From 'heartburn' to $14 billion: Inside Menlo's early Anthropic investment that broke all the rules.

In an ambitious move that defied conventional wisdom, Menlo Ventures decided to invest in Anthropic, a company viewed as a potential rival to OpenAI, despite the risks involved. At the time of their initial investment in early 2023, Anthropic was still pre-revenue and in the midst of seeking a valuation of $4.1 billion—a figure that far exceeded Menlo's typical investment range. Yet, partner Matt Murphy was captivated by a five-minute Zoom meeting with co-founder and CEO Dario Amodei, where he sensed an opportunity in the burgeoning AI sector. Murphy described his initial impression of Amodei as transformative, noting the CEO's energy and the innovative vision he presented. Despite the prevailing dominance of OpenAI, which boasted a valuation of $29 billion, Murphy believed that the market could sustain multiple significant players. "I was blown away by his energy and the potential of what they were building," Murphy said, highlighting the importance of being involved with Anthropic. As Anthropic gears up for a public offering later this year, Menlo Ventures stands to gain substantially, with estimates suggesting their $1 billion investment could soar to approximately $14 billion. Menlo has participated in every funding round since their initial stake and has also launched the Menlo Anthology Fund to support early-stage AI startups. This investment has marked a turning point for Menlo, which, despite its history of successful investments in companies like Uber and Roku, has often been overshadowed by more prominent firms in Silicon Valley. Recently, Menlo announced that it raised $3 billion in funding—more than double what it had achieved three years prior—underscoring its renewed position in the venture capital landscape. Anthropic's latest funding round has valued the company at an astonishing $965 billion, outpacing OpenAI's recent valuation. This growth trajectory would have seemed improbable just a year prior when Menlo first entered the scene. Murphy, who joined Menlo in 2015 after leaving a larger firm, has long believed that even in markets with clear leaders, there’s always space for strong challengers. Reflecting on the competitive landscape, Murphy noted, "There's typically at least two independent companies in any venture market, and one can emerge as a significant player while the other still finds success. We recognized that even being the second player in this massive market could yield great results." Murphy was also impressed by Anthropic’s efficiency and technological prowess, particularly considering it had achieved significant milestones with comparatively less capital. The company, founded by Amodei and several former OpenAI employees, sought to advance AI responsibly, a mission that resonated strongly with Murphy. While Menlo participated in Anthropic's Series C, they opted not to lead, a decision Murphy later regretted. However, they made a strategic comeback by leading the Series D round, contributing their largest investment to date. Despite initial skepticism surrounding the company’s valuation, the momentum shifted dramatically as Anthropic’s revenue skyrocketed to nearly $1 billion by December 2024, marking an impressive tenfold increase within a year. Murphy’s investment philosophy has always embraced the potential of underdogs in the tech industry, and in hindsight, he acknowledges that they were fortunate to seize the opportunity when they did. "As soon as we recognized the breakout potential, we acted swiftly," he concluded, reflecting on the remarkable journey of Anthropic and the transformative impact it has had on Menlo Ventures.