The Exchanges

Q of funds that, you know, like KP, that there's now funds that are, like, effectively, like, four or five times larger, and then these sort of crossover funds that are getting involved, and are you seeing more Like, do traditional venture funds like KP ever try to sell into these rounds that are intended more for, ah, employee liquidity? Is that a potential future if companies are just staying private?

A Yeah, I think we're, we're just now in the early innings of this. Um, but we are a hundred percent starting to see it. We, we certainly have not done like a, a continuation vehicle. Um, is, is kind of like the most common term for this, like a CV where you can sell essentially like a slice of your fund. Um, cause you know, commonly venture funds have like a tenure life. And then sometimes you can have an option for like two years of extension. And then after that, you're kind of supposed to be, have the capital returned and like everyone can move on with their lives. Um, hopefully, hopefully much richer for it. Um, and, uh, and, you know, SpaceX has been a private company for what? 20 years now. Um, you know, over 20 years. Um, and so I think the, the most common vehicle for this would be a con, uh, a con, uh, a CV, um, where you sell either like a bundle of company, like a slice of your holdings or like a slice of your fund. And you're starting to see that like several funds have done that. I think, I think NEA Um, has, has, has done it in the last year or two, and you're seeing more funds do it. We certainly haven't done that before, but I think as an asset class, we're going to have to start coming to grips with the fact that the liquidity timeline for these amazing companies is very different than it used to be. Um, and it's actually, um, really flipped on its head because …

AI assessment note: “we're just now in the early innings of this. Um, but we are a hundred percent starting to see it.”

Q Uh, do you think it affects tech? Do you think it affects any of the, I mean, like immediately the reaction was like all the, all the NASDAQ was way down, but at the same time, like even semiconductors were, you know, on day one kind of excluded. Uh, was there, is this something that all founders should just tune out or is there something here to pay attention to?

A I think, I think it's, it's probably both, right? Like I think, um, I think Mike McDonald from, from Lightspeed had a good tweet, um, or post today or yesterday where, uh, he was like, I'm getting a lot of questions from maybe it was LPs about the tariffs. Um, and they have to, to realize, you know, I invest in companies that aren't going to exit for seven to 10 years. And so there's like something about the like duration of the asset class where, um, you know, something like economic turmoil that happens today If you're investing in the venture asset class, isn't going to necessarily impact like your, your exit because ultimately the founders and the board and the management team have some control over when they exit. Um, and so you, you can kind of theoretically wait a little bit for, for a better environment to, to either IPO or sell or whatever you want to do to get liquidity. Uh, I think at the same time, um, the, the like underpinning, like the undercurrents of what's going on, um, uh, especially politically. Are immensely relevant for, for startups and tech, like obviously everything around Taiwan and just like semiconductors generally. Um, and, and if that escalated, how bad it would be for not only technology companies, especially in AI, but like just our day-to-day lives. Like I think our day-to-day lives would, would pretty much come to a halt. Um, and, and I don't t…

AI assessment note: “I think it's, it's probably both, right?”

Q We're not going to touch it. But what's your, what's your kind of read on, on that situation?

A Yeah, I think, I mean, obviously before, before this all kind of blew up, obviously it was unfortunate that there was like, you know, four or five IPOs kind of on the shelf, um, ready to go right when this blew up. And so, so it seemed like, ah, you know, we were, we were opening things back up and then, uh, immediately some black Swan event happened and it kind of shut it back down. But for, for, you know, uh, like a full almost nine to 12 months before that, it was a solid environment. It wasn't, you know, IPO-ing in 20, 21, um, where, where you could go and, you know, SPAC for 50 times ARR or something, but it was not a bad environment, and I, like, I kind of have a slightly orthogonal take on the IPO window, which is, there's this kind of, like, rock and hard place situation for the IPO market, which sums up to, like, one, Do the IPO markets want you? Um, but then also just as important, like, do you want the IPO markets? Um, so on the first one, I went and counted this morning the number of public software companies on, um, you know, the Meritech kind of software comparables index that they run, um, that currently have over five hundred million dollars in ARR, um, which is like an incredible achievement, and right now there are over 80 public SaaS companies that have more than five hundred million dollars of ARR.

AI assessment note: “I kind of have a slightly orthogonal take on the IPO window”

Q So what's the bull case for, for software? What's the bull case for SAS? What's the bull case for AI slopcos?

A Look, so to, to quote the godfather Neil, Neil Mehta himself, the laws of great businesses are the laws of great businesses. The job of a business in a capital society is to maximize and find the efficiency frontier for three things. ROIC, AKA return on invested capital, the amount of capital you can actually deploy, and how long you can deploy that amount of capital at and above market ROIC. There's a lot of different framings for the paths to do this and how companies can actually do this. The one that people like in tech circles is Hamilton Hemler's Seven Powers. A company accumulates power in the form of scale economies, network effects, uh, whatever, whatever power you want to take, and then uses that power to produce above market ROICs for as long as possible, and with as much capital invested in the business as possible. There are great atoms-based businesses that do this. There are terrible atom-based businesses that don't do this. There are great digital businesses that do this. There's great, or there's terrible digital businesses that don't do this. Um, I mean, you want to hear of a great atoms-based business that does this, listen to the Acquired Pod on Costco. Like, it's certainly not like a atoms versus SaaS thing necessarily. The advantage that digital businesses have is that in, like, in this process of producing above-market ROIC for a long time is that their p…

AI assessment note: “forms of power that naturally lend themselves to digital products”

Q I guess, uh, Everett, how are you, uh, how quickly, like, how much should people be fixated on the cost per token with these frontier models over the next six months? Like, how, how long can, can, uh, Venture capital sort of like backstop these, uh, chain losses.

A Yeah, I think that the, the way to delineate, um, the whole, so, so obviously like, I think there was this, um, kind of consensus narrative that like every, you know, 12 to 18 months, token costs were going down in order of magnitude. And I think that did hold for a while. I think what you've seen now is like actually for frontier models that started to peter out a bit and like pricing has actually started, it's still going down. It's not going down nearly as much as it, as it used to. Um, when, when, like when, when we were kind of in, in the, In the, like, the meat of the curve of, of capability improvements on Frontier LLMs, um, uh, in terms of, of pricing curve. So I think that the way that you want to delineate it is, like, there's a certain, like, what I always tell everyone is that, like, there hasn't been a ChatGPT query since GPT-IV that, like, my mom hasn't been able to ask and have it answered by the model. Uh, so there's, like, the mom test of models where, like, there's a growing subset of tasks, like, economic or knowledge tasks that the models are tasked to do. That no longer need frontier intelligence. And when you're not on the frontier, um, either through open source or just the, like the, the, the cheapening and distilling of, of older models, like the price still falls off a cliff. Sure. There's going to be a very, very large set of tasks that models do that…

AI assessment note: “for frontier models that started to peter out a bit and like pricing has actually started”

Q really? 21. You dropped playing different games or why Tiger is eating your lunch and your deals. Uh, this cycle, it feels like we haven't, no crossover funds have really made a name for themselves, but at the same time, Databricks is doing bigger deals than ever. There must be new pools of capital coming in. What does the late, late, late stage look like, and how is it changing?

A Yeah. So it's funny. I actually dropped a sequel to playing different games, like very quietly. I initially wrote it in 20, 22. And it was one of those things where like, I think it's like solid, but it's just nowhere near the banger that playing different games was. And so I had a lot of like sequel anxiety about it. And so I just like, kind of like quietly put it out there. Cause I'm like, I like it. My thoughts should probably be out there. Um, but it's called game over question mark, and you can go read it on my sub stack. And I think it's held up pretty well since I wrote it in 20, 22. And I think the, like, overarching message from that, um, and I use a Game of Thrones analogy in playing different games, so I'll use one for this too. Um, there's, like, you know, there's a part in Game of Thrones where, you know, spoiler alert if anyone hasn't watched the show, where, like, Roose Bolton for a while is this, like, lord who's kind of, like, one of the big bads, he's one of the main bad guys, and he gets killed by Ramsay Bolton, his son, and then you realize, like, oh my god, this guy is, like, so much worse, and it's, like, he has, like, The scope of his destruction is like so much greater than like this guy was actually kind of a pedestrian bad guy. And I think the kind of version of that that happened to our asset class is that, um, obviously people saw Tiger kind of fail …

AI assessment note: “I think the kind of version of that that happened to our asset class is”