Saam Motamedi: Why Series B Won’t Make Money & Why $1M ARR is a BS Milestone for Series A | E1177

AI Investment Landscape

• The current AI investment landscape is experiencing a valuation bubble driven by corporate investors seeking partnerships and cloud credits.
• While some AI companies show explosive revenue growth, concerns exist about the long-term sustainability of their revenue streams.
• Despite market conditions, focusing on fundamental market dynamics, product-market fit, retention, and defensibility is crucial when evaluating AI investments.
• Differentiating between multiple players in specific AI spaces remains a challenge for investors.

Investing in AI

• Investing in AI at the application layer is not fundamentally different from traditional software investing.
• Success lies in identifying companies with strong founders, a clear product vision, unique distribution, and defensibility.
• OpenAI's capabilities are impressive, but focused applications built on top of large model capabilities offer greater opportunities.
• The foundation model layer as a standalone investment is less exciting due to uncertain sustained competitive advantage and margin potential.
• Tight integration between the model and the application is crucial for certain use cases like personal agents, horizontal enterprise agents, and code generation.
• Hybrid pricing models combining per-seat pricing with additional monetization based on work performed are predicted.

Future of Software Delivery

• Deep systems of record for important horizontal functions still present significant opportunities for SAS companies, challenging the notion that businesses will build their own software for most use cases.
• The future of software delivery is shifting towards pricing based on usage rather than just seat-based licensing.
• AI-powered agents will dramatically change the user interface for enterprise applications, assisting users and navigating systems on their behalf.
• Generative AI has the potential to disrupt large horizontal application companies by offering alternative data models, delivery models, and pricing models.

AI's Impact on Pricing Power

• It is still uncertain whether AI will lead to increased pricing power for software companies, but indications suggest it could enable companies to replace elements of work and thus increase their value to customers.

Startup Valuations

• Seed and Series A pricing for AI startups varies widely, but high-quality teams building companies in secular areas typically have seed pricing between $20 million and $40 million post-money and Series A pricing between $80 million and $200 million post-money.
• Despite high valuations, this pricing is considered rational given the power law dynamics of the startup ecosystem.
• Expensive seed rounds can be less risky than perceived, especially when investing in teams with a proven track record.

Investment Strategies

• Adequate ownership (20-25%+) in early-stage investments is crucial for meaningful influence and control.
• Giving founders more capital early on can be beneficial if they have the right orientation and mindset.
• Founder dependency emphasizes the need for strong relationships before making investment decisions.
• Signaling is not a significant threat to companies, and a strong brand like Greylock can help secure subsequent funding rounds.
• Evaluating companies on their own merits, regardless of previous funding rounds, is essential.
• Prioritizing the right fit for the company over ownership percentage when leading rounds is important.
• Seeking additive investors who can bring value to the board and the business is beneficial.
• Maintaining a relatively high percentage of the fund in reserves for both offense and defense is prudent.
• Questioning the use of ARR as the primary filtering mechanism for Series A investments, emphasizing the importance of founder quality and market potential.
• Embracing contrarianism by investing in unsexy businesses or competitive situations where they believe strongly in the potential.
• Greylock invests in companies with repeatable product-market fit and deep conviction in the market and founders, even if it means taking risks that others are not willing to take.

Greylock's Investment Framework

• The framework for investing at Greylock is consistent across different stages, but they pay more attention to market dynamics and whether it supports a new company as valuations increase.
• Greylock is more likely to invest in a founder they believe is iconic, even if they don't love the market, but they are more cautious about this at later stages.
• The growth round market is not dead, but Greylock sees a different battlefield where early-stage platforms with massive growth funds are competing for a smaller set of companies, leading to exuberant pricing.
• Greylock believes that the series B asset class as a whole may not perform well in the current vintage unless public market multiples re-expand or growth durability improves.
• Greylock emphasizes the importance of independent thinking and not blindly following the "play the game on the field" mantra, as it can lead to costly mistakes.

Lessons Learned

• Some of Greylock's biggest mistakes have been when they met iconic founders but didn't like the idea, and when they invested in amazing founders but the market was wrong.
• The speaker reflects on two missed investment opportunities: Glean and Codium.
• Recognizing exceptional founders and adapting investment strategies accordingly is crucial.

Sourcing and Talent

• Sourcing is considered the most challenging and crucial aspect of venture capital, requiring staying relevant and identifying new entrepreneurial pockets.
• Young investors should focus on the firm's success rather than personal advancement and develop a unique approach to finding the best talent.
• Entrepreneurs ultimately choose which venture capitalists to work with, so investors need to offer something valuable, such as expertise, brand recognition, or distribution networks.
• A thoughtful young investor should build a lane for themselves by becoming an expert in a specific field, which enhances sourcing and increases the chances of winning the best investment opportunities.

Supporting Companies

• Investors can help companies in the pre-product market fit stage by providing valuable insights and feedback.
• Elad Gil is a highly respected venture investor known for his outstanding thinking and ability to support companies across all stages.
• The most memorable first founder meeting was with Anker Gual, the founder of Brain Trust, who demonstrated a clear vision and understanding of the market.
• Incubations often don't work because firms take too much of the cap table, there's negative selection bias, and they can't provide effective help.

Notable Quotes

• "The future of software delivery is shifting towards pricing based on usage rather than just seat-based licensing."
• "Deep systems of record for important horizontal functions still present significant opportunities for SAS companies."
• "Sourcing is considered the most challenging and crucial aspect of venture capital."
• "A thoughtful young investor should build a lane for themselves by becoming an expert in a specific field."