We’re back!! 20VC x SaaStr with Harry, Rory and Jason!
Bottom Line Up Front: Three seismic shifts hit venture this week. OpenAI completed the most significant corporate restructuring in tech history, clearing the path for a potential $2 trillion IPO while Sam Altman keeps zero equity. Andreessen Horowitz raised $10 billion—but when you break down the individual funds, they’re more beatable than the headlines suggest. And new data proves what great investors always knew: two-thirds of Series B investments return less than 2x, making picking more critical than ever. Meanwhile, companies like Mercor hit $500M in revenue in record time, and the debate over when founders should sell intensifies as regulatory risk reshapes M&A.
OpenAI’s Big Escape: From Nonprofit Chaos to For-Profit Clarity
The big news this week: OpenAI successfully cut deals with Microsoft, Delaware, and California attorneys general to implement their long-awaited restructuring. They’re now a proper public benefit corporation (PBC)—similar to Patagonia—with a $135 billion charitable foundation owning roughly 20%, Microsoft owning 27%, and employees owning another 20%+.
What This Actually Means:
The most shocking detail? Sam Altman will have zero equity in the restructured entity. Think about that for a moment—we’re simultaneously watching Elon Musk argue for a trillion-dollar pay package while the CEO of OpenAI owns nothing in a $500 billion company.
Jason Lemkin noted the absurdity: “We’ve got Elon Musk arguing he deserves a trillion dollar pay package… and everyone was saying show Sam the money when he was fired as CEO over a very long weekend, right, the night of knives or whatever… Fast forward to today, that same nonprofit is still in charge and he has no shares. We’ve never seen someone own nothing, have we? Like this. Have we ever seen anybody own nothing? It’s crazy.”
Rory O’Driscoll explained the power dynamics: “It gives him in some ways more power as well as less power. You can’t assail the man for capitalism when his other billion-dollar entities are the ones that let him finish off the McLaren collection.”
Microsoft emerges as a clear winner, turning their $13 billion investment into a 10x return with ongoing revenue share and Azure contracts. O’Driscoll was emphatic: “Microsoft corporate development and lawyers deserve a gold star from their shareholders in a way that frankly Microsoft R&D does not. And the proof of this is this morning Microsoft stock is up nicely. They’re like, ‘Thank you for the hundred billion. We’re up.'”
The charitable foundation also wins big—$135 billion is, as O’Driscoll put it, “a significant contribution to whatever good they hopefully will do with that money. There’s $135 billion out there that’s not going into someone’s pockets to buy yachts, boats and football teams. It’s actually going to try and solve world’s problems.”
He added the historical perspective: “I would have laughed in 2016 at the people who started OpenAI saying we want to do good for the world. But at a big picture level they succeeded—they built something worth $130 billion which is a foundation that they can be proud of.”
The IPO Question: Can You Really IPO at $2 Trillion?
Here’s where it gets interesting for founders and investors: OpenAI now has a clear path to what could be the most popular retail IPO in history.
Lemkin was direct: “I just can’t think of a retail IPO that would be more popular than OpenAI. Just bringing everyone out of the woodwork to put a little bit of their life savings into it—to ignore even if the valuation makes no sense. This would have to be the most popular retail IPO of all time, right?”
O’Driscoll agreed: “I think you’re exactly right. People aren’t going to be reading the prospectus and saying maybe we won’t make profits. They’re not going to be reading the thing about $250 billion of cloud commits to third parties. They’re just going to be like, let me get some of that OpenAI.”
Current math: At $500 billion with roughly $12 billion in revenue, they’re trading at ~40x revenue. O’Driscoll broke down the trajectory: “At even at 5x revenues, my god, that’s six billion… It’s kind of, you know, 40 times gap and if it’s 20 billion it’s 25 times AR run rate. My guess is it would take two years in the normal course but you might see that euphoria moment. It’s within the trajectory, it’s within the strike zone if anything like the current growth rate continues.”
But he added the critical caveat: “If you’re trading at 40 times revenues and your growth rate slows, it’s nasty and you fall sheer.”
Lemkin pointed out another crucial advantage: “This unlocks maybe four times more equity for them potentially if the public markets are different than the private because of the potential valuation they could IPO. They may need that—they may need an extra 200 billion to go the distance.”
O’Driscoll noted the banker feeding frenzy to come: “Every banker on the planet will be making decks as we speak and calling on Mr. Altman and Mr. Taylor. They might pretty much do it for half nothing just to be on the biggest IPO of all times.”
The Andreessen Horowitz $10 Billion Raise: Smaller Than You Think?
Everyone’s talking about a16z’s massive $10 billion fundraise, but when you break down the funds, it’s actually more reasonable than the headline suggests:
- $6 billion growth fund
- $1.5 billion AI apps fund
- $1.5 billion AI infrastructure fund
- $1 billion defense fund
Lemkin had the contrarian take: “I thought they were small. And what I mean is I didn’t think it was small until I saw the breakdown of the funds. At first when we talked about this before, I’m like 10 billion—that’s unprecedented. But when I look at that and the new Sequoia fund, $200 million Sequoia seed fund—that’s not that big compared to 20 VC… 1.5 billion for AI apps when you’re investing in 11 labs and friends and Replit doesn’t seem to get you very far.”
He continued: “When you break apart the funds, I really don’t think Sequoia having $200 million is that different than what Harry has. And I don’t think one and a half billion for their AI app funds—I think it’s only twice the scale. So I just don’t think air cover is an excuse. You have to work twice as hard as they do.”
The Red Army Strategy
O’Driscoll provided the big picture: “Andre Andreessen Horowitz is the red army of the venture industry now. They got the 10 billion and they’re going to march it forward. The amount of self-knowledge embodied in that is stunning. There’s one of my favorite expressions from the Russian Red Army which is quantity has a quality all its own. In other words, when you want to take Berlin, at some point what you do is you just get two million people willing to die and you march them forward.”
But he also acknowledged the scale advantages: “It’s not of course it’s 10 billion. It’s 10 billion of 30% carry and 10 billion of 2% fees and 10 billion of all this. The definition of a good strategy is if you have a strategy that doesn’t allow you to have to work that hard. And therefore by definition having 10 billion is a good strategy.”
Harry Stebbings added the structural insight: “That is a lot more money for management fees to pay great people. That is a lot more carry. That is a lot nicer offices which founders do get wowed by—like it or not they get wowed by it. That is a lot more events to host where you can have serendipity.”
O’Driscoll explained the optionality advantage: “You can spray if you have option value if you’re just doing options. If you spray and that’s the only way you make your money, the probability of being wrong is just too high. The more bankroll you have to build up option value… the more option value you have at the back end because you have a $10 trillion fund, the easier it is to spray because you can amortize the cost of the losses over the one winner.”
Stebbings noted the LP dynamic most don’t understand: “They don’t often understand the stapling that is required to be in these funds, which is if you’re an LP and you want to be in the early stage fund, you will often very often with top tier brands have to put in two times that into another fund to get that $1 in the other. And you don’t get your pick of which fund. Very often you have to be across all of them.”
O’Driscoll summed it up: “Bundling and rent extraction is fully understood.”
Mercor: The $500M Revenue Machine You’ve Never Heard Of
While everyone obsesses over foundation models, Mercor quietly hit $500 million in revenue faster than any company in history—just 17 months to reach that milestone. They’re now valued at $10 billion, up from $2 billion just eight months ago.
What They Actually Do:
O’Driscoll explained the business: “They provide humans with specialist knowledge to—and their customers are the large foundation model companies—and what they do is they bring this human talent to bear to help the foundation model companies train the models by providing human feedback. You people would have heard RLHF—reinforcement learning through human feedback—these are the humans that do that.”
He continued: “If I’m OpenAI and I want to teach my latest model how to do advanced math, what I need is a whole bunch of doctorates and PhDs who understand math that are available to pose questions to the model, judge model questions, give feedback on which answer is correct. By doing that, you effectively—by giving this human feedback—I think of it as you pound the model into submission where it eventually says, ‘Okay, I’ve learned this shit by adjusting the weights.'”
The evolution is stunning: “Five years ago, we were labeling cats. And you had people often overseas charged with labeling cats and not getting a lot of money. I think Mercor realized that the market today is not labeling cats. It’s in fact answering complex physics questions, math questions, bio questions because the models know how to label cats now and what they need to do is the outer edges of human knowledge.”
The Bull Case:
Stebbings broke down the expanding value proposition: “It all started with talent acquisition—if you got the talent and could provide it, fantastic. We’ll pay you. Pillar two is get the talent, now we want data acquisition—you provide it to us, not we extract it. And you measure the quality of it too. And now we’re adding the third pillar, which is the implementation layer—we expect you to implement it efficiently and make sure our models get off the ground more effectively. And with that, you also see increased pricing and the willingness to spend much, much more from the model providers.”
O’Driscoll on the growth opportunity: “The growth isn’t surprising because if you think about it, these model companies have grown faster than any company in human history. They’re spending $400 billion on compute. They’re probably spending $4 billion dollars on RLHF and they were spending zero five years ago. It’s an explosive growth market.”
The Bear Case:
But Stebbings identified the concentration risk: “You have concentration of buyer unlike any other industry. Two buyers are 50% plus of every one of these labeling providers’ revenue. So there is real revenue concentration there. It’s high quality customers but you do have that dynamic as well.”
O’Driscoll was even more direct on the structural challenges: “Your margin profile is not amazing because the gross revenue is 500 million but you give 70% of it to the doctors and the mathematicians who are doing all whatever it is—some percentage I’m not going to speculate—and then the second fact you have against you is massive customer concentration. And at some point they’re going to say, ‘I’m giving you $200 million which means you’re making 30% on that—$60 million—hell maybe you do it for $40 million,’ right?”
He concluded with the ultimate framing: “From a long-term value extraction perspective, you prefer to be OpenAI and have 800 million customers than to be Mercor and have two. When you look at those positives and negatives, this is fundamentally a bet that the AI capex train will keep running for two or three or four more years.”
Lemkin added the timeline caveat: “OpenAI is not going to focus on getting efficient until it’s dealt with hyperrowth. So as long as it’s not getting efficient, you probably can lean in. If it slows down, then the positives—which is the growth rate—goes away and then all the negatives come back to bite you.”
On the valuation at $10 billion with $500M revenue, Stebbings noted: “It’s only 20 times revenue. So like it doesn’t seem—this is where actually we’re seeing revenue compression.”
But O’Driscoll provided the sobering underwriting math: “You should be underwriting anything to a 3x. So you got to be 30 billion to make it worth your while and 30 billion… at even at 5x revenues, my god, that’s six billion. You’re underwriting a lot of training data.”
Ramp at $30B: The Funding Machine That Never Stops
Ramp raising again at $30 billion (up from $23 billion) prompted questions about whether constant fundraising is now just part of the playbook.
Why The Skepticism:
Lemkin was blunt: “To me, going from $23 billion to $30 billion, I don’t even consider it an up round. It’s not enough. Let’s say I was a seed investor, I’ve probably had a token of dilution. So let’s imagine I’m down to 2%, which would be great. I have a $400 million position at the last round. Right now, it’s worth $480 million with dilution after this next round. I mean, it’s a lot, but it’s not doubling my position like a classic round is.”
He continued: “These little rounds—22, 25, 30—and with a lot of AI companies, a lot of dilution or a lot of others, you could see 10% annual dilution in these companies or more. You might go from 22 to 30 and have the same price per share. It’s possible. I just don’t really care about these micro step-ups that look great—you’re like 30 billion—well if the last round was at 10, impressive. If the last round’s at three like Mercor, impressive. Here I’m like, meh, that’s cute.”
Why It Makes Sense:
O’Driscoll explained the capital needs: “There does appear to be a combination of insane demand for the stock, an ability to use that to create this aura of inevitability. And this is more than most companies—this is one where constant growth requires lots of capital because you’re in a capital advancing business. So you probably have every dollar you add of revenue takes $5 of capital because you got to finance purchases—you’re effectively recreating Amex. So it may well be that there’s a larger demand for capital here than the average deal.”
On the valuation progression, he noted: “Someone’s lending you $4 billion of that, they’re probably going to want a $1 billion equity cushion. Going from 23 billion to 30 billion… let’s say I was a seed investor with 2%—I have a $400 million position at the last round, right now it’s worth $480 million with dilution.”
The Public vs Private Debate:
O’Driscoll made a critical distinction: “Another spin on what you’re saying is with the exception of the new AI companies, that probably is the kind of IRR you should expect to get in a mature growth private company. There’s really early and late stage venture and then there’s venture for companies that already could comfortably be public and I think we need a different word for that—it’s not even late stage—it’s private as public, could just as easily be a small midcap stock at this point in time public.”
He continued: “You don’t expect midcap stocks to gap up 3x in a year—you expect the overall market will go by 11%, the best companies grow 30-40% year-on-year. There’s no reason to assume that the return to the stock should be different just because it’s held in a different corporate structure. The company is the company independent if it’s public or private.”
Lemkin countered: “You just said we’re still underwriting Harry asked you what we’re underwriting to. You said at least 3x. So if I’m going to underwrite to 3x and I did the last Ramp round at 23, it’s not really getting me to my 3x.”
O’Driscoll clarified: “You’re confusing your pronouns. You’re trying to underwrite to a 3x. If you’re running money doing companies at 30 billion pre, you’re probably not underwriting to an overall 3x on your fund. I don’t think you are underwriting to a 3x when you’re doing ultra late stage billion-dollar revenue run rate $30 billion valuations and you’re definitely not underwriting to a 30% IRR.”
The Spray and Pray Debate: What The Carter Data Actually Shows
New data from Carter looked at all 547 Series B investments from 2018. The results are sobering for anyone who thinks picking doesn’t matter.
The Distribution:
- 35% returned less than 1x
- 30% returned 1-2x
- 18% returned 2-5x
- 10% returned greater than 5x
- One deal (Figma) returned 100x
The Math:
O’Driscoll analyzed the data: “If you hit those three buckets correctly, the blended return—I know it from our fund model—is 3.7x gross, 3x net to the LP. So if you look at that business, if you get enough slots in the buckets, right, in each of the buckets—the good buckets, the 5x bucket and the 10x bucket—you end up with a 3x net to the LP. So the first piece of good news is if you do it right, the return was available to you.”
But he emphasized the picking challenge: “Jason picked on the negative which is two-thirds of all deals are less than a 2x which means they just don’t help. And what it says is picking is so important because if you skew instead of 66%, if you skew 75-80% in that less than 2x bucket, your math doesn’t work. And it’s not that hard to be that bad because on average it’s 66%.”
Does Spray and Pray Work?
Lemkin disagreed with the spray characterization: “At series B, everyone thinks they’re a great picker, don’t they? This isn’t pre-seed. Everyone’s a great picker at series B, right?”
O’Driscoll responded: “Everyone thinks they’re a great picker. Not everyone is a great picker. But the third sentence is you have to be a great picker to win. I think if you don’t pick, if you’re not a good picker, you will end up with more… If you skew 75-80% in that less than 2x bucket, your math doesn’t work. It requires a fair amount of discipline and picking to pull this off. I don’t think the spray and pray strategy would work here.”
He identified three distinct strategies: “There’s actually three approaches. There’s picking, there’s spraying, and then the third one which someone big like Andre can do which is optioning. You can spray if you have option value if you’re just doing options. But if you spray and that’s the only way you make your money, the probability of being wrong is just too high.”
On the a16z seed strategy with 72 seed bets (compared to number two at 27), Stebbings noted: “Exactly to your point there, Rory, you said you can’t win without being a great picker. I’m not saying Andre are not great pickers, but you can if you have 72 option bets.”
O’Driscoll agreed: “There are three strategies. There’s spraying, picking, and optioning. Optioning allows you to spray more. Once upon a time, you thought seed was all about option value and anything beyond that wasn’t. Because we’re dealing with gargantuan sums of money, it is now plausible that for some people A’s and B’s are partially options. If you’re going to deploy $200 million in the growth round, you don’t want to be totally slipshod at the A and the B, but you can think of it as more option value. That’s absolutely a superpower that a wall of money gives you.”
Even at Seed:
On whether spray works at seed, O’Driscoll did the math: “Going back to the Carter data, there were 547 series B’s in 2018. I’m going to guess graduation rate probably implies 800 A’s. That probably implies 1,600 seeds. So even what you are pejoratively calling spray and pray is doing 50 deals out of 1,600. There’s still a huge element of picking involved in that.”
He identified the only exception: “The only people on the planet who have a structural business where they can de-emphasize picking because they can write checks—option checks at scale—is Y Combinator because they have a structured advantage in terms of their economics. They are the only people who’ve built a mass production seed business.”
On why even the single best outcome doesn’t justify true spray: “It’ll always be true that if you pick the single largest outlier in any vintage—like if one of those deals was Figma where the B made 100x—even if it’s 300x, if you did an index and did every deal equally, it’s only a 0.2x. If you put a dollar into everything, your Figma check doesn’t return the fund. Maybe an OpenAI would—maybe there is one deal so big that it would literally return the vintage such that if you just bought the entire vintage you’re good—that probably happens maybe once every decade or two.”
Synthesia’s $3B Adobe Offer: The Founder’s Dilemma
Synthesia, the AI video generation company at $150M ARR, reportedly turned down a $3 billion acquisition offer from Adobe. They’re now raising north of $3 billion instead.
The Case for Selling:
Lemkin was direct: “I would tell him to take it unless you’re 100% sure you’re going to build a $20 billion public company, $10 billion public company. And if you are, do it. I like to stress the test. So I’m not saying that’s the right thing to do, but I want to be the guy that gives that advice.”
He continued: “Even 10 is not really worth it for a founder. It is worth it for the VCs. Excel gets another play. 3 to 10 for Excel—huge difference. So let’s say they own 15% out of a—what—$450 million fund. Instead of a 1x fund returner, it could be a two or 3x. You make that bet as a VC all day long. For the founder, let’s say owns 10%—what the hell’s the difference? There’s no difference.”
On the reality of wealth: “We’ve had billionaires on our show. You’ve had billionaires, Harry. I don’t think Jeff Lawson would be living a better life with half the money or twice the money. It’s the same dude.”
The Underrated Question:
Lemkin raised the question no one asks: “There’s another thing that’s under-discussed and I’ve had this conversation twice with founders in the last 12 to 18 months in similar situations: Are you really an IPO guy? I love everything about this company, I love the founders, I love everything. There’s nothing negative. And I told them to take the offer even though I didn’t want them to as an investor. I told them to take the offer because I said, ‘You’re such a great set of founders, but I don’t know if today I see you living the public company CEO life. I just don’t see it—the way you have to do it, the constraints, the stress.'”
He explained the stakes: “You have to assume it’s IPO or bust. And if you’re not that guy, then you’re going to bring in an outside CEO or it’s just a mess. So that’s the question I have: Do you really want to run a public company for real?”
On the weight of being public: “I was at this Dreamforce Benioff dinner. I saw maybe 10 public company B2B CEOs that we know that have all been on Harry’s show and Rory’s invested in some of them. And it was great and it was fun. I got some hugs. But man, the stress on those guys—you could just smell it out of the pores. The weight—they weren’t stressed, no one was stressed—the weight of being a public company CEO—it’s so heavy today. We could see it when we’d had Jeff Lawson on and Cliff didn’t have any of it at Canva—he didn’t have any of the weight crushing.”
The Case for Taking the Risk:
O’Driscoll provided the growth analysis: “Victor, I admire Synthesia enormously as a company. We tried to contact them—they didn’t get back to me. They got the deal done. I’m so disappointed. We have another investment in the space. I love the space. I admire Synthesia a ton and many of the investors there. I think the first question is how do you feel about the business? And you threw out a statistic there—they said they’re at 100 million in ARR when they took the Adobe money in April. I checked. And if they really have gone from 100 to 150 in less than 6 months, then I can make this conversation really quick. There’s no way they should sell because that thing’s exploding.”
He added the category perspective: “It’s a great category. There’s a reason we made another investment in the space. We like the category. I think there’s runway there for that kind of human interface to compute.”
On the LP pressure question, Lemkin pushed back: “I don’t believe that. I don’t see it. I’ve asked my LPs, I’ve asked a few others. If you’re a strong manager—okay, if you have a track record and their goal is not a 3x seed fund, but if they really want 5x or north out of you—they get the game is you got to keep playing another card. No matter what they say, I’ve asked my LP and I guess it’s a small set—do you want more money back? Even ask my most conservative LP like a university endowment that is small, that has stress—I ask you want your money back, I mean with a gain—they’re like no, we’re just telling you we’re really worried about it, like we really want DPI but we don’t want it. We want you to play another card.”
O’Driscoll summarized the board conversation: “I always tell the CEO, ‘Now would be a really good time for you to look into your own heart and see how you feel. And if there’s something about the business that’s really worrying you and you haven’t told us, now would be a good time to share.’ And sometimes stuff comes out.”
Stebbings added the regulatory timeline dimension: “If you’re a Synthesia, you’re looking at Dylan and Figma going, ‘God, do I want to put myself in that potential 18-month waiting period?’ By which time I’ll be $400 million in revenue being acquired for $3 billion. You think you’re getting this great multiple of—oh, they’re paying me 30 times revenue—but the damn thing’s going to close in 18 months, by which time you might be down to 10 times.”
Amazon’s Rough Week: When Founders Punch Out Too Early?
Amazon announced their largest white-collar layoffs ever (10% of corporate staff), is losing cloud market share (from 50% in 2018 to 38% today), and had a major AWS outage causing billions in damage.
The Timing Question:
O’Driscoll noted: “Contrast this with Sergey Brin coming back to Google, everything else happening. Maybe this was a tough time for your founder to leave and go to Miami. Maybe this was not—maybe it seemed like a very stable time to do a transition. Long time as CEO, but maybe this wasn’t the perfect age of maybe stepping down just before AI hit was suboptimal for Amazon.”
Lemkin provided historical context: “Jeff Bezos checked out right at the peak of the last era when products were frozen in time for a decade, when AWS was the same product for a year. So are most of the companies we invested in all three of us in 2021—they were the same products as 2015. It was the great time to go to Miami because nothing was changing in the product. It was just going—just stock prices were going up in revenue, but the products were the same. So why wouldn’t you retire? There’s not going to be any change.”
The Counterargument:
O’Driscoll offered the alternative view: “Or maybe it was brilliant for Jeff because maybe the hook—because you’re implying in that that had he stayed all these bad things wouldn’t have happened. And it’s plausible just given his world top two or three entrepreneurial achievement of the last three decades.”
But then he turned cynical: “When you’ve got a couple hundred billion dollars, my guess is you’re not maximizing money. You’re maximizing psychic pain and joy. My guess is his psychic joy in the last three or four years doing what he’s been doing has been significantly higher than the psychic pain that would have been involved in realizing you’ve never done a big acquisition in your life, you got to do a huge corporate deal in AI to matter, and all those people you hired in ’21 trying to do the right thing for COVID and expand—you all got to lay them off.”
Lemkin was even blunter: “I think Bezos would lay off half his company in a fortnight if it was the right thing. I don’t think you even care.”
The Problem Analysis:
O’Driscoll broke down Amazon’s challenges: “The first problem is in their retail business they overinvested for COVID and now they’re trying to replace people with robotics because the technology is there and that’s just something that had to be done. And in cloud it’s less that their core AWS business has folded up. It’s like all the new compute which is 10x and 20x larger in terms of demand for these customers is AI-related compute and you’ve neither built something compelling standalone nor have you partnered—except to be fair a little bit with Anthropic. You didn’t make a meaningful partnership and you haven’t found a way to get some of that compute.”
On the hyperscaler comparison: “Of the three hyperscalers in the pre-AI world, Google was able to be relevant because they had their own model. Microsoft went and rented a model from OpenAI and now the contract’s nearly up and they did it to make a lot of capital gain but they didn’t actually in my view really develop something compelling that they own from it. And you did nothing—so you lose.”
Lemkin added perspective: “One thing we shouldn’t do here and you saw a lot of it with Google too is that you don’t want to overcompensate. There’s a bunch of bad news in one day and it is bad. But your position in retail is broadly good. You’re a little schlocking in terms of shopping experience but you have dominance because of your distribution and you’re doubling down on that. You’re reinvesting in robotics, you’re cutting costs. Amazon wins in their retail business because they can deliver shit faster than anyone else on the planet pretty much anywhere and you’re doubling down on that. So that’s like a win on the compute business on the AWS business. Your problem is you just—you’re not relevant in the new world. So just knuckle down and figure that out.”
The iRobot Tragedy: Regulatory Risk Is Real
iRobot (Roomba) had a $1.7 billion acquisition offer from Amazon blocked by the EU “because of an incipient monopoly in the house vacuum cleaner marketplace,” as Benedict Evans sarcastically noted.
The company raised $200 million in debt to bridge the deal. Now that debt is spent and they’re likely going bankrupt.
O’Driscoll was emphatic: “It’s a horrible and unfair outcome for which the government and Lina Khan and the FTC is entirely responsible based on an outdated, stupid, and foolish belief about how things work beyond doubt.”
The M&A Lesson:
Lemkin explained the broader implication: “It’s also a reminder that when you’re going to the M&A offer like Synthesia, sometimes you’ll get the acquirer will pay a multiple that only sort of kind of makes sense—a revenue multiple that makes sense for them but you couldn’t get. And so when you get one of these deals, it’s tragic what happened to iRobot, but you got to take it.”
Stebbings added the timeline problem: “If you’re a Synthesia, you’re looking at Dylan and Figma going, ‘God, do I want to put myself in that potential 18-month waiting period?’ This prolonged antitrust process really is kind of sand in the gears for a lot of these M&A decisions.”
O’Driscoll provided the math: “Everyone’s like, ‘Yeah, you got a 2.5x in 6 months.’ No, you didn’t. You got a 2.5x in 2 years. And this prolongs—this antitrust—this prolonged antitrust process really is kind of sand in the gears for a lot of these M&A decisions and at the margin probably pushes people to either push on or in the case of the crazy deals when the acquirer only wants the people, then they do the Silicon Valley acqui-hire routine. But when you’re buying the vacuum cleaner company, you want the freaking vacuums.”
Duration, DPI, and the IRR Optimization Problem
The conversation turned to a technical but critical question: Should investors optimize for IRR or multiple?
Stebbings made the case for duration: “That duration period is also why I think it’s our responsibility as early-stage managers to be much more proactive in secondary markets because we get cash back way sooner. And the age-old thing of a 4x fund over 17 years is the same as a 2.5x fund over 10—and duration matters and time matters and IRR is king.”
O’Driscoll provided the mathematical answer: “It’s not the only king because—I mean back to Jason’s comment—look, in this very show Jason was going, ‘Oh, it’s only a 30% IRR Ramp from the 22 billion to 30 billion.’ From an IRR perspective that looks amazing. So I don’t think IRR matters. I actually think the correct formulation of the optimization function is the maximization of multiple subject to a constraint on a minimum IRR.”
He explained: “Basically you should know what your target IRR is—and let’s just say it’s 25%—you want to maximize the multiple provided you don’t dip below 25%. That’s actually what you’re trying to do. So a 30% IRR in one year isn’t as good as a 25% IRR for four years. But if you hold on too long and that 25 starts dipping to 19, 18, 17, then you’ve gone to a different place.”
The reasoning: “In the end you want the maximum amount of capital to invest and you get that because you are held accountable at the investor level at the IRR basis because at some point they’re looking at you, they’re looking at the public markets and they’re saying risk-adjusted I need my 20%. So it is the constraint because it’s what prevents money from coming down the spigot to you but you’re actually trying to maximize your multiple.”
What This All Means for Founders
On Fundraising:
The mega-funds are real and here to stay. But as Lemkin pointed out, when you break down their individual fund sizes, “I really don’t think Sequoia having $200 million is that different than what Harry has… So I just don’t think air cover is an excuse. You have to work twice as hard as they do.”
O’Driscoll agreed but added the caveat: “The definition of a good strategy is if you have a strategy that doesn’t allow you to have to work that hard. And therefore by definition having 10 billion is a good strategy.”
On Valuations:
Revenue multiples are compressing for mature companies. As Lemkin noted, “Going from $23 billion to $30 billion, I don’t even consider it an up round. It’s not enough… You might go from 22 to 30 and have the same price per share.”
Understanding your per-share price, not just company valuation, is critical. Stebbings emphasized: “You have concentration of buyer unlike any other industry. Two buyers are 50% plus of every one of these labeling providers’ revenue.”
On Exits:
When a strategic acquirer offers a premium multiple, think hard about whether you’re really an IPO CEO. Lemkin’s advice: “Are you really an IPO guy? Can you really run a—do you really want to run a public company for real? The weight of being a public company CEO—it’s so heavy today.”
But understand the VC incentive misalignment: “For the founder, let’s say owns 10%—what the hell’s the difference? There’s no difference. We’ve had billionaires on our show. I don’t think Jeff Lawson would be living a better life with half the money or twice the money.”
On M&A:
Factor in 18-24 months for regulatory review on any significant acquisition. O’Driscoll: “You think you’re getting this great multiple of—oh, they’re paying me 30 times revenue—but the damn thing’s going to close in 18 months, by which time you might be down to 10 times, and it’s just not going to feel that much.”
And as iRobot shows, Lemkin noted: “When you get one of these deals, it’s tragic what happened to iRobot, but you got to take it.”
On Capital Efficiency:
The Carter data confirms what great investors always knew: picking matters. O’Driscoll: “Two-thirds of all deals are less than a 2x which means they just don’t help. If you skew 75-80% in that less than 2x bucket, your math doesn’t work. And it’s not that hard to be that bad because on average it’s 66%. It requires a fair amount of discipline and picking to pull this off.”
On Market Concentration:
Companies like Mercor with massive customer concentration can grow incredibly fast, but as O’Driscoll warned: “At some point they’re going to say, ‘I’m giving you $200 million which means you’re making 30% on that—$60 million—hell maybe you do it for $40 million.’ You prefer to be OpenAI and have 800 million customers than to be Mercor and have two.”
The Future: What’s Coming Next
OpenAI IPO Watch:
O’Driscoll: “Every banker on the planet will be making decks as we speak calling on Mr. Altman and Mr. Taylor. They might pretty much do it for half nothing just to be on the biggest IPO of all times.”
Mega-Funds Everywhere:
The venture industry is bifurcating. O’Driscoll: “This is the dominant modality today. These are—this is what top dog venture investing looks like. This kind of scale, this kind of dollars at work and there’s four or five other firms doing this.”
AI Capex Super-Cycle:
Everything from Mercor to OpenAI to AWS vs Azure is a bet on continued AI infrastructure spending. O’Driscoll: “This whole thing top to bottom is one big-ass bet on AI capex hyperrowth and as long as it keeps happening… you got to stay on the floor and keep dancing.”
As Chuck Prince famously said in 2007: “As long as the music is playing, you got to get up and dance.”
Private Staying Private:
Companies like Stripe, Brex, and Ramp are staying private far longer than historical norms. O’Driscoll explained why: “There’s really early and late-stage venture and then there’s venture for companies that already could comfortably be public and I think we need a different word for that—it’s not even late stage—it’s private as public.”
The venture game is evolving faster than ever. The winners will be those who understand not just what’s changing, but why it’s changing—and what that means for where the puck is going, not where it’s been.
Quotable Moments
Jason Lemkin on Sam Altman Having Zero Equity:
“We’ve got Elon Musk arguing he deserves a trillion-dollar pay package… and everyone was saying show Sam the money when he was fired as CEO over a very long weekend, right, the night of knives or whatever… Fast forward to today, that same nonprofit is still in charge and he has no shares. We’ve never seen someone own nothing, have we? Like this. Have we ever seen anybody own nothing? It’s crazy.”
Rory O’Driscoll on Microsoft’s Win:
“Microsoft corporate development and lawyers deserve a gold star from their shareholders in a way that frankly Microsoft R&D does not. And the proof of this is this morning Microsoft stock is up nicely. They’re like, ‘Thank you for the hundred billion. We’re up.'”
Harry Stebbings on LP Bundling:
“They don’t often understand the stapling that is required to be in these funds, which is if you’re an LP and you want to be in the early stage fund, you will often very often with top tier brands have to put in two times that into another fund to get that $1 in the other. And you don’t get your pick of which fund. Very often you have to be across all of them.”
Rory O’Driscoll on The Spray and Pray Myth:
“Everyone thinks they’re a great picker. Not everyone is a great picker. But the third sentence is you have to be a great picker to win. If you skew 75-80% in that less than 2x bucket, your math doesn’t work. And it’s not that hard to be that bad because on average it’s 66%.”
Jason Lemkin on Public Company CEO Stress:
“I was at this Dreamforce dinner. I saw maybe 10 public company B2B CEOs that we know… and man, the stress on those guys—you could just smell it out of the pores. The weight of being a public company CEO—it’s so heavy today. We could see it when we’d had Jeff Lawson on and Cliff didn’t have any of it at Canva—he didn’t have any of the weight crushing.”
Harry Stebbings on A16z’s Structural Advantages:
“That is a lot more money for management fees to pay great people. That is a lot more carry. That is a lot nicer offices which founders do get wowed by—like it or not they get wowed by it. That is a lot more events to host where you can have serendipity. There are a lot more things I think that scale and AUM buys that do increase.”
