20VC: Leading Anthropic's First Ever Round | Will Open Source Threaten Anthropic's Business | Do Margins Matter in a World of AI | Why Triple, Triple, Double, Double is Not Good Enough Today | Why Series A is Hard Today with Matt Murphy @ Menlo
Episode
62 min
Read time
3 min
Topics
Productivity, Relationships, Investing
AI-Generated Summary
Key Takeaways
- ✓Ownership vs. Entry: Menlo passed on 1% positions in Eleven Labs, StarCloud, and Deal — all of which would have returned significant capital. Murphy's framework shift: being in a winner at 1% ownership outperforms owning 20% of a company exiting at $300–500M. In today's outlier-driven market, getting into the right company at any ownership level beats missing it entirely over ownership thresholds.
- ✓SPV Strategy for Concentration: When a fund's per-company cap (e.g., $100M in a $1B fund) is insufficient for a breakout company, SPVs allow continued offense without breaching fund mandates. Menlo's first-ever SPV exceeded $500M for Anthropic's follow-on round. The trigger: LP enthusiasm after an Anthropic executive presentation convinced the partnership to sign a term sheet within two weeks.
- ✓Series A Barbell Approach: Series A is the worst risk-adjusted insertion point today — companies show $1–3M ARR at $200–400M valuations with unproven PMF. Menlo's response: a barbell strategy of seed checks up to $8M (tripled from $3M) deployed quickly by three partners, combined with late-stage entry into clear category leaders above $10M ARR where winner dynamics are established.
- ✓Open Source Won't Displace Frontier Models: Application companies using Anthropic report measurably higher customer retention and user engagement versus open source alternatives, making the cost savings insufficient justification to switch. Murphy's framework: companies will run hybrid stacks — roughly 50% frontier model, 50% open source — with intelligent routing layers like OpenRouter optimizing across price, reasoning, latency, and performance at scale.
- ✓Gross Margin Path Matters More Than Current Margins: Many hypergrowth AI application companies currently run 20–30% gross margins due to inference costs, but the investable question is whether a credible path to 60–70% exists. Murphy's diligence framework: can the company reduce model dependency through open source integration, proprietary fine-tuned models on their own data, or multi-model routing to structurally improve unit economics over 18–24 months?
What It Covers
Matt Murphy of Menlo Ventures details how he led Anthropic's first round at a $4B valuation with a $10M check, later orchestrating a $500M+ SPV — the firm's first ever. He covers open source threats to frontier models, why Series A is the hardest insertion point today, and how venture return math has fundamentally changed.
Key Questions Answered
- •Ownership vs. Entry: Menlo passed on 1% positions in Eleven Labs, StarCloud, and Deal — all of which would have returned significant capital. Murphy's framework shift: being in a winner at 1% ownership outperforms owning 20% of a company exiting at $300–500M. In today's outlier-driven market, getting into the right company at any ownership level beats missing it entirely over ownership thresholds.
- •SPV Strategy for Concentration: When a fund's per-company cap (e.g., $100M in a $1B fund) is insufficient for a breakout company, SPVs allow continued offense without breaching fund mandates. Menlo's first-ever SPV exceeded $500M for Anthropic's follow-on round. The trigger: LP enthusiasm after an Anthropic executive presentation convinced the partnership to sign a term sheet within two weeks.
- •Series A Barbell Approach: Series A is the worst risk-adjusted insertion point today — companies show $1–3M ARR at $200–400M valuations with unproven PMF. Menlo's response: a barbell strategy of seed checks up to $8M (tripled from $3M) deployed quickly by three partners, combined with late-stage entry into clear category leaders above $10M ARR where winner dynamics are established.
- •Open Source Won't Displace Frontier Models: Application companies using Anthropic report measurably higher customer retention and user engagement versus open source alternatives, making the cost savings insufficient justification to switch. Murphy's framework: companies will run hybrid stacks — roughly 50% frontier model, 50% open source — with intelligent routing layers like OpenRouter optimizing across price, reasoning, latency, and performance at scale.
- •Gross Margin Path Matters More Than Current Margins: Many hypergrowth AI application companies currently run 20–30% gross margins due to inference costs, but the investable question is whether a credible path to 60–70% exists. Murphy's diligence framework: can the company reduce model dependency through open source integration, proprietary fine-tuned models on their own data, or multi-model routing to structurally improve unit economics over 18–24 months?
- •Relationship Timing Determines Deal Outcomes: The most common reason Menlo loses competitive deals is arriving weeks before a round closes while a competitor has a year-long relationship with the founder. Murphy's counter-strategy: Menlo's Anthology Fund deploys $100K–$1M checks into 50+ seed-stage companies, creating cap table presence that makes the firm 10x more likely to lead or participate meaningfully in subsequent rounds when breakout signals emerge.
Notable Moment
Murphy reveals that Menlo had never executed an SPV before the Anthropic follow-on — and the first one exceeded $500M. He describes the fundraising process as unexpectedly grueling, generating genuine empathy for founders, with occasional investor rejections and repeated due diligence questions making it the most nerve-wracking period of his career.
Episode Transcript
I think the foundation models, let's say specifically anthropic, have such special models, performant, intelligent models. This can be hard for somebody to just kinda say, I've used open source with my data. It's going to be functional and positive for some amount of what you're doing, but I just don't think it can be powerful enough to really, you know, displace it. This is 20 VC with me, Harry Stebbings. Now joining me in the hot seat today, we have someone I've known for ten years. Matt Murphy, partner at Menlo. He's the guy that led the deal into Anthropic. I mean, Jesus. If anyone's got brownie points inside a firm for leading a deal, it's the dude that led Anthropic. Come on. He can do anything for years and he's got a hall pass. But then he follows it up with check this out. Investing in lovable and then investing in Legora? I mean, this man is just hitting banger after banger. Matt is on a tear right now almost more than any other venture investor. And so, it was an incredible opportunity to sit down with Matt. He's a dear friend and this is honestly two friends shooting the shit, if I'm allowed to say that, and having a great discussion. But before we dive into the show today, founders face a different set of challenges at every stage of growth. For Sid Sheit, cofounder and CEO of Dmatrix, JPMorgan delivered the guidance and expertise to help navigate what came next. He credits JPMorgan's high touch approach with supporting Dmatrix as it grew and expanded internationally. Whether you're in the early days or expanding into new markets, JPMorgan helps startups navigate complexity with real confidence, offering personalized guidance and deep sector expertise. Find out how JP Morgan helps founders at jpmorgan.com forward slash grow without limits. JP Morgan is the bank of the innovation economy. While JP Morgan supports growth, Corgi protects it. My word, what an arresting first line. Get your ass covered with Corgi insurance and I'll tell you why. If you're running a business right now, you already know this pain all too well. Getting insurance, it's really slow, it's confusing, and my word, it's full of paperwork. Well, that's exactly why Corgi is here to change the game. Corgi is the first and only insurance carrier designed specifically for tech companies, allowing you to get covered in minutes instead of days. Corgi provides essential coverages for all growth stages such as DNO, E and O liability, cyber, commercial, general liability, and more. Get your ass covered. I love the way we say ass with Corgi Insurance alongside thousands of other start ups at corgi.com/20vc today. That's corgi.com/20vc. You won't regret it. While Corgi covers risk, Flex gives you room to move. Business owners run their whole financial life on Flex. One platform from business revenue to their personal spend, float every purchase for sixty days, tap capital that grows with your revenue, and …
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Books, tools, and gear mentioned in this episode
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Tools
“companies will run hybrid stacks — roughly 50% frontier model, 50% open source — with intelligent routing layers like OpenRouter optimizing across price, reasoning, latency, and performance at scale.”
company
“Menlo passed on 1% positions in Eleven Labs, StarCloud, and Deal — all of which would have returned significant capital.”
“Murphy's counter-strategy: Menlo's Anthology Fund deploys $100K–$1M checks into 50+ seed-stage companies, creating cap table presence that makes the firm 10x more likely to lead or participate meaningfully in subsequent rounds.”
“Matt Murphy of Menlo Ventures details how he led Anthropic's first round at a $4B valuation with a $10M check, later orchestrating a $500M+ SPV — the firm's first ever.”
“Matt Murphy of Menlo Ventures details how he led Anthropic's first round at a $4B valuation with a $10M check, later orchestrating a $500M+ SPV — the firm's first ever.”
“Menlo passed on 1% positions in Eleven Labs, StarCloud, and Deal — all of which would have returned significant capital.”
“Menlo passed on 1% positions in Eleven Labs, StarCloud, and Deal — all of which would have returned significant capital.”
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