Lucas Swisher on How Mega Funds Can Still Do 5x Returns & Why Big Markets are the Most Important

Quick Overview

Lucas Swisher asserts that price matters least when evaluating high-growth private companies, emphasizing that the focus must be on identifying platform companies in gigantic TAMs capable of delivering 100x or greater outcomes, as they drive the majority of venture capital value creation.

Key Points: The public SAS market struggles because the AI wave questions the terminal value of software annuities, causing investors to question which SAS companies will survive. Swisher states that when evaluating exponential growth companies, valuation is the last question answered; the primary focus is finding companies on a curve that can 5x, then 3x again, such as a company growing from $20M ARR to $600M ARR quickly. The critical test for an investment is determining if the company can become an enduring public company potentially worth $50 billion or $100 billion market cap, requiring belief in $50 billion of revenue to go get. Mega funds can still achieve venture-like returns because companies are staying private longer and achieving bigger outcomes, allowing funds to deploy large checks and double down on winners, which is necessary for fund math. Swisher believes that market size is the first principle; a great founder in a small market struggles to reach $100 billion valuation compared to a good founder in a gigantic market. Margin matters at scale, but early-stage technology shifts, like AI, can feature horrific margins initially, citing Snowflake and Data Bricks as examples where this was misleading. The 'kingmaking' concept is dismissed; while large capital concentration provides an advantage, it does not guarantee success or prevent other businesses from building great value.

Context: The discussion is an interview between a podcast host and Lucas Swisher, co-lead of the growth fund at CO2, focusing on current dynamics in public Software as a Service (SaaS) markets and the investment strategy required to achieve significant returns (like 5x or more) in the private technology investment landscape, particularly in the context of the ongoing AI wave.