Invest Like the Best with Patrick O'Shaughnessy
00:00:00 · Patrick O'Shaughnessy
[00:00:00] S0: Ramp is the only platform built to make your finance team leaner, faster, and better, saving businesses 5% annually on average so you can stay focused on growth. Ramp customers grow 3.2 times faster than the average American business. Visa, Vercel, Cursor, Stripe, and 70,000 other businesses all run on Ramp. Mine does too, and so should yours. Learn more at ramp.com. Rogo is the AI platform purpose built for financial institutions serving tens of thousands of bankers and investors at hundreds of leading firms worldwide. Rogo's AI agents autonomously execute large chunk of your firm's workflows. They can screen deals, draft sims, run buyer outreach, and due diligence on data rooms, all with full security and compliance handled. Every action feeds Rogo intelligence, the firm's context layer, turning years of deal experience into a secure, governed institutional memory that makes each new transaction stronger than the last. To learn more, visit rogo.com/invest. OpenAI, Cursor, Anthropic, Perplexity, and Vercel all have something in common. They all use WorkOS. And here's why. To achieve enterprise adoption at scale, you have to deliver on core capabilities like SSO, SCIM, RBAC, and audit logs. That's where WorkOS comes in. Instead of spending months building these mission critical capabilities yourself, you can just use WorkOS APIs to gain all of them on day zero. That's why so many of the top AI teams you hear about already run on WorkOS. WorkOS is the fastest way to become enterprise ready and stay focused on what matters most, your product. Visit workos.com to get started. One of our mutual LPs describes you as the person from whom he learns the most per minute about what's going on in venture markets when he talks to you. And we're kind of trying to recreate that here today and really focus on not big picture stuff, the history of abstract, etcetera, which we did the first time, but really just like zoom in on this moment in time. How would you describe the state of things right now, like zoomed all the way into the deal level here around San Francisco?
00:02:09 · Ramtin Naimi
[00:02:09] S1: It's very fast paced, insanely fast paced in the sense that rounds are happening quicker than ever. Follow on rounds are happening quicker than ever. There are certain companies that just get a lot of attention very early in their life cycle, and they get a lot of demand for their financing, whether it's their seed or their series a or their series b. There's a handful of firms that those founders wanna raise capital from and those guys get preferential pricing, which is really tranche number one. And there's a bunch of VC firms that lose that deal. And historically, the VC firms that lost the deal would say, okay, we'll maintain a relationship. We'll put in a small check or something to maintain that relationship. And as the thing performs, we'll do the next round. And in 2021, you have the fast follow, which was a couple weeks later, they would raise a two x evaluation from one of the people that lost that financing. But in this market, it's like, okay, we lost this round, but we don't wanna wait for the next round. What do we need to pay to get into this financing today? And it's usually not two x. It's usually like three to four to five x happening in tandem with the primary. And that's the secondary tranche which has become known elegantly in Silicon Valley as the cuck tranche. But the thing that's interesting is these companies are so capital intensive that they actually need that level of capital, and they don't wanna raise all that in that primary tranche. So I don't think that tranching is a thing that's an unhealthy sign of the market. I think it's actually a necessity of these types of companies and the environment that we're in. Sometimes you get into the early tranche, other people get into the second tranche, and sometimes you're the one getting cocked. So like, think anybody who tells you they've never gotten cocked is completely bullshit. Everyone's gotten cocked once or twice at least. And anyone who says otherwise is lying to you. Things like that are happening. You're also having people running around like chickens with their heads cut off, trying to just keep up with the market. Throwing out offers very, very quickly. And then you're also seeing some bad behavior where people are changing those offers quickly after the fact or pulling those offers.
00:04:00 · Ramtin Naimi
A lot of things that are somewhat reminiscent of 2021 in that sense, but the other things you're seeing is the pace at which things are moving kind of makes everyone feel like they need to do something to stay ahead of the curve. In this market, getting markups is the bare minimum requirement to be keeping up. So to the point where markups don't even feel like good anymore. Markups just feel like you're keeping pace with the state of the market. Once every three weeks, you have something happen in your portfolio that makes you feel pretty good and you're like, okay, cool. I'm doing really, really well in this market. Then the subsequent three weeks, you see things happen to companies that you're not in. Then you're like, holy shit. I'm falling behind once again. You see the pace at which things are happening. You're seeing exits that are the largest in history happen, and then it's news for, like, two days and people move on to the next thing. So I'd say the pace at which things are happening is not unprecedented because I think the similar pace happened in 2021. I think the pace is more healthy today because, know, there's real value creation. These companies are doing truly amazing things. I do think the thing that's a little misleading about this market is the story behind the revenue with all these companies. You do have companies growing 10, 15, 20 year over year. But I think any company that's growing at that rate has something interesting about their revenue. It's not a clear, clean, pure play SaaS revenue, 90% plus gross margins, annualized recurring revenue contracts. They all have something that's either ridiculously high growth but very low margins. Either low margins or negative margins. Ridiculously fast growth but really high customer concentration or annualizing revenue because they're selling data and whatever their revenue was last month, they multiply by 12 and that's their annualized revenue. Or it's consumer based revenue and not enterprise based revenue or it's usage based revenue and not contractual rhetoric. So there's a lot of that and I think that could be somewhat discouraging to founders whose companies aren't growing that pace when they see those numbers and they think like, oh my god, I'm completely left behind.
00:05:50 · Ramtin Naimi, Patrick O'Shaughnessy
But I think if you peel back the layers and you start looking at it, you need to actually compare your revenue growth companies within your style of company versus the absolute top line figures. You have data labeling companies growing at insane rates with their margins of 15 to 20% because getting that data is expensive. You have other companies that are reliant on foundation model providers to power their products, and all of the margin goes to the foundation model companies. But the cool thing that you are seeing is that these margins are improving at really rapid clips. Anthropic were 85% in [00:06:19] S0: the first half of this year, they said.
00:06:19 · Patrick O'Shaughnessy, Ramtin Naimi
[00:06:19] S0: the first half of this year, they said. [00:06:21] S1: We have companies in our portfolio that are gonna grow 200 to 700 this year, but their margin profiles are going from negative 15% to positive 35%. So you're getting massive revenue growth and margin growth simultaneously. And then you have other companies that are like vertical SaaS businesses that are getting 100 x revenue multiples. And then you look at that and people are like, well, how do compare that to the public markets when the SaaS multiples publicly are at 13 x revenue multiples? And you look at these and you're like, well, are these actually SaaS businesses or are these labor replacement businesses? And then some people don't buy the labor replacement thesis, but the way you actually kind of have to believe in it is these companies are still growing five, seven, 10 x year over year even at, like, the massive scale they're already at. I haven't seen them actually start to replace labor yet. But the pace at which they're growing, you know, if you look at companies that sell to law firms, you look at the total amount of money that law firms spend on software every year, and you're like, oh, these companies can't be that big, actually. But you look at how much money that these law firms spend on paralegals every year, and you're like, oh, that's actually a really big number. So if these companies can capture 20% of that, the scale of it [00:07:17] S0: doesn't actually work. [00:07:18] S1: So the math starts to really, really work.
00:07:18 · Ramtin Naimi, Patrick O'Shaughnessy
[00:07:18] S1: So the math starts to really, really work. [00:07:20] S0: If you were to compare this to 2021, which you lived through and were very active through, obviously, two very euphoric, frothy seeming markets, what are the most notable differences and similarities?