00:39:05 · Alex Immerman, John Somorjai
[00:39:05] S1: And do you think so much of it is a result of just like power law thinking? Like, you know, Anthropic is likely to go out at a valuation north of 1,000,000,000,000, let's just say, obviously SpaceX at 2,000,000,000,000. Those companies grew to those valuations in, you know, certainly in Anthropic, and then OpenAI's case in a relatively short period of time. Right. [00:39:27] S0: And those are generational companies. Absolutely. They're very rare. And when you when you find one of those, they're amazing. And that's why we invested in six rounds of Anthropic. Mhmm. Because it was clear it was clear from the first meeting we had with Dario and Daniela that these were special people. They were some of the most brilliant minds we'd ever met, and they were going to build something great. And so from that vantage point, it made sense to keep investing. But those companies are rare, and I see a lot of sort of mediocrity in in in entrepreneur... Entrepreneurs and their ideas that are not going to become those generational companies. And they shouldn't be commanding the $10,000,000,000 plus valuations, but yet they get them. And so that's where I I feel like a little bit more discipline is warranted right now.
00:39:27 · John Somorjai, Alex Immerman
[00:39:27] S0: And those are generational companies. Absolutely. They're very rare. And when you when you find one of those, they're amazing. And that's why we invested in six rounds of Anthropic. Mhmm. Because it was clear it was clear from the first meeting we had with Dario and Daniela that these were special people. They were some of the most brilliant minds we'd ever met, and they were going to build something great. And so from that vantage point, it made sense to keep investing. But those companies are rare, and I see a lot of sort of mediocrity in in in entrepreneur... Entrepreneurs and their ideas that are not going to become those generational companies. And they shouldn't be commanding the $10,000,000,000 plus valuations, but yet they get them. And so that's where I I feel like a little bit more discipline is warranted right now. [00:40:18] S1: I I agree that in certain pockets of the ecosystem that exists, I think part of my optimism comes from, like, what a top 1% outcome was ten years from ten years ago is very different from what a top 1% outcome is today. Even on the M and A side, you mentioned Wiz earlier, Cursor. So, there have been these larger outcomes that drive the returns for the ecosystem at large.
00:40:18 · Alex Immerman, John Somorjai
[00:40:18] S1: I I agree that in certain pockets of the ecosystem that exists, I think part of my optimism comes from, like, what a top 1% outcome was ten years from ten years ago is very different from what a top 1% outcome is today. Even on the M and A side, you mentioned Wiz earlier, Cursor. So, there have been these larger outcomes that drive the returns for the ecosystem at large. [00:40:46] S0: Definitely. And I, you know, and I'm an optimist. I could not do my job if I wasn't an optimist. But, just know that I see the thousands of companies every year that don't make it. Because they all come to us to try to be acquired. And so we we see we see that part of the industry that you know, you don't read about in the press. The press doesn't like to cover those stories. And so it's just an important fact when an entrepreneur is thinking about raising money, what's the right evaluation, what's the appropriate way to build this business, you know, they have to think about all of that. [00:41:23] S1: You've been involved in some of the largest enterprise software transactions. Sometimes those deals go south and don't happen. What kills deals?
00:41:35 · John Somorjai
[00:41:35] S0: I think when when you go through the diligence process, first of all, it's really important that you're ready and you're organized so that the data is flowing. And it doesn't look like you're having trouble getting access to data. I think one of the things that we found is a lot of times customer... Companies don't have strong controls over their financials or they don't have data on their customer contracts. They don't really understand what customer attrition really is. And I think one of the one of the mistakes that a lot of founders are making these days is they focus on one metric alone, which is ARR. And ARR is a wonderful metric, but it masks attrition. And you... It's really important that you think about what what is the... And that you understand the attrition of your customers and you do something about it. Because that is when you meet with a company that has very high attrition, that usually means that there are a lot of not just unhappy customers, but there might be some product quality issues as well. And so it is one of the big red flags that we look for. I think another area is how are you handling your data privacy? How are you handling your security? So security is the one function in all... Have 14 functions that we work with on all of our diligence processes. And security is the one function that can hold hold up the red flag and say, I'm killing this deal. And so if you have built your technology stack where it's easily open to hacking, that's gonna be a real problem for us. And so what you also wanna do and be prepared for is try red teaming your technology stack and see what happens before you go into diligence. Because we're gonna do our own penetration testing and find the problems and you definitely want to identify the vulnerabilities before we do. But so, know, nothing nothing goes better in a process when a company is totally buttoned up, when they have all their data accessible, when their tech is secure, then the diligence process moves really really rapidly and we can get through it quickly and painlessly. But when they don't, that's when, you know, deals can die.
00:44:00 · Alex Immerman, John Somorjai
[00:44:00] S1: Is there an example at the eleventh hour of a deal not going through? Of course, you can't name names, but like, maybe a painstaking anecdote for you or for the founder. [00:44:15] S0: I think that it usually doesn't happen at the eleventh hour, but it'll happen, you know, after the term sheet is agreed, and you've negotiated you've negotiated price and and and the major terms of a deal, but then you get into the deep diligence process. You know, we we have we have found problems where... One example was we were when we did the pen test, we were able to not just access all their source code, but even get into the CEO's laptop and get information about their employees. And so it was all [00:44:53] S1: When you shared that back [00:44:55] S0: And we shared it back, of course, we always share back what we find and try to help them fix the problems. But it was so bad, like some of the worst that we'd ever seen, that it was unrecoverable. We've had other, by the way, security incidents that are recoverable, and you can identify sort of what are the p zero problems, p ones, p twos, and have as a condition to close... Or maybe it's a condition of signing even that we won't sign until these are fixed, we won't close until these other others are fixed. And so it all depends on how bad it is, but you gotta have your house in order when you go through one of these processes.
00:44:55 · John Somorjai, Alex Immerman
[00:44:55] S0: And we shared it back, of course, we always share back what we find and try to help them fix the problems. But it was so bad, like some of the worst that we'd ever seen, that it was unrecoverable. We've had other, by the way, security incidents that are recoverable, and you can identify sort of what are the p zero problems, p ones, p twos, and have as a condition to close... Or maybe it's a condition of signing even that we won't sign until these are fixed, we won't close until these other others are fixed. And so it all depends on how bad it is, but you gotta have your house in order when you go through one of these processes. [00:45:32] S1: Makes sense. There's an amazing photo of you and your mother online, representing your father in 2023 for his Feremy Award. Your father was an extraordinary figure. He, you know, survived the Holocaust, fled Europe, you know, came here and had an incredible scientific career at Berkeley. Would love to just close with your experience growing up with your father, what he thought of your career, you know, how he shaped you. [00:46:12] S0: Well, my father wanted me to be a chemist, to be clear. He founded [00:46:17] S1: You came pretty close.