The 8 Moats of Enduring Software Companies: How to Analyse for Durability and…

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I think the best way to think about the Google experience is Google taught me that ultimately the best companies have a remarkable product at their core. Google was definitely a philosophy of build it remarkably and they will come. GTM was not Google’s specialty. But what Google was really good at was building amazing products. Sometimes the go to market worked, sometimes it didn’t work. But at the core, was a remarkable product. So ultimately, my core investing thesis is that if there is not a remarkable product, all the go to marketing distribution in the world will not save you.

I look for what the remarkability is in the core product or value proposition of the company. Is it 10x, 100x better than the alternative? I’ll tell you a story at Google. When I joined in 2003, there was a project going on called Cariboo internally. I said, What the hell is this? This was web email which gave one gigabyte free storage. And back then, Yahoo Mail offered 10 megabytes of storage. So it was 100x. I was like, there’s no way it’s possible. And turns out it was.

And it was released on, if you remember, 04/01/2003, and that people thought it was an April fools joke. But that was Google literally taking something that was unbelievable and making it reality. And so that’s that’s the kind of products I like, something remarkable, something unique, something powerful.

What is interesting is that even if you have a remarkable product, you still need distribution. Facebook taught me the power of distribution. Mark, I think, is the best distribution genius in the world. He would look at a product and say, This is how this product is not going to work. And it taught me the power of multiplayer products in particular. Most software products are single player. And as soon as you make the multiplayer, there is a uniqueness in switching, distribution, etcetera, that comes about. Facebook, by nature, you can’t use it if you only have one person on Facebook.

And so when I saw Figma, the power of Figma I felt was it was not just that a person could use it, but it was much easier to share with other people in your company. And I think the best PLD software companies are those that you can use multi loop you can use, and it increases defensibility. So the power of distribution and multiplayer products. What about Square? What did you learn from Square that you’ve taken to your investing? The power of a multi product portfolio. I think at Square, when I joined, we were a single product company, payments and payments only.

When I left, we had, I think, 11 products each doing more than $50,000,000 in revenue. And one of the interesting metrics was our key North Star metric went to median number of products used by a seller, by a merchant. Turns out that the more products that a merchant uses, the more retentive they are, the more sticky they get. So this is the other thesis I have. This is obviously very clear now. You cannot be a single product company. And most importantly, your product number two needs to emanate very naturally.

Can’t be like this completely separate product. Has to be very adjacent. For Square, it was a product called Square Capital, which was basically a cash advance product that really came from the fact that Square controlled the payment flows and knew exactly the merchant’s credit history and could underwrite based on basically money going in and out. It was a beautiful product. The interesting thing about having a multi product portfolio is that not every product needs to generate profit. People are always like, Oh, it’s not making money.

Square Capital didn’t make much money, but it was very good for retention. Some products are good for making money. They’re part of the profit pool. And some are good for retention. Companies need be very clear which are the profit pool products and which are the retentive products. If you confuse the two, your teams don’t know and they’re built for the wrong outcomes. But the power of a multi product portfolio and being able to have products with different goals, retention versus profits.

We’re at negative gross margins for the first, like, year, I think. Negative gross margins.

It was the most operational of all four companies. I thought I was a good operator. When I got to DoorDash, I really realized what operations means. And so a lot of my philosophies around how to truly operate in a hard mode have been shaped by it. It really was the epiphysis or the epitome of, I think, how product and operations can work together in the physical world. So how it shaped my investing philosophy is the kinds of people that came out of DoorDash, I just think they are excellent.

I try to get them. It’s really around hiring. It’s around talent. It’s around taking really hard problems. I’ll never forget, when COVID hit, as you know, most restaurants were shut down for the first couple of weeks. And so DoorDash had to make a very hard call around what to do, how to get these restaurants open. And ultimately, we decided to not take any revenue share from these restaurants for a month. Even though we were a private company, we had some amount of cash on the balance sheet.

And that really hurt. It was the right thing to do in the long term, but it was extremely painful in the short term.

Well, as all of our software portfolios are deep red, right? All of us have some software stocks, the reality is public market has decided that since code is becoming free at the low end and becoming much easier to generate and create at the high end, the market has decided that every software company is going to zero. I think this is 100% an overreaction because not all software companies are created equal. And actually, both you and I think about this a lot. What are the characteristics of a durable software company?

And I think there is a few that we can talk about. But yeah, I think everything has been painted with the same brush at this point. It is absolutely no reaction.

It’s basically a play on Hamilton Helmer’s seven parts, but it’s slightly different. I call it the eight motes. The first motes, data moat, which we all talk about, but it truly has to be proprietary. It has to be data that nobody else has access to. I think Spotify is a good example. If you look at their Discover product, it uses a decade of listening behavior across hundreds of billions of people. You can’t create that Discover product easily. Second is the workflow mode, which a lot of people argue it’s a weak mode.

I agree by itself it’s a weak mode, but the deeper you’re embedded in the company running their operations, moving their money, the deeper the workflow mode. Just by itself, I don’t think it’s enough in perpetuity. But the deeper you’re embedding is, for example, NetSuite is an ERP that runs your business. They have a much, much deeper mode than, say, Zendesk, which is a lighter workflow mode. So that is a mode. You can say it’s one. Maybe Zendesk has 0.5, NetSuite is a one. Third one is regulatory mode.

So licenses, capital require multi year procurement contracts. Coinbase, where I’m on the board, is a great example. They have MTLs, Money Transmission Licenses state by state, with Fini CN, all of those things. It makes it impossible for a company to use anybody else than Coinbase to custody their crypto because of that reason. Fourth mode is a distribution mode where you have proprietor exclusive distribution. Intuit is a great example. Anybody who wants to build an accounting system I remember when I started a company, it was after Google, I basically tried to use this company called Xero, x e r o.

And I was like, let’s use Xero. It’s like the new had just started. It seems like a cooler interface. My accountant said, No, I’m sorry. I don’t use Xero. You shut it down. I had to cancel Xero and go to QuickBooks. What a great distribution mode. You’ve trained a network of CPAs to only run QuickBooks. I don’t know if they have a commission or what they get, but that’s a proprietary distribution channel that these guys have. Very hard to displace them. Fifth one, ecosystem moat. If you have a platform or ecosystem where many third parties are built on and rely on, you have a moat.

Shopify is a great example. You can wipe code an e commerce hosting platform, no problem. But can you wipe code the 100 thousands of developers and third parties who built all these applications on Shopify? Every Shopify merchant I know uses at least five or six other third party apps. That’s a huge part of the Shopify ecosystem. That’s a moat. Sixth one is a network moat. That’s classic DoorDash. I think DoorDash has many other moats, but AI can wipe code the ability to access restaurants, but you can’t wipe code liquidity, courier density, reputation history, all of those things.

So marketplace density is a network effect, which is structural. Seventh one is the thing you mentioned, physical infrastructure. Atoms. Wherever you have atoms, it makes for a moat that’s hard to displace. Again, I think humanoid robots will maybe at some points start taking, but it’s probably a few years away. And the eighth one, I would say, mode. If by virtue of your scale, your costs are so low that it’s hard to replicate. I think Amazon is a great example. TSMC in semiconductors, scale mode. So those are the eight modes, basically: data, workflow, regulatory, distribution, ecosystem, network, physical, and scale.

And so what you do, I think any one of these modes is not enough, but what you want to do is you want to take a company and score it across them, maybe assign one point to each mode they have. And I think anything four or more, you’re pretty damn secure. But if you have a two or three, it’s a weak mode. And if you’re one or less, you probably need to really build some more modes or you’re not you need to do something to make up for if you have zero, you’re you’re screwed, basically.

I agree with that. I think Atlassian has proprietary data. Now they need to use that data to build products. They have unique proprietary data on all the code out there because it’s being checked in. There’s a lot of stuff they have that they need to use for better. They have a workflow mode. They don’t have a regulatory mode. I don’t know about distribution mode. Need to think of whether they have something there. Ecosystem mode, I think there’s a lot of third party things that are built around them.

So they at least have a score of three here. They have a network mode. Do they have a network mode? No, I don’t think. They’re not a network effects company, the way you think about it. They don’t have a physical mode, and they don’t have a scale moat. So they have a score of three. Monday probably has a score of one, I think. They have a workflow moat. I’m not sure if they have the other modes. So you’re right. Monday, in theory, has a much weaker score, I guess, than Atlassian on this.

I don’t think Shopify will build it. Shopify is an investor, and Shopify, I think, has decided, at least in my opinion, that Shopify has these things called missions, and I think they decided this is not part of their mission to build this product. So I don’t think the risk is Shopify. It is that it has become easier to build Klaviyo now than it was a year ago. So it’s easy to build Klaviyo. I haven’t talked about brand. I think brand is no longer a strong mode.

I explicitly excluded brand. I don’t know how strong Shopify’s promotion of Cloudview is. I think a lot of it depends on whether the propriety distribution they get from Shopify, how strong and tight it is. If Shopify is actually going to promote them, when search for messaging or communications, Google has a vote with Apple. When you use Apple, you basically Apple products, you get Google search engine. If Claudio is a preferred product and they have a relationship that makes it work, I think it’s very hard to displace them.

It’s hard to at least displace that part of their business.

Businesses are much more rational in thinking about it, less irrational, and the alternatives are going be much stronger. I think on the consumer side, consumers are much more like dollars. And there is dollars and cents, but there is a natural inclination to just trust brands. I think on the business side, it is going to get weaker. I actually disagree a little bit because switching costs are so much lower. One of Hamilton Helmer’s seven powers is switching costs. I think switching costs is going to go to essentially zero because over the next one or two years, ability to port data, your data, as a business or consumer from any ecosystem to another ecosystem is going to be very easy.

And then people are going be able to replicate almost pixel by pixel the experience you have with one product a different product. So you’ll have clones popping up left, right, and center, data portability is going to be easy. In that case, what is that brand really? It’s like in professional sports, do you cheer for the player or the team when they switch teams?

Well, don’t have scale. Their scale means that it is cheaper for them to produce. I think they have a score of three. Because that’s the thing, software earlier was a scale game. Because you had produced a lot of software, it was cheaper for you to produce a lot of software. Guess what now? Everybody can produce software as cheaply as anybody else. If they had their own data centers, the hype I think hyperscalers are the ones that basically are able to say confidently that they have scale of people in the physical world.

A pure software company can’t get that scale. But yes, they are very similar to Atlassian, where they have a score of three, I would say.

They are more attractive than most companies, most software companies. But if they don’t build agentic workflows and commoditize a complement by figuring out where their profit pool is, I think they have to figure out, is the profit pool in the data or the workflows? If in the workflows, they need to make data storage free and basically change pricing to an outcome based model based on workflows. If they feel the profit pool is in the data, then they need to give away these workflows for free. And so they need to really commoditize all the agentic companies that you and know that are trying to build on top of them and charge for that.

They need to build better products using their data and make it free. And I think that’s the way that a NetSuite or a Salesforce or a System of Record needs to operate. They have to commoditize their complement. They can’t just wait around for other people to build on top of them.

It’s both. They are confident internally, but they need a signal to show that they are confident. I think the founder buyback is the most the strongest signal. It’s not just the company, but also the founder.

Yeah. I think there there are buybacks and there are there are buybacks with a capital b. You want the capital b one. You want a CEO of a large company to do a $2,050,000,000 dollar buyback to show confidence.

It’s an interesting thing. The bolt on AI strategy by itself has a real ceiling, But I think the companies where the Bolt on really works are the ones that reframe what the product does, not just add the capabilities. So I think if you just add AI search as there’s one thing, you just add AI search or you build search as an experience with new UX primitives. One is just an upgrade, the other is doing something completely different. So Notion, for example, I think very highly of them.

I think Notion is adding AIs. You mentioned they’re adding a lot of AI agents. I’m hoping that the way they’ve added it I’ve actually played around with the product. I think it’s pretty good. But the AI just need to now get better based on how the user interacts with it, and they need to tune the model for their customer base. Most bolt on players are not doing it. They’re simply using a GPT or Anthropic model, adding a thin layer. You have to rebuild the entire experience end to end.

You do that by identifying something where AI doesn’t just improve the margin, it changes the experience and the economics. Document processing was a good example. Think, ultimately, you couldn’t actually extract structured information from unstructured documents until about six or nine months ago. Now, you can reliably read dense legal contracts. So your experience around documents needs to be fundamentally different. If you’re just getting someone to upload a document in the flow, you need to instantly give them immediate insights from the document while they’re uploading it versus the same document upload thing.

That’s crazy because now you should be able to infer any document that enters what the hell is going on instantly. So you need to reevaluate every single interaction and see what has changed. That’s the biggest difference in product development today. Model capabilities are improving every six months. Because if you have too long a product roadmap, you’re going around your program and the model comes and just blows it out of the water. So you’ve got to really understand what the capabilities are of each new generation. You can’t have too long a roadmap because your roadmap is going to be blown out by the next model iteration.

If you have some of the other ones that you have physical and so on, it becomes easier. If you’re a pure software companies, which of those apply to you? I think fintech is a good one. Think fintech goes through these cycles. Think fintech, especially Marathon, we invest a lot in fintech. We actually think, oh my god, fintech is one of the best ones. If you’re moving money, you’re generally in a good place. So anything that touches money, we feel there’s a very strong moat there, much more defensible.

And so data and workflow moats are the two things you’re really hanging your hat on as a software investor, because if you’re not doing fintech. And then I think at early stage, it’s too hard to know what a distribution moat is unless they have some hack, and these hacks never really stand the test of time. Ecosystem, too early to say. Network effects, too early to say. So really, physical infrastructure, they don’t have any software company. Scale, they don’t have any. So it’s really about, Okay, go deep into what is the data asset you’re creating?

Does it get better with time? Do I believe it gets better with time? Are you building your own model over time? Are you fine tuning a model and improving it over time? And then how deeply are you truly embedded in the workflow? Are you just a lightweight thing that the underlying system of record could create? So these are the two things that you have to hang your hat on: a data asset that gets better with every interaction, and then a workflow. It’s hard, man. I think pure software companies are hard.

I think application based software companies are hard. You’ve got to really believe that the founders can ship with great velocity to basically build that and see proof of that compounding.

I do think these are viable businesses. I don’t think they’re going to be big businesses. As soon as you do vertical, I don’t think you can do one function within a vertical. I think what you want to see there is the ambition and ability to truly own the full stack, build the whole product for the vertical. Service Titan, for example, is a canonical example. It went public last year, Great Outcome. It’s still a sub-ten billion dollars company or something like that. And they own like 30 If you look at the S1, they have 32 different products.

And even after selling 30 different products and really being, at least in The US, for any service field services company, they are the canonical company. They still are a $10,000,000,000 company.

13. Voinbase has 12 doing $100,000,000 in revenue. Exactly. You’re a horizontal product, you’re serving a broad base. I think vertical products, you’ve got to really own full stack. I think it’s harder otherwise to be a $10 plus billion company.

I think you can. Maybe the mega funds might say, look, it might not be a 100,000,000,000 outcome, but I think if you’re a $200 $300 $400,000,000 fund, you can absolutely create a $10,000,000,000 company. Because remember, one of the big changes is that vertical SaaS does take over labor. And so vertical software is no longer SaaS. It’s basically software as a service, but it is services. So you’re going after the services spend. So one of the interesting things, as you know, is that verticals, especially if you’re selling to small businesses, they spend some amount of tooling, but they spend a tremendous amount on both BPO as well as some human capital, human labor.

You need to basically target those two spends. And I think if you do that and you’re committed to building the whole product, you can, absolutely.

No. We are seeing that. We are seeing that. I think the first one, most businesses don’t want to lay off people. So the way we are seeing it, the first thing that’s happening is businesses are outsourcing to third party BPOs, many of them in India, Philippines, etcetera. That spend is the easiest to cut because now you can offer the same service higher quality, faster, and 20%, 30% cheaper. The second thing they do is when somebody leaves, they don’t replace that person. And the third thing they do is layoff.

So I think layoff is still maybe a little bit a while away, but you’re seeing absolutely BPO spend. All the call center companies that you mentioned, all the next generation AI service companies, they’re going after BPO budgets. I was shocked when I was doing work in this space how many different verticals, doctors’ offices, etcetera, use call centers outside The US. They already have budget clearly allocated, and there’s a better service. So I think it’s BPO spend first, don’t replace the person second, and then potentially think about laying off.

I didn’t know 30,000.

There are two outcomes for these companies. All of us have those companies in our portfolio. A bunch of them are going to become zombie companies. They’re going to try to add AI features as a last resort, not succeed, and be sold to PE. The problem is even that might not be a good outcome because PE itself is struggling to digest the companies they bought a couple of years ago, and the prices have reset. They do have good assets. I am seeing in some verticals there are companies merging with each other.

I think we’ll see if that happens just to create more scale, but it’ll be interesting. But hopefully, better outcome that many of them go to is with strong leadership, you basically can burn the bridges and create a completely new AI native product. I think you had the intercom CEO, right, Fin? Great example. Podium, another great example. Both of them with their new products have grown to 100 plus million in a couple of years and basically just burned the bridges. This is legacy software. I think the more you fixate on how do we fix the business, the less you’re going to focus on how do we create a new business.

So we’ve got to create a new business from scratch. You have customers. You almost got to say, I’m going to be ruthless about migrating the current customers from the current business to the new new product. Even if it’s lower price, it’s a bright thing to do, and you’ve got to abandon some cost fallacy. Help me on podium.

need to assume that they will take over huge parts of the service budget in the businesses and that they will not just be a billion dollar company. I believe that they’ll be a multi billion dollar company because earlier, I think they were limited to one part of the stack and they were on top of a bunch of systems. Now, they’re taking over the entire software stack. That’s the thing I like about you want founders who are ambitious enough to go after the entire stack, not just the earlier piece of the stack they were in.

You want to be the only product that the company uses, and you want to replace as much of the digital labor as you can possible. That’s the ambition. So what you want to say is, what’s your market size here? In all your customers, how many people do they have that are doing digital work? And do you have the ability to replace all of that payroll over time and all of the other things they are doing and take a part of the payments transaction revenue? And if you think that’s a big enough opportunity, that’s when you invest.

Seed pricing doesn’t die. You know why? If you look at ChatGPT Enterprise, ChatGPT Enterprise is priced based on seats because seats provide predictability for enterprise buyers, but they don’t drive expansion revenue by themselves. So, you basically have to bundle a lot more into each seat. ChatGubit or OpenAI sells seats based on different tiers, where they have different functionality. I think Figma sells three different types of seats. You’re going to see different kinds of seats. Now, the big challenge of seat based pricing, which you alluded to, is it breaks when the product’s core value is not about access, but it’s about something doing the work on your behalf.

So at that point, charging per user doesn’t make sense because user isn’t the constraint anymore. It’s the work output. So at that point, you’ve got to go to outcome based pricing. So for example, if I’m something like Harvey, I don’t know how Harvey prices, I bet that they price based purely on how many contracts they process versus how many people are using it. For example, even if 100 people are using it and they process zero contracts, in theory, they should get zero. So I think you have two kinds of products.

You have access products and you have work products. Access products is basically seat based, like I think at GVD Enterprise is a good example. And then work products like Harvey are probably more outcome based and not seat based.

King Making is a thing. I think it is a thing. See earlier than earlier, companies are getting these rounds that are valuing them at valuations which really are eye opening. That said, I think it won’t work unless the company executes on the promise. I think other firms can take it as a signal and decide to pile on or not, but ultimately the company has to execute on the vision. If it doesn’t, then it’s just a bad bet. So yes, it is there, but it by itself just because you’re King Making doesn’t mean they are the king.

They still have to execute and justify it. I think the reality is everyone’s playing different games. Right? You and I know, being venture capitalists now, that somebody with a 10,000,000,000 fund is playing a fundamentally different game than somebody with a $400,000,000 fund. And if you try to play the same game they are, you’re gonna lose. You’ve got to play the game that you’re best equipped to play. Benchmark plays a different game than than, say, Andreessen Horowitz, but both of them play different games, and both of them do well at their game.

It’s not dead, but it no longer elicits the jaw dropping that it used to a few years ago. As you said, the one to 10 is becoming more and more common, and those numbers will basically get you mean, lovable could probably go public with that kind of trajectory. Now, the bigger question for me is durability. And it’s not even quality, it’s durability. Because like you and I discussed, margins can improve over time and will improve over time. So it’s not about margins, it’s about is this revenue durable?

And so retention is basically very important for me to understand. Are people using it as I think we saw in the first wave of AI, we saw many chat GPT. Like there was a company called Jasper, not to pick on them, but they went from one to 40, and then they came back from 40 to 10 or something like that. Maybe one to one hundred and one hundred to 40 within a very quick time frame. So there’s a lot of tire kickers out there, especially in prosumer products, who test the product and then move on to something else.

So what you want to look under the hood behind all these numbers is two things, which I think are the fundamental indicators of business quality: customer retention or gross retention, and then net revenue retention. Those two, I think, are the biggest indicators of quality. I would always take a company that’s just, I should say just as crazy, doing a triple, triple, double, double with excellent gross and excellent net revenue retention, then a company that’s growing 10x in a year with really bad customer retention and less than 100% or less than 90% net revenue retention.

Yeah. I think you want to basically weigh the retention in the light of what they have encountered. You’re absolutely right. I think just like you want to weigh the growth of a company in light of, have you gone through any seismic events? If they’ve not gone through any seismic events, you’ve got to then take it with a grain of salt. What competitive threats have you faced? Has a single competitor come out? Have you been able to ward off that? Has your retention stayed strong in light of that?

Some of these products like Granola, etc, we’ll see if they are the case. But they are these unique products that really open up non consumption markets, which means that I would never have actually bought a notetaker before, a separate notetaker outside of Zoom or something, because Zoom comes with its own notetaker. GMeet comes with notetaker. But Groq Lula is so powerful that it basically got me to consume a separate notetaking product. And it’s probably true for many of us. And I think that just changed the market opportunity for them.

I think Uber and so on are great examples where they just saw non consumption markets.

You’ve got Google Slides built into App. Exactly. Great. They’re very good parallel. Non consumption market. You would never assume, why would you ever buy a PowerPoint thing or a presentation thing separately? It’s a non consumption market, a zero market. But the product is so good, so remarkable that it gets people to buy it separately as a separate SKU. I think we need more of these standalone remarkable products. Intuit is a great example. As you know, Microsoft tried to crush Intuit again and again and again back in the eighties and nineties with bundling everything into Office, but Intuit TurboTax survived and thrived.

You will need to be multiproduct. They can’t just be a single product and go. They will need to have a second product. I’m so sure of that. They will need to have a second product. Intuit has multiple products. Okay. What was Grunoda and Gamma’s multi product? I don’t know. I don’t know why Gamma would not create just like they’ve they have taken their riff on PowerPoint, why can’t they have their own take on documents or slides the same way? I have to assume it’s basically the different kinds of content that people create.

Are you on websites?

We’ll see.

Yeah, I think inference costs are dropping, so you automatically assume that margins in theory should go up. But I think it’s not about margins in year one or two. The more defensibility or leverage you have, in some ways over your customers and what choices they have, the more pricing leverage you have. So I would rather see margins go up with price increases than cost decreases. A good example is PayPal. Groq both of us on our board at Square, and he told us that PayPal, back in the day, raised prices five times in three years.

Because there’s such stickiness, they knew their customers really couldn’t do anything. And you see, those are I mean, Uber I have to say, I don’t know if they have raised price or not, but I know that they have basically changed the economics of how much they pay drivers over time so that their margins have just expanded continuously. And they’ve also raised prices in different ways. So I think you have two ways of increasing margins. So first of all, you and I both, we don’t look at margins in year one and two.

Mean, it doesn’t make sense, even years four and five. But you want to have, on one side, the ability to increase prices. On the second side, you want the ability to cost to get lower. I think that second thing is happening by nature. What you want to see is, in addition, the ability to have such a good product, and ideally, multi product story which makes switching really hard and you can raise prices.

I say you don’t you don’t look at margins. You look you look to see whether or not they have they have a product that is compelling enough. For example, I think, obviously, Disney plus for every year, I think they increase prices on me. They’ve gone from $20 to $30 to $40 or something like that. Amazon Prime is another one. But this takes many years. But you want the potential. You want to evaluate the potential. Do they have the potential? Do they have the ability to increase prices in the future?

It’s not something I worry about. I think durability and defensibility is much more of a worry. I think good companies, if they are defensible, they will have the ability to increase margins. That’s what I was saying, actually. Have you ever shopped in Chenal Gokul? I think they do have stores of mini stores. Yes. I’ve never shopped myself where life has. Yes.

is a good example. I think you’ve got to have massive scale. I’m an investor in a chemical Atlas, which sells to billionaires. It’s the opposite. It’s a great business. It just you you need massive scale. You need a veg product that is almost cheap or free. Mean, Robinhood, you have to have free canonically in your thing. Robinhood obviously offered free stock trading for a long time, and that was their core pitch. And that allowed them to basically get a lot of people. You need to have something free or some hook that is really low cost that allows you to expand.

But it is a harder business because you can’t make the ARPU or the average revenue per user is low enough, then you need millions, if not tens of millions or hundreds of millions of people. When you sell to very rich people or wealthy people or large enterprises, look at Palantir, which is the business equivalent of selling to wealthy people. They have, I think, what, less than 1,000 customers, maybe even less. And each customer pays them $20,000,000 or 30,000,000 or $100,000,000 or 1,000,000,000 it’s an easier business to obviously, it’s a very hard business, but you can see, I like those businesses.

I mean, it’s look at Veeva. They sell they went public with four customers. Four customers.

think non consumption is the biggest challenge. But yes, you cannot do market sizing. I do bottoms up with a specific segment. And I always know, I think any customer base that has more than 10,000 customers or a few thousand customers, you’ve got to segment them. There’ll be a few different segments. So you want to understand within each segment what the bottoms up propensity to pay is, what’s the problem you’re trying to solve with them. And then you’ve got to talk to them to understand what the budget is.

You’ve got to do the work. That said, I have misread non consumption markets many, many times because you just don’t know how big it’s going to be. It’s very hard. Kudos to those who’ve been able to bet on Uber every time when Uber hit a billion, 5,000,000,000, 10,000,000,000. I was like, hang on. And then you see your own behavior. It’s sometimes your own behavior is the proxy for how it’s expanding, but with the noncustodial markets are the hardest. What’s

I remember seeing Shopify at a billion, and I was like, how many e commerce merchants are there really? Or maybe even before a billion, one of the early rounds. Tam felt really concerned. I think what I missed was that Shopify was not just selling e commerce, it was basically allowing anybody to sell. It basically changed any entrepreneur on the planet. Anybody who wants to sell something went. So it wasn’t just existing e commerce merchants. And that’s what you want platforms to do. They literally make it possible for every person, every person to think of the possibility of selling or renting their home out or taking a ride, which they never would have thought before, or buying a new presentation app or a note taking app.

They are the biggest hits. They’re also the biggest misses. If the bet doesn’t play out, they’re screwed. If bet plays out, they could be bigger than anything else. Google, non consumption. Many of them are non consumption markets. They’re new behaviors that didn’t exist before. That’s in some ways what venture is all about. It’s not about existing, it’s about new behaviors and betting on that Facebook non consumption market. Mean, think of all of these iconic companies.

But the biggest difference was identity. And Franzster and MySpace, you didn’t know who the people were. They didn’t have the real photo thing. I remember when Facebook had to go into Japan, Japanese cultural norms were that all the Japanese social networks back then were incognito. You couldn’t, for some reason, maybe saving face or something, could not share your real name or your photo. So everyone said, Facebook, you’ve got to adhere to Japanese cultural norms. You’ve got to change Facebook and make it similar. Mark said, absolutely not.

Even if it takes us longer, and they they succeeded.

Well, this is is very hard. I think it’s a mental thing where you’ve got to take every opportunity at first principles. We all struggle with it. I think the best venture capital someone asked me what the best venture capital bets, I talk about a paradoxical one. I think it’s Mike Muritz betting on Instacart. Why? Because he lost $370,000,000 on WebBand less than a decade ago. He burnt it through. Same space, approval comes to him, he bets on it. He bets on it after losing hundreds of millions of dollars.

It is not all Sequoia money, but the whole thing burned to the ground. And think about the first prince he was thinking needed and the courage needed to make that bet. I think it’s brilliant.

I’m so curious to see how he, like, just incredible.

I think there are two ways I’ve now realized after many years of doing this. At Seed and A, price almost doesn’t matter if you’re right about the company. So I think you just invest at whatever the price is. For example, I invested in the Seed Round affair back in the days of about eight, nine years ago, 20,000,000, which is very expensive for Seed Round. It was the highest price YC deal at that point. I I think it’s been 100 or 200x for me. So I think you invest in a company which is great.

You have conviction, you invest. Now, I think the B, I think B plus, that’s when price starts destroying returns. I think by then, you’ve got real revenue, real traction. You can pick a generally good company and still get crushed. For example, one of my friends invested in this security company, and they had $100,000,000 in revenue. He invested in them at $4,000,000,000 I think they’ve gotten to $500,000,000 in revenue, but guess what? They’re still at $4,000,000,000 And so basically, they will not make 1x the capital they invested.

And so that’s a challenge, I think. But guess what? Even in WeWork, Benchmark made money. Benchmark made money at WeWork because they invested early enough. So I think at sub 100,000,000, maybe that’s an arbitrary number, you can if the company is good, you’ll make money regardless.

I don’t think an A investor can do there are two kinds of deals that investors have to do. One is, I think, where there is less legibility on the company, where you’re betting on there is some early product market fit. There’s not 3,000,000 revenue. There’s $05,000,000 in revenue. And that’s, like you said, when you get it basically for 50,000,000 or sub-one $100,000,000 a million or so. But then as soon as it gets to 3 or 4, it gets maybe you can do a couple of deals like that, but I don’t think you can build a Series A fund doing deals at 300 or $400,000,000 because it’s not going be enough ownership.

Some of these are going to fail, etcetera. So I think you can probably All of us I think even benchmark, I think on your pod, one of the pods, I think Chetan mentioned this, they’ve done a few of those deals where they have single digit ownership percentages in high valuation companies like Merkul or something like that. But most deals, I think, you’ve got to have double digit ownership. You’ve got to invest slightly earlier. It’s a tough game, but you’ve to be patient. I think the good news is concentration is your friend in some ways.

It can be your enemy, it’s also your friend. It can be your enemy if you’re picking wrong in some ways, but it can be your friend because then you don’t feel that you gotta do 10 deals a year. You can do four deals a year and do 15 companies in the portfolio.

Reserves. We have 35% reserves. You have to have a mix of

This doesn’t work. You’ve got to a seed mix and incubation bets and a mix of Series A bets. I don’t think you can do purely Series A’s out of a fund that’s like 200 or $250,000,000. You’ve got to have a mix of bets. So the incubation bets are bets you take on founders who are basically the best in the world at what they’ve done. A good example, I think, was investing in a company. This was before Marathon, but with my Marathon partners, who were part of the Marathon, they led the round with Vinod, Vinod Khosla and Mickey Malkad Ribbit and a company called Lead Bank, which was my colleague Jackie Reese’s.

Yeah, I interviewed her. She’s amazing. What a So that was his inception round at like some crazy value I mean, very strong valuation. Not a crazy valuation, but a strong valuation because Jackie was Jackie, and she had built the bank at Square. She built this bank again. So you want somebody in an industry where they know the inner workings of better than anybody else in the world, and you say you back those people. And that’s a much, much better risk reward there. So you want to do a few of those in addition to you want to do a few incubation seed in addition addition to to CDs.

I think you’re doing that in some ways. I think every early stage firm, I think you’ve got to have proprietary founder access and access to founders and they you’re their first call when they go to start a company. And then you meet founders, you don’t know them before, you’re kind of betting on traction and so on. You’ve got to have a mix of both kinds.

proprietary founder access. What is proprietary is your ability to add value. And I think founders, you basically have to, I think, build If you’re just capital and assuming founders will come to you, you’re not going to win. But what you have to offer them is something. What you offer them is something very different and unique. What I offer them is something very different and unique. I think you’ve got to hone, as investors, what is it that we’re offering? Is it counsel? Yes, that’s free. Is it distribution?

You offer incredible distribution. Is it a network of customers that you can get them access to? Is it like talent hiring? What is it they can do? One of the most interesting firms, I think, which I like a lot, is a firm called The GP. The GP, basically, they work with companies to help them place their first few hires. I’ve been impressed, very impressed. Dan Portillo founded it, his job was sweat equity. He would basically work alongside you to place your first five engineers, to place your first biz dev people, and he would take equity instead of cash in exchange to create a fund alongside that.

That’s true value add, I think, for example, very differentiated.

They will not need it. I generally agree with Keith that on the margins, investors don’t add value and the value they add gets less and less as the company grows. But I do think there are a few points where a few things you can do on the margin, for example, helping them choose between this candidate or that when they’re hiring, helping them think about go to market, that could make a difference between the company being a mediocre exit or an outcome or being a generation company.

You don’t need to do everything for them, but just those one or two things that you can help on in on the margins can hopefully be the difference.

Very simple. Go and talk to the founders. Go and talk to the founders and see why they chose, especially the earlier stage founders. Go to the seed founders that they invested in and the inception stage founders and ask them, What was different? Why did you choose them? What other options did you have? I think you’ve got to use the data. You’re right. Most VC pitches look the same. What you want to do is dig one level deeper and talk to the founders themselves and understand, for each of the last five companies that they’ve invested in, why did this founder pick this firm?

two ways of operating. I’ll give you an example. Trade Desk, where I’m on the board, had two seed investors, AI Ventures, Roger Ehrenberg, who’s absolutely a GOAT, and then Founder Collective, again, GOAT firm. So they have two completely different philosophies. Founder Collective only does first checks. They never do any pro rata afterwards, period. Roger, on the other hand, doubles down again and again and again. So Trade Desk raised, I think, two or three rounds of financing. That’s it, and went public very early. It was very hard for them to raise financing.

So the multiple that Founder Collective generated was incredible because they only invested at the seed round, and they got it at $5,000,000,000 or something like that, or even more. Think they held for longer. And Roger generated a huge dollar return, even though his multiple was different. So there are two philosophies. My philosophy is more, if you look at Founders Fund, which I think is one of the best performing funds, a huge part of their success is basically doubling down on the companies that matter. The unsung hero founder fund is a guy called Napoleon Tarr, who leads the growth practice.

And Napoleon basically is the one who decides which of the companies should we double down on. And I think if you double down properly, it changes the complexion of the fund. Because you have much more insight. I would argue that if work closely with these founders, you have much more insight into these companies and how they’re going to do and even how they think about the future opportunity because you’ve thought about it with them than a random company you meet. Now, is a balance there. You don’t want to be over concentrated.

But I would argue that if you have x number of bets and you work with the founder and you think highly of them, that’s why each founder’s fund fund is named after the company that makes it, like in colloquial terms. There’s the annual fund, there’s a SpaceX fund, etcetera. Why? Because that one company is the one that makes it. And that’s the reality, Harry. Literally, you have one company, most likely, one or two companies that will drive most of the returns of any given fund. The question is, do you just want to have the initial stake?

Do you want to increase your probability of finding the initial company? There is an explore exploit thing. Where do you stop exploring when do you stop exploiting? So different people have different points of view there.

You’ve got to be thesis driven first and foremost. I think what we are is we think about what is the thesis. In other words, you’ve got to have a good sense of who the other companies are and players of in the space, and you’ve got to understand why this company is better than every other company. On what dimensions is it better, and is that durable enough over a venture timeframe, which is seven to ten years or even maybe ten to twelve years now? So you’ve got to do work.

You’ve got to be thoughtful and patient. Remember, what being concentrated does, it gives you more time. It gives you more time to meet companies. It gives you more time to think. It gives you more time to be helpful to companies. But you don’t feel the pressure to deploy on a monthly basis. If you look at a 30 portfolio fund over three years, which is the initial deployment period, you’re basically almost investing one company a month. So that’s incredible. I almost feel there’s pressure on the folks who do 30 to 40 to do basically one company as a partnership per month.

If you’re doing Green Oaks, I think if you were to ask me who’s one of my favorite, Neil, you mentioned Neil, who was on the show. Their seven funds have, what, 65 companies overall. Our six funds have 65 companies, 11 companies per fund.

I mean, just I think you’ve gotten better with every one of those interviews. I’ve seen just your style and just your investing. Who do you learn from? Entrepreneurs, most of them people in the arena. I think, for me, since I’m so trend driven and we really care about what is a thesis, what’s a market, the best way is, I think, you can talk to investors, they’re always one click away. You’ve got to talk to people who are in the trenches building products. You’ve got to understand what’s changing in their lives, how they’re thinking about the customer.

Today’s world, you’ve got to stay close to the model companies, for example. So I have people that I meet with at each of the model companies who understand what’s coming down the pike, how they are thinking over the world, etcetera. Because like you said, you’ve got to also understand, we always use a joke, this joke like this was ten years ago. If you’re a startup which is directly in Google’s roadmap, directly, you should not be building it. Because Google is very good when something is directly in the roadmap, they’re like a tank.

They will just roll over you. Slowly, but doesn’t matter. They were implacable. But if you’re even 10 degrees to the side, it’s very hard for them to move like that. You’re generally safe because they’re just rolling in one direction. I think you just want to know what direction the turrets or the guns are pointed at for each of these models. There’s one part of this is what the labs are going do. The second part is what a customer is going to do and what customer behaviors there are.

And so you want to talk to You do want to learn from entrepreneurs a little bit to better understand who are the companies, but then you want to go and talk to the companies themselves and you want to understand. You talk to three or four companies in the same space, you very quickly I think I’ll never forget, I think people who met Tony at DoorDash and many of the other folks who were fundraising at the same time, they always felt Tony had a deeper understanding of the same market than others globally.

That’s why I think my biggest regret is, one of my biggest regrets is actually passing on vanta because I met Cristina, but I had already committed. I was like, this person is going to win the market. But I’ve already committed to another company in the space. Sadly enough, believe in once you invest in a company, as an angel, I didn’t have the time to scan the landscape and meet with all the companies in this space. And that’s what I do now. I have time. But, you know, Vanta is will be definitely part of my Ante portfolio.

I think it’s part of yours too, if I remember correctly.

Yeah. As an angel, I used to hold till IPOs. So Figma had many liquidity opportunities during the years, but I kept kept holding it for thirteen years till it went public. I think at the IPO, it was actually priced very nicely. Unfortunately, after the IPO, it has been more challenging price wise. But I think as fund investor, it becomes interesting. I think there are two situations. One of the things I think most early stage firms get wrong is they just focus on MOIC, they don’t focus on IRR.

And MOIC is multiple invested capital. I think IRR matters a lot, as you know. An LP told us about a firm that gave them a 7x MoiC over twenty years, and that was a teens IRR. And that is like, Okay, there’s something crazy here. That is a venture firm. And so you’ve got to look at go forward IRR and your projection. If your go forward IRR at every liquidity opportunity is lower than what you are basically promising your LPs or what you think your fund should have, I think you should sell.

I think you have an obligation to LPs to at least sell. I like Fred Wilson’s strategy around selling, which is sell a third, hold a third, and trade a third. This is when the asset is completely liquid. But in this case, I think you want to sell at least part of it, especially if the asset is a company that will return a chunk of your fund. So if it’s going return 20%, 3040% of your fund, you owe it to your LPs to sell a piece of it, especially if the go forward IRR is not compelling.

Exactly. And you don’t have exactly. And that’s another uncertainty. So I do think the secondary markets have been one of the best or most interesting developments over the last few years. And so now, all these great companies have pretty liquid secondary markets where you can sell shares. Obviously, there’s Rofer and so on the company has. I do think there are these hyper liquid periods in the market. Now is one of them. So I do think one should be very careful and thoughtful about what the go forward IRR is for any asset one owns and really think carefully about whether one should sell or not.

Can

portfolio, what’s the biggest regret? Pattern matching too much. I think a good example is, Quince recently raised at $10,000,000,000 I saw Quince four years ago when it was at $100,000,000 valuation. And I was like a D2C company. D2C companies were kind of on the downswing. How good can this company be? What do you I literally just dismissed it. I didn’t even look deeper into the company. What was the takeaway from that then? The takeaway is that you can’t just take an industry and say it’s good or bad within every category.

There are great companies and there are mediocre companies. And you’ve got to understand each company’s remarkable differentiation. Quince, for example, had an incredible 35% to 40% repeat purchase rate, which was higher retention than most consumer apps. So I should have paid more attention to that versus just missing it. It was literally in the blurb, and I was like, okay, so what? How big can this get?

seed investor if you’re a pure seed investor, I think you have to do that. I think that’s what VC does. Right? I think that’s actually the right way to do pure seed investing. First Round Capital, I think, is one of the best seed firms. Guess how many companies they have in their pool each fund? 80 companies. Why? Because you’ve got to take 80 bets, which means that some of them and VC, of course, best seed investor of all time or pre seed. I mean, you’ve got to take hundreds of bets because most companies will pivot.

But I think as a consolidated portfolio, you’ve got to basically understand the business and you’ve got to bet on both the business and the founder, unless the founder is an N of one founder in a space. Actually, there’s three categories of founders in some way. There are repeat founders who know a space exceptionally well, who’ve done it before. You’re betting on them again and again to do it. Security is a great example. Security is full of repeat founders. They know the market. They know the customers, all of that.

But then there are consumer companies. Consumer internet is full of first time extraordinary founders. Mark Zuckerberg, Larry Page, all of these are just first time founders. So those are two archetypes. The third archetype that has come up is AI labs researchers. And so I think that one is a more interesting bag where you have, of course, Dario and the OpenAI folks. But then you have a bunch of other labs that came up and ultimately didn’t turn out to be anything. So for these kinds of folks, you, as a seed investor, you just want to blindly write a check into them, a brilliant young person who’s done something extraordinary, a repeat founder, or maybe an A lab researcher.

Not possible. I don’t think with our fund it’s possible. I think the ownership is just literally, the first round for these companies is, like you said, a billion dollars. So I think it’s just too high a the risk reward is just not worth it.

They are playing a different game. I think very highly of the mega funds. They’ve basically gone, and they deploy $15,000,000 checks almost as an option and a lead generation for the next round. And their strategy is obviously to have an index at the A of every single good A company, and then double down on the ones that truly matter, and triple down and quadruple down, and do SPVs in them, and do specialized funds in them, and so on. It works. It works for LPs in some way.

It’s a different asset class than the funds that the early stage funds. But it’s different. I think smart founders, good founders have started to look beyond just the fact that they can get 10,000,000 very quickly from a mega fund and say, What am I getting here? We see many examples actually in mega funds of partners leaving the fund and the company’s orphaned within the mega fund because their partner has left and now they don’t have a single person to advocate for them in any way, shape or form.

They’re adrift. And anybody who saw repeat founders actually, what is interesting is repeat founders are most likely to essentially know and see behind just the glitz of a mega fund in some ways, because many of them have gone through, especially the ones that have started the company in the last five or six years. We have many stories where the mid level partner at a mega fund has left, was who their partner. And then they are like, Okay, shit. I basically don’t have an advocate in the fund.

And I now am left with a person who I don’t know. And they don’t know me, and they’re joining my board. And that’s a tough one.

I think we are going to see a more spinouts. I don’t I do think there is a limit. We’re going to see these mega funds train again more waves of investors, and these investors are going to realize that being a mid level partner at a mega fund is not what all it’s cracked out to be. So they’re going to spin out and go back to the way of doing things that venture used to be twenty, thirty years ago, which is a small group of partners building deep relationship with entrepreneurs.

to think pure remote would, would scale for early stage companies if you had the right culture, but I don’t think that anymore. I think you’ve got to be in person at least a few days a week. What made you change

I think just seeing a few companies where literally the companies died because the founders were unable to agree. They had everything going, but the founders were just not in the same place and they were just not able to move fast enough and agree and align on the strategy and change things. Iteration speed just suffers massively if you’re a pure remote. It doesn’t need be five days a week, but at

three days a week.

I know it feels exciting to start a company. Everyone’s doing a startup. AI is a new way. But my strong advice is to first get two to three years of work experience at a company, at a good company. You won’t regret it. You’ll learn a lot. Both the experience and the network of people will be invaluable for you. So just two or three years, don’t be impatient. Life is long. Work gets a work experience before starting a company.

First on capital and benchmark where I win l I win an LP in both and then Green Oaks. First on would be the seed, benchmark with the Series A, and Green Oaks would be the would be the growth.

people are

do it. LPUs asked us this question. They basically said I don’t know whether they were asking us for it. They literally asked us, okay. What’s this? So I I’ve actually answered this question with LPU before.

Leaving Google. Leaving Google, I think. There was a saying, you leave Google only once. So leaving Google to start a company. I was on a pretty incredible trajectory there. I was learning a lot, really enjoying it. It was really tough to leave Google. I don’t regret it, but it was very, very hard to leave Google. Who’s the best CEO you’ve ever worked with? I think they’re all different. I would say all four of them, Larry, Mark, Jack, and Tony, and now Brian Armstrong, Bill and Ben at Pinterest, it’s a hard one.

I think all four of them are different superpowers. I would say the best technical CEO, Larry Page the best growth centric CEO, Mark Zuckerberg the best Design Centric CEO, Jack Dorsey, and the best Physical World Operational CEO, the most likely to be Jeff Bezos. Next, Tony Hsu. What’s the biggest miss? We’ve said vanta. Is it vanta? Quins. Quins, man. Most recently, quins, but to be honest, even bigger miss than that in some ways. It’s not a miss in terms of investing. It’s that I couldn’t predict if Facebook could be a $2,000,000,000,000 company.

When our company was going to be acquired by Facebook, I was arguing with the corp dev team at Facebook and we were arguing over the terminal value of Facebook. And we had to put China into the mix saying, this is going take China, will get us to $40,000,000,000 in market cap. And we were arguing whether it was $20,000,000,000 or $40,000,000,000 in several years from then. This was in 2010. And it turns out in less than ten years, eleven years, it was a trillion dollar company. So when these things work, they work in a scale that is unimaginable.

And even at Google, I remember very well after the IPO, I was there during the IPO, and we were sitting around with a bunch of PMs. They were saying, man, the company is valued at $30,000,000,000 It’s too expensive, too expensive. And so you just these things compound. It’s just incredible to see these things become trillion dollar companies. So Facebook and Google, in some ways, the biggest misses in terms of not being able to predict that they were going to be multi trillion dollar companies.

Five of between 500 and a thousand x at the time of IPO, but it has sadly gone down since then.

most ambitious entrepreneurs are finally tackling the hardest problems. The ambition with AI especially has unlocked is just incredible. The ambition of entrepreneurs tackling the hardest problem facing humanity and society is just absolutely incredible. How can you not be optimistic when you have Elon going? I mean, I think we have now these entrepreneurs who are role models who are not just building these small companies, but they’re truly taking on humanity problems. So the answer to Peter Thiel’s question of we were looking for flying cars and we got one forty character apps, I think, has been it’s finally, I think, coming it’s coming into focus.

actually am a huge fan of it. I I feel even at companies, I feel some of the companies that are not hiring young people, they’re making a huge mistake because young people are more AI Maxed, as you could call it, like, Maxing, AI Maxing, than anybody else. The younger people are adopting tools better and they just live and breathe differently than others. So I’m a huge fan. I’ve actually invested in more dropouts as an angel now over the last few months than I have invested in the rest of the last fifteen years I’ve been investing.

So I don’t think it’s the right thing, to be honest, for many of them to be dropping out and starting. I do think they could benefit socially, emotionally, etcetera, but some of them are just exceptional. I don’t think all of them are, but I do think this crop is going to produce some incredible founders.

forward to doing stuff together.