🎧🍌 Benchmark's Chetan Puttagunta on the Past, Present, & Future of Software
Inside the $2.5B Manus acquisition, lessons from cloud companies beating on-prem competitors, why software incumbents should be making big AI acquisitions, and inside Benchmark's current strategy
Chetan is a human encyclopedia of software markets, and I convinced him to talk to me for 90 minutes about the past, present, and future of software.
We get into his recent investment in Manus and its $2.5B acquisition by Meta, how cloud companies beat on-prem incumbents, how the same thing is playing out again in AI, why he thinks the cloud incumbents should be making big AI acquisitions today, how public market investors are begging for AI companies to go public, and go inside Benchmark’s current investing strategy and what they look for in founders.
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Timestamps to jump in:
0:08 Inside the $2.5B Manus acquisition
6:24 Manus' three main use cases
11:08 Taking heat on Twitter
15:10 Starting to tweet about software in 2018
22:50 The history of application software
29:15 Benchmark’s 25x Fund 7
31:33 SaaS incumbents got too dominant by 2020
31:48 Going all-in on AI software in 2022
39:31 Benchmark didn’t invest in the big AI labs
40:48 How cloud companies beat on-prem competitors
44:33 Why AI companies will beat legacy cloud competitors
50:04 Software incumbents should make big AI acquisitions
57:35 Why incumbents have not bought more AI companies
1:04:43 Public markets are starving for AI companies
1:10:14 Inside Benchmark’s fund strategy
1:14:14 Benchmark’s history of non-traditional VC rounds
1:17:56 Is the 20% ownership model outdated?
1:19:20 Chetan’s rebirth as a consumer investor
1:22:39 What Benchmark looks for in founders
1:25:01 AI coding and AI software gross margins
Referenced:
Find Chetan on X / Twitter and LinkedIn
Related Episodes
👉 Stream on YouTube, Spotify, and Apple
Transcript
Find transcripts of all prior episodes here.
Turner Novak:
Chetan, welcome to the show.
Chetan Puttagunta:
Thanks for having me.
Turner Novak:
I want to jump right in. First thing on the docket, so you’re coming off, you invest in a company called Manus.
Chetan Puttagunta:
Yes.
Turner Novak:
And I saw your partner, Eric, who I had on the podcast this summer. He tweeted something about, it was 1,000% IRR, something, I forget exactly what he said, but it was like, “Oh, that’s a pretty big number.” What’s the story behind Manus?
Chetan Puttagunta:
Absolutely. And you had a great episode with Eric too. Manus was just one of the unique consumer AI agent products that really spiked. And obviously, the Meta acquisition has been announced, and it was an incredible journey to be on that product journey with that team. They’re just, the six founders, which is a large group of founders. But I think that seems to be a theme in AI, which is to have a lot of founders.
Turner Novak:
The more founders, the better.
Chetan Puttagunta:
Yeah.
Turner Novak:
So if I meet someone 10 with co-founders... instant check.
Chetan Puttagunta:
That’s right. Are just some of the most resilient, brilliant and kind people that you’ll meet. And the story really starts with, these dates are directionally accurate, if not precise. But first week of March, they posted a YouTube video with a demo of Manus. And I saw it in the first couple of hours of them posting it. Somebody I follow on Twitter posted it on Twitter saying, “I saw this cool demo of an AI agent.”
I clicked into the YouTube link, saw the video, and then went to the website and signed up for the beta. And I think a couple hours later, I got beta access to Manus, and I used it and I was thoroughly wowed by the experience. And the reason I was thoroughly wowed, so this is March of 2025. Obviously, we’re well past the ChatGPT moment. I was a user of ChatGPT, user of Claude, user of Gemini, user of Cursor, et cetera. But what they were presenting was an agent product that could actually get further on tasks than any other AI product had at that point.
It really felt magical when I first tried it, and immediately, I texted all my partners and I said, “Sign up for the beta of this thing. It’s really magical.”
And then I just reached out to the founders because I wanted to know who they were and just wanted to know about what they were working on and how Manus worked. How did Manus get so much further on task than a regular AI chatbot? What were they doing? What was their key breakthrough? What did they learn to get there?
Turner Novak:
Yeah. What was it?
Chetan Puttagunta:
And so what they had figured out was, I think at that point, people at the application layer had learned that you could use multiple models at once to do more with a task. What I don’t think people had quite tried was breaking up a task into a thousand little tasks. And then for each sub-task, using multiple models in parallel, trying to get past that substep. And so they had just taken the idea of breaking a task into subcomponents and using lots of models to solve subcomponents to such an extreme degree. I don’t think anybody had tried that yet, and so we reached out and they got on a Zoom with us on a Monday and explained to us what they were doing and it was super compelling. And at the time, for some reason, the beta had gone really viral in Japan, and so the team was in Japan trying to figure out why it was going viral in Japan.
Turner Novak:
So you had to go to Japan to figure that out, apparently?
Chetan Puttagunta:
Yeah. So they wanted to just talk to users because they wanted to be like, “Why is this breaking out in Japan?”
Interestingly, I don’t know if you know this, but when ChatGPT first launched, Reddit Japan actually was one of the places it went viral early. And so there was something about consumer chatbots and consumer AI and the Japanese market that seems to be an early signal of things that can go viral in consumer AI.
Turner Novak:
Oh, sure.
Chetan Puttagunta:
And so the team was in Japan talking to users, running a bunch of user meetups because they wanted to know why it was going so viral in Japan. And so we did a Zoom on a Monday and I wanted to meet them in person. And so they were like, “Well, we’re in Tokyo, so you’re welcome to come hang out.”
And so I think that Friday, I flew out. And before that, a couple of the founders were in San Jose at the time, and so I met them in San Jose. And then on Friday, I got on a flight, Friday night I think, I got on a flight to go to Tokyo. And then Saturday night, Pacific Time, they presented to the partnership and then-
Turner Novak:
Over Zoom?
Chetan Puttagunta:
Over Zoom. And I was there in person with them in Tokyo. And then after their presentation, Red, who’s one of the founders and CEO, Red and I went for pizza and beer and got to a handshake. And then that was the start of the relationship. They ended up launching the product in general availability first week of April. They basically ran a one-month beta with a closed beta where you had to sign up and then they would let you in. And then the product exploded, and in December they announced that they had gone zero to a 100 million ARR in eight months, and 100 million ARR, and then if you counted the consumption revenue they were generating, it was 125 million run rate. I think that’s the fastest company to have ever gone zero to a hundred. I mean, eight months is just an outstanding speed record to go zero to 100 million.
Turner Novak:
Yeah, that’s pretty good.
Chetan Puttagunta:
The interesting thing about this product was where it was being used and how it was being used. The three primary use cases that emerged were deep research; coding, which was like a fascinating use case.
Turner Novak:
Interesting.
Chetan Puttagunta:
And three was slides. The three primary things that consumers were using Manus for was those three things. So if you dig into each of those components, Manus was getting further on deep research and writing further, more detailed reports than other AI chatbots. On coding, it was interesting that Manus was being used by non-technical people to code websites, applications, prototypes, mobile apps, whatever, and they were basically using it as a technical companion, and largely by people that were not technical. And something about the user experience, something about the UI, something about how far Manus would get on a prompt with a website or developing a mobile app really attracted a lot of consumers, prosumers. And then finally, the third one was slides, and that of course makes a lot of sense. If you’re really good at deep research and people are doing a lot of deep research, they want to turn the deep research into a bunch of slides that they could use for work or whatever. And so those were the three primary use cases that emerged.
And yeah, they just kept building features based on consumer pull. And then obviously it caught the eye of Meta and they acquired the company and couldn’t be happier for the founders. They’re incredible group, incredible technologists. I think that they had built a product that really blended multiple AI models, the three AI models. They exclusively used Anthropic, OpenAI, and Gemini models, and they had just created a way to blend the APIs of these three models to just get further on tasks. And I think it’s just... From my perspective, Meta is acquiring a team that’s very deeply knowledgeable about how these APIs work, and how to get further on a task, depending on the kind of task with a certain set of APIs. And I think if you just project out the consumer market for the next couple of years, I think you’re going to see more and more consumers and consumers want to just get things done and this Manus team certainly has figured out a way to do that.
Turner Novak:
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So you got some heat on Twitter when you invested. What was going on there?
Chetan Puttagunta:
People are welcome to say whatever they want on Twitter, and we had a great deal of conviction that this company was a great company founded by a great set of entrepreneurs. And ultimately, the company at acquisition was about 105 people roughly, maybe a little bit bigger. And the team was 95 people in Singapore, a couple people in Tokyo, and a couple people in the Bay Area. And the company was pure technologists, pure product engineering people, building exclusively on American models like Anthropic, Gemini, OpenAI models. They weren’t fine-tuning or post-training or building any of their own models. They were using APIs from American models, and their product was hosted fully on American clouds, so they were using largely Google Cloud, AWS, and Azure to host the product.
And so if you just looked at what they were doing, they were delivering incredible consumer value for a great price and had built an incredible business. The founders happened to be of Chinese origin, and for a company headquartered in Singapore. And for us, we want to invest in great people. And I think that if you just looked at, for example, this has been published on Twitter or X a lot, which is rosters of great AI scientists and AI research scientists.
Turner Novak:
They’re all Canadian.
Chetan Puttagunta:
Yeah, sure, a lot of them are Canadian, a lot of them are American, and a lot of them are of Chinese origin. And Jensen Wong of NVIDIA recently said something like, “Half of the world’s AI scientists are Chinese and half are American.” And so I think there’s a large population of AI researchers, AI engineers, and AI product people that are of Chinese origin.
And I think that to me, I want to back the smartest people building great consumer products, and this was a great consumer product targeted for the world market. The primary users of this company were in the US, Japan, Europe, Brazil, India, et cetera. The product wasn’t available in China. Manus couldn’t be accessed in China, they didn’t have a business in China. It was a worldwide business. And to me, those are the kind of businesses you have to back as a generalist investor, especially as somebody that was looking for consumer AI.
For me, going into 2025, it was pretty clear to me that somebody was going to build a consumer AI agent or a consumer AI product that was going to allow people to get tasks done. I mean, this was pretty much the thing that everybody was talking about, if you remember towards the end of 2024, they were saying 2025 was going to be the year of the agent.
Turner Novak:
Yeah, it was starting to piss me off a little bit, people couldn’t shut up about it.
Chetan Puttagunta:
And so if you just were paying attention to what everybody involved in AI was saying was that 2025 was going to be the year that we were going to start to see agent products really come alive. As soon as I saw the Manus demo on YouTube, it was pretty clear to me this was the instantiation of exactly what people were talking about. And you just had to do diligence on the company and the founders to realize this was a great company, a great product, and was going to really do a lot for consumers and provide a lot of value. We had all the confidence that this was a great company, this was a great, great set of founders. And if people want to say a bunch of stuff on Twitter, that’s their problem, not mine.
Turner Novak:
I feel like you’ve gone through these waves of being active on Twitter.
Chetan Puttagunta:
Sure.
Turner Novak:
I feel like when I first met you, it was maybe one of your earlier waves and you didn’t, because I actually realized I had notifications turned on for your tweets.
Chetan Puttagunta:
Oh. Do you still have them?
Turner Novak:
I do. Yeah, I do.
Chetan Puttagunta:
Oh, wow. Thank you.
Turner Novak:
I’ll notice, sometimes I’ll like or reply very quickly, but there’s definitely a period where you didn’t, I feel like.
Chetan Puttagunta:
That’s right.
Turner Novak:
So how do you think about your being more active on social or pulling back a little bit?
Chetan Puttagunta:
I ramped up my activity on Twitter a lot starting in 2018, 2019, primarily because at that time there were a lot of companies in software going public, a lot of public activity around software, and then we entered the pandemic where I was in front of a computer basically all day, like most people, so I was on Twitter and X a lot. And then software, as you know at that time, experienced an extraordinary moment in time of exponential growth. And in that moment, you realized that software valuations that were in the public markets and private markets really did feel unsustainable, but you had no choice but to accept the unsustainable nature of those valuations because you had to play the game on the field.
I think that other venture capitalists, including Bill, have talked about this, which is that in venture, you only have one strategy, which is you can only go long. In our asset class, there’s no such thing as like shorting something. That’s just not a thing that we-
Turner Novak:
It’s just like selling maybe.
Chetan Puttagunta:
Maybe.
Turner Novak:
If you own the shares, you sell?
Chetan Puttagunta:
Maybe.
Turner Novak:
But that’s-
Chetan Puttagunta:
But even that, if you’re an early stage investor buying 15%, 20%, 25% of a company.
Turner Novak:
Just, I’m going 25%.
Chetan Puttagunta:
Right, it’s not a highly liquid market for that, and so you’re going long only, and so you’re reacting to the market constantly. And so in that moment, it just really felt like we were in a really wild time, and the kind of growth that software companies were experiencing, the kind of earnings acceleration software companies were experiencing at that moment in time, the amount of spend that was going into clouds, cloud infrastructure, it was just a really fascinating time, and I decided to just talk about that because it was something that was super fascinating to me. And I just started, at that time, just starting to listen to every earnings call.
Turner Novak:
As one does in their free time.
Chetan Puttagunta:
Yeah, that’s what I was doing. And yeah, I was just summarizing and highlighting the things that I was learning off these earnings calls. And for some reason, it found a niche, large niche audience on Twitter. And yeah, I mean, it ended up building a pretty sizable audience, which was frankly surprising. I was quite surprised that that many people were that into software companies and software trends.
Turner Novak:
And it’s such a simple thing too, and it’s something where you arguably would’ve done that anyways, and maybe you would’ve also summarized it, just instead of sending it to a friend or a couple of coworkers, you just put it on the internet.
Chetan Puttagunta:
That’s right.
Turner Novak:
And there’s a big audience for that.
Chetan Puttagunta:
That’s right.
Turner Novak:
People want to get smart.
Chetan Puttagunta:
That’s right.
Turner Novak:
People want to learn things.
Chetan Puttagunta:
So that happened for a bit. And then I think May of 2021, so these are... Again, I think this is when we reopened our office, the Benchmark office in San Francisco, and that’s when you can clearly see my Twitter activities start to fall off. And so once we reopened our office in San Francisco, the number of people that wanted to just meet in person went through the roof. I think there was just, we had basically been meeting everybody on Zoom for over a year, and I think there was a moment where as people started to move back into San Francisco, the early stage entrepreneurs just wanted to do everything in person. And so we saw probably around the summer of 2021, a lot of activity moved to in person, and a lot of people just wanting to meet in person and reconnect in person, much like we’re doing now. And I think that’s when we may have also met for the first time around that time, or maybe we met in 2019.
Turner Novak:
I think we met before COVID.
Chetan Puttagunta:
Okay.
Turner Novak:
I’m trying to remember.
Chetan Puttagunta:
And then we met again because I think you made a trip out after.
Turner Novak:
Yeah, there was one, we got breakfast. Was it at the Rosewood?
Chetan Puttagunta:
Yeah, in Menlo Park. That’s right.
Turner Novak:
Yeah. It was maybe the second time we-
Chetan Puttagunta:
That’s right.
Turner Novak:
... met? Maybe that was the first time actually that we met in person. I can’t remember.
Chetan Puttagunta:
I can’t either, yeah.
Turner Novak:
Everything is hazy.
Chetan Puttagunta:
Because we’d met a bunch of times on the Zoom while we were in the pandemic. Anyway, so I think as a result of my schedule just going back to mostly in person, I just stopped tweeting, and I just thoroughly enjoyed meeting people in person far more than listening to earnings calls and stuff. And so I just stopped listening to earnings calls. And then if you stop listening to earnings calls, there’s not a lot to summarize. And then I just stopped paying attention to public software companies as a result and stop... You always still pay attention to public software companies in your own personal time and to understand the industry and stuff like that, but I wasn’t paying as close of attention as other people were, and I wasn’t looking at it first and offering first impressions. So it started to go back into the standard practice of I’d read earnings releases maybe two weeks after they came out or I’d read analyst report two weeks after it came out. And whereas in the pandemic, I would read it the day of.
Turner Novak:
It was like your entertainment, your event was like, “Oh man, Salesforce earnings at 1:30.”
Chetan Puttagunta:
That’s right, so that’s what I was doing. And so once we came back into the office, it was just delayed again. And then I think if you didn’t tweet about it right at the moment, I think there was a moment in time interesting too, which I thought was interesting that revealed itself, which is like, I tried a couple of tweets that was on earnings that were a month old or two months old and it was basically like people were like, “I already knew this.”
Turner Novak:
Yeah, you usually need a chart. You need a good chart that showed how AI adoption maybe was changing in Salesforce or something, but you run the rest of the day of earnings, somebody probably grabbed that and tweeted it.
Chetan Puttagunta:
That’s right. And so there was a timely nature to it. So I didn’t do that, so I stopped doing that. And then I think I’m back more on Twitter now with all this AI stuff happening. And I think the reason that I’ve started to reengage is-
Turner Novak:
Watching launch videos?
Chetan Puttagunta:
Yeah, sure. Launch videos are really impressive now.
Turner Novak:
They are very good.
Chetan Puttagunta:
Very high investment. I think the thing that I’m starting to tweet more about is just that the stuff that’s happening at the application layer with AI is a fundamental shift. And I think that it is a fundamental shift on the same scale of on-prem to cloud, and on prem to cloud took a long time.
Turner Novak:
Can you maybe give us... So Everett on your team was like, “Oh, you got to ask Chetan, give us a history lesson on the eras of software.”
Chetan Puttagunta:
Sure. Absolutely.
Turner Novak:
Can you maybe walk us through as early as you can, it’ll recite and talk us through all the way to today?
Chetan Puttagunta:
We’ll go all the way back to the abacus. Start there.
Turner Novak:
So King Nebuchadnezzar, back in the Babylonian empire.
Chetan Puttagunta:
That’s right. We came up with the number system, no, and then look, I think it started with mainframes. Mainframes is when we started to get real application software level stuff and we went from.
Turner Novak:
So this was massive machine that weighed 50,000 pounds.
Chetan Puttagunta:
That’s right, and that’s when people started to create customer applications to automate stuff. And whether it was for the defense sector, whether it was for the public sector, whatever, for private enterprise, that’s when you started to automate things using mainframes. That then transitioned to client server, and then you had the internet show up, and then the internet obviously changed everything with regard to application software so all of a sudden you had consumer applications and then you had B2B applications. Internet also helped centralize servers and how clients were served, it created edge networks.
Turner Novak:
Why is that all important? How did that change the business model?
Chetan Puttagunta:
It allows... There’s two, so every new wave, two things happened. The number of applications created exploded each time.
Turner Novak:
Every time?
Chetan Puttagunta:
Every time. The number of applications created to serve either businesses or enterprises exploded each time.
Turner Novak:
Is this it increases an order of magnitude, like 10X?
Chetan Puttagunta:
Yeah.
Turner Novak:
Okay.
Chetan Puttagunta:
But the internet was 100X, so it was two orders in magnitude. Each time there’s a big jump in the number of applications, and then there’s also a big jump in the number of companies creating applications for either consumers or businesses. And so these are enabling technologies. And then you had internet, internet showed up, and then it went from client server, and then you went to basically the cloud model, which was you centralize where all the servers are hosted, and then you serve people by the internet, the browser, and that ended up being the genesis of cloud. And then the cloud thing ended up being extraordinarily transformational.
Turner Novak:
What was the biggest kind of transformation?
Chetan Puttagunta:
I think number one of all was Amazon. And so Amazon, when they released EC2 and S3, which was cloud computing and cloud storage, in ‘09, ‘10, and ‘11 is when you started to really see that become very, very significant. And if you were around the Bay Area around that time, what you noticed was a dramatic shift in net new companies, they were all using Amazon. So if you were an app developer when the App Store first came out in ‘09 and your app was really working, you still had to go get server storage in downtown San Francisco.
Turner Novak:
You had to buy computers?
Chetan Puttagunta:
You had to buy a rack, and then you could go to Equinix and they’d sell you space and then you would have to rent servers from them, or you’d have to go to Dell or HP or you could go to Quanta if you really wanted commodity boxes and they would sell you these servers. And if you bought your own, you’d have to come put them in and then install them and wire them up. Or you could get the person that ran the facility to.
Turner Novak:
Hook it up for you.
Chetan Puttagunta:
You could rent the servers from them, or you could buy the servers from them, but this is what it required. And the crazy thing is that not that long ago, this is 2009, 2010. It’s just not that long ago.
Turner Novak:
Yeah, that’s like relatively speaking, I mean, I guess I’m almost 35 now. So I was graduating high school. To me, that’s not that long ago.
Chetan Puttagunta:
Not that long ago. And that was really the cloud. And it just so happened that it coincided with the launch of the App Store, which was in 2009. And so you had this cloud thing happening and you had mobile devices about to explode worldwide. And so the total demand for applications from both consumers and businesses was about to go... It was going to have two factors that were going to increase orders of magnitude so it was 10X multiplied by 10X. It was like you had cloud happening, which basically meant more application developers could develop applications.
Turner Novak:
It was just easier to get off that, off the launchpad.
Chetan Puttagunta:
That’s right. You didn’t need to think about servers. You didn’t need to think about renting space. If you were running demo apps or prototypes, the standard way to have done it was to bought a server and plug it into your apartment, and that’s where you’d host it. And then if you were a solo entrepreneur, this is how you do it, and then you’d go ship it. Once you were ready to launch it, you’d go get some servers, plug it in, and then hopefully it would work. And this thing was just, it was, one, capital intensive because you had to go invest the capital on compute and storage.
Turner Novak:
You also had to figure out how do I run this server thing?
Chetan Puttagunta:
100%, and it was expensive. The barrier to entry was high. And again, this is the other thing about each wave of technology. Each wave, the barrier to entry for developing an application went down. And so with cloud and mobile, it was, one, the cost of deploying a prototype or an initial version of application went way down because you could go put it in the cloud. And then two, the cost of getting to an end user also went down because you had this amazing distribution mechanism through the App Store, and so-
Turner Novak:
Just like a kid in the class would be like, “Check out the Snapchat thing.”
Chetan Puttagunta:
100%.
Turner Novak:
And just all these kids just downloading it and using it.
Chetan Puttagunta:
100%, that’s right. And then you could pay Amazon on a credit card and it would be consumption based.
Turner Novak:
So you technically didn’t even actually really pay upfront.
Chetan Puttagunta:
That’s right.
Turner Novak:
You could not pay your credit card for 30 days or a year really if you didn’t want to.
Chetan Puttagunta:
That’s right, you got a loan. Yeah, you got a 30-day loan, essentially. And so it was a remarkable unlock and you saw an absolute explosion in app layer. Obviously mobile apps, anything from like Instagram, Twitter, Snap, that all was unlocked there, Uber, Airbnb.
Turner Novak:
You’re just listing off Benchmark portfolio companies.
Chetan Puttagunta:
That’s right. Maybe not Airbnb. Yeah, Airbnb wasn’t, but.
Turner Novak:
Did you guys have a bet in the space? I’m trying to remember.
Chetan Puttagunta:
Of rentals?
Turner Novak:
Home travel type of-
Chetan Puttagunta:
This was before my time.
Turner Novak:
Got it, okay.
Chetan Puttagunta:
I don’t remember.
Turner Novak:
You’re not an expert on the portfolio?
Chetan Puttagunta:
No. I should be, but I’m not, unfortunately.
Turner Novak:
Bill’s going to be listening to this like, “Come on.”
Chetan Puttagunta:
We may have had some, but I think they did great. I think the 2011 fund is legendary for having just gotten mobile and cloud perfectly right.
Turner Novak:
Even WeWork. WeWork wasn’t even mobile or cloud, how did that even get in there?
Chetan Puttagunta:
That was Bruce, and so you’re going to have to go to him for the history on that one. I don’t know.
Turner Novak:
Yeah. What was that fund? What’s the performance on that one?
Chetan Puttagunta:
Benchmark VII, and we don’t publicly talk about our performance. You can find it on the internet, there’s plenty of-
Turner Novak:
Okay, what’s the number on the internet? What does the internet say?
Chetan Puttagunta:
That’s a good question. I don’t know. I think the last thing it said is... Yeah, you should Google it.
Turner Novak:
I’m Googling it right now.
Chetan Puttagunta:
Benchmark VII, and I’ll tell you if it’s high or low.
Turner Novak:
Said it was around $550 million fund in 2011. It says it was roughly 25X before fees.
Chetan Puttagunta:
There you go. Sounds pretty good.
Turner Novak:
Directionally correct?
Chetan Puttagunta:
Correct. Directionally correct. It’s a good fund.
Turner Novak:
And then you added in your Manus 1000% IRR.
Chetan Puttagunta:
Yeah.
Turner Novak:
Pretty good.
Chetan Puttagunta:
So that really unlocked the number of applications, ease of deployment, lowered the capital required. So that was mobile, that was cloud. We’ve been on that wave basically until, call it 2018, 2019. I think what you started-
Turner Novak:
And then COVID was an incredible-
Chetan Puttagunta:
Accelerant.
Turner Novak:
... period also, right? It kept going.
Chetan Puttagunta:
It was huge accelerant.
Turner Novak:
And almost foot on the gas even.
Chetan Puttagunta:
That’s right. Huge accelerant through 2020. And then the other thing that was happening though was that the SaaS companies, incumbents were starting to get really dominant. They controlled distribution, and they would start to eat up not only their core category, but would start to eat up adjacent categories. And so this is how Salesforce went from being just CRM. They did CRM, Service Cloud, integrations, et cetera. It became huge. Same thing with ServiceNow, they started with ITSM and then it expanded into HR, sales and all this kind of stuff.
These SaaS companies started to get really, really big. And if you just looked at it from a startup perspective, it was actually harder to get distribution in 2020, 2021 because the incumbents had gotten so big and so powerful and basically penetrated every enterprise account. And if you were a brand new startup, you would show up and be like, “Well, I could do this nichier thing 15 to 20% better.”
And then your buyer would be like, “Well, I could just go to the Salesforce thing and ask them for a discount and they’d probably just give me 5% off and that’s probably easier.” And so it was frictionful.
Having a net new company to find its niche and to be able to really go after a big horizontal category was really hard. And so what you ended up seeing 2020, 2021 was a lot of hyper vertical application software companies get created.
Turner Novak:
Give me an example for someone listening.
Chetan Puttagunta:
There were a whole bunch of companies that were created for the construction vertical as an example. There were a number of companies created for the compliance vertical. Some of them are doing really well now, of course.
Turner Novak:
So it’s basically like a what are things that Salesforce isn’t doing or won’t do?
Chetan Puttagunta:
Yeah. Salesforce, Workday, ServiceNow, what are they not doing? There’s still opportunities, and then people would go attack them. And some of them obviously became successful, but you didn’t see the same Cambrian explosion of applications that you saw in ‘09, ‘10, ‘11, ‘12. It just wasn’t this extremely fertile ground to create new startups, especially at the application layer.
Turner Novak:
It was mostly just a big, it got most of the value or-
Chetan Puttagunta:
That’s right.
Turner Novak:
... can store most of the value.
Chetan Puttagunta:
And obviously, things dramatically shifted starting in 2022.
Turner Novak:
Yeah. So how do you dissect what was going on in ‘22, ‘23?
Chetan Puttagunta:
GPT APIs were available in 2022, and this was the earliest signal we had gotten at Benchmark that people were thinking about developing new sets of applications. We would meet entrepreneurs that would be playing with these APIs and saying, “Hey, have you guys seen this thing? You can make this API call, you could do this and that, it’s generating all this interesting stuff.”
Turner Novak:
Maybe how like Jasper was maybe a breakout at that time.
Chetan Puttagunta:
Yeah. There were a bunch of people doing copywriting as the first use case because you could only interact with these things through APIs. And in 2022, November of 2022, obviously ChatGPT comes out. I think everybody that used the product that moment in time thought it was the most magical thing. And I think feeling like it was magical wasn’t a particularly unique insight. I think everybody thought it was-
Turner Novak:
Most obvious insight.
Chetan Puttagunta:
Yeah. It was like, “Wow, this is incredible.”
Turner Novak:
Yeah.
Chetan Puttagunta:
I think what we as a firm did at that moment in time, which I look back on was particularly insightful, was to then say, “This is obviously the way of the future. This is clearly what the experience of the future is going to look like, which is there is going to be some automated system at the back giving you the answer or finishing the task.”
It became pretty obvious to us around the table that that was the way of the future, and so what we decided to do at that moment was focus heavily on AI applications. I think this is one where if you’ve just been investing in software like I had for at that time, probably over a decade, this is the best thing that could happen to you as a software investor because now, as an early stage software investor, you’re a late stage software investor or a private equity software investor, you now have a lot of portfolio companies that might be threatened. But if you’re an early stage software investor, if you recognize the catalyst of a shift change and you think this is the next-
Turner Novak:
Shift change.
Chetan Puttagunta:
Yeah. As next catalyst as big as a cloud, it’s incredibly exciting to go all in on software applications again at that moment. So then, it became pretty clear to us that every large horizontal category was up for grabs again, and it was a good time to go back into it and.
Turner Novak:
So the Salesforce, the Workday, the ServiceNow.
Chetan Puttagunta:
All of those. All horizontal categories were up for grabs, and all we needed was entrepreneurs that saw the future by playing with ChatGPT and the OpenAI APIs, and then there were also net new categories to be created. You don’t only have to go after incumbents, you could create brand new categories and sell software into areas that hadn’t bought a lot of software before.
Turner Novak:
And that’s because the software could solve new problems for you that it couldn’t?
Chetan Puttagunta:
That’s right. And so this is where coding assistance and legal software, very specifically, those are not categories of software that are pre-established, legal as.
Turner Novak:
That was a dead zone.
Chetan Puttagunta:
It wasn’t great.
Turner Novak:
That was like a do not touch.
Chetan Puttagunta:
It wasn’t great. I mean, to be fair, I had one successful company there, a company called Logikcull, which was an eDiscovery, which I invested in and had a very successful outcome. It was acquired by a PE firm, of course, because it’s like once you get eDiscovery customers, there’s a lot of cash flow that shows up as a result.
Turner Novak:
What is eDiscovery? This is the process of learning more about the case and collecting evidence or something like that?
Chetan Puttagunta:
Yeah, so basically whenever you have to go through litigation, you have to go discover a bunch of facts against that case that shows up in emails and documents.
Turner Novak:
This is like when someone says, when we see those posts about the Steve Jobs and Apple.
Chetan Puttagunta:
That’s right, yeah.
Turner Novak:
It was through the discovery process.
Chetan Puttagunta:
Yeah. That was an eDiscovery software that found that email. And so those companies ended up being pretty interesting. There was a company in Chicago called Relativity that ended up becoming big. There were some companies in Europe.
Turner Novak:
This is basically just a SaaS document storage that was verticalized for legal.
Chetan Puttagunta:
100%, with search. Yeah.
Turner Novak:
Okay.
Chetan Puttagunta:
And so that was the only category in legal software that worked. But when AI shows up, you now can start to meet entrepreneurs that are dreaming big again in horizontal categories, and that also allows you to invest in AI app enablement. And so it’s like all of the frameworks, all of the new cloud infrastructure to host all these AI things, these all open up as opportunities. And so if you look at our investments on 2022 onward in AI, there’s a one central theme to it all. It’s all AI applications and application enablement, and that was very much on purpose because we just found that there was tons of opportunity there. In our view, it was also opportunity that a lot of people weren’t paying attention to in our industry because I think people at that time saw the magic of ChatGPT, rightfully, and then a lot of AI labs ended up getting funded at that moment in time in 2022.
Turner Novak:
How many did you guys invest in at Benchmark?
Chetan Puttagunta:
We invested in one open source one.
Turner Novak:
That feels like a classic Benchmark approach is the open source version of something.
Chetan Puttagunta:
Oh, yeah. I mean, as you know from our history, we deeply believe in open source, and in this case it would be open weights. And there were a lot of open weights models, including Llama models, but then more recently, if you look at models that are coming out of China that are open weights, these are really unlocking a lot of additional models in the US that people are borrowing techniques from these open weight models. They’re borrowing these open models themselves and then customizing them, crafting them, fine-tuning them, applying RL to it, all that kind of stuff. And so open weight models in general are a category that I fully believe in. And I hope that Llama continues, Meta with Llama models continue to keep them open. But I think that we spent a lot of time meeting with entrepreneurs building AI applications and entrepreneurs that wanted to enable the next generation of AI applications.
If you look at that fund and you look at the investments that we made, we made a number of seed and Series A bets at that time in 2022 in companies like Sierra, Legora, Fireworks, Levelpath, LangChain, that just are entrepreneurs building very horizontal applications that are attacking gigantic markets with truly innovative tech. And when you open this application and you experience it for the first time, the SaaS comparable looks really bad. It just looks like-
Turner Novak:
So give me an example of one of those contrasts that I might come across in the wild.
Chetan Puttagunta:
I think if you just ever interact with Sierra as an enterprise customer, if you were to buy, for this podcast, if you ever wanted a customer agent, you have two options. You could go to a traditional SaaS provider, legacy vendor.
Turner Novak:
So who would that be?
Chetan Puttagunta:
You could get a ticketing system, plus a CRM system, plus some kind of auto responder.
Turner Novak:
So what is this? Salesforce or Workday?
Chetan Puttagunta:
You could get Salesforce, you could get HubSpot, you could get Zendesk.
Turner Novak:
Zendesk, okay.
Chetan Puttagunta:
You could piece together lots of these softwares. And by the way, we invested a lot in these SaaS companies and I invested a lot in these SaaS companies, so they’re all great companies, have a great deal of respect for all the entrepreneurs.
Turner Novak:
They have good distribution that they built.
Chetan Puttagunta:
Incredible. But it’s the same thing that happened with these cloud vendors versus their on prem rivals. So Salesforce versus Siebel and Oracle, Zendesk versus Remedy.
Turner Novak:
We forget the name.
Chetan Puttagunta:
Remedy was-
Turner Novak:
Remedy, okay.
Chetan Puttagunta:
... I think the ticketing software before that, Workday versus PeopleSoft. The on-prem incumbents when the cloud software showed up just felt like a terrible piece of software because they were slow, they had all the setup, they were expensive, they were not interactive, they couldn’t be accessed anywhere.
Turner Novak:
Why didn’t they just go to the cloud? Why didn’t they just go to cloud app and fix it?
Chetan Puttagunta:
Because it’s really hard. I think you’ve read Innovator’s Dilemma and it applies to technology companies.
Turner Novak:
I actually haven’t read it.
Chetan Puttagunta:
Really?
Turner Novak:
I mean, I know the premise of that, haven’t actually read the book.
Chetan Puttagunta:
You should read it.
Turner Novak:
Maybe I should actually read the whole book.
Chetan Puttagunta:
You should.
Turner Novak:
Page to page.
Chetan Puttagunta:
You should read that. You should really read it, and you should read also Competitive Analysis. And so it’s like these classic business books and it’s... If you look at, if you have a great business and then you make a technology architecture and you build a large application, you now have built an application that’s serving thousands of customers and then you’ve built a huge distribution force to take that out and sell.
Turner Novak:
Yeah.
Chetan Puttagunta:
And so the business machine that you’ve built runs on this thing sustaining. So if you need to re-architect your platform, you need to pause everything, pause distribution, break your architecture, move it to the cloud, by the way, and then actually get it to work, have it scale and all that kind of stuff, and then teach your distribution networks to distribute this brand new product and then basically start from scratch, it’s really hard.
Turner Novak:
That’s hard.
Chetan Puttagunta:
It’s really, really, really hard. The thing that I think people really forget is that when Salesforce was really growing really fast, Siebel created a product called Siebel On Demand, which was their-
Turner Novak:
That just sounds like a not good product.
Chetan Puttagunta:
Siebel On Demand was the Siebel answer to Salesforce, and there were people that were covering Siebel at that time that said Siebel On Demand would crush Salesforce. That would be the end of Salesforce, would be Siebel On Demand.
Turner Novak:
Were they both publicly traded at the time?
Chetan Puttagunta:
Yes.
Turner Novak:
Okay. So I’m sure Salesforce stock dropped like 10% the day of launch or something.
Chetan Puttagunta:
I’m sure, whatever. But Siebel On Demand didn’t work because the Siebel on-prem product was just so profitable that, and Siebel On Demand may have worked as a product, but it had deficiencies against the Salesforce product. And then Salesforce was, because they had built that company from scratch, was able to distribute it far more efficiently than Siebel could. Just the company structure was built for selling licenses for 5,000 bucks or 10,000 bucks to a company where Siebel was built to distribute licenses that were million dollars or greater. And so Siebel On Demand would come and quote you $100,000 and the Salesforce rep would be like, “You can have mine for 10,000.” And yeah, Siebel On Demand is 10% worse.
Turner Novak:
Why would you even sign up for that if you’re doing any research at all?
Chetan Puttagunta:
That competition becomes so uneven.
Turner Novak:
So that the distribution wins, that assumption assumes that they’re not going to look at comparable product when it’s so easy to just-
Chetan Puttagunta:
That’s right.
Turner Novak:
... salesforce.com, click a button, we’re in the product-
Chetan Puttagunta:
That’s right.
Turner Novak:
... and you can put in your credit card-
Chetan Puttagunta:
That’s right.
Turner Novak:
... and just use it.
Chetan Puttagunta:
That’s right. Now, fast-forward to today with AI applications, we’re going through the same thing again. For an AI application to become, for a SaaS company to beat a native AI application, I would argue that they would have to break their fundamental architecture and rebuild the application and redo the business model and reteach their distribution on how to distribute the thing. The advantage of having an AI application company start from scratch is you build this thing AI first from point zero, you don’t create any code that’s not AI friendly.
The first set of salespeople you hire and the first set of marketing hires you make are all intended to distribute this AI product, priced as however you want to price it, consumption, seats, whatever, but it’s priced like an AI product. You go against the SaaS vendor in these things, it is, to me, the early signs are astounding how fast these AI applications grab traction and grow and how quickly they’re able to displace traditional SaaS vendors. And I think on Twitter, or X, we’re seeing a lot of-
Turner Novak:
You can call it Twitter, I refuse to call it X.
Chetan Puttagunta:
I think you see a lot of people saying the SaaS companies can be really replaced by Claude Code. I’m not sure I buy that. I think that-
Turner Novak:
Of the, “Hey, make me Salesforce.”
Chetan Puttagunta:
That’s right.
Turner Novak:
“Make no mistakes.”
Chetan Puttagunta:
That’s right. Yeah, or build me a billion dollar software company, you make no mistake.
Turner Novak:
Yeah, 10 billion.
Chetan Puttagunta:
Right. I don’t think that is what’s going to happen, but I do think that if you look at legacy SaaS, their business models are seriously going to be challenged by AI applications that deliver 10X the value for a third of the price. And if you’re an enterprise and you can buy an AI native version, you will buy it. I can’t see why you wouldn’t. You see the experience and it’s that stark.
I’ll give you a couple examples. If you look at Sierra and you deploy it as a customer service agent, it is absolutely a mind-blowing experience. You don’t need a ticketing software, you don’t need call routing software. You don’t need all this stuff to make tickets that customer issues that are coming into your company go away. It just goes into Sierra, and there’s a resolution. And guess what? Your customers are happier and you’re basically replicating your single best customer agent to infinity. That is what Sierra is.
So all of a sudden, your customer satisfaction goes through the roof, your business metrics get a lot better. Your renewals get better, your expansions get better because customers are actually happy with their experience. And so comparing that with legacy, which is chaining together four or five software solutions, it’s just hard to really compare them. And then the question then becomes why does an existing software person just like do it?
Turner Novak:
Yeah, because I was going to say, if I’m Marc Benioff at Salesforce, I went through this, I see why I won and I see the advantage I had over Siebel. Do I look at saying it’s like, “Oh man, this could happen to me.” I should know that this is coming, shouldn’t I?
Chetan Puttagunta:
That’s right. I think that if... And of course, look, I think Marc Benioff is one of the greatest entrepreneurs of all time. He’s also been an extraordinary friend of startups, and how open he’s been with Salesforce APIs and the ecosystem and all that. I think I only have great things to say. I think that Salesforce should buy a lot of companies now. I think that one of the things that Salesforce has always done really well historically is buy the right companies at the right time.
Turner Novak:
I was going to say Slack is an example. Is that a bad example?
Chetan Puttagunta:
No, it’s not a bad example.
Turner Novak:
I feel like that one’s been ridiculed of too high a price maybe.
Chetan Puttagunta:
Too high a price. Yeah.
Turner Novak:
I have a friend at Slack, she’s like, “They fucking ruined it.”
Chetan Puttagunta:
They ruined it?
Turner Novak:
Yeah. She’s not bullish on Salesforce, or Slack as a part of Salesforce.
Chetan Puttagunta:
Yeah. If you just look at Salesforce history, I think people forget that it was founded in the late ‘90s, and just in different waves. For example, when Marketing Cloud took off, they went and bought a great marketing cloud company. When commerce took off, they went and bought Demandware. They were making key acquisitions at the right times throughout their growth trajectory, and they were actually very good at M&A, and Salesforce Ventures is an incredible investor. They’ve invested in great companies and they continue to invest in great AI companies. I think one of the things that they should do, and of course I’m telling a public company what to do so I have great level of humility to assume that they would listen, but I do think that if you’re-
Turner Novak:
I’m going to cut that part out, by the way. I’m not going to let you say that, I’m going to make you look like, no, just kidding.
Chetan Puttagunta:
I think if you’re a SaaS company right now, you should really think about spending 10 to 25% of your market cap to buy AI applications. I really think that’s a good idea. And I think if you’re an AI application company like Salesforce or ServiceNow or Datadog or whatever, name your favorite SaaS company that’s public or private, I think they really should go buy AI applications that they then could feed into their distribution networks or these AI application companies come in and build them a new distribution network. I think it’s one of those things, if you study the history of software, the history of application software, there are moments in time when the on-prem vendor should have just bought the cloud thing. The best example of this is BMC, which was ServiceNow before ServiceNow, should have bought ServiceNow way before it got as big as it got.
Turner Novak:
Aren’t they the seventh or either biggest software company now or something?
Chetan Puttagunta:
Yeah.
Turner Novak:
Yeah.
Chetan Puttagunta:
Of course. But BMC should have bought it, and there were moments in time where I think BMC could have bought it. And I think if they showed up, they had the market cap to buy it, they had the wherewithal to buy it, but they didn’t because it was like, “Well, we’re trading at X revenue multiple and I don’t want to give ServiceNow 20X revenue multiple,” whatever. But in retrospect, it completely changed the game.
The other one is obviously Salesforce. I mean, there were times when it was rumored that Microsoft was going to buy it. There were rumors that could Oracle ever buy it? Salesforce just completely cleaned out CRM from all the on-prem vendors, and all those businesses just ended up going to zero. And so it could have taken Salesforce out much earlier in its journey. So if you just look at every big category winner in SaaS, there was an opportunity for the on-prem company to make a big acquisition and make something of it, and they didn’t.
And I think that if you’re watching the AI application thing happen, you’re starting to see M&A sort of pick up, but it’s not really at the pace that I would encourage these companies to think about it, which is just, you really should jump into this game and buy some of these things because these companies are about to get gigantic. They’re getting to 100 million. I mean, Manus went zero to 100 in eight months. These companies are getting really big, really fast. They’re going to go 100 million really fast. Once they’re getting to 100 million, they continue to scale beyond that.
There’s lots of questions about margin profile and all this kind of stuff. And I’m telling you these AI application company P&Ls, maybe they don’t look as pristine and as predictable as super mature SaaS companies, but the early days of SaaS companies, those P&Ls don’t look that pristine either. People just should go look at the Workday S-1 and look at the gross margin of Workday in the early days.
Turner Novak:
What was it?
Chetan Puttagunta:
So interestingly, the software had around 75%, 80% gross margin, but they were selling services to implement the software at negative gross margin. So blended, they had gross margin some years in the 50s or even below 50. And that was fine. And I think there was one year, if you go to pull up the S1, either it was the first or second year they had negative gross margin, which is fine because.
Turner Novak:
So in the S-1, you’re going public as a software company.
Chetan Puttagunta:
Like one of their original years.
Turner Novak:
Two years out was like, “We have negative gross margin.”
Chetan Puttagunta:
Yeah. And then it got better, obviously. And then the year right before they went public, they had great gross margin.
Turner Novak:
Really good, yeah.
Chetan Puttagunta:
But you could see that evolution in that S-1. And so to me, it’s like if you’ve been around software long enough, you’ve seen some of these patterns before. It’s like, do not complain about a negative gross margin software company if you’re seeing the patterns that you saw in the last phase, which is like people are implementing these things, treating these things as systems of record, whatever. There’s some kind of gravity around the workflow or the data or whatever, and these things end up becoming a core part of a business. They’re not getting ripped out. The only way that business account goes to zero is if the business customer goes bankrupt or goes out of business, otherwise they’re paying for this piece of software, it becomes that essential to the business.
And if you look at that kind of trend, it’s like, “Yo, this is happening.” And I think you’re going to start seeing the first set of S-1s for these AI applications 2027, 2028. And I think people are just going to be really surprised at how much these companies look like software companies. It’s like, yeah, they look like software companies. And then instead of paying a ton of gross margin to the cloud vendors, we’re just paying a ton of gross margin to inference providers.
We’re either paying OpenAI, Anthropic, Google, or paying Coreweave or Fireworks for inference tokens. That’s where the cost of goods is going, and that’s okay. And then companies get better at optimizing that and getting more efficient, and so it’s a real wave. I think the private markets have fully realized its opportunity. And I think this is why you’re seeing application companies are, it’s a very attractive category for venture today, but I’m not sure that the public markets have quite embraced this, and I’m not sure public companies have quite embraced this.
Turner Novak:
So why not? Because if I’m public market CEO, I look at my stock and I trade three times revenue or whatever, and I’m like, “These fucking kids are getting 200 times revenue and they’re so small,” maybe they’re growing fast, whatever. Why do you not think they pulled the trigger on some of these acquisitions?
Chetan Puttagunta:
Well, I think it’s human nature. I mean, imagine you’re a software company that’s run the company for a long time and you’re trading at three times revenue as a SaaS company and you’re like, “Okay, I should go buy the AI version of this thing,” and you have to now pay 20 times revenue, 50 times revenue. You’re at 90% gross margin. Your AI alternative is at, I don’t know, let’s say 20% gross margin. That’s a pretty-
Turner Novak:
Bad deal.
Chetan Puttagunta:
Yeah.
Turner Novak:
It seems pretty stupid, the way you just described those numbers-
Chetan Puttagunta:
That’s right.
Turner Novak:
... sounds not good.
Chetan Puttagunta:
Imagine being in that room where you’re trying to pitch that deal to your management team, or to your board, or to yourself.
Turner Novak:
And it’s probably 20% of your market cap or something like that where it’s like almost to bet the farm.
Chetan Puttagunta:
That’s right.
Turner Novak:
It’s probably close to that threshold.
Chetan Puttagunta:
This is, again, I would just ask people to look at the public markets of 2012 and look at where SaaS companies were trading then and compare them to their on-prem rivals. SaaS companies were trading at 20, 25 times revenue. If you just look at where ServiceNow and Workday went public, they were trading at the time and you could just look at their coverage of these valuations. People were calling them absolutely insane. That’s what they were calling them. Salesforce was always considered an ultra expensive stock in the beginning. So was ServiceNow and so was Workday. They were all considered wildly overpriced.
Turner Novak:
Well, a lot of it too is just they don’t have any cashflow profitability. If you’re trying to pull up the financial statement and just, oh, according to the statements, free cash flows, they’re trading at 800 times free cash flow, it’s overvalued.
Chetan Puttagunta:
Sure, all of that is fair. But the interesting fact on ServiceNow actually is that they were cashflow positive from year two or something, something outright. It was an ultra efficient business.
Turner Novak:
But most good businesses are, they’re quickly profitable.
Chetan Puttagunta:
Yeah, they’ve become very capital efficient. Salesforce was very capital efficient too. So if you just look at 2012 as a case study, look at where SaaS companies were trading, and look at where the on-prem vendors were trading. I just talked about how those on-prem vendors should have bought the SaaS companies. They should have just paid 20 or 30 times and that would’ve been the right business answer.
Turner Novak:
Yeah. I’ve heard actually from Benioff is he would’ve sold. He needed a 40% premium and people would only offer him 30%.
Chetan Puttagunta:
There you go.
Turner Novak:
He just never sold.
Chetan Puttagunta:
There you go.
Turner Novak:
Because he never got the price he wanted.
Chetan Puttagunta:
There you go. And so there were good deals to be had, but at the same time, they look like bad deals to the on-prem companies because it was like, “I’m trading at 20 times free cashflow or two times revenue and you want me to pay 25 times revenue and 800 times free cashflow to buy this SaaS thing?” It seems like.
Turner Novak:
It could be a fad. SaaS could be a fad.
Chetan Puttagunta:
100%. SaaS could be a fad. AI could be a fad. This is where you get into the circular thinking of not doing the deal and you just get stuck. And I think if you just play this out, these AI application companies were much cheaper to acquire in 2023, and they were in 2024, they were in 2025, then they’re going to be in 2026, they’re going to be in 2027. And it’s happening. It’s happening right in front of us. We’re just seeing this happen.
And I have to tell you, from a venture investor perspective, it’s a really fascinating cycle to live through, because I was an investor in the first cloud cycle. I would always think, “Why aren’t these people making the move? They should buy these SaaS companies. This is obviously the logical thing to do.”
And here we are, again, for me, sitting in a second cycle and I’m saying the same thing. And it’s really interesting that the SaaS companies have forgotten their own state that they were in. They have forgotten their own position in 2012 and ‘13 and ‘14, and what it would’ve taken for an incumbent to buy them. They are now the incumbent and not embracing what it takes to buy the upstart.
Turner Novak:
So if I’m an upstart, if I’m the founder of an AI company, and I just heard everything you just said, why would I sell? Because I’m going to beat the SaaS companies in three years.
Chetan Puttagunta:
Yeah.
Turner Novak:
I’m going to be bigger than that, why would I sell to that?
Chetan Puttagunta:
That’s right. I mean if you, like you mentioned, some founders just know there’s the number and there’s all these famous stories about Google named a price to Yahoo and Yahoo said no.
Turner Novak:
Yahoo could have been the largest company in the world.
Chetan Puttagunta:
Yeah.
Turner Novak:
Google, Facebook. I bet they talked to Amazon at some point.
Chetan Puttagunta:
I’m sure. There’s a story of Facebook and Yahoo, something like-
Turner Novak:
Billion dollars or something.
Chetan Puttagunta:
Ordered a billion, and then there’s some kind of counter, something, whatever. There are these famous stories of-
Turner Novak:
And Zuck was like, “Well, what would I do if I sold? I would just start another social network.”
Chetan Puttagunta:
That’s right.
Turner Novak:
“So why would I sell it?”
Chetan Puttagunta:
That’s right. There are these notes in history where companies, they named a number to the incumbent and said, “Okay, you just have to get here.”
And of course, in some cases, the incumbent did get there and that’s how you have giant SaaS acquisition, or the incumbent didn’t and then those companies went on to be independent and got gigantic. And so I think that some founders may just have a number in mind that if the incumbent hits 40% premium to their current stock price or whatever, that might be attractive.
But I think what I’m surprised by is how few people are trying. I would’ve expected many of these doors to be M&A people all over those companies being like, “What would it take?”
Turner Novak:
Do you think part of it is that there’s so much late stage capital that if I’m a founder, it’s not as hard as it maybe could be or should be to fundraise? And yeah, I could take a deal I could sell to Salesforce, but also there’s 18 people that are giving me $100 million and to keep going, it actually makes that easier-
Chetan Puttagunta:
It does.
Turner Novak:
... to stick on the path.
Chetan Puttagunta:
Absolutely. The private markets have gotten way bigger today than they were in 2012 and 2013, 2014, so that makes it much better. I think the other part of it is going public has gotten harder for companies, and I think there’s just-
Turner Novak:
Why is it harder? It’s the same thing. I mean, what’s so hard about it now?
Chetan Puttagunta:
The difference between today and even 2007 and ‘08 is the number of things you have to do to be a public company, there’s just more to do. Now, is it really difficult? No.
Turner Novak:
You should just hire a couple more people. It’s not that hard.
Chetan Puttagunta:
Hire a couple more people, pay a couple more consultants and they’ll do it for you. And so what I think is going to happen, and I think you already see it from the bankers, is there is a growing demand from public software investors, software PMs.
Turner Novak:
Because they’re looking at their universe and they’re like-
Chetan Puttagunta:
That’s right.
Turner Novak:
“This thing’s shrinking.”
Chetan Puttagunta:
That’s right.
Turner Novak:
“What is up with this company?”
Chetan Puttagunta:
You can already tell from our conversations with investment bankers, they’re already telling us, the software investors are telling us to bring them the AI application companies. And so for the first time in a long time, you’re starting to see investment bankers talk to companies under $100 million of run rate saying, “Do you guys want to start doing non-deal roadshows where you start meeting PMs of public software investors?”
This is quite a shift. A couple years ago, people would say, “Oh, you need 500 million of ARR before you can talk to any public investors because if you don’t get there, nobody wants you to go public.” Very different.
Whereas we just had a conversation with a banker who wants to organize a non-deal roadshow for one of our companies, and the company’s not yet at 100 million because it’s fundamentally really interesting technology, and there is a great deal of demand from public software investors to meet these companies. And for the first time in probably a decade, I’m hearing bankers say things like, “Yeah, 100 million ARR, we could probably take that public.” Haven’t heard that in a while.
Turner Novak:
Really? And it’s probably just because, I mean, it’s really the companies are growing fast and that’s all investors care about. They just want you to grow-
Chetan Puttagunta:
100%.
Turner Novak:
... as fast as possible-
Chetan Puttagunta:
That’s right.
Turner Novak:
... in a semi-healthy/will be healthy at the end state.
Chetan Puttagunta:
That’s right. I think if you just look into the public markets, how many companies in software are growing greater than 30%?
Turner Novak:
It’s zero.
Chetan Puttagunta:
That’s right.
Turner Novak:
It is right now, right?
Chetan Puttagunta:
Yes. And so-
Turner Novak:
You can’t be growing less than 3X to raise a Series A in venture land.
Chetan Puttagunta:
There you go.
Turner Novak:
If you’re below 3X year over your growth, I would say it’s probably better just to get the growth rate up, how to grow faster versus spending time.
Chetan Puttagunta:
Actually, I think the 3X thing is probably overdone. I think if you’ growing 2.5X still private.
Turner Novak:
Okay. Well, fair, yeah. But there’s a lot of private companies double from 50 to 100.
Chetan Puttagunta:
100%.
Turner Novak:
That would be really attractive.
Chetan Puttagunta:
And there are a whole bunch of private companies that want 50 to 150.
Turner Novak:
Yeah.
Chetan Puttagunta:
And it’s just-
Turner Novak:
And there’s public market PMs are like, “Give me that. I want that.”
Chetan Puttagunta:
That’s right. That’s exactly what they want. And they know because public market PMs also are stepping into private markets and meeting these private markets companies on their own and saying, “Wow, there’s a ton of growth in these companies.” If you’re sitting here as a software PM, you’re looking at your universe of software companies that are available to you as a public market investor. If I was sitting in that seat, I would be demanding the bankers bring me-
Turner Novak:
Give me this.
Chetan Puttagunta:
... AI applications, because again, if you’re a software PM that invested through SaaS, and I was talking to a hedge fund manager who was, at one point through SaaS, he was telling me he was long on a hundred software names.
Turner Novak:
Okay. And it would probably all grow in 50% a year.
Chetan Puttagunta:
He went long software starting in 2010, and he just decided this is clearly the future. And every time a software company came public, he figured out a way to enter that company, and they were extremely successful, et cetera. And his comment to me is, “When are you bringing your AI application companies to the public market? We need those in the public market because we’re completely starved for growth and all the growth is being just taken by these AI native companies. They’re all taking all the growth.” If you just look at net new ARR added, where’s it going? It’s really just going to all these AI companies.
Turner Novak:
I think maybe you saw the stat, you might know what I’m talking about, since ChatGPT launched, I believe this is about a quarter ago that I saw the stat that OpenAI and Anthropic added as much revenue as every single publicly traded software company. Did you see the stat?
Chetan Puttagunta:
I buy that.
Turner Novak:
And I mean, this was three months ago, so it’s probably even bigger now.
Chetan Puttagunta:
Right. And so I think there’s press about OpenAI revenue that had gone from six to 20 billion this year. I mean, that’s a lot. Net new 14 is a lot.
Turner Novak:
Yeah. Well, and part of the argument though for some of these AI companies is, oh, the valuations are so high.
Chetan Puttagunta:
Yeah.
Turner Novak:
How do you square that up then if you’re thinking about, what am I investing into? Maybe you’re doing a Series A, you’re doing a seed round, or you’re doing, it’s a public company but.
Chetan Puttagunta:
That’s right.
Turner Novak:
How do you justify the higher valuations on some of these companies?
Chetan Puttagunta:
I think it just depends on your fund size and your strategy. We have a very specific fund strategy. We’re a 500 million dollar fund with four equal partners. You know Eric, you know Ev, you know Peter, you know me.
Turner Novak:
I actually don’t know Peter, I’ve never met Peter before.
Chetan Puttagunta:
Oh, well.
Turner Novak:
I want him on a podcast. It’d be cool to meet him and have him on sometime.
Chetan Puttagunta:
Yeah. So it’s four of us and we’re investing in seed and Series A companies. And the primary goal of each of our investments is that we want to be the primary board member for the company. That’s the goal of every investment. And if a company’s not looking for that, then we don’t have a role to play. And so the valuation frankly is not the governor in our investment decisions. If you were to be a fly on the wall in one of our partner meetings, the discussion really isn’t about the valuation or the deal structure. We don’t spend very much time on that at all. The conversation is really about the company and does the partner that’s advocating for the company want to work with that entrepreneur, and do the rest of us want to work with that entrepreneur too and help them support and build something really meaningful?
And oftentimes, what you’ll find in our conversations is that when one of our partners is excited about a company, you’ll quickly find that the other three partners encourage you to lean in. I think this is where our incentive structure really helps because we all share economics equally famously, and so if my partner is excited to work with an entrepreneur to help them build something big, I want them to go do that. It’s like, “Yes, please, go invest.”
Turner Novak:
Go make me money.
Chetan Puttagunta:
Yes.
Turner Novak:
That’s, yeah.
Chetan Puttagunta:
100%, and so our incentives are fully aligned on that. And so when somebody gets excited, it’s very clear the firm helps rally and helps them gain elevation, helps them finish that investment. And so to us, that’s the governor. And then at the other side of that is also by having four partners, each of us probably has capacity to do two investments a year. And so as a fund, we’re doing, call it eight, nine, maybe 10 investments a year?
Turner Novak:
Someone gets really excited in one year.
Chetan Puttagunta:
That’s right. And so that means that you have on any given day, your time as the governor of, where do you want to spend time with? Who do you want to spend time with? And so that’s ultimately it. And that’s our strategy. And so that means that we have decided that that means that there’s a typical investment size and a typical ownership that we’d like to go for. And of course we’re very flexible on that, it’s like there’s no rules. We don’t have written rules that say we’re only going to do it if we get this much or that much.
Turner Novak:
The classic venture model is 20% Series A, $15 million check or something like that.
Chetan Puttagunta:
Well.
Turner Novak:
Or maybe, I don’t know.
Chetan Puttagunta:
When I started in the business, it was a little less than that.
Turner Novak:
Yeah, I don’t know. It’s all over now.
Chetan Puttagunta:
We’re doing something.
Turner Novak:
I mean I saw a, $4 billion seed round the other day.
Chetan Puttagunta:
There you go.
Turner Novak:
I don’t know, what is this anymore?
Chetan Puttagunta:
But I think for us, to be clear, we still have those rounds where you can write small checks and get meaningful ownership. This is part of the incubation effort that we have. We have EIRs, we’re helping incubate companies, and I think those opportunities still exist when you’re building relationships that early. And then there’s certainly companies that are much further along that have a little bit of traction or whatever, and they’re commanding a different market price, and that’s okay. And for us, as long as we have a relationship with the entrepreneur and can serve on the board, that’s cool. We’re flexible on that.
Turner Novak:
What’s the most untraditional kind of venture round when I’m a venture purist and I would scoff? What’s the one you think they would be the least characteristic of a-
Chetan Puttagunta:
You know what’s really interesting is that if you look through the history of Benchmark, there are times when Benchmark did these non-traditional investments. So if you look at the internet era, I don’t know if you know this, but Nordstrom spun out nordstrom.com and Benchmark invested in that corporate spin out as an example.
Turner Novak:
I didn’t know this. I know you guys invested like Jamba Juice. That was probably the craziest one I saw, it’s a movie shot.
Chetan Puttagunta:
If you want to scoff at traditional venture, there’s examples like this throughout our history. And perhaps the most famous, and I remember because I was just entering the ecosystem then, was when Benchmark did the growth round at Twitter, that was a very unusual move for Benchmark at the time.
Turner Novak:
Was it a Series C or something?
Chetan Puttagunta:
Yeah, that’s right. It may have been a Series B or a Series C, and that was considered a late stage round at that time, and it was very unusual to see a very early stage firm like Benchmark do that round. And so I think the thing that people like this narrative of somehow there was only one set of ideal deals that Benchmark has ever done since the founding for 25 years and all of a sudden the model has to change. It’s like, no, the model has always been you have a small set of partners working with companies that they really want to work with. A set of partners that really want to back a certain of fundamentally game changing ideas that end up becoming really large standalone companies. And that idea then has resulted in lots of flexibility on the other side of what does that structure look like? And the one thing that we haven’t done is created a family of funds and we haven’t gotten big as a partnership. We’ve continued to be small.
Turner Novak:
There was an era, early Benchmark, you went to Europe.
Chetan Puttagunta:
That’s right.
Turner Novak:
I remember an Israel fund maybe too.
Chetan Puttagunta:
That’s right. There was Benchmark Europe, Benchmark Israel, Benchmark US. I was in the venture business then. I wasn’t at Benchmark, but yeah, Benchmark had and then decided to get small again, and we’ve been small since.
Turner Novak:
And you think that was the right move?
Chetan Puttagunta:
Absolutely.
Turner Novak:
To get smaller?
Chetan Puttagunta:
Absolutely. I think now other people have built incredible franchises by getting big.
Turner Novak:
Yeah. There’s people that do more in management fees every year than your fund size.
Chetan Puttagunta:
That’s right. Multiples of our fund size in management fees. I think that’s a great business. And I think you’ll eventually see venture firms that are public too. And I think that’s okay, I think that’s great. And I think ultimately, you have to come back to the partners themselves and what kind of organization do they want to be a part of.
And for us, we want to be a part of an organization where you could do deals like Manus and Sierra and Legora and Fireworks and LangChain all in a span of 12 months. All of those deals are completely consistent with how we want to practice the venture business. And specifically, in all of those, you have a Benchmark partner partnering with a founder, joining the board, and working with the entrepreneur to create a really big business.
Turner Novak:
Do you think that is maybe an outdated model of that we must own 20% in your Series A? That approach of I have this rigid portfolio construction based on the rules that have become memes over the years, whatever, is that not a good approach to venture anymore?
Chetan Puttagunta:
I think everybody should approach venture however they want to approach it. Everybody’s on their own journey, everybody has their own strategy.
Turner Novak:
This is the most complicated, but I mean, I’ve heard Eric told me, he’s just like, “We’re trying to just find people building the best companies and just be there and own a part of it and that’s how you make money in venture.”
Chetan Puttagunta:
That’s right. And I think, look, there is a model that works really well, which is the YC model. They have a very specific structure, specific amount of money, there’s an incubator program, and there’s a specific ownership on the other side of that. And I think that’s a fantastic model. And I think YC is great value for founders.
Whenever founders ask me the question of, “Should we do YC?”
I say, “Absolutely, yes.”
Turner Novak:
A good chunk of your personal portfolio companies have done YC, right?
Chetan Puttagunta:
That’s right, yeah. I am a huge fan of YC. I think it’s a great program, I’m a big fan of the partners there. And so I think YC has a very specific structure.
There are other incubators and other early stage funds that have very specific things that are like, “We only want to do deals that are this specific tech size, this kind of ownership.”
And I think that’s a winning strategy as long as you don’t have FOMO and you very specifically focus on, “I only want to do these kinds of investments.” Okay, great.
But the way we’re structured is we’re generalists, we’re a group of generalists, and we want to invest in really exciting companies. And look, the last investment I did was a crypto company.
Turner Novak:
Oh, this was Fomo.
Chetan Puttagunta:
That’s right.
Turner Novak:
I was like, “What the hell is this?” I was like, “What?” You’re like, enterprise... I always thought of you as enterprise software.
Chetan Puttagunta:
That’s right.
Turner Novak:
Manus is consumer AI, and crypto.
Chetan Puttagunta:
Yeah, consumer crypto. So if you look at the two investments that I made in 2025 were both consumer apps.
Turner Novak:
You’re rebranding, you’re going through a phoenix moment of enterprise SaaS has been burned to the ground by the public markets.
Chetan Puttagunta:
But I think fundamentally, if you go back to, again, what is that motivated by? I just thought the entrepreneurs in both cases were extraordinary. And as a generalist, you understand what they’re working on. You have a deep appreciation for the product they’re building, and how they’re approaching the problems. And honestly, I just wanted to work with both of them.
I just really think at Fomo, it’s Paul and Se, they’re amazing. They’re just extraordinary entrepreneurs that want to bring a totally brand new experience of crypto to consumers. You’re well versed in this, versed in crypto, but.
Turner Novak:
I mean, I don’t know. I’m just like, “It’s all a scam.” It’s just people scamming you. So what’s the different thing? Are they scamming you in a more polite way?
Chetan Puttagunta:
Absolutely not. Crypto is, to me, the way I think about crypto is that it has a huge on-ramp and there’s a big barrier to entry. I think that’s part of why there is fraud and scams is because it’s very hard to onboard onto crypto, and very hard to manage crypto.
Turner Novak:
Yeah. I remember buying my first NFT. Everyone’s like, “Oh, this is the future. It’s so easy.” It took me 30 minutes to-
Chetan Puttagunta:
100%.
Turner Novak:
... get MetaMask up and I bought this NFT.
Chetan Puttagunta:
That’s right.
Turner Novak:
And I was like, “There’s no way.”
Chetan Puttagunta:
That’s right.
Turner Novak:
“There’s no way this is like, your plane ticket is an NFT? Come on.”
Chetan Puttagunta:
That’s right.
Turner Novak:
This is not.
Chetan Puttagunta:
The experience is so frictionful that... And then it’s very easy to analogize back to my own personal experience, which is like crypto to me has been hard for me to experience as a software investor because it was such a frictionful experience to get crypto or to get an NFT or to experience anything on chain. And I met Paul and Se, and they told me to download the Fomo app and try something, and I did and it was consumer grade, and I was like, “Whoa.” And there’s a built-in social graph and all this kind of stuff with UGC. All these kinds of elements that are very classically software just applied to a new industry.
Turner Novak:
If I search Fomo in the app store, will it come up?
Chetan Puttagunta:
Yeah, absolutely. And I think that these are the kinds of things that I look for.
Turner Novak:
It begs another question of what do you, or what do you feel like Benchmark looks for in founders that you’re trying to back? We’ve talked a lot about a bunch of different stuff, but if I were to soundbite this, what is it that you guys are looking for?
Chetan Puttagunta:
The through line for the entrepreneurs that I’ve worked with is that they have some deep insight on the problem that they’re really passionate about. And it could be just serially going backwards from the investments I’ve done, it’s like could be consumer crypto, could be consumer AI, it could be legal AI, it could be document processing, could be sales tax. It could be stablecoins, it could be payment rails, it could be integration software, all of these things. The common line in all of them is I’m typically investing seed, Series A, usually there’s no product, usually there’s no revenue, usually there’s no metrics.
For example, Manus, I did pre-launch. This was a beta product, and there’s some deep insight that the founder has, some deep perspective that the founder has. And intuitively, as soon as I hear that, you’re like, “Yes, that’s absolutely obvious and that’s how the world should function.” And when I hear that, I want to work with those founders. And for me, that’s like the number one thing above all else.
The great thing about being an early stage investor is you get to go with these founders on these journeys and then it’s okay if it doesn’t work. The thing that is a mistake as an early stage investor is missing out on the companies that work, not investing in companies that don’t work. If a company doesn’t work, it’s okay. It’s a 1X error. If a company works, it can generate a lot of returns.
Turner Novak:
1000% IRR.
Chetan Puttagunta:
Yes, that’s right. And so you just want to be in companies that work, and so you don’t worry about the downside. And so when you have this view, as I do, that you just want to work with founders that have a deep passion for a sector or a problem and have some unique insight as to why that opportunity is now available and why they’re uniquely positioned to address this problem, I want to back them.
Turner Novak:
Maybe this is an interesting, probably last thing we can talk about. You told me that one of those interesting insights was with code gen, some things that you saw, some stats. It’s also a company where they publicly, there’s negative gross margins. There’s people like, “Oh, these companies are...” You read some of the consensus maybe a year or two ago, it’s like six months and these things are going bankrupt.
Chetan Puttagunta:
Right.
Turner Novak:
So what was the thing you got excited about there? And then the margins, how did you get comfortable with that?
Chetan Puttagunta:
Look, we’re investors in Cursor. I think code generation, and look, one of the Manus primary use cases was also code. I think that we’re very early in how much code can be generated for the world. And two, the thing that surprised me is how much demand there is for code generation across consumers, B2B, prosumer, there’s just massive demand for code generation products. I do think that the margin question at the moment is a little too early to make a final verdict on, we don’t know. And the thing that is happening that you may have seen, for example, is where Eric is on the board of a company called Cerebras, which is a very specific AI chip that speeds up inference. Once that chip starts to propagate and you start to see AI technology run on that chip as an example.
Turner Novak:
It’s like an AI native chip, right?
Chetan Puttagunta:
That’s right.
Turner Novak:
Where it’s built for running AI native workflows on top of that.
Chetan Puttagunta:
Inference goes way faster on a Cerebras chip as an example. So if you speed up inference dramatically, so the thing we don’t have yet is we don’t have AI specific chips beyond NVIDIA, we don’t have AI specific clouds. We’re starting to get that. We’re starting to get AI chips, we’re starting to get AI clouds like Fireworks. We’re starting to get AI infrastructure built. Once all of that gets built, then we’re going to start to see a stabilization of the infrastructure parts, and then only then are we going to actually understand what the gross margin characteristics of these things are going to be.
But right now, I think it’s too early to judge the P&Ls of these things. All you can actually just get a sense of is the consumer, prosumer, and B2B demand. And right now, we haven’t hit the ceiling of that demand. The more we produce coding models, the more we generate code, the more we make code generation faster or more efficient or more accurate, there just seems to be more and more pull of it. And I think if you just look at the amount of revenue generated by code generation, it’s gone zero to a couple billion really fast.
And you can count that at the inference layer, you could count that at the application layer, whatever you want. It’s probably the fastest growing software market in the world right now, so you can judge this demand side of it. And I think it’s way too early to understand what the long-term margin characteristics of this sector is going to be.
Turner Novak:
Is there anything else you want to talk about at all?
Chetan Puttagunta:
No. I think it’s perfect.
Turner Novak:
I had a bunch of other stuff. I know we got to get going.
Chetan Puttagunta:
Oh, I’m sorry.
Turner Novak:
I probably need to eat this banana before we cut the film. Actually, do you know how to break a banana in half?
Chetan Puttagunta:
No.
Turner Novak:
Have you ever seen this?
Chetan Puttagunta:
Wow.
Turner Novak:
Have you ever seen that before?
Chetan Puttagunta:
No. That’s amazing.
Turner Novak:
Yeah. One of my skills in life is opening there.
Chetan Puttagunta:
Amazing.
Turner Novak:
Well, this was a lot of fun. Thanks for doing this.
Chetan Puttagunta:
Thanks for having me.
Turner Novak:
Do you want the other banana?
Chetan Puttagunta:
I’m good.
Turner Novak:
That’s a good place to cut it right there.
Chetan Puttagunta:
Yeah.
Turner Novak:
You’re refusing my banana offering.
Chetan Puttagunta:
Yeah.
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