So we start with Anthropic's monster week.
We may be at the stage where we throw the humans under the bus, not the AI anymore, which I think at some level is pretty terrifying.
We move to OpenAI killing Sora.
I think shooting it in the head is even more significant.
A big part of the whole strategic direction of the company was flawed.
Agreed. You're seeing the economists, the accountants have wandered into the room and they said, 'We have a scarce resource here. Let's optimize it. Let's devote this compute to the people who can pay the most for it.'
And then we finish on the man with the biggest balls in tech, Masa. You haven't lived till you've seen an 85% decline in an index.
This is one where it's just backass backwards. I don't believe there's right or wrong in money. There's just money.
I just don't think raising it 5 or 8 billion when you're at 80 million or 100 million of suspect ARR is the most exciting accomplishment in the world.
Let me be direct. Get over it. You should conform your company around your customers and your model, not your VCs. Being mean to a billionaire is actually a feature.
Ready to go?
Boys, welcome back. It is this week in Anthropic, otherwise known as the SaaS OGs, which has been renamed. I want to start with, you guessed it, Anthropic. Unbelievable 28-day month of February where they did 6 billion in revenue, which was more than Databricks has done in their entire lifetime. You know what I think was the most interesting news out of Anthropic this week? It was actually the accidental leak of Claude Mythos, essentially 3,000 unpublished assets leaked. It's a 10 trillion parameter model apparently that is this next-level step-changing capability that they're not releasing because of how powerful it is. This is by far the most interesting to me. Jason, how did you think about this news?
Well, look, obviously it's embarrassing, right, to Anthropic to leak it. I actually just think we're going to see more and more of this accelerate. The faster we vibe code, the faster we ship, the more corners we cut in general on application-level security, it happens. I mean, so many folks are accidentally uploading code to insecure GitHubs, to databases, to Supabases that are by default open. So this is accelerating our data, which is just open on the internet. And you could say, 'God, this shouldn't happen at the Anthropic level,' and I'm sure someone will get scolded, right? I'm sure it will. But overall, this is accelerating, and it's going to accelerate even more as we let our AI agents make decisions. Our agents are going to decide where to put code. They're going to decide what level of security to use. And this is going to become happenstance.
And you know, it's funny. I mean, people were like, 'Oh, how could Anthropic have a new security agent and have this happen at the same time?' I think it makes perfect sense. The Anthropic AI security agents, which I've basically used in Replit, are very, very good. And it also makes sense as we rush, we're going to leak source code, data, PII, right? It was, I don't know whether it's happened, it was reported today, all of Merur's data leaked. It's being held hostage, all of it, every single interview, every single piece of PII, every single piece of humans. And so, you know, we used to mock these. I think it's going to start happening daily and weekly in the agentic era. And it doesn't excuse it, but it's a reality. Agents are goal-seeking, and agents are going to make — not only are they going to make the same mistakes as humans, they're going to work a thousand times faster. So even if they make the mistakes 10% as often — Rory, help me with the math — if they're a thousand times more productive, they're still going to make a hundred times more mistakes. So we're going to see it everywhere.
Again, just for perspective, because there's two things going on here. Anthropic, some data leaked from Anthropic about their new model, Mythos, which of itself is meant to be amazingly powerful in dealing with cybersecurity. And there was a whole consequence that we'll talk about in a second in terms of how that impacted cybersecurity stocks. But as Jason pointed out, the level of irony here is acute because it was an inadvertent leak. So you had the situation where a model that's meant to be amazing for cybersecurity actually leaks via a cybersecurity leak. So that's kind of — so we're toggling between the two. On the cybersecurity leak, it was newsworthy. Anthropic, quote-unquote, blamed human error, right? We may be at the stage where we throw the humans under the bus, not the AI anymore, which I think at some level is pretty terrifying.
But and you know exactly what happened. You see this — I mean, not down in the weeds — you often see this where you know you're about to do a big announcement, you have your content management system, you stage all the assets, you know, be it the Fed press release or in the UK it happened on the budget, if you remember Harry, the budget. You have the press release ready to hit play the minute the budget is ended and someone inadvertently forgets and puts it on the public side in advance. It's the same thing here. So it probably was human error with a whole bunch of content ready for, I don't know, pick a date, the March, the May 15th announcement of Mythos. They forget to secure it correctly and out it goes. So that's the first thing, right? So that's kind of the embarrassing part of it.
And then the interesting part of it, and you really do have to do this not without sniggering, despite the fact that it all leaked, you also have to separately talk about the fact there's some big claims on Mythos, right, and on Anthropic we're making via, again, via this leaked memo. Reminder: no one else has seen the actual model, at least not publicly available. Obviously some people have seen it, but not publicly available. And even I was trying to get copies of the leaked memo. There's just a few screenshots at this stage. It's hard to track it down, at least quickly anyway. But the statement is it's way more powerful. Second thing is it's going to be way more expensive for them to serve, and therefore it's going to be way more expensive for customers to buy. And then the third thing is a particular focus on cybersecurity. It's meant to be, quote-unquote, extremely good at detecting cyber issues. And the result of that was a 4 or 5% decline in the average cybersecurity stock last Friday when this leak happened.
Yeah, just two — maybe just two other things on the leak, just for this tradeoff. You know, I'm dating myself, but when I was at Adobe and we were acquired, we were an early customer of GitHub. And so we were putting source code in the cloud, and that was banned in Adobe at the time. It was banned because the source code was their crown jewel. It was pretty easy to make a crappy PDF reader or a crappy image generator, but to do what Photoshop or Adobe Acrobat did — all the exceptions, all the tens of thousands of corner cases — was the crown jewel, right, of the company. And so we got the first exemption to be able to use source code in the cloud, pros and cons. But when they used this on-prem source code management tool, it took a month to do a release. A month, a month. Okay, now we're doing 60 releases a day, right? Or even Anthropic, fastest-growing enterprise company of all time, is still doing massive releases every month or two and dropping features every day, right? So we went from something that took 30 days at a tech leader to something that takes hours. There's tradeoffs there, and I'll take them, but we're going to see it explode in terms of like the stuff that was published today.
Going back a few threads on show number 50 to Rory. One of the things that I thought was pretty cool in Claude was two things: always-on background assistant that works constantly. Our AI is working with us 24/7, and agents that can sleep, wake, and self-resume. The autonomous agents, which I've been talking about how this is going to consume orders of magnitude more tokens and change our life. I'm excited to see more coming. And you know, Open Claw was just this brief thing that woke us up to what Anthropic appears to be all in on, right? Truly autonomous agents running 24/7, hopefully safely, hopefully not leaking all of our source code, but it's coming soon, right? Not these, you know, this whole idea that we've been doing. When we started this podcast, you went on to ChatGPT or Claude. No one had heard of Claude when we started this. I was a quirky guy using Claude. And you talk to it and go back the next day. The next release, it's going to be on all the time. All the time. Debating Harry's latest investment. Was it big enough? Is he too concentrated in the fund? Where should he go? What was Rory thinking on that deal? Right.
Why was Rory abusing Harry by email again for the second time in a day?
Laugh, but this is the future. I'm excited to see it coming sooner when our agents are 24/7, like they're literally around us and we give up all of our personal freedoms and autonomy as part of it.
I hear you on the embarrassment of it being leaked and, you know, the human error element, but while Anthropic has Mythos, which is supposedly as powerful as it is, you're juxtaposing that with OpenAI around with killing Sora, kind of ads not really working and people being unhappy with it, and it's seeming like this massive chasm of the progression of force that is Dario and Anthropic continuing faster and harder than ever with a fault-altering, confused and dazed OpenAI wandering around the product desert trying to find some water.
You're just being mean. I mean, again, as I said last — and I'm sorry to repeat —
Yeah, but again, narrative is overdone on both sides, right? So I think some parts of it are true. Obviously, you're true in a bunch of different things. The decision to shoot Sora in the head, right? Almost certainly a good decision. Look, it's obviously embarrassing to say something is going to be amazing less than four or five months ago and then shoot it in the head. But if it's a mistake, give him credit for at least saying it's a mistake. Move on, right? And yeah, that relationship with Disney again, I think — I'm going to give — it wasn't me. I was sneering at it in real time when it happened. I think someone else in this podcast said it's really significant. Just saying, right? It's clock.
I do. I think it's massively significant.
I think shooting it in the head is even more significant. I think it's saying that a big part of the whole strategic direction of the company was flawed.
The whole that we are going all in on consumer — that from what I read, Sora made single-digit millions of revenue, right? And was consuming a million a week, which actually sounds way too low, right? It must have consumed billions and made single-digit millions. It makes no sense as a product either in the short term or the long term. But if you want to own the whole consumer experience with AI, they decided we have to own image and video, and Anthropic never even attempted to do it, right? So it's a massive retreat. It doesn't mean it's the right — it's probably the right decision to your point. In fact, almost certainly is. But man, that's a — our strategy was wrong. Like this is a huge own goal. Our strategy was wrong.
Agreed. But I agree with that. But I still think that, as I say, I still think Harry's kind of overegging it a little bit because look, you made a comment about ads that I think is caught effectively implying that the ad strategy hasn't worked. That's a bit of a bigger leap. I mean, Sora hasn't worked. They've killed it. I think I'm with Jason. I think that's smart because I think one of the things you're seeing right now is in a world of scarce compute and astonishingly, despite all the investments that we've seen in terms of actual available compute for people to sell AI on, we're in a scarcity mode. You don't devote compute to things that are highly compute-intensive and low revenue-intensive. I mean, and Sora was almost the definition of that. Video generation is extraordinarily compute-intensive relatively speaking and the revenue is almost minuscule. Conversely, you know, codegen, while it is compute-intensive, is orders of magnitude less compute-intensive and there's real dollars attached to it. So you're literally — what's happening right now, I actually think at a higher level, it's actually very healthy. You're seeing the economists, the accountants have wandered into the room and they said, 'We have a scarce resource here. Let's optimize it. Let's devote this compute to the people who can pay the most for it.' So that's the Sora comment.
On the ads comment, Harry, it's early days for, you know, GPT ads, but again, I cite that quote from Brian Kim that I thought was really good. Of course they're going to run damn ads because there's no other way to build a mass consumer business and they have no choice, right? Because, you know, their consumer conversion rates run roughly 5%. That gets them to, I think, a roughly 10-15 billion dollar consumer business, right? And, you know, out of their 500 million uniques or whatever it is. So one of two things has to happen in the consumer business. Again, I'm going to leave the enterprise business out. On the consumer business, either A, they take that conversion rate to a number we've never seen before from a typical consumer business. I think that's unlikely. I don't think most consumers are going to pay 20 bucks a month for this. Or option B is you make an ad business work. They got no choice to make it work. And by working, I don't mean 100 million dollars. People are kind of ragging on the 100 million. It's in the noise. It's scale.
Big picture here: Facebook and Google each do 200 billion plus or minus a year in digital ads. If these guys aren't doing 20 billion within a couple years, they're not even in the game. And to get to the market cap of — I mean, remember, Facebook has a 1.7 whatever it is trillion market cap doing 200 billion. Alphabet/Google has a three trillion market cap doing 260 billion plus. If they're going to grow into the market cap on the consumer side, 20 billion is not enough. They have to do 50 billion, 70 billion of ads. So unlike Sora, this is not going to be a try the ads and then fold. This is a — there's only two existential bets for this company. One of them is ads to make the consumer business work. And then the other is, oh my god, we should have done coding all along. Let's get a competitive coding and enterprise model out there and compete with Anthropic on that side. So those are the only two things they're doing and they're the only two things they should be doing. It's straightforward. I mean, I actually see this as good news. Like at least they've — like we've gone from the let's wander around the woods feeling cool building to there's only two things to do. Let's get them done. It's net net, it's a positive. Better late than never.
Man, did they — had the Wall Street Journal this week, they had a story of why Dario left OpenAI. Did you —
I mean, yes, I did. The amount of tension at OpenAI, the fact that Greg Brockman recruited them and no one would work for him. He and Dario and his sister would not work for Greg Brockman, would not talk to him. They would not allow him to be part of the LLM or GPT groups. Then Sam had to constantly tell each of them that they were in charge, right? Told Dario he was the boss, then told Ilya and Greg they could fire him at any time if they wanted to fire Sam, right? Then begging Dario to come back. Then Dario saying he would stay only if he directly reported to the board and nobody else. I mean, the level — and then firing Sam and then bringing him back and then Sora and we're not doing coding. It's just — I mean, I'm exhausted. I maybe I'm wrong. I have to think at least someone like me would feel much more comfortable in Anthropic where it appears there's a much more consistent process in leadership, right? Same founders, same things, same goals. It just — I have to think a company organized like that is just going to out-execute someone with that level of drama. I almost can't take it.
You're going to kill me for this, Rory. It's the best thing for OpenAI not to buy Sierra, incorporate that as its customer support product and have Brett Taylor come in as the day-to-day CEO and Sam can be fundraiser. Sam can be master of —
I'm not in the boardroom. So, you know, I hear — look, at the end of the day, at the end of the day, I think you're right, Harry, and I would favor that as a board member, but I'm not going to say that publicly because I don't want Sam to break my balls. I am too unimportant for Sam to even give a about. Right? So I don't worry about that at all. So let me say this delicately. That amount of board-level and senior team-level turnover over an extended period of time is probably the highest warning signal that you could have as a board member about how your CEO is doing, right? And if it was anything other than a founder — let's put it this way — if it was anything other than a founder company and this level of drama was going on, you'd probably be having — you'd probably be sitting down with the CEO and asking how's it going at least and what are you thinking of doing about this. I don't think you turn on people just when things go to . But you probably want to cut down the drama from here, build a team and try and call a shot and play it for more than 20 — you know, for more than six months at a time.
When you've worked at or observed startups where the CEO is spending so much of their time load balancing talent that can't work together versus when you've worked at one or with one where the talent's rowing in the same direction, to say that it's night and day would be an understatement, right? It's like the backside of Pluto and the front side of Mercury. And it's just — and I think Sam, we can criticize him. Actually, when I read everything I've seen and then when I read the Wall Street Journal, it's like, my god, this guy has spent so much time load balancing the drama of these extremely brilliant personalities that just — oh my god — that can consume most of your time as CEO, most of your time load balancing.
You're exactly right. It is the drama of — you know, we're not dealing with a bunch of people just trying to crank out some B2B software and make a paycheck. We're dealing with people who are angsting about whether this is going to change the world, who have fears about the technology, who have, yeah, desires to be seen as credited for the technology despite their fears about it. This is a — I mean, as is often the case, extraordinarily talented people come on an extraordinarily high bandwidth — a demand on attention and care and feeding. It's been a real slog, I'd say.
Okay. The man with the most balls in investing, Masa Son. SoftBank gets $40 billion bridge loan to buy OpenAI stock. How deep can Masa go? He'll go as deep as they let him. I mean, that's the one thing we know. If they give him another 20, he'll borrow that too, right? I mean, look, this is a high — I checked the SoftBank. You've got SoftBank Holdings. Have to be careful. There's the telco group which is reasonably levered at the Japan level and then SoftBank Group is around — it's around 2x levered, right? One and a half to 2x levered in terms of equity, right? What that means is a 30-40% decline, you know, wipes them out, right? It's a very aggressive stance, right? It would be like me taking our $800 million venture, $900 million venture fund, borrowing 1.8 billion and investing it all. And if it works, I really juice my return, but if it goes wrong by 30%, I'm done, right? And it's just — it's super aggressive. I mean, I suppose his lesson is Masa survived 2002 when I remind everyone the NASDAQ went down 85%. You haven't lived till you've seen an 85% decline in an index, right? And obviously if that happened or anything like it, you'd just be way underwater, right? So it's a fairly high amount of leverage for an investment fund to say the least.
Yeah, I mean, for sure it's dramatic. Having said that, you know, real estate investment funds get the maximum leverage they can by design, right? That is how they work. I would imagine if venture had access to more debt, we'd all load up on it. If we all could do the growth rounds in your hottest company, maybe we would, and we could get all the carry from it. And the worst thing is we leave the keys to fund seven on the table, we might load up too. I'm not sure, but certainly real estate funds load up as much as they can.
But just pushing back again because real estate funds load up because the cash flows are predictable, right? At the end of the day, I mean, look in —
Well, and they can — but they can because the cash flows are predictable, they can load up.
Right, we don't — it's just harder for my little fund to go to Silicon Valley Bank and borrow 200 million against the —
premium of risk. I would argue the SoftBank portfolio, not the telecom company at the subsidiary level, but I would argue the SoftBank portfolio is more like Jason's fund than it is a real estate fund. So I think it's a high level of risk.
Well, plus, what did he lose on WeWork? 12 billion. He knows what it's like.
Yeah. The two big assets from memory are obviously the OpenAI position and I think the ARM position, which I still think is in the holding company. And yeah, but I mean, amazing companies, world-class companies, easily imaginable a 30% decline. So yeah, it's a hell of a way to live.
Speaking of declining 30% and being in the hole, we touched on it earlier, but obviously Mythos leak hammered cyber stocks. CrowdStrike, Palo Alto, Zscaler all down 6%, Okta, Netskope down 7%, Tenable down 9%. Was this a justified dip or is this an unjustified reaction to Anthropic news?
I was listening carefully to the names because there's different aspects of security and some of them I can say, yeah, maybe that overlaps, and then some I go, that's just a different thing, right? And when you listen to all the names being thrown out, you say that's just, you know, baby with the bathwater. Because step back, how does Anthropic make security better at the code development stage? They can look at code and find security flaws. So there are companies that upfront do something like that, and you know, application security companies, and you could argue that this is a different way of doing that. Maybe some of those guys will be impacted, right? What they're not doing, for example, is real-time perimeter defense. They're not in a real-time basis, you know, blocking people like a firewall, right? Nor are they doing what, for example, Okta does, right, which is single sign-on and authentication. That's simply not what they do. It's a different thing. And the fact that both of those kind of stocks sold off says it's just a kind of knee-jerk reaction rather than anything true.
It will have an impact. If you were doing application security or code review for security, code review, you're probably going to have to either incorporate how this works in your analysis or you'll be redundant, just as the coding companies — anyone kind of just as GitHub had to roll in complete models and figure out how to adopt it. Right? So for some of them this is really going to matter, and then for others it's like it's just a different thing. Stepping back, I think we're in the panicky stage, right? I think we're in the stage of because these companies are doing so well, because they're private, no one sees the numbers, because AI is so sexy and so potentially amazing. We're at the stage now where everything, anything can cause a panic.
Robinhood was down like 10% because Elon didn't potentially give them the tender and was going straight through E-Trade. And that alone was like a massive hit for them.
Obviously, there's a panic in the market. And the question is, is the panic justified, right? The panic is that this revenue is not durable, right? That's the panic. The cybersecurity one's really interesting in my experience and opinion. This is one where it's just backass backwards. Because if you're in the agentic world, this is the golden age of security. The number of security threats and issues is going up orders of magnitude. Claude leaking its source code, it doesn't matter. The number of apps exploding. The number of — like there's so many mobile apps that the app store is like it's like a month to get your app reviewed versus a week. It is — everything is exploding. These apps are being built by agents. They're being built in unpredictable ways. Folks aren't looking at the code. The pace of features being shipped, products being shipped, corners being cut. This is a golden age of taking any mature category and acknowledging good news for us. There's more threats. Good. Whether — I don't care whether it's application level, perimeter — and like the good news is threats are exploding.
And the whole shtick of cyber — I'm not a real cybersecurity expert, although I'm doing another investment right now for just this reason — the whole shtick in my whole lifetime has been, look, you've got to constantly buy new products because new threats keep emerging. Like this is — there's been a golden goose of cybersecurity that has allowed new entrants to come into a conservative category. Someone like Wiz will show up and say, guys, we know how to do this on the web. And people are so terrified of new threats, they'll take the meeting. Right? This should be the golden age for new and existing investors because the threats are terrifying. And you can't stop the rogue engineers that vibe coded something that accessed your data. This should benefit everybody. Like everyone should be a rocket ship. Like everybody built — like everybody monetizing GPUs is a rocket ship. We have — and the fact that the market doesn't see it shows we're in a — in my opinion, we're in a true panic, which is hard to predict a bottom. But I don't get it. Everyone should be benefiting when you see an explosion in application production and a change in the paradigm. The change in the paradigm is good for everybody except, you know, Windows Defender from 1996. Like it probably doesn't help that product or whatever the hell they have, but anyone — everyone with engineers should benefit.
I broadly agree with Jason. I mean, there might — there are more than Windows Defender 2006 that might be impacted. As I say, some of the application security code review stuff could be, but big picture, Jason's right. Instead of having people trying to get into your firewall, everyone's now downloading an agent, giving it full root access to their computer and telling it have a go. And as Jason just pointed out, work overnight. It's going to — I mean, no one yet — it's funny, my colleague Aaron who does a lot on the security, we've been looking at a lot of these companies. No one yet knows the exact approach that we're going to have to take to defend against agents running within the organization, but everyone 100% understands that this is an emerging mega threat because of the velocity of adoption times the power of the solution. So I agree with Jason. It mightn't be the old guard that takes advantage of it, but there's no — but they tend to be. I mean, one of the things I admire about the security companies is the CrowdStrikes, the Palo Alto Networks of this world is they know damn fine that when a new threat emerges and a new solution emerges for that threat, when an earlier winner comes out, you better spend your 300 million bucks, your 500 million bucks and just swoop up the winner and add it to your product, right? So I think there'll be a ton of fast acquisitions as agent security solutions emerge, you know, and people will be doing if they're smart. And I think those two companies are extraordinarily smart. They'll be doing acquisitions long before it's, quote, certain because you're going to have CIOs come and talking to you, right?
One thing worth mentioning on that is it was interesting again — and somebody leaked information from Anthropic. They're masters at selling fear. One of the things they're doing is they're releasing the Mythos model first to CISOs within companies. It's kind of like, oh, it's so scary, we're going to give you this model and give you time to figure out how to use it. Of course, part of that time will involve giving a million bucks to Anthropic for — so it's just great marketing. So they're actually leaning into that and saying to the CISOs, you're going to have to figure this out. This is the new terrifying weapon we've invented. Please give us a million dollars and we'll let you defend yourself with it. Also great marketing, and but it speaks to the perceived — to Jason's point, it speaks to how correctly afraid every security for SISO should be given the pace of agentic AI adoption in the enterprise.
I mean, it's just — how hard is it to get a meeting? Whoever you are, if you have any established brand, we've got a new agentic product, we're going to help protect you from this, you're going to get a meeting that afternoon, right?
Wish I bought them over Figma. That's a depressing chart that I'm looking at.
You need to let go, Harry. You need to let go.
Down 30% in a month, Rory. It's hard to let it go after 30% in a month.
Okay, no crying in the casino. Move on.
We — I do want to discuss revenue kind of questionability. We've got Anthropic recognizing revenue in a very different way to OpenAI. And then you also have questionability around Emergent Labs and is it okay if ARR is kind of questionable in sorts of how it's accounted for. How do we think about that? You can choose which one you want to take.
Let me just — can I just — maybe Rory can dig into it, but I'll tell you there's one startup I invested in that's over 100 million ARR and I own just enough to get the investor updates. It's not — I'm not on the board. And I get three numbers every month. Three revenue numbers. I don't know what the hell they are over 100 million, but the smallest one is ARR. Now, I invested at seed. I don't really care. I'm in the money. I don't have a choice. But I can't understand. This company's doing great, but I can't — for the life of me, I cannot understand these three numbers. And there's asterisks and daggers, and there's charts that go every — but they keep going up and to the right, which I think was on this emerging thing. We could talk about our next. I think that's what some of the investors said. Who cares? But I can't tell the hell the difference what an ARR is in 2026.
Well, what I always get is like pipe, which is complete — the contracted and then there's live. So, first of all, stepping back, to be fair to both Anthropic and OpenAI, they have a very clear and sensible way they define ARR. What they take is they take the average of the last four weeks to smooth out times 13 because there are 13 four-week periods in a year, which is more sensible than monthly because you have these varying months. So they're basically what they're saying is realized revenue for the last four weeks averaged — you know, the average of the last four weeks times 52 — but basically it's actual GAAP revenue. What did we bill for the last four — the average calculated across the last four weeks to take into account how it is — that's their run rate, right? So it's actually pretty — it's not committed, to be fair to them, it's not committed or any of the kind of higher-level stuff. It's actual money flowing through the system. And Anthropic is roughly at 19 billion according to that kind of trailing four-week metric and OpenAI is around 25.
But now let's talk about your thing. There was this kind of whole meme of OpenAI reports net on their partner revenue and Anthropic reports gross. And what they're saying there is if OpenAI sells through Microsoft and Microsoft takes some money off the top, OpenAI only reports the net amount. If Anthropic sells through AWS and they sell $100 worth of revenue, they report the gross amount and then they give $20 back to Amazon as a cost of sales. So there's two different methods for what looked like the same revenue kind of mix or same revenue approach.
I thought you were going to extend that. I thought part of where you were going was to Michael Canon-Brooks' point on the show was that a lot of this revenue is getting double or triple counted because it's being recognized and not only does this happen, then Cursor is selling it again and recognizing the revenue, right? The same — people keep reselling these tokens again and again and recognizing them as their own ARR. How many times do we get to resell these poor little tokens?
I think that's actually a great point, Jason. I hadn't got, but you're exactly right. No, it's like everyone's got amazing revenue growth because it's the same little token going to this little token.
I mean, if we all agree to have essentially 0% gross margins, an infinite number of us can keep reselling tokens to each other, can't we?
This is our new 20VC scale faster demo day. We all resell a million tokens to each other on the first week. So everyone in batch 001 has a million ARR its first week because we just resold our tokens to each other. So it's completely fair. The VCs don't mind.
And you're exactly right. And the sentence that you added in passing is the key one. Until we all have to get profitable, all this, you know, can continue. And then at some point, that's why I said I think you're starting to see it. Someone's going to have to say, assuming we want to have a net present value and a cash flow, what's going on here? And then all this becomes more clear. I didn't comment on the Emergent Labs fastest to 100 million.
Jason, you actually tried — you tried it, didn't you? You thought it was good.
I did. I thought — I mean, listen, it's hard for me to know the criticism, right? You know, some folks in the press in the India B2B environment tried to make this some sort of scandal, right? Because — and in a sense, fair enough. If you go to Emergent Labs and Emergent Labs is sort of an Indian competitor to Replit and Lovable, which I'll show you what I learned in a minute, right? And if you go right now to the homepage, they say 0 to 100 million, I think, in eight months. It's right there. It's the biggest banner. So in all fairness, if you're going to put yourself out there — not just as a tweet, but if it's going to be right there on your website — one would expect 70 to 80% accuracy in that number, ideally higher, right? So if it's lower than that, I think it's fair that some daggers came out. But I was curious. But I don't actually know what happened. Is it triple counting?
I can tell you one thing that I learned which I don't love, which is that what a lot of AI startups do this. So this is not unique to Emergent. They kind of — instead of getting you to use the free version, they try to get you to immediately do a free trial instantly that says it's $0 and $20 a month thereafter. Now so many folks do this. It is not unique to them. It's probably best practice in most accelerators. But I'm pretty sure that means they recognize all $240 in ARR that first month when you're paying zero. And they trick you because you don't even — yeah, you do have to click on the Stripe link, but you almost think you're just using the free product. So is that — if I do a $0 a month product that's discounted as a marketing cost and I churn after 30 days, does that count as $240 of ARR? I think for a lot of startups it does. Okay, so that's a fair criticism. I'm not saying this is what Emergent does, but a lot of startups will instantly recognize that as $240 in ARR, which is how they rocket if you're self-serve. That's how — otherwise you can't get there that quickly, right? So they clearly did that.
I will say what was interesting is I overall I think the criticism is probably unfounded because I thought the product was pretty good, much better than Make, like an order of magnitude better than the disaster of Make. Because I do a five-part test, a six-part test. The first part is awareness test. So I ask it to redo the saastr.ai homepage. Actually, of all the platforms, it did the best job. It beat all of them, all of the leaders, because I redid this recently. I redid it and they're all good at it. Replit, Lovable, v0, they're all good at — they all pass the test, but it actually was probably the best and it passed a bunch of the other tests. So I'm not going to switch to Emergent Labs, but I would say it's in the top 10% of vibe coding apps. That's pretty good. So that tells me it's a legit business. Like they did the work. And a lot of these — the truth is if you play with a lot of these, even from leaders, like, v0's not the only one that's crappy, okay? Because they're basically relying on the fact that Claude Code does 90% of the work for you, right? They're just putting the simplest wrapper around this. And so they did a good job.
But I really didn't like the way they do the billing, but we'd probably have to shoot half our portfolio companies that do like PLG AI because I think it's a sus practice. I just don't like tricking you with this $0 for the first month when you think you're using a free trial, right? That's the sus part. I don't love that kind of gray art. But the product's pretty good.
You know what I don't like when it comes to confusing? I was wondering whether to go off on one in this show and then I thought, fuck it, let's go off on one. It's been a long day. I'm pissed off by these tranched rounds. I see them all the freaking time. The amount of Sequoia rounds where it's like, oh, you know, X raises money from Sequoia at 5 billion. Trust me, Sequoia got in at one, but they just club it together and then announce the sum and then the latest valuation and it's just very misleading. The tier ones get in early, a tier 2, tier 3 instantly marks it up saying —
Same as crypto, isn't it? For years, what's the difference?
Well, I think the Andreessen crypto fund, the, you know, essentially 80% off the token. What's the — it's the same thing, isn't it? This — you're paying for the signal. I think if you break it down —
First of all, just so everyone's on the same page, because interestingly neither —
Claude nor GPT was on the same page and didn't know what a tranch round was, and they gave the old conventional venture tranch round based on performance milestones, you know, BS from back in the day when we actually ran businesses, right? So didn't have a clue about this. So let's be clear on the practice here. The practice here is when a company, a hot company, raises a round where there are effectively two different prices per share. A first, let's call it a first close and a second close, even if they're at or near contemporaneous, where the first one might be at 250 and the pre, and the second one is at a billion pre, and you know, the highlight and the headline is always at a billion pre.
There's two impacts of this. First, let's do the simple one where there's just a single participant in the round, right? That's where, you know, if I'm the new investor, I want to pay 600. The company wants a headline of a billion. And to win the deal, someone says, 'Okay, let me put some money in at 250, some money in at a billion. I can do math because I'm paid to do math because I'm an investor. So I know my overall basis is a billion, sorry, 600 million. So I'm getting what I want and the company's getting what it wants, which is a headline number of a billion, right?' It's silly, but that's all that's happening in that case. That's the single participant tranch deal, right? And it's, and for some, if a company wants a headline, that's what they get, right?
Generally those things come back to bite you because by definition, if you are the company, just as the investor can do math, presumably you can do math. If you accept that combined deal, you're implicitly saying, 'I know I'm only worth 600, but I'd like the optics of a billion.' You better be damn sure that your next round you're at one half billion. Otherwise, you'll have the optics of a down round. And if you're an optics believer, that's probably worse than the uptick, right? So that's kind of the single participant version.
The much more annoying version that Harry clearly was getting on his high horse about is when you have the same structure, but access to those rounds where the lead investor maybe does all of the 250 pre-round and only half of the billion round, and then some new investors just get to do the billion round. So literally at the same time, the lead investor is investing at 600 billion and the follower investor, the marquee investor, is investing in the same asset at a billion. And there's, I don't believe there's right or wrong in money, there's just money, right? That's where at the minimum you have to look yourself in the mirror as the other investor and saying, 'Wow, that's the price of being cool, right? That's the price of access. I'm paying 50% more because I just can't access that deal, right?' And that feels like a pretty invidious thing to... I mean, again, going back to the comment, the prof, you got to remember if you think about, and again, trying to avoid morality and saying, oh, because it would feel shitty. I mean, you really would feel like a loser if you did that, but let's play it out.
This is a situation where the lead investor, let's say it's Sequoia, because everything good and strong should be Sequoia. They're admitting it's only worth 600 on average and they're just doing this fakey transaction. The company is admitting it's only worth 600 on average because they're taking the money at a blended cost of 600. So what you're saying doing at a billion is you're either saying either I have a lower cost of capital and I'm willing to take a lower return than everyone else, or the only positive spin you can come up with is the company thinks it's worth 600, Sequoia thinks it's worth 600, but I am smart enough, even though I don't have access, I am smart enough and clever enough to know that it's really worth a billion and I should do it at a billion even though I can't get to 600, and I'm willing to put up with the upfront tax and foolishness look because I think six, twelve months from now it'll be obvious that I bought at a great price and maybe I look like a genius.
Yeah, but we've, well, we've entered an era though. I think the meta thing, maybe this wasn't exactly what you were queuing up, Harry, but it is tough. We've entered an era where so many founders are obsessed about headline prices. Obsessed. They're obsessed coming out of demo day. They're obsessed. They're obsessed once they cross a billion, which I think should be a moment to take a pause because of M&A options. They're obsessed about driving to 11 billion and 9 billion and one-upping their competition. And the numbers have become a joke to many founders, right? They just don't, joke is the wrong term, they don't think through any of the ramifications of the valuation they hit and they don't care. And I'm not even saying that's bad. I mean, I think burning the bridges is a good way to have a big outcome, but it's become utterly gamified on many levels, right? It's just become gamified.
And so this 11 tranch isn't a round, is just part of gamifying it, right? It's been true of YC since I started investing there. There was always a cheaper price before demo day if you're reasonably hot, a higher price at demo day, and then a 20% or 30% after demo day. So that version has just become institutionalized and so be it. If it's what the founders want, if they want to gamify it, so be it, right? I just don't think raising at five or eight billion when you're at 80 million or 100 million of suspect ARR is the most exciting accomplishment in the world. Like, I'm not going to, like, I'm going to send a few thumbs emojis on the email, but that's about it.
That's about it. They're all, they're all fake anyway. They're all just bets, right? These are not public companies. It goes back to your point though on Emergent Labs and the graph doing the eight months to 100 million. The gamification of like the race to 100 million. I'm not choosing Emergent Labs, but...
Listen, I think they built a good product. I think, I'm sure they've been overly lambasted because whether it's 100 or 80 or 60, I don't care. It's pretty damn good, right? Whatever it is. But if you're going to, if you're going to, if you're going to do that, you deserve the daggers to come out when it's not 100%. Right.
One that I thought was fantastic, exciting. I always like to see a potential IPO or to IPO shortly. Um, I thought this was fascinating. It's been an incredible journey actually from like, you know, Scandinavia, these founders building this business. It's had a couple of CEO changes. Um, the business is actually in incredible shape both actually and Whoop announced today that they raised I think it was 500 million at 10 billion. Fitness and health data. Do you know what actually, Rory, Jason's annoyingly right again? I don't know if you remember his predictions, but he predicted, if I'm not wrong, that 2027 would be the year for like human healthcare data and longevity.
