Would you prefer to be a SpaceX investor taking 20% dilution here, or a Twitter/x.ai investor rolling into the largest market cap private company on the planet, maybe six months before it goes public? What you just saw is the rehabilitation of the IPO. I'm going to call it the end of stay private forever.
Compute and revenue have a one-to-one correlation. So as long as that holds, it makes sense to consume every single penny of capital on all of planet Earth. Elon operates like the Marines. No investor left behind.
For simplistic folks, for founders, I say inference is the new sales and marketing. The good news is I believe in a balanced scorecard. The bad news is revenue growth rate is 95% of the balance.
China's doing the same thing. So we have to do it. We have to guarantee 0% financing for all data centers. We'll get all our money back. We kept the airlines flying when things were tough during COVID. We'll keep the data centers flying as well.
You don't see a bottom until these things are at free cash flow multiples, net of delusion. And when that happens, that's your bottom. What a shitty time.
Ready to go, boys. My word, what a week. It feels like every week we move years. In the last few hours or 24 hours, SpaceX has completed the acquisition of xAI, valuing the combined private company at $1.25 trillion as Elon moves to pair the businesses together. It's big news. Twitter employees must be very happy. How should we read and interpret this seemingly pretty batshit crazy news?
Well, look, for what it's worth, Rory probably has better thoughts than me, but you know, he's done it before. It's not the first time. He's been doing this for years. So when SolarCity needed more money and wasn't going to make it, he mashed that into Tesla. When different folks need loans from different folks, right? Loan cash, invest cash into xAI from Tesla. So it's hardly new. Load balancing his portfolio across the greater outcome and the greater good. We're just not — we don't all have this luxury.
Agreed. I mean, my favorite Twitter quote — and there have been so many. And you're right, by the way, Harry, every week you come on, you say this is the most exciting week ever. This week it's actually true. There was so much news I barely got through it. But my favorite Twitter quote about this was: Elon has now bought Twitter three times in four years. He bought it standalone, then he bought it at X, and now he's bought it at SpaceX. He's bought the same — he really likes that product, baby. Right. I mean, he's literally bought the same company three different ways. So you literally have to make entire buckets of things to talk about on this. You know, the whole 'does it make sense' bucket. How do you feel industrially, for lack of a better word? In other words, do these companies go together, and what's the combined rationale for that? You got to discuss that. Then you got to discuss kind of how you feel about it. You know, in every merger there's always a person who does — if you sell the cheap thing to the guy who has the dear thing and you take stock, you win. And by definition, someone else loses. Right? Now, if the industrial logic is enough, the combined entity makes everybody happy. But so that's why that's the first conversation. But the second conversation is: at the margin, would you prefer to be a SpaceX investor taking 20% dilution here, or a Twitter/x.ai investor rolling into the largest market cap software private company on the planet, maybe six months before it goes public? I mean, the way I phrase that question makes it clear what the answer is.
Yeah. Although, you know, maybe you guys thought through this better than I did. Superficially, you'd be like, listen, if I'm a SpaceX employee, why would I want this dilution in this deal, right? It seems like a bad, selfish — having said that, and that probably could well be true, the deal is structured in such a way there's instant secondary for everybody, as I understand it, right? And it's also an instant markup. So SpaceX was worth $800 billion what, a couple of shows ago, now it's worth a trillion. So in the world of dilution, yes, we've been massively diluted, but on paper our share price has gone up 25% and can sell. So who gets to complain? You don't like it? Sell for a material markup from eight weeks ago. And on paper, when you log into Carta, your share price is higher. It doesn't mean there isn't dilution, but it does kind of insulate some of the feeling of the dilution in the short term.
If you want out, you can get out. So yes, that's true. But, you know, again, I also feel like such a Debbie Downer when you talk about these things. If you were in Delaware, it's not just you can sell, but you have an opportunity. I mean, the way to think about it is: you had this opportunity, you owned 100% of SpaceX, you want to hold it for the next 10 years, and now you own 80% of SpaceX and 20% of something else. At the margin, you probably would — I don't — you might at the margin not prefer that. I mean, even on a simplistic revenue multiple — I mean, if this is an 80/20 split, which is a trillion and 250 billion, on a revenue multiple basis, my understanding is yes, SpaceX is 80, $19 billion, growing 30%, profitable allegedly — again, we haven't seen the data — and the other company is not doing, you know, it's some $4 billion in revenue. So even on a revenue multiple basis, you know, at the margin you could skip it from a pure value-to-value perspective. Now, that's people playing small ball, which is why you got to go back to the first comment and say: if these things obviously should be together and it makes a ton of sense for them to be together, then, you know, being wrong 5% on price doesn't matter at some level, right? So now you actually are forced to talk seriously about data centers in space, because that's where — I mean, if you read Elon's note, which was wild, that's a good slug of where this is going, and you now have to have a developed opinion on the economics of data centers in space. How does this change Elon's ability to compete with OpenAI and Anthropic, with his asset in the race being X? Does it give him unlimited cash that he didn't have before? How does it change that ability for him?
He has unlimited cash. The only person of whom you can truly say he has unlimited cash is in fact Elon. But yeah, at the margin it's probably going to be easier to raise money for the combined entity than it would have been for xAI, even though they just raised at $200-something billion pre, right? To the extent that you're going to play the current game — the literally pun intended, the ground game of data centers in Tennessee versus data centers in Austin or data centers wherever the OpenAI ones are — you now have more capital to play that game, right? Which is interesting at the margin. And but of course his real comment would be — and again, I'm not commenting on the — I won't use the word believability, I'm not commenting on the timeline of it — but the real argument would be: we're going to change the game because we can, quote-unquote, do data centers in space. And maybe that happens in the near term and maybe it doesn't. But if it does in the near term, that would be the kind of big-picture argument.
My guess — I don't — when you look at three things happening: you have this seemingly crazy deal, right, of Twitter combining with SpaceX — I'm being a little flippant, right? You have Anthropic seemingly seriously planning to IPO this year, and you have Twitter rumors, but whatever, saying that OpenAI has slowed hiring. And I may not — I'm not a total expert — but what all three of those say to me is there's no matter — there's subtle pressure around access to capital. Like they've all got to have an IPO strategy sooner than they'd hoped, because data center — because xAI needs capital, because Anthropic is even worried about capital. And why would OpenAI slow hiring? To me — maybe I'm — maybe I could well be missing the point — to me, like, I think they're going to try to IPO with massive losses but want to show declining losses more quickly than they planned to. Why else would you slow hiring?
I want to commit — Jason, could not agree more. In fact, I was just about to go — like I said, all this, you know, talking about data centers in space is beyond my pay grade. But I think the most significant terrestrial thing that's happened here is: what you just saw is the rehabilitation of the IPO. And I'm going to call it the end of stay private forever. And with one caveat — SpaceX versus OpenAI, right? I think Jason nailed it exactly. We've now found all the private capital on the planet. It's still not enough. And I think we're going to flip from, 'Oh, why would anyone IPO? It's not cool,' to: there's going to be banking teams with guns against their head told, 'Start piping, start planning. We want to get all these things public.' Right.
Yeah. And Jason, I think it's spot on, right? And yeah, I was thinking about that — this is totally obscure. I'm only going to make the reference because Harry loves it when I go back 10 years. I'm going to go back 120 years. If you read 'Reminiscences of a Stock Operator,' which is the definitive book about trading — the Jesse Livermore book about trading — there's that piece where he says in 1904 he suddenly watched all the companies bringing forward their planned capital raises, and he suddenly realizes, 'Oh, the smart money's realized there's not infinite money available. I better get mine right.' And I think in a weird way, Jason, that's exactly what's happening here, right? And the one thing that would be counternarrative to that was actually for SpaceX, because this has made it at the margin harder for SpaceX to go public, because it's a more complex story, losses. But then I remembered: Elon operates like the Marines. No investor left behind, right? And the truth is, this makes it harder for SpaceX but easier for xAI, because he's basically taken that which would have been the orphaned little Chucky in the storm, right? And instead he's co-attached it to SpaceX, and he says, 'Now we're going to save all my investors,' which is at some investor level very interesting, and we can talk about that in a second. But exactly — it's lashing xAI to the OpenAI mast, and then as Jason says, every one of these things are going to be diving for the line to get that capital. This is the rehabilitation of the IPO and the end of being private is cool — not for any reason other than what we always said: when the cost of capital gets expensive enough in the private markets, people are going to go public. You called it, Jason. Exactly right. That is the kind of boring but key thing that happened.
I hate to say it, and with the caveat — rehabilitation of the IPO for a certain size of company: for Anthropic, for OpenAI, for X or for SpaceX — not for cute CRM for doctors in certain geographies. No, I think $4 billion growing 50% or more is the new IPO to have a good IPO. That's where we're at today. $4 billion growing 50% or more. That's sort of like enterprise software or above, right? It's just if you're a bit below that — like look at the SaaSacre of this year. Everyone except Palantir is below that line, and they've been massacred. And you're right — we have — I made — Jason made that comment, I piled in on it, and I do have to say at the same time you're going to be able to cite Sigma and say, 'Oh my god, the SaaSacre of 2026 is horrible.' And you're right, and we will come to that for the — what — in terms of what the cutoff is or what the market doesn't like. But what I think the story about Anthropic, OpenAI and SpaceX says is: for the thing — even for the things that people most like — you're going to need to get capital from the public markets.
Well, listen, I think the thing that OpenAI keeps saying, and it is very compelling to see it, is that compute and revenue have a one-to-one correlation. So as long as that holds, it makes sense to consume every single penny of capital on all of planet Earth, because it's one-to-one. You would literally raise every dollar at any plausible valuation, because every single dollar you can put into compute leads to a dollar or more out. It is — at least for topline — it's the greatest money-making machine ever generated in the history of mankind. It's a perpetual motion machine for the moment. So you would suck up every dollar.
I think you — and in a weird — this is a weird analogy, Jason, but I was thinking there was a period of about 10 years when sales and marketing spend was like that for SaaS. You put in the money and you got out the revenue, and the revenue was worth more than the money went in. And you're exactly right. Now what's happening on a far larger scale is — you're exactly right. I mean, Microsoft said the same thing on their investor call, that they're limited on compute, so they just got to allocate it. But they could turn compute into money at the drop of a hat. If that is true, and if as Elon says you can't build in Tennessee, then by God you'll build in low Earth orbit.
Well, you know what I call it — for simplistic folks, for founders, I say inference is the new sales and marketing. It's the new sales and marketing. It's that simple. And you can't have it both. You got to pick. You either got to grind it out with thousands of reps struggling for ever, ever, ever more constricted budgets for traditional software, or you got to find a way for inference to be your sales and marketing arm. It's the new sales and marketing, and it's got to work. It's got to work. Inference has to make your product so good, so viral, so ROI — so ROI obvious — that the sheer act of the agent, whether it's just ChatGPT or Claude or whatever, or whether it's Replit or Gamma or heck, Granola, it's so powerful that it is your sales and marketing motion. That inference — that's the only play that works in venture today. I think it's the only play that works at all. It's got to work.
Honestly, I think most content sucks because people aren't honest and vulnerable, or like — like genuinely. I feel like a beginner. I'm being serious. Like everything that I've learned for 10 years is kind of like irrelevant. The rules, the laws, the rules of 40 — no one gives a [__]. Like none of it makes sense anymore.
No. And if it's any consolation, I'm in the same place. It's like this is — yes, everything's — yeah, everything's changing.
You know what the problem is though? It is changing, because even if I want to simplify it, there's a lot of interesting things like compute and revenue with the one-to-one correlation. But the reality is the reason these rules are all dead is we've just decided this revenue isn't so durable after all. I think there's an existential crisis around durability everywhere. I think everyone has lost confidence that any of this traditional revenue is durable in the way it was since we all met. I don't think anybody — the public markets don't believe it. And honestly, I don't believe it anymore. I don't — my whole learning as a founder was, my god, this revenue is durable.
But is that actually justified? If you go to very enterprise sticky revenue that SAP or Oracle have with some of the largest enterprises, have we got data to prove that enterprise sticky revenue of old is no longer that sticky?
Yes, we have the data, which is that every single quarter since Q1 of 2022, growth has slowed for all public software stocks. Every single quarter it has slowed, and it continues to slow. And there are a handful of folks that have reaccelerated like [__] and Palantir. And there are a few that bounce off a dead-cat bounce like Twilio. But if you look at the basket of the top — not the worst, the top 25 public software stocks — every quarter their growth rates decline. Every single quarter, right? And you can hide in your GRR and your logo retention, but that is a slow death. That is dying of cancer in 20 years.
Okay? Which is — we got to stop. First of all, we got to remind — because we knew each other — we got to remind everyone how we got here. Right? In the last few sentences, we went from inference as the new kind of sales and marketing. We're talking about the new world and the AI spend and the need of OpenAI and people like that to get public, raise capital, and continue to invest in inference to continue to grow, which is the happy side of the equation. And we kind of flipped to the sad side of the equation, which is happening at the same time, which is the SaaS massacre. As we speak today, it's Tuesday noon, which means you're down 10% on the day on your SaaS stocks and down like 30, 40% in the last four or five weeks. Right? And when you put it that way — what? When you put it that way — I am looking at my Q4 asset allocation decisions. Glad I did some, and in retrospect missed on others. But so the second shoe drop here — and maybe they're related, we'll come back to that — is this massive erosion in belief that SaaS revenue, recurring SaaS revenue, is, you know, has a terminal value, is repeatable. And Jason, I agree with you 100%: the growth rates are down, right, which is clearly true and been clearly true for four or five years, worth pointing out. And I think you did a great post on this. For the best systems of record like ServiceNow, I just want to be objective: the churn rates haven't gone up. So there's no evidence that the revenue is any less durable. And there's this whole narrative about how it'll be replaced by vibe coding. But I think, Jason, your post was great on why that's [__]. Churn hasn't spiked for a certain class of software companies. It has for others, and we should make that distinction. But what happened even for the great companies where churn hasn't spiked: new customer growth has slowed down. And I think that's a combination of something we felt for a while, which is the markets are just tapped out. Anyone who needs a CRM at scale has one. And then the other thing, Jason, is the point you made in your post, which is you're competing for attention at the CIO level with all these exciting new AI developments. And at the margin, you might get that extra revenue for your Salesforce instance because the money might go elsewhere. So even the good ones — the way good, a normative judgment — even the ones that are systems of record, there's probably a bit of an overreaction here in the sense that they're not going away, but they're just not the exciting place of growth anymore. I don't know if you guys agree.
I agree. It's like dial-up lasted a long time too. There's always a subset of folks that kept the AOL account, and their Yahoo mail seems to be still doing okay. Yeah. Yeah. But Jason, Atlassian's not dial-up. It's down 37% on the year, 67% on the last 12 months. You know, Shopify down 25%. As you said, Gartner down 71%. Man, as my partner very politely said, 'Gosh, there really is no floor.' Huh. There is a floor. And the question is, where does it lie for different — yeah. I don't think we were — just talking about this before we got on the show — they're not all in the same basket. And if you have some way of having a mental model to distinguish between the levels of risk each of these companies are facing, you can probably make some significant money here, right? And I think sorting out a couple of things. One, the core systems of record where at its heart it's transaction monitoring, transaction aggregation like the Salesforce backend — those things aren't going away. Accounting systems aren't going away. I mean, SAP is an entire — and Oracle is an entire generation older than many of these SaaS companies, and they ain't going away. They were client-server, for God's sake. In fact, SAP was mainframe once. They're not going away, because accounting systems don't get thrown away because some dude vibe-coded it. On the other hand, if you're a task — if you're a to-do list, right? You might go away, just because that's a fairly trivial app. If, as Jason said, if you're one of these kind of CRM execution engines, it might go away because the seats that you're selling to go away themselves. So there's a different dynamic if you're HubSpot versus if you're ServiceNow versus if you're Monday or Sana. And yeah, mentally trying to sort through that is kind of the to-do here.
Well, look, there's a lot of interesting and — as I wrote about — kind of depressing factors here. There's: we don't need as many seats. There's: the number of vendors is flat. All of the new budgets being sucked into AI, right? Price increases are absorbing whatever oxygen is left. A lot of issues. But putting all of those aside, the — probably most folks watching this and the three of us — we're in the growth business. And if these stocks have not — if their growth rates, except for two, have declined of the top 25 since 2022, this isn't — it's not that these companies are going to die, but we're not in this business. We shouldn't be investing in these businesses. We shouldn't spend time in this. We have to — you know, profits ultimately matter more than revenue. But whether it's growth in profits or revenue, that's the business we're in. And if these businesses are all shrinking their growth rates, we got to sell.
First of all, you're talking — well, two levels: on a public stock level. As venture investors — let's do it as in venture investors first and then public investors second. As venture investors, you're right. If you're funding a non-AI SaaS company in 2026, you're willing to be quite contrarian. And it's not impossible that there will be some companies that work, but the burden of proof is heavily against her.
It just has to grow like crazy. I think we're even past this AI versus non-AI — I think this is a dated 2025 debate. I think there are only two types of companies. For private companies, they're growing at insane rates or they're unfundable. And for public companies, they're accelerating and not decelerating. And whichever category — there's no — it's a waste of time almost, unless you just need a paycheck, to be with either of the other categories. There's no — I don't even care whether you're AI, SaaS, or non-AI, fintech — it's: are you growing like a beast? If we're looking at these growth rates that are so divergent, like they're almost — that when Harry said he feels like it's a new world from what he learned, we never saw growth rates like this, and we never saw deceleration like this, right? It was a much narrower band. Now it's utterly insane. It's — and the really tough question for venture is: when do you give up on the portfolio companies? When do you — when do you leave? When do you bring in a Lmin from down the hall, the junior kid that just joined 20VC, and have him handle the investment? When do you give up? Because in the old days we didn't want to give up, but do you give up now?
No, the truth is across the board — you give up much sooner. This is the trend that you're seeing across venture. I'm not saying for us, but you see it across venture because the opportunity cost of missing the next Harvey, the next Loro, the next Replit is so high. You have to — I think you — that's what I see. I'm not saying it's good, Rory. I'm saying many do, because you have to in a heat-seeking missile game of large partnerships where you're judged for the deals that you do as a young to mid-level partner or principal. [__] I just need to get in Harvey or Agora. Doesn't matter if I have the dogs, but move on. At some level, that behavior in the end, when pushed to extremes, just results in — remember, if you blithely write off five in a row and assume the sixth will save you, and you don't spend any time on the five — well, if the sixth doesn't save you, you've lost all six, right? So I do tend to be more — I don't think you can make a bad company good, but I do think there was a whale of a difference between getting one to two times your money back and just writing it all off. And I know the logic: provided you get 10x or 20x, nothing else matters. But there's times when you get to 10 and 20x, and then there's times when it's not there in the marketplace. And you just want to think about that. You also want to think about your relationship with the entrepreneur. I mean, I'll admit — I hang on to the point of being wrong. I admit it. It's a human fail. I hate to quit, but I also, you know, it does make you a little queasy. I mean — but I think you — but you're seeing the same founders have that same behavior, which is quit so much earlier than they did before too, because they're aware of the opportunity cost.
Oh, yeah. Founders have no problem quitting now either. No problem. It doesn't mean that it has to be the same, to Rory's point, right? And, you know, if you're a founder, unless you — you know, you don't have a big portfolio at any given time, unless you've got a few hundred million in your fund. It is — it's just this — when results were a little less divergent, you could believe more that they would pop later, right? When the outcome — when it was — when the best ones grew at 100 and you'd be struggling at 50% growth, you could see reignition. When it's 20 versus 500% growth, it's — unless a great — if a great product can always come — like these LLMs are available to everybody. Here's the thing that I — this is why I've lost confidence in so many founders. Like last year it was tough love for me. This year it's just tough, because the LLMs are open to everybody. You have no excuse. You have no excuse to be in legal tech and not have built a competitive product to Harvey or Loro or whoever you want. You had plenty of time. Or to AIGC. You had time. They're the same LLMs. Yeah. Guardrails. Hooray. Build your own guardrails, right?
Jason, as Rory always says, 'I master and that's great, but what about me?' We apply. That's great, but what about me and venture? Does that mean I only have a job funding labor displacement products that use AI to replace humans?
No, he's not even saying that. He's just saying [__] go up. You only have a job funding things that grow 10x, fund mega growth. I mean, and he did before in the past. Agreed. But today, all he said was: look, and I get it. In a world where the best companies grow at 3x, a 2x growth company feels like it could be a contender. In a — what you're saying? And as usual, you express it very crisply. In a world where the best companies grow 10x, you just feel like — why, if you're doing 2x, you just feel like, why bother now? You're growing.
Well, especially if your neck is on the line, especially if you're not the managing general partner of the fund and your neck's on the line, you might not even have the luxury. That was sort of Harry's point. Like, you know, people are — you got — because the companies go faster, you have less time. You don't have 10 years to prove yourself anymore in venture. I don't think — maybe you do. I don't think so. I think you got 22 months to prove yourself in venture. I think you get 22 months. It will be interesting when we have a longer perspective than three years of this boom to see which were the fast growers that kept growing, which were the fast growers that flamed out because their economic model was wrong, and which were the slow growers that kept compounding and improved in the end. And all I'll say is, from the dot-com boom in particular, don't assume that the former will entirely track the latter. Right? There will be companies that have 10x growth where you step back and go, 'Oh my god, the economics were just wrong.' And there will be companies that grow 2 or 3x that keep compounding at 2 or 3x, and fast-forward five years have very compelling businesses.
Look, I'm not — we got to wrap on. I mean, I'm a mild growth junkie, but I'm not going to be just a growth junkie.
It's just — I know you want to move this. I think the existential challenge for 2026 is: I've lost faith in that. Listen, nothing wrong with steady compounding, right? There's nothing — especially we're paid to go along, right? We have 10, 15, even 20 years sometimes, right? It's okay. Like, it's not perfect. Like, you'd love to have a $10 billion outcome in 24 months, but it's okay if the startup takes — at least as an early-stage investor, a decade's fine at the end of the day, right? The problem is I see everything decaying that isn't growing at abnormal rates. I see everything decaying. I can smell it. Not only do I see it in the numbers, I see it in the precursors. I see it in leads. I see it in close rates going down, not up. I see it in an inability to charge more for your product when your agent competitors are charging 10 times as much. So I just smell decay rather than constant compounding. I'll take an 80% compounder. I'll put it at a decent valuation. I don't even need to know what they need to do. That was Tiger in 2021, right? I just smell decay in all of them, Rory. I just smell it at the board meeting. I smell it in the investor — I smell it when the investor update comes 28 days after the end of the month. I just smell it everywhere. Decay.
I think I'm not going to comment on the smell of decay, but I do understand that 2x growth isn't enough. If one of the things you always have to look at is: is your relative market position decaying, right? And that's where you are, right? If you're growing at 2x and there's no one else doing what you're doing and you're in the lead, it's fine. Don't panic. Right? I think that the scary thing — and this is what's happening — the closer you are to something that's growing at 10x, the more likely you are to be sucked into their black star — you know, black hole vortex, right? So, and if you've got a direct competitor growing 10x, you are by definition losing every day. So some part of this is all about where are you relative to competition. If I push you, going back to your framework, Rory, you said there's ones which will sustain those high growth rates and there's ones which will flame out. If I were to push you on well-known examples today for one in each camp, what would you put as one in each camp?
You know, I try to avoid being a hater, so I might do categories on the ladder, right? Yeah. Look, on the former, it's trite, but you'll say it. Any of — you know, obviously the core model companies do. Yes, it's easy to say Anthropic. You almost don't get any points for that. I do believe — so I'll pick some harder ones. I do believe that many of the quote-unquote wrapper type opportunities — I'm deliberately using the pejorative — I do believe there's many compelling enterprise applications to be built on top of those, and all the apps that will compound durably, even if the growth — even — oh my god, I can't believe I said that — if the growth is 3x, 4x, 2x, even, right? I think, you know, you've mentioned the legal case. We have an investment there, GCI, Harvey, LGO — all those things I think are going to compound, right? There might be competition, but those are great categories. I think the obvious example of things that won't — we'll have to transition the business model to compound — and many of the, you know, consumer-led, high growth, ultra-high growth but uncompelling margins, you know, creative tools, some of the stuff like that, maybe where they will have to morph the model. I'm not saying they won't, but what you show up with in the end will be different from what you're showing up with now.
Can you guys help me understand a divergence that I've been struggling with, which is the 4x R on HubSpot, where you said — I was kind of thinking of that when we were talking about the challenge companies like the 4x R on HubSpot and the challenge position of traditional CRM providers. And then you look at the number of CRM next-gen providers, whether it's your Days or your Atios or we're in one called Zero Revo — I mean, the list is 50, literally. Help me understand that.
My thought was there's two things going on. One is what I call dad VC. It's the VC that sometimes even gets out of touch, that either invests in what they know — I know CRM, I know ERP — or they invest in what their kids say is cool. You know, my kids came back and I invested — I did the seed round at Snap because my kids are using it. And dad VC is not actually — I used to mock it when I started investing. Now I see it works. It does work. You know, that like endless executive assistant investments VCs would do. It's so hard to schedule meetings with 30 founders a day. I've got to schedule — that's a classic dad VC investment. So I think some of it is that VCs understand CRM and they understand it's a large market and they think it's broken, in air quotes, like Salesforce is broken. And I will tell you, I think the least broken app I use is Salesforce. It's very powerful. It's just — so I think there's a dad VC. But I will say, to answer your question, the products that we use and are using here are hyper-agentic. So sometimes CRM is such a broad term, and sometimes we really just mean SFA, and sometimes we really just need one part. If all this product does is go out and automatically acquire you customers, that's not the same thing as Salesforce. And that's what a lot of these products are doing — is they're agentic customer acquisition. And that's very powerful. In fact, that is one of the easiest things to sell. 'Hey, hey Rory, it's Jason and Harry. We're from NextGen CRM. For $50,000, we've built an agent that will get you $5 million of new bookings. Would you like to try it?' And Rory's the new CMO. He's got 10 months until he's fired, and he's got a $5 million budget. You know what? Rory may churn, but if we're the best sales guys and have some good case studies, Rory's going to give us 50 grand, 100 grand, while Pipedrive struggles to get eight bucks a month. That's what's happening today. And it may all churn, but this idea that agents will do the work of many humans is very powerful. And I think that's what the best of these CRM startups are really doing — is replacing 10, 20, 50 humans with an agent.
I like your answer, Jason, because I want to pick it apart. Because what we're basically saying is Salesforce and HubSpot are —
Extraordinary valued public companies in the CRM space. There's a whole bunch of VCs funding a whole bunch of next generation CRM companies at 50 or 100 times revenues. How do you reconcile those two things? Right? And what Jason, you put forth is two theories. One theory is the dad theory, which is poor old VC is like they all we understand is CRM, so we're just doing a new CRM. And implicit in what you're saying is, and I agree with you by the way, if the new CRM is pretty much the old CRM but with some AI bells and whistles, it will fail for two reasons. The first is the old CRM growth rate has slowed because the market saturated, so now you're trying to do a replacement sale of a slightly better product, even if it has some pretty AI features. That's just not going to work. And what you're saying, and I agree with you, what you're saying also is, but you could envisage a separate category of CRM startups, next generation CRM startups, which don't just replicate the workflow part of old CRM, but literally do the work, including generate pipe, generate maybe even generate sales, and at some point that would become compelling and those are the guys who can take market share. That's the argument, correct? I mean, look, I'm an investor in one that hasn't launched. But one that I'm not an investor in that I know that we use is called Artisan, which is just an AI SDR tool and more. They did 2 million last month. It's 2 million bucks up from, you know, nothing 12 months ago. And part of that is just we'll get you customers. Now, you can criticize the product or whatever, but that is not the hardest sell for 50 grand or 100 grand today, right? And that is not a threat. It is an indirect threat to HubSpot and Salesforce. We could talk about it because for every dollar that goes there, it makes the upsell just that much harder, but it also runs on Salesforce. So, at the same time, it makes Salesforce more powerful when Salesforce is the hub. But those are easy sell honestly in today's world, especially if you're selling to growth companies that it's an easy sell. I'm not saying the products don't have to be good, but man, this is not a 20 call, seven visits and the office close. It is an easy sell though and we have investment as the one of the learnings you've had is there are nuances around every B2B company's go to market such that one time in two you promise I'll generate 5 million a pipe but you don't because you know maybe it's a very tight ham where there's only 200 300 target customers and there's no undiscovered customers to call maybe it's depending on the sales cycle or whatever it is there's dynamics that quite often are my observation. Having seen a lot of companies come in and out this market is purely a promise the easy sale which is that will make customers happen turns out to not always be true and you end up with and you end up and those customers have a high propensity to charge.
You know what it is true. I will just add one nuance just to this because we have literally sent and I'm not an investor either. We have literally sent millions and millions of business to artisan and qualified because those were the first two ones we used. This was not because I'm an investor. I'm not shilling anything. Um, they ended up being small sponsors for Saster because they made millions. But I really don't get any benefit out of it. They were just the ones that helped us in the early days. That's why we picked them. They helped us. Okay. What I can tell you from these guys just to seeing where the future is, they turn away most of the leads we send them. They turn them away. And so that feeling before of, oh, we're going to and I'm not saying that they're all the deployments are perfect. I'm not saying you won't find unhappy customers. Don't get married. But I can tell you quantitatively is we they turn away leads that I think were are quite good that I would certainly would have closed as a founder in a heartbeat because they know they don't have enough data. There's not enough web traffic. There's not enough analytics. The CRM isn't rich enough and they turn them away. They don't have the data to service them. They don't want the 100 grand or the 50 grand. It's not worth and not only do they not want the revenue, they don't want to waste the FTE and the onboarding resources. This is the real thing. If it were pure software, they might do it. But there's a human. You only can have so many FTEs, so many so forward deployed engineers. So you don't want to put it on a failed deployment. But literally, I get DMs on LinkedIn, Jason, they won't return my call. What should I do? I'm like, well, they did. They qualified you out. Sorry, but they don't want it to fail. It's just an interesting evolution, right? It is an evolution because yes, you're right. The first generational will make magic happen everywhere. And you know, we've seen that in our companies, too. The second generation is we have to be very clear on where we can add value and do that really well and don't promise AI magic pixie dust because you'll just end up getting revenue and getting churn right it'll be so so so pushing on this thread you made the comment unlike some of the re-engineer CRM from the ground up the two you cited qualified and artisan artisan right mine reggie and a bunch of others run on top of salesforce right so which of those plays do you think is the right one re-engineer CRM from the bottom up like I think D is doing like Adio is doing and you know build a whole stack or sit on top of Salesforce you know do the agentic part well but rely on them for the day for the core CRM functionality which is the right bet
I actually interviewed the founder of podium Eric Ryer which is an Excelbacked company and he said yesterday that there is no way that you can make the agentic layer on top of a CRM work you have to own the full stack and that's what they do Well, that's Listen, I love Eric, but that's talking his game. That's patently wrong. Like, we've sold we're gonna sell 10 even a little faster with two people is going to sell 10 million running agents on top of Salesforce. That's a Eric Eric is very smart. I do like him a lot, but that's a talking your book whatever comment that I want to throw my mouse at the screen. It's not even remotely true. Talking your game is almost dangerous in the age of AI. Everyone's talking out of their ass. Why don't you instead tell us what doesn't work at your company? Probably because you're about to fundraise. I actually I do think though for what it's worth I don't I want to we can go you're the boss and we can go back to question I do think in my limited experience today as we record this the more vertical you are and the more SMB you are the more that might be true okay so podium I think is still SMB right it's very verticalized it's very hard unless you're Shopify to build a massive platform of thirdparty agents on top of what you're doing and it's very easy for Salesforce which is very enterprise to attract that talent right so actually the answer Jason because you are it's not that you can't I it's not that you can't run on top of Salos and just be the agentic layer but just as in kind of SAS era to do that you need either the data to be clean when you come in or you need to be able to afford the cost of cleaning the data figuring out the data structure if you're doing a $200,000 deal on top of a $5 million Salesforce instance that all works. If you're selling a 10 grand agent on top of messy data structure from a small Salesforce instance, you just don't have the budget to do it. So I think you're exactly right. At the SMB stage, you probably will buy the integrated thing. But I do believe there is will be a very compelling business selling agents relying on the CRM Salesforce infrastructure for a long time to come.
I think the public market just panicked. But when I look at Shopify trading at 15 times revenue and Clavio selling at five, okay, and Claio growing just as quickly, I do I don't think markets are this nuanced, but I do wonder if what they're thinking in the end time is going to Eric Ray's point is that Shopify will just own everything. It and its agents will just destroy eat its entire ecosystem because for SMBs, the agents, they just have to do everything. There isn't any room for third party agents. Like I don't know the markets are this smart but it may underpin it that like Shopify is just going to eat its entire partner ecosystem I think. But then why is Shopify down 25% and surely Shopify should be up on that belief. Well it's still doing better than its peer set. Claio is down 38% right? Um listen I do think Shopify is the oversold one right but um you know 15 times ARR is still is still a solid 15x AR. I think that it is I might have it wrong. No. 12 billion run rate, $172 billion market cap. Okay. Right. And that's with fintech gross margins. That's not with 80% gross margins. Right. So, it's just super expensive. But um but for a while they traded almost the same Clavio and Shopify, right? It made sense because 80% of Clavio's revenue is off Shopify, but it's higher gross margin and growing as faster quickly. Like you could argue for a discount, right? But it was interesting then they started to diverge and now I think the markets have said um Shopify is going to absorb everything. Um I don't think Salesforce will but but I do think um that is there's a line. Is there any room to build third party agents for SMBs? Maybe not. Maybe not. Maybe you got it. Maybe you have to build the whole platform. It's probably true at least today.
Has HubSpot hit the floor or is that further to fall? We were early investors in HubSpot. I love those guys. says, "I love Brian even though he's not there. I love Damesh. I don't know the new team. I was not the board member. I've always thought he's super smart technically." So, if they get done what they need to get done, they should be fine because distribution still has an advantage, right? So, I'm not going to say I'm not going to again I'm not going to rain on anyone's parade. I'm particularly not going to rain on the parade of someone who was kind enough to make us many hundreds of millions of dollars, right? They have my vote or whatever it was, right? I just think Jason's right. In the end, A, you have to just get it done, right? And if you, you know, you have to cut through the noise and get to the new product universe and then b the proof will be in the pudding and it'll show up in revenue. And if it's not, there's no, you know, I remember years ago a CEO doing a company meeting in kind of his first week when he took over and someone asked about something else and he said, you know, the good news is I believe in a balanced scorecard. The bad news is revenue growth rate is 95% of the balance right and then cash is the rest right so in the end is the opportunity there for all these companies to pull it off and become relevant yeah I believe so I don't believe anyone in an SMB end customer says I won't buy from a 20-year-old company I need to buy from a new one but you just got to get it done so that's what
Here's my theory and again I don't think the markets are as deep as we might be, right? But it's not just HubSpot is has been under the most pressure of any of the leaders, right? But Monday has been under a ton of pressure, too, and it's growing much more quickly, right? It's not growing peak rates. It's still growing over 30%, trading at five times revenue. And here's my theory, and again, I think it's overthinking it because I don't think the markets go this way. But the tough part about SMB is, man, you got to grow seats to grow revenue. It's that simple. you have for HubSpot to grow with 100% NR you cannot you cannot hide in price increases and so they're under and so if you believe seats are under pressure and there's a lot of evidence it already is under pressure right the more folks I talk to even in enterprise B2B players they're like every time I go to a renewal they only want 90% of the seats they had last year right if you believe that is accelerating which the data suggests then the SMB guys are going to get the hardest hit the hubspots in the Mondays will be hit the hardest. Right.
You're right. Yeah. But I totally agree. You're right. But it's just interesting that we jump around. The three things we said are: we don't believe SMB can support a separate product. Right. We, in the sense of the agent, needs to be integrated with the CRM. Right. Yes.
And the second thing you said was we totally have proof that agents can deliver huge value because Jason Lemkin, SMB owner in San Francisco, is making millions of dollars from his AI agent. Therefore, an existing SaaS company that has tens and hundreds of thousands of SMB customers should just get its act together, make an agent, and go deliver that value.
And I believe the CEOs of those companies I just named believe that, too. I believe the products just aren't good enough yet. The evidence, you can't argue with the fact that the agentic products have not inflicted revenue. Like, the proof is in the revenue.
I agree. And then the next thing I want to say — I'm just, and by the way, the reason I'm making this up as I go along is this was just not on the agenda. So I just came off a board meeting. I had no preparation on this, but we'll keep going. The sound bite that we had someone give a while ago, which is every one of these markets, it's a race between the incumbents who have distribution needing to add product and the new guys who have product needing to add distribution, right? And if you think about — I'm going to take Monday, HubSpot, and then say Salesforce, right? If you think of, if the incumbent is the guy who has the distribution, right, it boils down to how long does that last, right? The stickier the existing product, the more time you have to cover the gaps, right? Which is why I think many of the accounting products will get a long time. But to push on it, something like a Monday, which is task management at some level, it strikes me as the kind of thing where the more of the knowledge worker tasky that's not system of record, that's not ultimately rolling up to an accounting system of record — because even though Salesforce is not an accounting system, it is the core information for most companies' P&L because it's where the contracts sit and roll up — the less you're like that, a system of record, and the more you are some kind of system of work, the more likely you are to be disrupted and the less time you have to get done, right? I think those products are probably a lot less. And then obviously SMB is just inherently less sticky, to your point, than kind of enterprise.
But again, to your point, Shopify, even though it's SMB, the natural churn there's nothing you can do about, but you're probably, provided you're still alive as an SMB, you're probably going to be slow to change off Shopify because it's not clear what an AI Shopify would give you. And it's pretty core to what you do. So that's why we get back to the same thing. It's probably much — baby's been thrown out with the bathwater here, but which means there should be trades to do. But one other thing that's interesting, and you saw some of the commentary here, is this. This is where it also gets hard. When companies shift from being valued on revenue multiples with no deduction for loss and totally ignoring option dilution, all the way to being valued on free cash flow and where they're counting on, you know, where they're basically deducting the SBC, it's just such a huge change that it takes for — I mean, it's such a valuation reset that if you go into that valuation reset and the market suddenly stops thinking of a growth company and starts thinking, 'Okay, let me compare you to a bank or a utility or an industrial company.' You know, it takes a lot of years of flat stock price and reasonable growth before you can be worth 10 or 15 times free cash flow. And I think that's what's happening here. You don't see a bottom until these things are at free cash flow multiples. Net of dilution, not SBC, but dilution. That makes sense. And when that happens, that's your bottom. What a shitty time.
Well, well, it's pretty shitty for Sacha, too. I mean, it's pretty shitty for Bill, too. But let's stay on Sacha because we're not going into politics. Um, good old Bill. He's busy right now in Australia.
For the record, that is many things, but it's not politics. Let's get back to S. Yeah.
Um, anyway, Microsoft second largest market cap loss ever. I'm a buyer of Microsoft. I have a shitload of Microsoft. Can you please help me understand why we're 360 billion loss in market cap in a single day? What is the problem? Why is this so depressed and down? Let's be clear. Made the numbers, maybe missed Azure growth by 1%, 37 versus 38, all within a margin of error.
I think it's a combination of a couple of things. One is, as you say, some pushback on much of your future RPO, which is future revenue unrecognized — like 40, 50% of it was from OpenAI, and suddenly people are questioning whether that's going to turn into money. And if that really is the concern, then when OpenAI raises 100 billion dollars, logically some of that should come back. But I think the wider — and you know, and again, they also reiterated the Jason point, which is inference or GPU is money, and they allocated more of their GPUs to internal product development and therefore were able to sell less of them in Azure. And they basically explicitly said if we'd used more of our GPUs in Azure we could have made that extra 1% of growth, so we'd have, quote unquote, been fine, right? I think...
I love it when I hear that at a board meeting: if it wasn't for the storms on the eastern seaboard, we would have been fine. If it wasn't for the 1%...
I think fundamentally what you're seeing is — we've said this before — in the world of AI, they haven't. As we said, the corporate development team at Microsoft have executed brilliantly; they own one-third of OpenAI. The product team at Microsoft have not executed brilliantly. They don't have any compelling AI products. They don't own either an LLM, which Google has, or even compelling apps. They just don't have it, right? So they're reduced to being — so a little bit of their, quote unquote, buzz was they were getting some perceived lift because they were a vendor to OpenAI and selling them Azure. But now the market has kind of soured on that because they're saying, A, maybe it's a low-margin business anyway; it's not — I'd prefer to own the model than provide the compute. And then B, if you sell into OpenAI, is that really money good? So I think it's kind of what happens in these markets when they turn against — I mean, there's an element of narrative and momentum that you'd think shouldn't be there in the efficient market hypothesis, but it is there because we're human. And that's one of the things I've learned. I used to be a total efficient market hypothesis guy, and I think in the long run I am, but in the short run narrative shapes everything. And there's been two years of Microsoft narrative being really strong: they all have OpenAI, they're killing it, we're, quote unquote — remember, we're going to make Google dance. Remember that, right? And I think...
Have you seen the chart since he said that?
And I think what's happened is the narrative shifts and suddenly the things that were perceived as strengths are realized as weaknesses. There's truth to the shift of the narrative, which is they don't have this compelling part. And then one day you miss Azure growth by 1% and everyone goes, 'Oh my god, narrative change,' and out they go. So I think that's what happened here.
Can I just understand: were they overpriced previously and they're now correctly priced?
Interesting. Of all the megacaps, the Mag 7, with the exception of Tesla, obviously, which trades at an astronomical multiple, all are kind of in that 23 plus or minus forward P/E. And there was a period where Google was at a compelling discount to that, and if you bought, you're up almost 100%. And now they're all much of a muchness. So I don't have a developed opinion beyond that, to be honest. I think, frankly, if AI keeps eating everything, it gets harder and harder to have a compelling software business without having relevant products in that space. And in the end, that's a tax that Microsoft is going to have to pay too, over the medium term. So the answer to — I'm trying to answer your question — is they're probably appropriately priced for now. But the real truth is they have to get their act together as a set of products that are relevant in the AI world at the knowledge worker level and at the Azure level, at the model level, if they're going to be at the right price 10 years from now.
If you're Sacha, what do you do from a product and a model level? Do you buy someone at the model level?
Do you go and buy Cohere or Mistral and try and have a play there in something that's buyable?
I'd be — didn't they buy Inflection AI?
