:47):
I'm hypothetically this, but like let's say fund
three was in Databricks's, youknow, Series B.

SPEAKER_00 (38:56):
Yeah.

SPEAKER_02 (38:57):
Are you taking anything off the table at a$50
or$100 billion valuation?
I mean, like you can return thefund and then some and still
probably keep half yourposition, right?
So, you know, do you do you lookat that and say, like, hey, this
is a good time for DPI?
Like, regardless if we thinkthis is going to be a half, you
know, half a trillion dollarcompany.
Um, and then on the flip side, Iguess, you know, second question

(39:19):
is well, are you takingadvantage of the secondary
markets to buy more into some ofthese companies?
Like if you're continuing to putmoney in the flock safety and
framework and things like that,maybe there's opportunities
where a company doesn't want totake on more dilution, but it's
a good opportunity to get somepeople out that have been with
the company for five or sevenyears, and you can do$20 million
worth of secondary for you knowemployees and get more access.

SPEAKER_03 (39:40):
We do tenders all the time for companies, and so
that's a very common.
Um, some of our most excitinginvestments, we only bought
secondary, data dollar.
For example, uh Tableausoftware, they didn't need any
money.
And so we led a tender offer.
Um, but back to your point, ifwe're in a 2003 fund and it's
today and the fund is 22 yearsold, and you know, Kendley, we

(40:04):
might have already sold someDatabricks at that point.
But I think that's those arequestions that will be asked
going forward versus today,because really the cycle kind of
changed in the past few yearswhere this like capital kind of
tidal wave came into the privatemarkets.
And so I think uh more and Ithink there was uh this year,

(40:26):
there's been more exits throughsecondary than through IPOs.
Yeah.
For the first time ever.
And will that accelerate?
Probably so.
Given the stage that we're at,we'd probably be the ones buying
a lot of that secondary.
Yeah.
Um, but if something were tohappen like can never say never,
I guess.
Yeah.
On the sell side.

SPEAKER_02 (40:43):
And there's certainly going to be, I think,
plenty of seed stage funds thatare looking for DPI companies
really well.
It's like, hey, this is plenty.
We can take half our position,three quarters of our position
off here, sell it to a fund likey'all who are buyers at that
stage.
Like, I think there's a lot ofopportunities in the marketplace
for both sides when thecompanies are going this big,
this fast.
And it's different than 2021.

(41:05):
I was having this conversationwith somebody the other day, but
you know, you'd see a companyraise three rounds of funding in
one year, and it's like, well,they went from like one to three
to ten million in revenue.
Like, this is it's crazy thatthey're raising like this.
But now you're seeing companiesgo from zero to a hundred
million in a year.
Oh, yeah.
All right.
They are getting a ten billiondollar valuation or three or

(41:25):
five billion dollar valuation.
At least it's at least there'sthe revenue there to back it up.
Yeah.
You know?

SPEAKER_03 (41:29):
Companies are growing so much faster now.

SPEAKER_02 (41:31):
Yeah.

SPEAKER_03 (41:32):
Even in our portfolio, that are more AI.
But I think goes back to themarkets are just kind of
fundamentally different, themarket structure, where if
you're selling a softwareproduct to a mid-market company
that has a thousand employees,their software budget is sort of
like anywhere from five to eightpercent of revenue, roughly
speaking.

(41:52):
But 70% of their costs areheadcount related.
So you think about the AImarkets, it's just it's 10x
bigger.
And that's why I think we'reseeing in the private markets
this concept of the triple,triple, double, double doesn't
really make sense anymore forthe best companies.
Yeah.
We're seeing many businesses gozero to a hundred million, zero
to fifty million, zero tohundred million within 12 months

(42:16):
because the TAM and the demandis so, so much bigger.
Also, there's this other conceptof a ton of experimentation
happening.

SPEAKER_00 (42:24):
Yeah.

SPEAKER_03 (42:24):
Like everyone's excited about AI with very good
reason, by the way.
And so everyone wants to buythese products.
Every Fortune 500 company CEOhas told the market they're
going to have an AI story thatfilters down to C-suite, to VPs,
to directors that's saying weneed to AI fy our companies.
And so what does that mean?
We need to go experiment withsoftware.

(42:46):
Who's selling all this software?
It's private venture-backedcompanies.
And so they are seeing explosivegrowth.
Open AI is what, 800 millionMAUs?
I mean, it's like insane.

SPEAKER_00 (42:56):
Yeah.

SPEAKER_03 (42:56):
It's like nothing we've ever seen before.
So I think the um the excitementaround AI is there, the budgets
are there.
Um, and that that's also areason why these companies are
growing so quickly, but also themarkets are just so much bigger.

SPEAKER_02 (43:09):
Well, do you worry at all that we're going to have
a 2022 style reckoning where,you know, markets turn a little
bit, maybe it's next year, maybeit's the year after.
But, you know, uh CFOs, uh Clevel executives all say, okay,
we've got this sprawl again thathappened in 20 at the end of
2021.

(43:30):
We have, you know, 70 differentsoftware for each function in
the business, and we got to cutthese down to the need to have
all have only.
Like, do you think that thathappens at some point again?
Or um you know, are we really ina period where we're replacing
so much labor and it's you knowso efficient?
And you say it's experimental,so that's my worry is that you

(43:52):
know, we we have all theseorganizations that experiment
with a bunch of this, and thenthey say, okay, let's get back
to reality here.
Let's consolidate, let's makesure we're being efficient.
And, you know, we the thewinners have kind of sifted out.
We know, you know, we want touse.

SPEAKER_03 (44:06):
Hey, there's a lot of froth in any new platform
shift.
I'm not gonna argue that.
Um 2022 wasn't that far away,right?
The software recession was real.
Yep.
Although the best companies havebounced back dramatically off
the lows that aren't even in AI.
I think um, to your question,there's a lot of cognitive

(44:27):
dissonance in the market whereit's obvious we're in a bubble,
but that's okay.
It doesn't mean that the largestcompanies ever in technology
won't be created, because Ithink that fact is also true.
And so the market is reallygrappling with that concept.
And I do think the dust willsettle.
Here's the thing I don't itdoesn't matter what platform

(44:50):
shift you are, whether it wasthe internet, the semiconductor,
or you know, clean tech or SaaS,the vast majority of companies
don't make it, um, irrespectiveof the platform shift.
Will that be similar in AI?
Likely so.
Uh, but there's huge excitementaround it for all the reasons we
discussed.
So I think there's gonna be umhow do you as an investor manage

(45:13):
those two facts of being in abubble but not wanting to miss
or not be a part of the largesttechnology companies ever?
Yeah.
And it just comes down to whatstrategy you're employing at
your fund.
And so um I'm not sure thatthere's gonna be like a AI
recession because of the factthat the markets are so big and

(45:35):
the technology is gettingcheaper while the capabilities
are improving and there's suchhigh demand for this technology.
But not all these companies aregonna be successful.
Yeah.
But but in any given category,like there's probably gonna be
some monster companies and therealready have been created in
just a few years.
Yeah.
We're just getting started.

SPEAKER_00 (45:53):
Yeah.

SPEAKER_03 (45:53):
Like I said, you can't even use an AI lab to log
into third-party software yet.

SPEAKER_00 (45:59):
Yeah.

SPEAKER_03 (45:59):
Think about if I told you, hey Max, I've got
someone who I've I've got anagent that would book this
entire event here today for youon one simple prompt, and you
didn't have to do ever anything.
You probably pay a lot of moneyfor that.
Yeah.
So there's millions of those usecases across our daily lives,
across existing technologyworkflows that haven't even been

(46:22):
tapped yet.

SPEAKER_02 (46:22):
And the cogs the cogs are only, yeah,
everything's getting cheaper,the margins are getting better,
right?
Over time, it's there's kind ofa little bit of a race to the
bottom between a lot of these.
Uh I think it's the race to thebest product.

SPEAKER_03 (46:34):
I don't think it's the race to the bottom.
Okay.
Yeah.
Explain that a little bit.
Where I think there's this fearthat, oh, if everyone just does
the same thing, um, it'll be arace to the bottom.
My old boss at Spark Capitalwould ask a question: is it a
toaster market?
You've got a toaster, everyonehas a toaster.
You don't really care which kindof toaster you buy, you probably

(46:56):
buy it at Costco or Walmart orTarget.
They're all kind of the same.
They plug in, they have variousdifferent features, they're all
like 20 or 30 bucks.
Yeah.
No one really cares.
Um, but it's a multi-billiondollar market.
And there's companies that makea lot of money selling toasters.
Being a venture capitalist,we're not in the business of
investing in commodity products.
We want to be in the bestproduct.

(47:18):
And I think this concept of willit be a race to the bottom is
just another way of asking, willit be a toaster market where
it'll be big, but no one willreally win or be super valuable
or trade well because it's allcommoditized.
We take the perspective that thebest companies and the best
founders will figure out a wayto create an exponentially

(47:41):
better product experience intheir end market that they will
be extremely valuable.
We've seen that time and timeagain in other technology
markets where it is very easy tosay there's 20 competitors,
there's not likely going to be alot of value creation.
That might be true.
But what about the one companyand special founder who had a
unique approach to the marketthat had the best product?

(48:03):
And they might create, theymight take most of the market
share and create a create acompany that's worth tens of
billions of dollars.
It's our job to figure out whichside of the spectrum that's on.
So I think the only race to thebottom are going to be in
markets that weren't all thatexciting to begin with.

SPEAKER_02 (48:19):
Yeah.
Okay.

SPEAKER_03 (48:20):
So you don't see it like cloud where it's like, oh,
I can use Azure, I could useGCP, I could use AWS, you know,
well, you still could, but thosethree companies are$260 billion
of revenue run rate growing,accelerating growth at 30% with
20 to 30% operating margins.
And so they're pretty greatbusinesses.

SPEAKER_02 (48:43):
Yeah, yeah.
Well, I mean, there's stillgoing to be great, like right,
there's Grok and OpenAI andAnthropic and Meta and all
these.

SPEAKER_03 (48:48):
And uh But I don't think I don't think the race to
the bottom on price will be thereason that a company is not
successful.
I think that's the output of themarket structure not being as
exciting, or it's an endcategory that the buyer doesn't
really care about.
Like if someone goes to build anew type of toaster, yeah, will

(49:12):
it really be sick?
Like, do people really careabout a new toaster?
Maybe.

SPEAKER_02 (49:15):
Well, I think the question on a lot of people's
minds is like, does it get to apoint where a bunch of these
companies that are growing, youknow, zero to a hundred million
or zero to two hundred millionin like such rapid pace, when
you look under the the hood alittle bit, it's like, okay,
well the all that money is justbeing passed through to the LM,
right?
So it's like at what point doesthat become affordable enough

(49:38):
for those companies to actuallystart making money on top of
that layer?
Where it's a dollar in two outinstead of every dollar in
you're paying two.
You know?

SPEAKER_03 (49:48):
I think that's gonna be one of the most interesting
fact patterns of how this marketwill develop is if you're in an
end market where the only wayyou can grow is by giving a
customer something that's thatyou're paying$2 for for a
dollar, that's not sustainable.
Obviously, that's not gonnawork.

(50:09):
And so the founders that are orthe companies that are doing
that, do the founders take theperspective of I'm gonna
parallel process growth whilebuilding out my product suite so
I can actually charge$5, eventhough I'm paying two over time.
There's been some companies thathave proven that already in very
impressive ways.
But in any new marketenvironment, it's a land grab,

(50:31):
particularly with the amount ofcapital that's flowing in.
That I don't really blamefounders uh for wanting to, you
know, accept a dollar forsomething they're paying two for
for incredible growth if peopleare willing to give them a lot
of money for it.
It's just sort of basiccapitalism.
So I think the the thing will behow does that evolve over time?

(50:51):
I still think the best founderswill figure it out.
I mean, we we have had uh, youknow, we've had examples of
companies where we invested inwhere we didn't even know what
the gross profit was because itwas so negative.
Yeah.
The company wasn't even reallysure.
But we knew they had a greatfounder and it was a great end
market that had some uniquetailwinds behind it.

(51:13):
And now they have incrediblegross margins and we don't even
really talk about it anymore.

SPEAKER_00 (51:18):
Yeah.

SPEAKER_03 (51:18):
So I think um that will happen in AI, but that's
not to say there's not a lot offroth in the ecosystem, too,
right?
Like, like I said, there they'rethe the kind of what we talked
about, the cognitive dissonanceof being in a bubble versus the
largest companies tech intechnology will ever be created
now, is like that's a toughthing to grapple with, and on
the margin, you see a lot ofthese things come up.

SPEAKER_02 (51:41):
All right.
So, you know, I worked withMeritech at Outreach.
I know you guys are prettycutting edge.
What how are you using AI inyour day-to-day right now and at
the fund?

SPEAKER_03 (51:50):
Yeah, we're doing a lot of experimentation.
Um, we're using um my favoriteproducts are Whisperflow, and is
it's probably the one I use themost.
Which is speech to text.
It's an app where you just, ifyou're on a Mac, you just hit
FN, FN and you speak.
And wherever your cursor is, itwill input the text
intelligently.
And it saves up your dictionaryover time.

(52:13):
So I think that um it's one ofmy favorite consumer products
where I can send a long emailfrom my phone or computer
without typing.
It's pretty awesome.
And the Siri and those other,like it's really an 80-20.
Like the last mile of speechdetectation is really hard.
And I think packaging that up ina seamless consumer experience

(52:34):
is really hard.
And Whisperflow has done areally good job at that.

SPEAKER_02 (52:37):
Siri's really dropped the ball.
I mean, we can go probably on anextreme tangent on uh Apple's AI
or lack thereof strategy, but Imean it's it's crazy.
Every time I'll say my wife'sname, Ashley, and it'll say it,
they'll spell it the wrong way,which is like not the most
common way to spell the name,and also like nowhere in my
phone.

(52:58):
So you'd think that it wouldknow to like see how it's
spelled in my phone and justspell it that way, or at least
spell it the most common way.
But no, it'll go likeA-S-H-L-E-I-G-H.
Yeah, I don't know.
Yeah.
But was so Whisperflow fixes alot of this?

SPEAKER_03 (53:11):
They do, they do.
Yeah, it's it's pretty awesome.
You should give it a try.

SPEAKER_02 (53:14):
Yeah.

SPEAKER_03 (53:14):
And I think Apple, um, I'm probably a little bit
more bullish on Apple, eventhough they seemingly have
maybe, I don't know, maybethey've dropped the ball.
If you just read about theirperspective, I mean, I think
they're grounded in consumerprivacy.
So interesting.
They actually can't train on youbecause they want to protect
your data.

(53:35):
Interesting.
And given how widespread Appledevices are used, I think if
they open the spigots on usingpeople's data and training on
people's data, what could thatlead to?
I think there's a lot of feararound that.
And Apple's not a company whotakes a ton of risk, right?
They've generally done buybacks.

SPEAKER_00 (53:52):
Yeah.

SPEAKER_03 (53:53):
They don't make huge acquisitions.

SPEAKER_00 (53:54):
Yeah.

SPEAKER_03 (53:55):
So there's a bit of a cultural element.
They're probably waiting.
I mean, I don't, I, I don't haveany inside information.
I don't know.
It's going by one safe.
But yeah, they they play itsafe.
And but no one's getting rid ofan Apple iPhone anytime soon.
And I don't think people aregoing to get rid of an iPhone
for an open AI appended.
They might also buy that one,but I don't think they're

(54:16):
getting rid of an iPhone.
And it goes back to anotherpoint, which is this concept of
software is dead.
Every single AI company we meetalso has an app.
It's still software.
Yeah.
Goes back to sort of the, youknow, history doesn't repeat
itself at rhymes.
But anyway, um, we're also usinga lot of the foundational models
for various tasks.

(54:37):
And I think like if you'retranscribing a PL into Excel or
copying and pasting or doing alot of these like small, really
uh minutia tasks, I think thatwe're finally getting to the
point where there's some reallyproduct products to help speed
that up.
We're starting there.
I think um AI is never going tomake investment decisions, at

(55:00):
least not for the foreseeablefuture.
Um, if it did, I think that umit would just turn into the ETF
market.
Yeah.
Which which maybe that's wherewe're going.
Uh, but uh it's stilldramatically driven by founder
relationships.

SPEAKER_02 (55:12):
And are you using anything like uh harmonic or
crunch base or things like that?
Yeah, we use and there's our AI.

SPEAKER_03 (55:18):
We use a variety of those tools that are really
good.
I'd say they're just forresearch.
For research, yeah, and liketracking company.
Like there's more companies thanever now.
And we're a small team.
So Meritec, there's only 11investors for a$1.4 billion
fund, and there's a lot to dowith very few people.
So we're definitely leaning intohow do we become more efficient

(55:39):
using AI.
We only have 23 full-timeemployees at the firm.
Wow.
Um and all of us areexperimenting and using it in
our in our day-to-day uh andtrying to push the boundaries
there.

SPEAKER_02 (55:51):
We built our own internal tool.
Uh, we called it XVAL, standsfor exponential value because
it's a little put on top of ourflywheel.
It's like a one plus one equalsthree tech thing.
So we're able to take thecommunity, the media, and the
fund and uh essentially maximizeevery aspect of it by layering
on this our own like custom GPTso we can type in there like,
hey, surface all the employees,surface all of our LPs that have

(56:14):
experience with salescompensation planning, and it'll
surface all of the LPs, it'llgive a little dossier on each
one of them.
And if we have a portfoliocompany that asks us for that
type of help, we can just copyand paste it into the email and
send it, and they'll get anemail like, hey, here are the 10
people we can introduce you to,here's a little bit about them.
And oh, by the way, here's like,you know, links to three

(56:35):
different podcasts ornewsletters that we've produced
that'll talk more about salescompensation planning.

SPEAKER_03 (56:41):
Very cool.

SPEAKER_02 (56:41):
That's so you've got your own kind of glean, nuts,
man.
Oh, very cool.
Exactly, exactly.
And it's trained on all of ourstuff.
And um, so that was that wascool.
We use harmonic, a couple othercouple other things as well.
I mean, obviously all of thesoftware companies now have AI
components like guarantee andeverything else has got souped
up.

SPEAKER_03 (56:59):
But uh I'm excited where the market is going for
all this stuff, but yeah.
Yeah.
Yeah.
Speaking of make our jobs a lotmore hopefully easier, but uh
harder.
It's it's always getting harder.

SPEAKER_02 (57:08):
Well, speaking of where the market's going, yeah.
Where is the market going?
Where do you where do you seethe next frontier being?
You know, we're in the firstinning of AI.
Yeah.
But what is what are what is therest of the 2020s look like, you
think?

SPEAKER_03 (57:21):
I think there are factors beyond just the
technology markets that willinfluence that, whether it's
geopolitical risk, risk of ofwar, uh, other instabilities
around the world.
Um, but if we're just talkingabout tech, I'm extremely
bullish.
I do think the, like I said,that AI wave and the cognitive

(57:41):
dissonance around, yeah, wemight be in a bubble or we
probably are in a bubble, butthe largest companies that have
ever been created will probablybe created in this in this
cycle.
Um so I'm uh myself and Meritek,our team, we're we're uh we're
incredibly bullish about thefuture.

SPEAKER_02 (57:58):
Yeah.

SPEAKER_03 (57:59):
You have to be an optimist if you're in this
industry.

SPEAKER_02 (58:02):
You have to, yeah, right.
And what's the what's thesaying?
It's like optimists, uhpessimists sound smart, but
optimists make money.
Uh some variation of it.

SPEAKER_03 (58:09):
I've heard that one.
Uh, or you know, what what isour job?
You know, you could argue, areyou paid to see the future
clearly or paid, you know, to orare you paid to see the present
clearly or paid to see thefuture?
Yeah.
You could argue for both.
Yeah, exactly.
Um so, but yeah, we're uh we'rebullish.

SPEAKER_02 (58:29):
Great.
Where are you getting um, I'dsay, most of your learnings
from?
Are you reading books?
You listen to the podcasts, orare there people that you're
following on Twitter that youyou're soaking up a ton of
knowledge from?
I mean to me, uh recently two ofmy favorite followers are you
and then uh Jammin Ball, whodoes the great writers for sort
of judgment.
Um I I you know, I just try tosoak up as much information as I

(58:52):
can.
Uh Twitter's been super helpful.
Yeah, obviously there's quite afew podcasts uh out now that are
uh very relevant.
But what are you what are yougetting information from?

SPEAKER_03 (59:01):
Yeah, I a bunch of different places.
I find um by the way, Jamin'sawesome.
We we're on the Stanford tennisteam together.
Oh wow.
So I know him very well.
Known him for good friends.
Uh he's great.
Um, I'd say I think X is goodfor sentiment on certain things.
Um that's really helpful.
Or the summarization of thingson X.
Uh, I like to read.
I like to read sort of uh randomkind of market books to sort of

(59:24):
because when you're in thisworld of everything goes up, not
everything goes up, buteverything is exciting.
We're in a huge platform shift.
How do you stay grounded inhelping history frame what's
going to happen in the future?
Um recent book uh that I love iscalled The Price of Time by
Edward Chancellor.
Just talks about the history ofinterest, which is really the

(59:46):
history of markets.
And you look at asset bubblesthroughout history and why they
were started and how they werestarted.
And it really talked about theum the advent of the central
bank controlling interest ratesover time and the history of
interest.
Uh, it would just reallyfunction.
Fascinating book about marketcycles as well.
Um, and then meeting withfounders.

(01:00:06):
I think the smartest people intechnology are founders.
Undoubtedly so.
And their teams.
And so I feel really fortunatethat I get to spend my time and
my day meeting with founders whoare really shaping the future of
not just technology, but how,you know, given the breadth of
how technology impacts theworld, really shaping the future

(01:00:28):
of the world.
So um as an investor, that'sthat's where I think you can
learn the most.

SPEAKER_02 (01:00:35):
It's funny you say that.
I actually posted on LinkedIntoday.
I'm not sure if you saw it, butuh Oh, cool.
I I think one of the most funthings about our job and really
what compounds our flywheel evenmore is um oftentimes we'll
bring our best practices and um,you know, our our GTM leaders
and everything to support ourportfolio company.
Yes.

(01:00:56):
And they're the sharpest,fastest moving, um, like
tweakers and tinkers ofeverything that you end up
working with are these thespounders you're invested in.
And so they'll take what we givethem from like a best practice
or a playbook, and then they'llcome up with something even
better.
And then we'll be able to takethat and then replicate that

(01:01:16):
across our portfolio.
So it actually makes us betterat our job.
Uh and it's just it's consistentlike that.
Um, you know, we're working onsome really cool stuff with paid
right now, Manny's company, andjust some of the things we're
doing there on self-serve to uhkind of enterprise sales allows
us to really like you know getin the weeds with them on it,
bring kind of our best practicesto the table, but then also when

(01:01:37):
we are able to see what they dowith it, you know, take that
back and repackage that andduplicate that across the pool
flow.
So that's very cool.

SPEAKER_03 (01:01:43):
Yeah, good uh very pressing timing.
I I I couldn't agree more.
I mean, it's uh think about it,you have to run a company, yeah,
and everything that's involvedin doing that while also
influencing and really being theuh the leading uh product, the
product leader at a company, aswell as the leading go-to-market

(01:02:04):
leader, as well as a CEO.
You know, there's it's um it's areally difficult job.
Uh, have a lot of respect forpeople who who who go and do it.
Uh and yeah, it's it's it's funto learn from them.

SPEAKER_02 (01:02:15):
Yeah.
Great.
What's the signal no one'swatching for right now that
you're watching for?

SPEAKER_03 (01:02:21):
I think it's very easy in today's world of AI
where companies are growingfaster than ever, have different
types of metrics to get lost inthe patterns of Cloud 1.0.
Not in a bad way.
History um, you know, doesn'trepeat itself, it tends to
rhyme, right?
So you think, well, if companiesgrew this way, then they must

(01:02:43):
look like this in the AI nativeworld to be successful.
And I think the finding thebalance between those two fact
patterns of just beingprincipled about what do you
think is a great business and agreat founder with great
tailwinds is really important.
And I think think about how fastthis AI world is moving.
What is the most important thingas an investor that is the

(01:03:03):
hardest thing to do is focus.
There's so many things you couldbe doing, chasing on a daily
basis.
There's so many companies,there's so many people you could
be meeting, there's so many newproducts coming out every single
day.
If you don't stay focused onwhat you're really good at and
the core of what you do, I thinkit's very easy to be distracted.
So I think it's actually um thehardest thing to do in market

(01:03:26):
environments like this is tostay focused.
And that's something that we arereally aggressively trying to
do.

SPEAKER_02 (01:03:31):
So early stages, seed series A, if a founder
could only obsess over onemetric, Lord Big.

SPEAKER_03 (01:03:40):
One is impossible without the other.

SPEAKER_02 (01:03:42):
Okay.

SPEAKER_03 (01:03:42):
But I'll how about two?
Let's get two.
The only thing I would say thatreally matters at the end of the
day is what is your gap revenueand cash burn.
With those two metrics, if thosetwo metrics make sense, you can
create an incredible business.
I wouldn't worry about if thoseare the only two, wouldn't worry
about NDR, I wouldn't worryabout margins because it will be

(01:04:03):
captured in cash burn.
If you just think about how togrow your business and how to do
it efficiently, uh, everythingelse will take care of itself.
Of course, easier said thandone.
But if given you only had one ortwo metrics to track, those
would be the ones I do.

SPEAKER_02 (01:04:15):
And you like that for seed and series A only, or
does that apply to all status?

SPEAKER_03 (01:04:20):
I don't see how it can't apply to all stages.
I guess if I ask myself thatquestion, because at some point
those metrics are really goingto be all the ones that matter.
And so why not start focusing onthem early?
I understand there's otherleading indicators of the
business that could be moreimportant, but at the end of the
day, it's all about what is thevalue, what is the product that

(01:04:43):
you're offering and theassociated value that your
customer is willing to give youin revenue.
And can you do that sustainablyover time?
It captures all of those things.
I feel very fortunate.

SPEAKER_02 (01:04:54):
You guys have this um is it the the entire culture
over there of athletes turnedventure capitalists?
Because he was a lacrosse guyand you were tennis guys.
That's true.
Yeah.
Alex Kronin also was a baseballplayer at USC.
Oh, wow.
Yeah.
So that's that's how theyrecruited.

SPEAKER_03 (01:05:08):
It didn't, it worked out that way.
Uh I think athletics growing upis a really uh helpful thing.
It teaches you how to prepare,teaches you how to win, and also
how to lose and how to getbetter.
So I think those are reallyimportant attributes that you
know can be applied to the tothe business world.
So it didn't happen umpurposefully, but uh happened by

(01:05:29):
chance, I guess.

SPEAKER_02 (01:05:30):
I think it does teach you accountability,
extreme ownership,determination.
I mean, there's so much thatcomes out of it from playing at
a competitive level um at theearliest ages.

SPEAKER_03 (01:05:39):
So 100% agree.

SPEAKER_02 (01:05:40):
Yeah.
Do you think, if you're abetting man, uh that Figma,
Klarna, NetScope, the IPOs thatare happening right now, are
they above or below their IPOprice this time next year?

SPEAKER_03 (01:05:56):
It depends on the company.
But I would say the companiesthat you mentioned, I think
they're based on what I know,probably above.

SPEAKER_02 (01:06:04):
All right, last question.
Who's your favorite Max fromLong Island?
Oh, well, now I don't even wantto know the answer.
I'm actually I'm actuallyworried it's not.

SPEAKER_03 (01:06:12):
That is an easier hippo, you know.
Yeah.

SPEAKER_02 (01:06:15):
Hope you enjoyed this episode.
We'd love to hear your feedbackon this new special series.
It was a lot of fun.
We've got some great uh guestslined up for future episodes.
So check out the fund, a GTMFund, and more of our content at
GTM Now.
If you like this episode,definitely subscribe to our
YouTube channel, GTM Now.
We have a lot more amazingguests coming and can't miss

(01:06:37):
them.

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