Speaker 19 billion doesn't clear the bar for seed investing in 2026. Let me tell you one thing I guarantee. If you get 15x on your failures in venture, you'll die a rich man. The VC money ran out on Entropic and OpenAI long ago, which is why no VC owns more than 1% or 2% of either of them. What if it all goes right? Entry price for any of these winners doesn't matter. They'll go out whatever price they get in 2027 because they can't wait any longer. If danger can be described as the absence of choice, they were now in danger. It's all about code. That's the only sense that matter. Your time is the entire US GDP. Thanks a bunch, Dario. Good to know.
Speaker 2I think you have to believe we're less than a third of the way through this cycle. Jesus Christ, if 30% of my company leaves to go work for Harvey, I'm dead in the water.
Speaker 1Silicon Valley forgets every three years that the average American is not trying to be efficient.
Speaker 3Welcome back to another week with the Trio. This is my favorite 20 VC of the week. So we have Jason Lemkin, Rory O'Driscoll, and me discussing the biggest news that happened this week. And hell. NVIDIA are going fast. One, they're buying Poolside for $12 billion. Two, they're investing in McCall's $20 billion price round. Three, they're investing in Perplexity's $30 billion price round. Then we move to OpenAI, where CFO Sarah Fry says, hey, we're definitely going public this year. Well, they had no choice. Science2Anthropic also doing the same. And then we discuss a really tough week in the public markets for a lot of the biggest AI names. What to expect moving forwards. And whether this is... A short term or a long term. And how to think about that moving forwards. But before we dive into the show today, when you're building a company, you learn that trust is what closes deals. You may have the best product, but no buyers will sign these days without proof of your security. Here's what happens if you're not prepared. A prospect asks for proof of compliance. The deal stools when you scramble. Your engineer gets pulled off the roadmap to audit prep. Every enterprise conversation turns into this horrible fire drill. That's where Vanta comes in. Vanta is the leading agent. And it's a fantastic trust platform that not only gets you compliant fast with frameworks like SOC 2, ISO 27001, HIPAA and GDPR, but keeps you compliant by continuously monitoring your controls. So your deals keep moving and your engineers really keep building. Now, access the Vanta agent everywhere you work, even if your team lives in Claude or Cursor. And that's why Vanta is trusted by more than 16,000 companies like Ramp, Harvey and Reiter. So prove you're ready for business. When you go to vanta.com/20vc, that's vanta.com/20vc. While Vanta keeps compliance covered, deal helps you hire globally. We get it. Global IT can be a headache. New hire in Tokyo, but the laptop, well, it's stuck in London. Someone left the company last week. Wait, is that access already revoked? Deal IT handles hardware, software and access to across 130 countries from one system. You have the right to be impressed. Brands like Eleven Labs are already managing their global IT at scale with Deal. It's one system, one source of truth with zero vendor gaps or manual workarounds. So build your global team with Deal. Visit deel.com/20vc and start expanding your business today. While Deal builds the team, Framer builds the site. When a new landing page turns into a pile of tickets and handoffs, Framer helps your team move faster. Here's what I love. Framer is the pro AI website builder for creators, teams and businesses that really care enough to get every detail right. The agents close the gap between AI generated ideas and production ready website work because it all happens where the site actually lives. It lands on the canvas, it stays editable, and it can be published when the team is ready. Build custom code components, create and manage CMS content, optimize SEO settings and ship everything all in one place. The agents bring speed and scale. You bring taste, judgment and confidence. And if you don't have the tools to do that, you're not going to get anywhere. It's an enterprise level solution, premium hosting, enterprise grade security and 99.99% uptime SLAs, which is why the world's leading brands like Perplexity and Miro build in Framer. Learn how you can get more out of your site from a Framer specialist or get started building for free today at Framer.com/20vc for 30% off a Framer Pro annual plan. That's Framer.com/20vc for 30% off. Framer.com/20vc for 30% off a Framer Pro annual plan. Framer.com/20vc for 30% off a Framer Pro annual plan. Framer.com/20vc for 30% off a Framer Pro annual plan. You have now arrived at your destination. Guys, I am so excited for this. It's so nice to be back. I feel like locked in when I'm in the studio. I have my big table. I have the agenda. And we're going to start with Nvidia moving across different layers of the stack. And we're going to start with the model layer where Nvidia is paying $6 billion to license Poolside's model factory and investing a billion dollars more at a $12 billion pre-market price. valuation, moving 109 engineers over to Nemotron to help build it. Pretty big news, especially on the American open model front. Agreed. Man, the one that gave me the feels or that hit me was
Speaker 2that letter that was, you know, the investor letter that was published on X. Thanks, leaking VC, or whomever it was, but basically saying, you know, we couldn't raise the $2 billion to buy 40,000 GPUs. That deal that maybe we talked about half a year ago, it seemed like they were going to build their own massive data center. They couldn't get the money and they wouldn't have compute going to next year. So they had no choice but to fail up for $6 billion, plus topping off $1 billion to $12 billion. But it read almost depressing. It's also maybe a reminder that despite NVIDIA seemingly funding everyone on planet Earth, you know, the gravy train, the VC gravy train can only last so long. There's only so much funding, right, from big funds. Maybe Rory sees it differently, but it seemed like tough. They couldn't raise the $2 billion in this environment. Not being critical, but it just showed that infinite capital isn't as infinite as it looks
Speaker 1even in the age of AI. First of all, I thought it was an excellent letter. I mean, I read it and I reread it, and there were some really good phrases in there. One of them I want to pick up, and it said, you know, we have found ourselves on the right side of prediction in a market which has scaled exponentially in terms of capital intensity, which is nice. But what they're basically saying is we were right three years ago that there was a market for a U.S. open source model, and we've built that model. We've done everything we said we'd do. And the capital intensity for the next turn of the model crank is just, as you said, way beyond us. Nicely phrased. A couple of things here. You could look at that and go, I mean, they did something that they took on a task they weren't able to do with the capital. Oh, that's a negative. On the other hand, they made money for themselves and all their shareholders. And I think the lesson here is, and we talked about it last week, in a market that's exploding, sometimes bets that on a standalone basis really just can't get to a positive DCF. You know, they just couldn't make the math on a standalone basis. Still have pretty significant value to the acquirer. Because from the perspective of NVIDIA, they looked at exactly the same facts and said, well, we have capital. It turns out we have access to GPU because we make GPU. And you've kind of carried the ball down the field this far. We'll take it from here. And frankly, we'll give you a pretty compelling return. I mean, I know you're a small poolside shareholder, Harry. So all those guys made really good money and the company gets to go standalone and continue on. So in one kind of negative way, the lesson is it's almost impossible to compete now at the front end. And I think that's a really good lesson. And I think we're on the frontier. And by the way, that has positive implications for OpenAI and Entropic, we should talk about in a second. So the negative lesson for everyone else is it is almost the next smartest people who are really going for it just hit the capital wall. So probably all the other people behind them are going to hit the same wall. That's the negative implication. And the positive implication is sometimes trying and moving the ball in a hyper growth market, you can still get a very compelling acquisition. In a different market, if you'd run out, quote unquote, run out of money, if you had reached the next level, you'd be in a very compelling acquisition. But if you're in the next generation, where you can no longer finance the company, in a time when the capital markets were depressed, or there was some feeling that the overall buoy around equity, I say around AI wasn't as strong, you might have had a very different outcome there, because your fate was outside your control. But I think in this market, it pays to take risks. It's what we're talking about last week in Cursor. And I'm sorry if I'm rambling a little. Even when you have this kind of all on a DCF MBA basis, it's not quite great. It turns out if you're moving in the right direction, and you execute and build a product of valuable, right now you're getting great exits. I think there's gonna be a ton more. I think I said last week, there's gonna be a ton more of these kind of exits. I read that and I thought, as an investor, if all the time you're saying is sometimes doing things where there is a fair amount of capital raising risk can still pay off in a nut market. In a very different market,
Speaker 3it wouldn't have, but here it did. Additions that I'd have is like, unwaveringly common thing that I see across all investors that I engage with, brands, people we have on the show, is like Neo Labs just going out of favor, and next generation model providers and companies. And I think that's a very good point. And I think that's a very good point. Going out of favor too. And I'm not surprised that Poolside found it challenging to raise as much as they did. That's universal from everyone that I speak to. Second, founders are gonna make a billion each. And then third, is that for me as an investor, I don't know if I'm allowed to say this, but I get in trouble, whatever I say these days, so fuck it. It'll be like a 15x for us as a
Speaker 1seed investor. Pretty great. Absolutely. Pretty amazing. Agreed. I think I was very on crisp a few minutes ago. When you're in the direction of travel, even when you're wrong, you can make a ton of money because you've created something of value to the acquirer. Does this really move the
Speaker 3needle for NVIDIA in their ability to make Nemotron truly competitive? Well, there's two questions
Speaker 1within that. One is, is this additive to Nemotron? And then the second question is, does Nemotron, even if it is competitive, does it move the needle? But if you zoom out a level, right now, there's a whole bunch of Chinese open source models that are getting a lot of the token volume, which means they're doing a lot of the compute, even if they're not getting a lot of the margin. And if I'm the maker of compute, It's awesome for NVIDIA if there's a viable US open-source model model running on NVIDIA chips, taking market share away from the frontier models at the margin. So I totally get why they're doing this. An open source model is a compliment in the economic sense of the word for NVIDIA, because the more open source market share there is, the more money goes to chips relative to the money that goes to financial model builders. So they're like, yay, team. I don't think 15x is good enough for a seed investor in Poolside. Listen, first of all,
Speaker 2let's step back. Seed has a weird definition today. Seeds could be at a billion or two billion pre or post, right? 15x sounds good for a later stage investor. And I know it scales scale. That's a good outcome, right? But for a true seed investor, you're not going to get a fund return out of a 15x. Listen, if you're a personal investor, it's fine. But if you've got a seed fund and you're investing, just a reminder, if you're investing at some of these valuations, it may not be enough. You're not going to get your 50 or 100x out of 9 billion.
Speaker 1But Jason, play it back. I hear you, but what we're really saying is you made a bet and it didn't work. It was not viable. And you
Speaker 2still made a 15x. No, I'm saying 9 billion isn't enough of an exit for seed investments today. I agree. But 9 billion doesn't clear the bar for seed investing in 2026. That's the irony.
Speaker 1So there's two things in that. I'm going to push on it because I often use it as a way to refine my own thing. One, it is weird that you can have an exit at 9 billion and only make 15 times your money, which by definition would imply a 600 million pre money, right? So yes, it turns out if you do a seed deal at 600, not 60, your return is-
Speaker 2Well, so the dilution is epic these days too, right?
Speaker 1Effectively, it's what your point. It's ex post facto. Ex post facto, the effective price was 600 because you took all the dilution. You're exactly right. Jason, I'm going to go back to, is 15x a great return on your best deal for a seed fund? No. But if you're doing a series of bets, one of them is a, hey, I built, I think I can build an American open source model and you can raise enough capital to do it. And it turns out that thesis is not correct and you can't raise capital to meet the capital intensity and you still get a 15x. Let me tell you one thing I guarantee. If you get 15x on your failures in venture, you'll die a rich man. And that's what happened here. And I don't like calling it a failure because I know Jason, I think they're awesome. I actually love the letter they wrote. I love the kind of vision they talked about what they want to do in terms of open source. I think they just ran into economic reality of the capital intent. And remember, we say the VC money went out. The VC money went out on Entropic and OpenAI long ago, which is why no VC owns more than 1% or 2% of either of them. The only people capable of financing a state-of-the-art frontier model in the United States of America has been the hyperscalers themselves. The only reason Entropic and OpenAI exist is because Microsoft, Google, and Amazon gave them enough money to play because no one else on the planet has enough money. And the only other person who now has enough money is NVIDIA. So they're doing the same thing with an open source model for the obvious reason that open source is good for them. There are only four or five companies in the world that can finance a financial model and they are doing it. And the VCs have been along for the ride and to provide an occasional piece of pricing discipline. These are financed by the five largest companies on the planet, except for Apple, who sticks their money in their pocket and just has the stock go up.
Speaker 2Obviously, if you can get 15x out of your pull side, of course, was not a failure. It's a big win, right? But if you get 15x out of your failures, you're going to be a wildly successful investor. Just the only point I'm going to make is that if you can get 15x out of your pull side, let's move on. It's just interesting. I do think unless it's a hyper-concentrated investment, your best investment still need to do 50x as a seed investor to make the math work. If pull side returned 15x with further dilution, what exit price would it have to be to be a good seed investment to return 50x? Help me do the math, Rory. I think it's about 7x. So it would
Speaker 1need to exit at about 63 billion with dilution. If you think about it, Jason, the answer to the question is actually very noble. You're paying in the frontier model game, the two winners in that game in closed source are both worth a trillion. The two or three ostensible open weight winners in China are each worth 50 to 100 billion. So it was a rational act. The win, if you could have done it, was in fact large enough to be, you could have had 100 to 1 return on a seed investment if you'd been able to be, possibly if you'd been able to be equivalent to the Chinese open source players, and definitely if you'd been a winner like OpenAI or Entropic. So my point is this, the potential was there for that bet, which is why, at the time, it was a rational bet. And then the capital markets were such that you couldn't get it, and you still got a 15x. That's the movie. So it was a good bet because it was one of the few businesses on the world-- I mean, there's only going to be $1 or $2 trillion outcomes per decade, and they're likely going to be all concentrated for now in frontier models. And this was a play at a frontier model. And basically, the aha is, if first prize is a trillion dollars, turns out fifth prize is still $9 billion. You don't golf on the last day. When you don't win, you miss a few putts. You don't even come in second in the US Open. You come in seventh, and everyone goes, oh, poor you. And then you think to yourself, oh, it's $5 million. I'll take it. On to next week. That's what happened here. You basically placed high, but not in the top three in the US Open, and you get a bunch of money.
Speaker 3I land in the bunker, and I don't get out. So--
Speaker 1You land in the bunker, and you chipped out. You got out. You got out. You took two
Speaker 3extra shots. Remember, this is a win. Jason, you said, how big does it have to be? Next layer that NVIDIA's in talks to be playing heavily into is McCaw's new funding round. I'm an investor in McCaw. I never thought this would be as big as it has got, as quickly as it has done, crossing out $2, $2.5 billion in ARR. They're doing a new round led by General Catalyst at $20 billion. And then there's rumors, suggestions, reports that NVIDIA's joining that round in a significant way. How do we think about this? Next layer of the stack for NVIDIA.
Speaker 1I think one of the things we saw with Intel back in the-- the closer you are to having 100% market share, the more you spend your time trying to move the whole ecosystem along. And clearly, that's where NVIDIA is now. They're using their capital to fund the Neoclouds, fund OpenAI, fund, as we just discussed, PoolSight, and for whatever reason, also fund Merkur. I will admit, when I think about all the things that NVIDIA should be doing with its money, it wasn't obvious to me that funding Merkur made as much sense as some of the other bets. Because the other bets are all about time expansion. If I fund the Neocloud, they can buy more chips. I'm happy. If I fund PoolSight, I can sell more open source. I'm happy. I don't get why, if I fund Merkur, they can do more training. But probably my-- unless there's some kind of strategic deal around needing that training information, from a purely financial perspective, it doesn't directly lead to more chips being sold. So it wasn't as obvious to me as the others. And maybe it is as simple as, we think it's a good business at $20 billion and stop thinking about it, we're worried.
Speaker 2MARK BLYTH: There's an investment. MARK BLYTH: There's an investment bank called Kroll. I'm embarrassed to say I don't even know them. Do you know them? MARK BLYTH: No, I thought they were a detective agency. MARK BLYTH: No, a different one. They published their report this week, looking at all M&A and big transactions over the last six months of the year. And I guess this is not that just-- it's a micro point to your point. But the analysis they basically made is gross margins above 30% don't matter anymore. You don't get any benefit in M&A or other exits, like for an agentic stock. They're not looking-- like there is a penalty if you look at all deals below 30, but there is no penalty. So if you can value Merkur at $8 billion, you make classic multiples for 80% gross margins and growing, it's not expensive. I don't know why Nvidia would do it, per se. They've got massive strategic goals here. But the tactical basically kind of seems to me, we'll spend all our free cash flow on our ecosystem. MARK BLYTH: Yeah. MARK BLYTH: This is our budget. Jensen says there's a budget. Our free-- I don't know what's going to be, $70 billion this year? Maybe I've gotten that wrong, right? And we're going to spend it all on our customers and ecosystem. And the strat team and the top VPs probably get around a room and they decide what's our best ideas. And there's some guy that thinks data labeling is important. And his best idea was Merkur. And so they put a few billion of the $75 billion. And you think I'm kidding, but I'm confident they go around the room and everyone has their best ideas. And the budget's $75 billion. And you know, OpenAI and friends are going to get a big chunk of it and there's going to be off-balance sheet guarantees. But I think they've decided to just spend it all, one for one. And I would do the same. If you can get away with it, adding cash to the balance sheet other than being defensive does nothing for you as a CEO of a profitable company, right? If I let you get away with spending it, I would spend 100% of my cash too.
Speaker 1First of all, I think you're totally right, Jason. It is as simple as that. It's like, you know, because by the way, Nvidia will have reported between the time we make this video and the time we distribute it on Thursday. So there could be a data point that makes us like total buffoons by Thursday and that's just life. But on the basic assumption that the trend continues apace, which I think it does, which is, you know, strong growing quarters, you know, it was 60 or 70% up last quarter and quarter last year, widely profitable, because the demand signals are still strong from the hyperscalers. So let's assume on Thursday, the hypothesis as of Tuesday continues correct. Then Jason, you're right. They're kicking off. I mean, I just looked at it, you know, they make huge operating margins, one note of a hundred billion of gross cash flow. And then you have, they do a lot of buybacks. We'll talk about that in a second. So they have young some money to invest every year. And you're right, they just make a list of what can we do to move the ecosystem along. Now, I make two negative comments on that. You know, one, it's worth remembering that only four years ago, they were like, well, you know, we're going to do something about it. Their cash flow was one tenth of what it is today. And I think the free cash flow after capex and everything is something like, and I think some of the capex is really investments. So it's a little misleading. It's kind of gone from 4 billion to 50 billion. You know, the gross profitability is well over 100. It's widely profitable. But you know, you say to yourself, and you do, you're right Jason, you get no points for cash on the balance sheet, but they only have only 50 billion of cash on the balance sheet, right? Cash and investments. There's a little part of me that says I might keep more for a rainy day than just doing share buybacks. - I agree, you do have to do something with it. And they're clearly, The best use for it is to spend the money with people who will in turn enhance the ecosystem, which is why, you know, which is why OpenAI gets a big watch of their money all the time.
Speaker 2If you invest right, it's brilliant. You get a customer. Not only do you get circular revenue, but you ensure the success of your ecosystem, the viability, you get a twofer out of it. So you just have to play the game really well. But if you play the game well, it's a lot better than making 3%.
Speaker 1Yeah, it's interesting. They're doing such a lot. Thinking in real time here, because the pull side acquisition is time expansion by buying an adjacent product. The Merkur acquisition is, I think, as you say, Jason, straight investing. It's kind of just, hey, it's a related space. We know somebody who has some money. And then something like perplexity investment or OpenAI investment is literally, especially the OpenAI, is vendor financing, where you as the vendor of the chips are choosing to give your customer money. It's not like that's a nefarious, because a lot of, oh, my God, it's circular. It's not like that's nefarious. It's just exactly. You said, Jason, you got to get it right. If you overextend credit and underwrite projections that aren't realistic, that stuff comes back to you, and you look like an idiot in two years. And we all remember the telecom crash in 2000. Well, we don't all remember, but some of us remember the telecom crash in 2002, where all those 99 deals unwound. And the bet that NVIDIA is taking here is it's not going to happen this time. You're not going to find that the OpenAI and the Antropix, if they don't suddenly need $100 billion worth of compute, you might regret some of this vendor financing. But right now, it looks like it's going to happen. It looks smart.
Speaker 3I think it's a good investment. I consistently regret not putting more money in over time. I think your largest data providers will be $200 billion companies. If you think about OpenAI and Antropix being $2 to $5 trillion businesses, is it crazy to think that the data provider that provides them their core data assets will be a 10% of their market cap? I don't think so.
Speaker 1I don't know. I mean, I think you have to think about it in terms of revenue rather than market cap. And then you start saying to yourself, what's the training budget for the frontier models at scale? If they're doing, I mean, what's this? And let me give you the negative math. We know that OpenAI is running at $18 billion H1s, call it $25 billion, $30 billion years. Antropix is at $60 billion a year. Together, let's call it $100 billion, round up, right? You know, most of that spend goes on, half of that spend goes on compute and inference. What's the training budget? Is it 10% of revenue? Is it 5% of revenue? Yeah, it's a $5 to $10 billion market.
Speaker 3Way more, way more. Do you think it's- Oh, I know. I know it's way more because surge are doing three, three and a half. McCore are doing two and a half. Handshake are doing one. Micro one are doing half.
Speaker 1But the question, you're right. So my point is, so it's predicated on, if that $100 billion spend this year goes to $400 billion, $500 billion, then you're right. Then 5% of that is $25 billion divided four or five ways. I don't think you get 10% of the market cap of the frontier models, but you still get a healthy $20 billion a year revenue spend. Divide that up three ways. And then as Jason said, it actually turns out. The most important question is the one Jason asked, which is what multiple do you attach to that? Do you attach the AI multiple or do you attach the lower gross margin multiple? That's really what will swing it.
Speaker 2The related thing I was thinking on that Kroll data, you know, if you go back to Cursor, right? $60 billion we talked about last week. This was one of the classic ones where the VC-isms were right. It worked itself out. You started off with something with negative gross margins. You start off with something that radically subsidized its costs. I forget what Cursor costs initially, $200 a month for unlimited use. Right? But it didn't have, but it didn't, it had no way to defend that. Right? And so then it had to cap it for, and then it had to stop doing it. And then it had to develop its own models. And then it had to do, it had to do it. But the VC-ism is these are some of the smartest kids ever. They have a strong market position. The wind is at their sails. They'll, the kids will figure it out. They negative gross margins and more or less they did. And they got to the $60 billion. And so it's kind of freeing for models like Mercure that we maybe we made fun of, right? Okay. This is a commodity. Low margin business, but the kids are figuring it out, man. The kids are figuring it out. So guns a blazing.
Speaker 1Yeah, no, I, I, I think though there is a bit of survival. First of all, I agree with you. And I think it gets to the, when there's a venture investor, you're doing in some, you're investing in something that has trouble in gross margins. It is rational to say for certain bets, the gross margins will come right over time. And you had Cursor as an example of that, just in the interest of completeness. I don't know why I'm the Debbie Downer today. Not every negative gross margin company makes it. And in the end, I think you want, I'm strong. Gross margin companies are the best investments. So don't, don't, don't just look at the sample of deals where you started with negative gross margin and it all worked. I can think of plenty of deals, including some we've done where you started with shitty gross margins and you ended with shitty gross margins and you were just wrong. I think Jason, to your point, the thing is having negative gross margins is not a reason, clearly not a reason not to do a deal. I mean, if, if every part of the financials were pristine, they wouldn't need venture capital because they'd be profitable. It's a question of in which cases is it rational to underwrite massive improvement and it has been for the foundation models themselves. I mean, and tropic went from negative 91 to positive 30 in a year. It has been, as you say, Jason for cursor, it'd be interesting to see what the sustaining long-term margins for something like Merkur are. I don't know if they have the same dynamics in terms of the ability to approve those margins that say cursor did, because the training companies only have three to five big customers. Whereas the cursor has literally hundreds of thousands, so I'm not as convinced that those margins go as well as the cursor ones, but you're right. The cursor, cursor beat the margin trap.
Speaker 2And Rory, and as I tell my partners and subordinates on Monday meetings, what if it all goes well, what if it all goes better than we expected? What if it all goes right? I challenged my team. What if it all goes right? Entry price for any of these winners doesn't matter. What if it all goes? What if it all goes right? Guys, that's, and I've coined that term and I've noticed many, many of my colleagues in the industry have copied it. What if it all goes right? You know what I mean?
Speaker 3It goes back to the optimist make money. Yeah. And pessimists are right that we often say.
Speaker 1And I, and the only reason I say it is because I admit that I can be naturally a pessimist. So I actually, I'm trying to learn to retrain the model to do that more. And Jason, I love the sentence and what if it all goes right? And I'm not the first to have said it. I know. I know that of course. But the ancillary point, interesting, going back to Pulsat is it turns out even what if it all doesn't quite go right, but you're in a great market, it turns out that can be okay too.
Speaker 3If enough goes right, you can all do fine. There's been a lot of cynicism, skepticism. Around and perplexity, it's a company that actually people like to dislike for whatever reason we've done shows with him. We're a small investor in the company. So Nvidia is actually propping up most of my portfolio. Yeah, thank you. Our friends at open AI, never a dull day at open AI CFO, Sarah Fry told employees that open AI, we will be a public company in 2027. This is when AI trades cracked. I don't know if it's interesting timing. It's kind of what we expected. To be quite honest, they've got pressure on them from Anthropic, who obviously are going public in reportedly the next few months. Is there anything surprising here about Sarah Fry's statement to the team?
Speaker 1I think they had no choice but to make those statements. And I'll tell you why. If you look at Q1 and Q2 for them, now I can't remember, it was like five point something billion to six point something billion, which was a Q1Q growth rate of 18 percent, which would have turned into an annualized growth rate of slightly under 100, depending on compounding. And it would have mean that they went from 12 and a half. Billion last year of gap revenue to roughly probably under 30 this year. If that Q2 number was sustained, it would put them obviously, A, would put them so far behind Anthropic at 60 billion run rate mid-year. And again, we haven't seen gap numbers for Anthropic, but clearly bigger and clearly growing faster. That A, it would be terribly bad for open AI and kind of how, because anyone would run that math and go, oh, two more years of this and you're in irrelevance, you're perplexity too. And then the second thing that didn't happen. But what happened is all those people like Broadcom, NVIDIA, that were expecting to sell $200 billion worth of chips to open AI might suddenly go, hmm, maybe if they're not growing quickly, they won't need $200 billion worth of chips. So that's kind of what, if all you had was the Q1 numbers, that was a conclusion you could draw. I'm not saying it'd be correct. If, in fact, open AI is massively accelerating in early Q3, they had no choice but to share that information with the world, because otherwise everyone would assume the worst. What they're not going to do is sit on their thumbs and say, well, I'll give you a Q3 update in three months. Meanwhile, you should just sweat it out. So I really detected a very concerted attempt to tell a Q2 is an anomaly, Q3 is exploding story. You could see it in the comments that they made to their internal team. You can see it in the stuff that's coming out. And there's been a whole massive reacceleration story. And again, I know nothing except until you see it in gap numbers, it's hard to be sure on it. But to me, the reason for pushing that agenda was you had no choice, because otherwise, you were just going to be left behind. If you're growing 2x, it's amazing. Growing 2x at $12 billion is amazing. But if your competitor is growing 10x or 8x at $60 billion, you're staring at relative market share of 20% or 30% in two years if that continues. So there's simply no way the Q2 trend could stand unchallenged and still leave open AI as a credible close number two, which is where they are now, to a tropic. That's why it leaked. It's existential for them. I mean, I was stunned when I saw the 18% gap revenue numbers, because I go back to my comment. At one level, if I had a company growing 18% Q1Q, doubling in the year, forget it, at $110 that size, $2.5, I'd be ecstatic. But that level of growth relative to expectations would have disappointed massively everyone, including all the people planning to sell chips to them for a much higher growth rate. If Anthropic goes out at $2 trillion, what price does open AI go out at? I have no clue, Harry. But the most important... important point you have to say is this: it will be lower than the other guys now at the high level in terms of reporting card you know there's a concept in math i can't remember what it is where you where you can't do accurate grading but you can rank things the big picture fact is the ranking has changed and you're now number two so you will go out later than and a lower price than the other guys unless you change
Speaker 2the trajectory massively what that is i don't know i i just think it'll be interesting by the end of the year to see where open ai is positioned in the platform the enterprise versus anthropic because at the beginning of the year there were two choices right there was anthropic and open ai for the most part and you had a default choice and then but people wanted to be to have multi-models they wanted to have at least two but you'd often use the cheaper version you might use sonnet and opus or whatever it was now people we definitely want different llms everyone wants multiple llms in their stack when one or the other but if anthropic is number one in platform which it clearly is you can't argue with the numbers perori's point now the number two could be it could be there could be there's five choices so open eye position in a sense and we'll see there's so much change guys but it could be at no matter what the numbers are it could be getting perpetually weaker because there's so many choices for number two there's so many choices there's so many open weight models where the performance is close and obviously we've talked about open router i've talked about other routers you can use 78 models if you want but it's tough when there's seven choices for number two it's just tougher it's just tougher right especially if you're a
Speaker 3right and you're saying then the material impact on the ev of open ai then is considerably less
Speaker 2because of the i think there's more pressure on them merely because by being number two there's more pressure on you from from open weights and open source competitors and there than there was otherwise you're just battling out for that second spot you can't compete on price and you can compete on brand and security but man yeah you want to just you want to at least be the be plugged into to every workflow right you want to at least have but that would be the nice thing if you had clod and open eye and then and then you just get a nice oligopical bake-off sales team then you hire a bunch of folks from salesforce that walk in for the oligopical thing and they put up a powerpoint slide and it's just us versus them they know how to sell that it's anthropic versus us you don't want the crazy guy who you want the guy the government trusts that's us but with 11 competitors or 12 competitors running on open source running running inference on on new platforms man it's just it's a hyper competitive
Speaker 1world for number two yeah i mean i i think that even if they are i don't think they get pushed into that compared with all the other companies that i've worked with i've worked with a lot of the open source things i don't think it's quite as dire as that but i do agree right there was a push from underneath from that but i think to your question on what quote unquote sorry to just
Speaker 3interrupt just going on that do you not when the cell obviously opened their data 68 open weights increasing i mean it shows the tidal wave moving towards what jason's saying i agreed i said yes i
Speaker 1think that the vast predominance of tokens process will be open weight and obviously yes keep a majority of revenue will still be frontier state-of-the-art because it can command more value than just the price of inference so yeah and so i suppose at some level jason is correct because if there's five or six and i don't see them as being peers but i think if there's five or six open weight companies dragging down everyone's gross you're basically trying to steal gross margin away from the closed frontier models especially if one of those reminder if one of those open weight companies is now funded by nvidia so it gets rid of all the other all chinese comments right jason is right in a situation where a low-cost competitor with nearly equivalent functionality is attempting to enter your industry you would far prefer to be number one than number two because number one can say you got to just buy us because we're number one but you're right jason number two has to say please buy us as well and don't buy the cheapo guys i'm recanting my position and agreeing with jason it would be okay bad enough to be number two in an industry you invented right which is where they are now but to be number two with a whole bunch of ankle biters on top that you have to deal with that's a total pain in the ass which gets back to your question how i will answer your question on what price do they go out in 2027 they'll go out whatever price they get in 27 because they can't wait any longer it's as simple as that if entropic goes out this year at the scale they're talking about now i can't imagine the world over and i says we're going to hunker down and get the cash flow right and then we'll go out in 2028 they have to go out so to some extent again it's a destiny outside your control comment if entropic trades at two then they might get one and a half if entropic trades at one they might get 700. but they'll do what they have to do i mean it's a great quote in that what was it come on the book the the storm sebastian younger's book super book but when the guys finally realized they're going to die at sea right and it said something like if danger can be described as the absence of choice they were now in danger right and i think for open ai what you're seeing here is the absence of choice is starting to pile up the other guys are ahead the other guys are profitable correctly the cfo says they're not going to write the only narrative but to some extent your narrative is getting written you've got to get profitable because the other guys are profitable you got to get public because the other guys are profitable so they have less options than they did a year ago by a lot and that will translate as in 2027 we're going to go public and if the markets are slightly down and this year we'll take our medicine and keep moving don't you love that book the storm jason i i loved it my my favorite super writer kind of sad obviously but wow that line always struck with me absence of choices that's
Speaker 2how you know you're in danger i think listen we can move on to the next topic the other thing what i when i'm listening to rory in the ipo the other thing maybe it's minor we can move on but i i'm getting confused today what open ai's differentiated mission is why open ai i mean we can all look at evals and we can read what ramp says and what rippling's report says and we can view this as just an llm paying top of market right paying eight figures per engineer but these were companies on on very specific missions right when we started this pod i don't have time right now apparently interviewing folks today asking them if they'd be happy joining anthropic if it all went to zero cool question actually but but nutso i think sam is a much more approachable ceo now he got through all the the the scam altman crap and and he's got the sweaters out and he's the more likable guy but i don't know what is the differentiated mission of open ai today that i would rally around as an employee as a shareholder or is it just a piece of just a piece of infrastructure plus some software i just don't know what is special about the mission vis-a-vis anthropic or now all these strong competitors i just don't know or is it just an eval is it just three lines on an eval i honestly don't know and these have been very mission-based organizations from inception right the most we've ever seen in our lifetimes right this mission this crazy missions for me the astonishing
Speaker 3thing is the consumer brand that chat gpt has and the penetration it has in audiences that no other has to most of actual the general population in large majorities of the world ai is chat gpt i am in awe that sam is not going we are the next google our business is going to be advertising and we're going to see jevons paradox like never before when we have a consumer hardware device that actually partners with consumers
Speaker 2and you see usage but that was the plan he just got outraced he just got lapped it was a good plan it was and sora was in it and cool videos it just was not the highest roi for for limited computers it was a good plan it was and sora was in it and cool videos it just was not the highest
Speaker 1computer it just wasn't the best use of it up until then it was all babbling stuff yourselves guys but jason nailed it it turns out i mean you're right open ai is the name and chat gpt is the name of an associates with ai right they have massive consumer market share and at some point intuitively you say to yourself that turns into a pretty big business we can circle back on how much but jason's right it turns out again i repeat it turns out that it wasn't the highest roi used for and i often believe i believe this is sometimes when you look back at outcomes you realize oh only one sentence matters and if you just internalize that sentence you've been rich example i always use is if you've been on the board of yahoo and for 10 years all you've done is screamed it's all about search you could have made them 100 billion dollars today what entropic is it's all about code that's the sentence that's the only sentence that matter because to make it concrete what jason said coding is the fastest adopting market it's the highest roi market it's the mother load you know it's as simple as open ai was focused here and entropic focus there but it could end up being
Speaker 2even worse we'll see in the financials right but the problem with the consumer businesses for open ai and entropic is there for power users they're massively subsidized right you can spend two hundred dollars on entropic or a hundred and some odd dollars on open ai and get eight to twelve thousand dollars worth of tokens and that's fine for when chat gpt was a proof of concept for a platform like we talk about open ai being a consumer company but it's not where it started chat gpt was just a proof of concept app right and claude was just the same but it worked much better for entropic right and entropic can lose you know a couple thousand dollars on some consumers and it won't impact them but um it's tougher for open ai it's a crappy business that consumers selling ten thousand dollars worth of tokens for two hundred dollars is one of the worst business models of our lifetimes right if that was the only business these guys would be dead in the water it's a pretty bad business i mean look
Speaker 1on the other hand i'm just going to argue google is one of the best businesses on the planet because the cost to serve is low and it may well be in the just to put it i kind of i don't want to kind of veer from you know open i love them hate them to yeah it may well be over the next five years that if you can continue to be the dominant consumer brand in ai as the cost to serve goes down as you manage that cost to serve as you build an advertising business i could totally see a business you know plus or minus you know 50 to the same size as the google consumer business maybe over the next decade so it's not like it's nothing it's just that the s curve in the adoption sense for coding was super high the s curve of adopt in adoption for consumers was super high for chat gpt but unfortunately the propensity to pay was almost you know relatively zero whereas on the coding side the propensity to pay is high and you know i'm just going to say it because i just saw the thing come true as i was as we were talking here to dump on the other side i just say entropic in the wall street journal they believe their time is 30 trillion and then i say to myself oh i remember everyone when they're doing really well gets slightly delusional your time is you know the entire u.s gdp thanks thanks a bunch dario good to know it's one of those overreaching statements that you get at this time of the year well he needs it to be a pretty big number he's got two percent so let's thank you if you're claiming a time that's the size of the u.s economy yeah that's a high bar let's just go with that do you want to go up a layer into
Speaker 3publics and actual performance of a lot of the core ai names falling off worst run since april are raising 820 billion of value or we can go back down to hugging face potentially being bought and what that does in terms of a neutral platform suddenly becoming potentially biased
Speaker 2let's not do hugging face because i'm not smart enough to understand why anyone would pay 13 billion for it i i just don't get it i'm just not smart enough for precisely that reason i i agree you chase me in the comments friends if you're watching because i i am not smart enough to to understand why it's worth 13 billion but uh i guess it's kind of a muchness with frankly the
Speaker 1pool side and the open rider thing which is everyone's i mean look i think it all goes together everyone's looking in a world where i mean i might think it's delusional but it's not but open ai and entropic are claiming tams that are larger than the entire u.s gdp and if i'm running in an it company in the u.s i'm saying let me get this straight they're claiming they're going to take everything shit i better get me something and therefore i want to be relevant in models that aren't closed source frontier models so you get in this whole trend for enterprise having their own models you know starting with open weight models and then adopting and hugging face is the place where you can access loads of those models revenue is really important and i think that's relatively light at the moment relative to a 15 billion dollar outcome i think it's roughly 150 million but if you think of strategic assets that an it company might want to own if they were trying to build a counterbalance to the closed weight frontier models this would be a super interesting asset now i don't know if it'll sell at that price i can't make head or tail i'm with you jess i can't make head or tail the price but if you think about assets you know if you were microsoft ibm you'd love to own to be relevant but if you think about assets you know if you
Speaker 2this would be one absolutely one i don't get it other than it seems intuitively to me if right now this is open router 2 right now is the moment in time to benefit from the lift of open weights right the demand is so strong just like elod gill said sell if you have an ai asset right now right i think even better if you have an ai product that's benefiting from the transition to open weights there can't be a better time to sell than plus or minus 90 days from today it's just a phase transition and your numbers are going to look amazing for night like they said open router was growing 15 and 150 million right the information said when stripe bought it yeah breathtaking if that 15 accelerates in scales right but it might not right this is the moment when all of a sudden every you know open weights and these models went from experiments to mainstream sell baby right if you can get north at 7 billion 10 billion i'd probably sell i mean even if i only got 15x i'd probably sell it's not
Speaker 1going to last this transition is going to not going to be a transition anymore i agree it may well be that remember you have to win the founders of hugging face also have mission objectives be on financial enrichment so they may choose not to sell because they may have angst about that but yes from a valuation peak perspective i mean it started with the satya comments on every enterprise needs to have its own knowledge and not give it up to the frontier to which you want to say no shit satya well thanks for funding open ai for three years but yes everyone in it has woken up and realized that these two frontier models could steal a lot of their time and everyone is saying we better have a different story and the enterprises are saying it palantir is saying it and you're right jason if you are an enabling technology for open weight models now is peak moment on the hugging face thing i don't
Speaker 2think it's so early for what it's worth to rory's point and the mission thing i would say one small thing if someone does buy hugging face for for whatever reason the deal has got to be you don't touch it because if you touch it you break it right if you promote it's a much bigger version of the tnpn challenge if it becomes an open ai commercial tbn has no value i know we're probably the only people that are going to compare tbpn to hugging face but if you mess with this marketplace you're going to end up with ten thousand models you know even if even if you put a little ad at the top you destroy it so it's never fun to get acquired but i can i'm almost confident if anyone actually spends three billion let alone 13 billion they're going to 95 leave it alone for 24 to 36
Speaker 3months right why hugging face could suffer like tbp and and then lay it out it's too obscure because jason correctly says no one other than us is tracking that anymore you know my favorite news from the public's was kenton griffin's citadel unwinds eighty percent of leopold ashenbrenner's forced sold book i'm like man never fight with ken griffin man will come out on top eighty percent sold already again i don't think it's surprising
Speaker 1but no it wasn't i mean yes they're not in the business of holding those kind of assets long term you know they're a market maker and a short-term trader and this was a great short-term trade exactly it's funny because about a month or two ago he had kind of did something about starting to add to their kind of stable of investment options you know longer term you know multi-month holds and clearly that was a conceptual idea but it turns out when you buy a bunch of stuff at ten percent below market and then that market jumps an extra five percent or ten percent just because you've put the assets out of weak hands into strong hands then the correct response is to
Speaker 2take your money and run look it's great it's just you can't do that every month so to me it's not that it is impressive it's incredibly impressive it's just not interesting because you just have to have the balance sheet and the cojones to wait so that every couple years like warren buffett used to do you could pounce on one of these special situations right yeah it's
Speaker 1every few years someone gets confused about how leverage works in the public markets they screw up and you're ready to price and buy and yes on top of your nice business which is still earning good money every three years some idiot gives you three or four billion of free money and you politely take it and put it into real estate in miami it's good to be ken right exactly right jason that's how i read there's nothing surprising in there and you know by the way it does get to the it's kind of going to circle back to nvidia and all their investment and vendor financing because in both ways both of situational awareness and nvidia that the aha here is when you're dealing with money and leverage you don't just have to be right in the long term you also have to be right every step along the way right if you don't have leverage all you have to do is be right in the long term and hold and it's probably a situation where it was right in the long term but when you put four to one leverage on it you have to be right every step along the way and the same is true about vendor financing as long as you're in the business selling chips all you have to do is right in the in the end people want to buy chips if you choose to lend against those chips then you're basically saying you got to be right all next year they got to pay their debt back next year so leverage does that it raises the return from being right and raises the importance of being right all the time and situational awareness just got the other side of that because he doesn't try in his business to be right all the time he's not trying to make five-year bets he's like stocks are worth 10 more today than yesterday we should
Speaker 2sell moving right along the other thing on the other side of the stocks for what area i know this is captain obvious but if we look at cosby as sort of like ai and steroids right with risk change it's still up 56.46 for the year i'm not a day trader i i pull up my goldman and morgan stanley accounts and look how they're doing i'm still feeling pretty like i'm some genius in my public market stock because overall plus 46 is pretty good it's just boy whatever leo got just
Speaker 3trapped in a dagger when i look at the chart right sorry you can laugh at me tell me i should know
Speaker 1what is in cosby all korea memory samsung around the era now korea now equals you know two memory
Speaker 2stuff attached but yeah and it's a very volatile market so it's on steroids but it's still just like nasdaq is tech on steroids cosby's like uh all the components of ai on steroids right and the peak was um 9 000 in june and then boom poor leo the dagger 5600 in july 29th and the guy had a generational loss that if it were even bigger might have brought down our financial ecosystem but it's it's you know it's rebounded 20 something percent since then is up 56 of the year crimea 56.46 a year i mean you got to be a day trader or whatever to to not love up being up 56 a year it's okay but all these headlines are like oh cosby's down six percent today and it just it's just hyper volatile the growth and margins we've never seen margins like this in semiconductors so the volatility and expectations there was an article i think it was in the wall street journal where in korea now the the most eligible bachelors are samsung and engineers they want to they all everyone wants to marry a a memory guy it's the first time in the history of the nation when being a memory guy was like made you one of the most
Speaker 3eligible bachelors in the country did you not see that like 50 of nvidia employees are now worth over 25 million dollars yeah pretty inevitable i see it walking down the block when nothing's for sale
Speaker 2yeah well i think it's a different i mean we could talk about i just think overall ai inflation and
Speaker 3craziness is uh yeah it is what it is what happens there is that like a persistent continued new world or is that a temporary moment of inflation
Speaker 2rents in the mediocre apartments just in dog patch are ten thousand dollars a month now mediocre apartments down the street from from yc the avalon i used to work in dog patch pre-yc and it was gritty and fun and i remember when they built this avalon and you know you didn't really want to live there it was new and now it's over ten thousand dollars a month and you gotta wait you got to apply and you're not allowed to run your startup out of it you have to sign a document that you won't run a business out of it two blocks from from yc hey if it's ten thousand dollars a month to rent a you know one bedroom at the avalon how much do you have to make to feel rich you're - A lot. That's 120 just in a rant to not, have an apartment at the avalon and dog patch you need 240k in california pre-tax to pay the rent you probably need 480 to feel good about yourself right it's just so interesting for me sitting in
Speaker 3london though because the money's not here i hear you and i hear you say that and yes there are some fortunate people like me in venture who are thrilled to be doing what we're doing but it's just not here that dispersion of wealth is just nil yeah because it's it's tech wealth and it's
Speaker 1all cons i mean look i saw it california it didn't just outperform everywhere else it got three quarters of the total dollars now that's invention that's skewed by the fact that entropic and opening eye together got probably 60 of the total dollars i'm doing it math in my head and everyone else got 15 but yes this is a wall of money flowing into a very small area where you know reminder the population of san francisco 750 probably 780 000 people it's a teeny tiny town london's eight nine million the whole barrier bay area is only seven hundred and eighty thousand people it's a teeny tiny town london's eight nine million the whole barrier bay area is only seven million this is a wall of money falling into a tiny place that's a peninsula which see on three sides and a little bit of mountains and a tiny valley called silicon valley on the fourth side property is not plentiful and it's hard to build what's going to happen is prices are going to go up most everyone else is going to get priced out when they get priced out they're going to get pissed off so probably it doesn't last at this level because you know i've been around in 99 2000 and 2007 you know there will be some kind of correction and there will be some kind of reset but it's not going back to the way it used to be it's going to go back to where it was because it never does it ratchets up you know fast forward five years at that point you know the ai boom has been digested it's not as crazy it is now but the base level of prices has gone up and the cost what it means is that the cost for anyone else to live in san francisco goes up the cost that you pay you know anyone in your organization the cost that you pay anyone that you want to act with all has to go up because the cost of living here is going to be
Speaker 3higher i genuinely appreciate doing the show with you guys so much because i i learned from you and it's the first time for me seeing cycles like this and i've been doing it for a long time and i've this does the floor fall from our feet in this ai wave or for the next five years do we just continue to see more money more up and to the right more mega exits i think it's it's just more
Speaker 2concentrated we need fewer people to generate more revenue than ever for for a variety of reasons and it's going to concentrate exit size it's going to concentrate wealth it's going to allow you know the salaries at anthropic and open ai seem crazy but some of it's normalizing now because if you can do it with half the people or a third of the people you're going to be able to do it with people you really can't pay them two to three times as much right so eventually of course and rory can pick the date like babe ruth this this will end but uh you know i i think you have to believe we're less than a third of the way through this cycle even though even that little tiny cloud thing lasted nine years we're just getting going here will the companies make enough money jason
Speaker 3fast enough to keep the cloud cycle going if the revenue train will keep spending a hundred
Speaker 2billion a year to keep the ecosystem going honestly that will help let me try
Speaker 1because i'm trying to figure this out too because obviously it is actually the only question that kind of my mental model is this on the supply side no one's going to blink they isn't going to blink the hyperscales aren't going to blink only iron trap is going to blink right not going to blink that's why i think even though we're recording this on tuesday nvidia is reporting on wednesday it's going to appear on thursday it's possible but i think highly unlikely that nvidia gets on tomorrow and says compute the man to slow down that sentence is not going to happen so to your question it's going to keep on going on the supply side because it's not likely to blink and no one's going to blink so the only two things that stop it are you know you run out of capital or you run out of demand when you say capital my gut is until the public markets get in on the game you kind of haven't exhausted all the money that's there which is why in many respects these two big ipos have to happen typically uh financial crashes go when you run out of marginal buyers there's still a whole bunch of untapped demand to play in the ai game because these companies haven't gone public you've clearly on the capital side got one more turn of the crank which is when entropic goes out and open ai goes out that's going to keep it going and then the other thing is demand for the actual end product i think that's the real question is can corporate america spend the kind of money quickly enough to feed the beast to make these guys revenue numbers for 27 i think it somewhere in 20 i mean entropic is talking about 200 billion of gap revenue in 2028 interestingly by the way that in itself is a significant slowdown which makes sense from where they are now it's not 10xing anymore but is there two three hundred four hundred billion of demand for this stuff and that to me is the question that will determine you know when the train stops i don't have an opinion yet on when that is because right now the demand is there in coding but that's what's going to be the weight limiting factor it's not going to be you know the ceo of google waking up tomorrow and saying maybe we should be more cautious so the ceo and video saying maybe we
Speaker 2should take those risks that's not a thing i do think at a meta level that next year will be the year and i think this this is why i think we're in a at least a five-year cycle where we we reckon with the fact that we are addicted to tokens we're addicted and so we went we went to the we started this year on token maxing prove yourself that we started this year with performative ai guys the more tokens you spend the better an employee you are right then they did it and we all got whiplash because we started to get these twenty thousand dollar bills per employee right so then we said oh we've got to manage our budgets let's look at open weights let's cap it let's cap it at two hundred dollars for five hundred dollars for non-engineers and temp that we're going through this this token balancing thing next year there's going to be backlash i can see it in my best portfolio companies where we we can't go back anymore we can't go back in time we can't go back in time i need my ten sub agents running twenty four hours a day to do my job or i quit i would quit take away my agents i quit so i do believe as businesses and in society we are token addicted we will have to find a way to feed that addiction over the next five years we don't even realize how
Speaker 1addicted we are to tokens agree you're on the addiction but disagreeing you on the managed statement and i'm going to cite some i thought this i read the stripe letter and it was really really good and those guys are smart right and it's not just because they're irish but that helps but the comment they made was that near the end of the letter they made a comment we've internalized i'm paraphrasing here from it we've internalized that intelligence is like capital it's fungible there's demand for it and it has to be managed and allocated in other words what they're saying is seat-based sass i sold five seats to harry's organization i'm done and harry's done allocating it to there's no follow-on work required for you within your organization you either buy five seats or you don't but to jason's point if you're buying intelligence on an uncapped basis in theory your employees could go on spending that forever and you're going to have to manage it and that's why the analogy of saying it's like money you have spending controls on your money but you also recognize money is the lifeblood of your business so you can say to your employees don't spend money because that's stupid i think that what they were saying and why they bought open router is people are going to have to control intelligence in a way that's more like how you control money and less like how you think about software licensing and that really resonated with me because you can't just cut it off but you can't just cut it off because you can't just cut it off you can't just let everyone go and it's going to be the big systemic problem for and i agree with you jason 2027 is the year when enterprises are going to have to say wtf do we just let this thing rip and hope the roi is there we can't go back to where it was before how do we manage it so can you
Speaker 3just drill one layer deeper for a layman like me what does that mean then if we control intelligence
Speaker 1as we control money it means you're going to have to price it and allocate it to jason's organization you should give them all you can but you give everyone all they can and they're ill-disciplined about it you could spend a lot of money i mean remember one of the amazing things right now is the kind of money that we're talking about as revenues for these two companies are an appreciable percentage of total u.s corporate profits you can't say as the cfo of take a mid a u.s midstream bank hey we make a billion a year i'm okay with running up a hundred million dollar token bill i just decreased eps 10 that's not a thing i've changed my mind is the addiction
Speaker 2when a society is addicted to something even if it's a positive thing right like caffeine we're addicted to caffeine it's not destroying our society is it right you cannot go back we cannot
Speaker 1go back yeah you can't go back but if you're going to allow them to spend 100 million dollars 10 of your budget of your profits and tokens you're going to have to say spend 10 less than
Speaker 2something else yeah we may we may have fewer employees but the back half of this year is managing the budget for sure it's already happening it will drill dribble into next year and next year will be the backlash next year will be i need to run five to ten agents 24 hours a day or i quit i quit i won't do my crappy job i won't edit your goddamn podcast i won't write your code i won't fix your endless bugs if i can't have 10 agents running 24 7 i just won't do it rory i won't do the job we're doing a cfo event this
Speaker 1evening and i think you're exactly right and you're with a high performing employee right but you got to put yourself in the cfo shoes he's going to say i get it i don't want to lose jason i'm going to give him and by the way he's productive but this is why the stripe letter is so smart then i got to say to myself before we had these tokens we're doing all this stuff and we had 10 people now jason's doing the work of four people who are the other three people we need to let go because what you're not going to do is say we've invented this new automation device that's making us wildly productive mr wall street and the net result of our wild productivity is our eps is going down 10 because wall street is going to say you're a fucking moron we'd like to hire someone else to run your bank or your industrial company you can't introduce automation and say the net result of automation is reduced profits so if you're spending more on automation you have to spend less on something else and someone's going to have to make that decision and that's what i think stripe was saying it was very clear and i say the analogy of comparing it to capital was really good to me it's like if you're the cfo where do i invest do i invest in jason's token budget because he's a winner but do i cut off harry's token budget because all he's doing is asking dumb questions of clause i don't know well look i'm glad you're having a cfo dinner i want you
Speaker 2to ask them a second question because this is what i hear this is and this is the challenge today the cfo challenge for the first going into summer was, my God, these teams spending so much. Every CFO under-budgeted for tokens. What the hell are they going to do? But we didn't go out of business. So that was the discussion of the last Scale CFO Summit going in tonight. I bet you're going to hear a second conversation, and this is about addiction. Retention. The CFOs I talk to talk about nothing but retention, at least the empowered CFOs. They are terrified that our stock price is down and we can't retain employees. They are terrified that the AI leaders have so much stock-based comp, so much other sources of comp, that all of their best people are going to be sucked up by the companies we spent the first two-thirds of this conversation talking about. CFOs are terrified about this because they're often responsible for that KPI, even if they're not doing it. And so there's this massive tension, which is if I don't give these people what they need for AI, I'm going to lose all of them. And it is true. You'll just be stuck with the folks that are still AI skeptics. Your organization will be full of the moldy oldies of SaaS. That's what you'll end up if you don't retain them. And so, yeah, the CFO. CFOs have to manage your token. But Jesus Christ, if 30% of my company leaves to go work for Harvey, I'm dead in the water.
Speaker 1No, I think you're exactly right. But I'm going to edit the statement until I think we're agreeing with you more precisely. If the wrong 30% of your company leave, then you're screwed. And you're right. But it's all the best people. It's not even 30%. It's 90% of the ones that matter. But I think we're saying the same thing, but you're not confronting the nasty bit. But you normally are good at confronting the nasty bit. If Jason is the best employee and he needs three X's spend in tokens, and there's five X's in tokens, then you're not good at confronting the nasty bit. If there's five more like Jason, and we give them more of that, then that money's gone there, right? And my revenue might not have gone up by that much, not if I'm a software company, but if I'm a mainstream US corporate. I'm probably not going to double my revenue because of this. So I've just got to find a way to pay for that. And, Harvey, this is going back to what does intelligence allocation look like? This is what it looks like.
Speaker 2I just think, listen, we can move on. I think the Stripe thing is great. And I think before we want to talk, we want to talk about the re-acceleration. I think it's super interesting. But I do think, to use Rory's term, they're talking their book. And Stripe wants to think about intelligence. As this asset that flows through routers and flows through things like finance. And, of course, it's true. But both the best and the worst of us are addicted to tokens. The worst of us are just... ChatGPD, we think, is alive in our therapist. And we talk to it like a human. That's what the worst of us, the air quotes, the worst of us do. We think it's alive. I used to fall victim to that maybe a year ago. And the best of us want to run 20 agents 24 hours a day. And so you have to feed them. This is the bull case for everything, including Mercor and everything, is we're addicted.
Speaker 3You say we're addicted. We're addicted, Jason. I mean... I mean this in a nice way. You are. And small numbers of people in Silicon Valley are. The majority of the population, I don't think, are quite as addicted. Just as a caveat.
Speaker 2Only because they're... I'm just 12 months further along. Everyone's going to end up doing the same crap that we're doing. What if you can just talk to your agent and say, I want a fully edited version of 20VC ready in one hour. Jason talked way too much about this goddamn addiction thing. Take that out. Rory rambled about this one a bit of it. Give me more of me. And you don't even need your team. And it's magical. And in... Rory, you're going to be addicted after this.
Speaker 3I can't tell you how shit AI is for media and content today. And it was a year ago. And it's still... It doesn't even do the most basic...
Speaker 2And a year ago, Higgs still couldn't work. And today it's at 700 million in revenue.
Speaker 3Pause, pause, pause. I'm actually agreeing with you. Because I had this conversation with my girlfriend last night who uses Legora. And she said six months ago, I was like, what a joke. This will never do. I'm a law student. Graduated. I work at one of the best... Now she's like, I just verify documents.
Speaker 2Yeah, she... As long as she has options, she will never... She's going to go back. She's addicted.
Speaker 3Never. Never. But my point is, look at how large markets are now. The numbers that we're seeing. This is basically just on coding. Imagine if that translates into your CFOs, FP&A, and legal, and...
Speaker 1And the question is pace of diffusion. Right. If it happens everywhere as quick as coding, we're in one world. If it takes 10 years, we're in a different world. You have to know which world you believe you're in impacts almost everything. I think it's hit the tipping point in legal. Probably next. Look, there's no... There's no doubt that it's the next denser adapter.
Speaker 2Andreessen had their chart of the day of the week that it was the fastest growing year-over-year segment, which is obvious, but it was verified, right?
Speaker 3Jason, you said it. Let's dig on it. Stripe accelerates to 41%. Accelerating to 41% at Stripe scale is a phenomenal achievement. What do you want to unpack there?
Speaker 2And billing's up 71%. So it's getting better. The only thing to say is it's just becoming a derivative of AI like the others. Stripe scale is so massive. It is a little bit like a chip manufacturer, right? It is benefiting so much from every agent, every agentic product using them. You literally have to argue with an agent to get it not to use Stripe. You have to, like, argue. Please, I just want to try. I just want to try adding it to something else.
Speaker 1No. I'd say random comment on that. You know, the interesting thing about Stripe is I kind of half agree with you in the sense of all the differential growth is coming from AI. And what's attractive about that, if you think about owning that stock, which I don't because it's private, is it's lovely because you have a core business that's much more diversified than just AI. And then you're getting this growth lift from AI. So it's kind of a, if this was a public stock, it would be killing it because it's a safe way to get some kind of AI factor lift on growth while at the same time being able to say to yourself, shit, if it all goes to crap and they slow down to 10% because the AI stuff peters out, they're still going to kick off cash like crazy. No, it's in a wonderfully advantageous position. You're kind of the best of the kind of cloud economy with a nice AI acceleration on top, which is why they've been able, it's noticeable. They've been able to use that stock for their acquisition, it sounds like, some of the open rider stuff with stock. So yeah, they're in a golden place.
Speaker 2You know what else I think it does? I'd be curious to get your guys' thought. I don't want to talk too much about the past, but I think it will be the nail in the coffin for almost every public software company. And what I mean is when Stripe and Data, like, okay, there's OpenAI, there's Anthropic. We can put them in a different category, right? They clearly are on many levels. When OpenAI and Databricks go public at 80% growth and, you know, Stripe accelerating 41% and 71% billings, nothing except Palantir approaches these, right? Even Cloudflare isn't this good, right? And so you almost just want to take everything below the line and just almost erase it as just a distant memory of the past, because these are slightly more traditional companies, but massive AI tailwinds, right? That have growth rates like almost no public comp. They're just going to rework the leaderboard.
Speaker 1I think the two documents I most enjoyed reading and prep for this were the Poolside letter and the Stripe letter. And they reiterated at the end, at one point in the letter, we're really happy being private was the summary, right? Thank you. Thank you for sharing, but we're doing what we're doing. But I think Jason's also correct. And it must be frustrating to be a public investor when you, if these assets were public, they would be so far up the rankings of good that you're right. Everyone else would just get pushed down. It'd be great to get that over with for what it's worth. Cause I think then you could start really figuring out what 300, $400 million revenue companies can they exist in the public markets. But right now it's got the promise and it's hanging out there. Kind of the honor. If you're a public small and mid cap investor, these are the unattainables, you just don't have in your portfolio yet, which is why so many of them are doing crossovers. It's a funny world and no obvious reason to change it. The imperative for open AI and entropic to go out is the vast capital needs. But Stripe is, I mean, another stunning fact on the Stripe letter, their share count is down on three years ago, four years ago, which means they've been buying back stock. They're like doing everything a public company can do while private. They're like, we have so much money that we're just going to buy new fun things. We're going to reinvest in the business and we're going to buy shares back.
Speaker 2I'm going to email that to some portfolio companies to be a thoughtful board member. I'm going to email them that quote. Yeah, no, exactly. Yeah. Please get your share count down. That would help me. Okay. I don't want no 15 X guys. Get that share count down, but blow out the number guys.
Speaker 3You can choose. We have the GitHub buckling under AI agent commit tsunamis. We have base 44, really saving Wix, hitting over 200 million there. Our stock up a hundred percent fractal, reportedly raising you around a six and a half billion recently following at shroud. At 20 billion, which we discussed last week, smorgasbord of options.
Speaker 2I like grok bot and instinct leaking everybody's information.
Speaker 3And I knew you'd like that. I like that one instinct is the kind of, uh, kind of reminded me of, um, clubhouse in the early days, like seeping out over Twitter through like VC inner circles and instinct for those that don't know, as an AI assistant that many VCs are tweeting about, and it got a lot of attention because one investor basically shared and then another person, Alex Cohen shared how there were data security problems with giving access to everything.
Speaker 1The second alone is laughable. We, we phrase it that there are data security problems, but giving it access to anything. Well, duh, there's data security problems by giving anyone access to anything. You're right. But that's just my passwords. You're right. That was just moving snide. I, I'm going to defer to Jason more here. Yes. But to your point, I interrupt you. I, but yes. So. As listeners are listening, think of this as a next generation agent that was kind of stealth launching, raising a VC round rather than focusing on just the negative. The, the idea here is obviously that this is an agent that can look at your email, do your work on your behalf, and if you give it lots of authority, it's kind of like having your own chief of staff. And that's the idea. And Jason, what did you think? Because you've lived the open clogs.
Speaker 2I just think it's interesting. I don't think this shouldn't be a surprise to anybody working with agents, but these aren't a set of issues that have been solved in the last year. They weren't solved with open claw leaking. Everybody's confident information. Now we have better guardrails. We have better harnesses. It's not solved with grock bot, which looks like it may be wildly successful, right? Cause it's part of grock wasn't solved with instinct. So it is the flip side is addiction, but we, we can't, we still can't trust agents today. We can't trust them with any, anything. And, uh, it's just very interesting that the next general open claw 2.0 can't be trusted either. It's not a surprise. I mean, we all have, we all have these issues, but, um, I would like to invest in the instinct that actually can honestly solve these issues that, that one, I w I would would do at 600 pre, but it's got to actually solve existential issues at no No one else at the moment can solve, including Grockbot or them or anybody else.
Speaker 3Do you not think this is inevitable? Do you guys remember when it was like, we'll never put our credit cards online? We'll never put our credit cards online. It was unthinkable. I think it will be very obvious that we will trust agents with credit cards, financial data, passwords. Sure, there's guardrails. This feels inevitable.
Speaker 2Smarter people than me will explain when it's solvable. But it is interesting that it isn't well solved with guardrails today. We've had so many incidents. I've had multiple incidents. Everyone's had incidents. And we live through the Mac mini open claw drama. And the new entrants can't solve the goal-seeking nature of the LLMs they're running on. The open weight models have fewer guardrails. You can just figure out how to build bombs and how to do illegal acts on these models. So we also have a vector that's having fewer guardrails and limitations. And these goal-seeking probabilistic LLMs are, truth is, it's not that they just make mistakes with your data, just like a junior engineer, just like people on your team would make. Just like if you had a personal assistant, he might give out your credit card to the wrong person. You know, when I was running the dumb mold book thing, it attempted to buy six AP watches for the team, right, for $360,000. It just didn't work. So it's just the nature of the beast. They're going to do what humans do too, but they could do it a thousand times more. Is it solvable? In theory, yes. But what's just interesting is that in practice, not as of today, as of today, you still can't trust these agents. Maybe in a year.
Speaker 1I'm kind of with you. I think the direction of travel feels correct. But I think the question is, is an individual's kind of idiosyncratic workload the best place to apply agentic technology versus the boring-ass corporate jobs? Like, you know, my idiosyncratic calendar management and email replies, yeah, I would love to automate that. I would love to have it go through it and get it right. But is that the sweet spot to spend money versus, on the other hand, an enterprise automates loan processes? Where there's much less discretion, there's much more expense, and there's much more budget around it. So yes, I think, but look, Silicon Valley in particular, we all fall in love with personal productivity tools. We love them because we're all hyper-personally productive, right? And I think Ben Thompson historically has one great comment is, Silicon Valley forgets every three years that the average American is not trying to be efficient. No one wakes up in the morning and says, I need to grind down my to-do list in the heart of it. They're just living life. Yeah, they're doing their job, and then they're going home, and they're done. Solve my inbox. I have too many founders reaching out to me every day. I shouldn't say, my wife doesn't clear her inbox. She has like 30,000 emails, and she's over it. She doesn't care. She's moved on. She just checks the stuff and searches the stuff she needs, right? Not everyone wants to be productive. So it's an interesting market, but you've seen in Evernote, you've seen in a bunch of other things that it's real, but it's fairly niche-y, and it's hard to get right. I mean, remind you of other companies in this space that are wildly interesting, and I love them, right? You've got Superhuman, which is now part of Grammarly. Yep. Harry and I are proud shareholders there. Yeah. You've got Calendly, right, which is an interesting. product, too. A whole bunch of attempts at personal, obviously, the Airtable and Notion discussed, but Notion did a good job of getting more corporates, right? The whole productivity suite, and then you say to yourself, yeah, AI can do something interesting there. I mean, it's always there, but always just a little bit out of reach. It's a tricky market. I mean, look, I want to believe in it, but the two things that worry me are, one, can you get it quite right? You know, to this day, I find my Google recommendations to be fairly mediocre. Now, obviously, that's the lowest of the low, and you can do a lot better, and then secondly, even when you can't do it, you can do it. If you can get it right, what's the market size for this kind of product? It's real, but it's mid, right? And that doesn't sound negative. We found that category super interesting, but I'm just saying it's very challenging. I mean, you asked a question, is it inevitable? It's inevitable, but it's not as low-hanging a fruit as some of the other areas where you just go, we'll automate this. It's repetitious work. We'll take away 10 back-office steps. We'll save a bunch of money, move on. Guys, any that I have missed?
Speaker 2Well, let me ask you each a related question before we close. If you want, Harry, what do you think is the dumbest category of investing we're doing in the AI era? Like, we're just throwing cash at a category that we'll look back on and just say, why the hell are we doing this in the AI era?
Speaker 3I think a huge amount of money is going to get burned in customer support.
Speaker 2Because it becomes a commodity? Because support doesn't exist as a unique surface? Why do you think that?
Speaker 3I think one or two players will win a large portion of the market. I don't think it'll be as distributed as prior generations. Two, I think actually for the majority of the most sophisticated providers, they're building their own systems. Every large technology company I know who's... Not sophisticated in any way has their own systems.
Speaker 1You might be correct. Obviously, we have a number of investments in that space. I think we'll do fine. And I think even if not, it won't be the biggest mess.
Speaker 2It's a good answer, though. I like just to moderate, to be flip it around. I like the answer, though. It's a good one.
Speaker 1And I'm going to answer it in the negative. It's a super good question, though. An area where despite it being amazing for America and important for the world, I think the venture returns of the March might be tough, will be defense. Not because we don't need all these products, but because I think there's an element of that business that you have to have account control. And I think the two or three largest companies like Andoril will end up doing a bunch of scooping up over the next two decades. Because unlike tech, where a single product can kill it, I think in these markets, I think it's a portfolio of products that it takes to survive the interaction with the Pentagon and just have enough diversification to make it. So I think you'll see a bunch of consolidation. Not negative, not losses, but I think there'll be two or three companies that get critical mass and public. At huge scale, and they'll hoover up the rest of us. I'm going to add one more, which is, I think, robotics.
Speaker 3Yes, humanoids in particular.
Speaker 2Why do you think they're so, VCs are so excited about it, Harry? Do you think it's the VC productivity thing? They think robots are cool?
Speaker 3Well, listen, the visionary term is exciting. If we replace X, and it's super exciting, the vision that they sell. But I think the vision and the reality and the requirements and dexterity and touch. It's a good candidate. It's a good candidate.
Speaker 1No, it is. Because look, we have a bunch of successful, I mean, I meant, we have a bunch of successful I'm on the board of Locus Robotics. We have 15,000 robots in the field, but it's a specific purpose robot. It's the best example of that. And I totally agree. Now that I think about it, Harry, there was this video over the weekend. There's two videos on robots. One of them, the one where the robot blew up, which was kind of funny. He ran and then disintegrated in two. That was cute. But the one that said, here's a robot running faster than you say in Bolt, right? And he does the 100 meters really quickly. And I'm looking at going, you know something? If I want a machine to do 100 meters really quickly, I'll get a freaking Tesla. To your point, Harry, I think. The human or use case is real, but I don't think it's nearly as big as people think. So I kind of agree with you. I think that more focused robotics, there's a ton that's going on as positive in that space, but overreaching on human is, I think, will be a tough slog. I could be wrong. Jason, you'll go. Final one.
Speaker 3You've got to join the crew. Great question, but you've got to throw your hat in.
Speaker 2I'll answer mine. I will say first, I didn't think of expression the way you did, Harry, but I agree. Customer support software is dead. And I think even a lot of CX is dead because it's merging into other categories. It's agents. This area changes so much. It's not that there won't be dollars in CX, but a classic CS and CX won't even exist in 24 months. There's really, there'll be commodity cheap products, but we won't even need it. It's already dying and merging into marketing, sales, everything's becoming one agent. But I guess the one I just, listen, you guys have the better ones. I like human robotics and the CX, CS, but I still just don't believe, and I guess I'm not a PE guy as I was pointed out the last show or made fun of, which is fine. I just don't believe you can. Throw a bunch of venture money into accounting firms or law firms and magically turn them into the next Merkur or Hugging Face or any of these things. I believe that there's an element of craziness in the business model where you're creating these sister companies where, where some of the folks have ownership in them. It's too convoluted. It makes too much sense on a spreadsheet. And I'm waiting to see the $20 billion outcome from turning a bunch of, you know, Ivy League grouchy grads working. A hundred hours a week into an AI driven services. I'm not saying it's not possible, but this is the one that I think is just gonna, gonna lead to no exits.
Speaker 1It's funny. I'm just going to admit something that makes me feel like an idiot, but I'm not going to say it because going back to something you said earlier, what if it works, right? All these categories we've angsted about and talked about internally. And I kind of share some of the opinions articulated, but in every case, I do find myself looking at an individual going, maybe this is the deal that can acknowledge those issues. And try and send them and work. And I think it just speaks to the nature of the job and going back to what, if it works, right. In every one of these categories, I kind of have the mental model you guys articulate about us, the fence, all this kind of a mental model I have. And as yet, I am, I'm just saying I'm open in every one of these categories and some of my partners have come in and said, you just got down wrong here. I hear you are. This is the issue, but this is how this team is going to get rounded. And I think I've learned enough to, to have my biases, but to be absolutely overcomable by. You know, a combination of facts, great entrepreneur, and frankly, cynical comment and portfolio construction. So you just don't have one of them and nothing else.
Speaker 2Well, we are in an area of unbounded creativity. Like we've never seen in our careers. It's AI created it, you know, defense budgets enhanced it. Milan Musk is part of it, but we've never seen the type of creativity from founders and entrepreneurs like we've seen today. It is, it is two doors of magnitude bigger. So if you are going to rewrite the rules and make things that didn't work four years ago, work today. Again, we're just, we're just epic creativity. The shots you could take at these models were right. A few years ago. We don't know if we don't know today.
Speaker 3Now is the moment, man. I love it. What a way to finish. And I didn't get cut off though. But before we leave you today, when you're building a company, you learn that trust is what closes deals. You may have the best product, but no buyers will sign these days without proof of your security. Here's what happens. If you're not prepared. A prospect asks for proof of compliance, the deal stools when you scramble, your engineer gets pulled off the roadmap to audit prep. every enterprise conversation turns into this horrible fire drill that's where vanta comes in vanta is the leading agentic trust platform that not only gets you compliant fast with frameworks like soc2 iso 27001 hipper and gdpr but keeps you compliant by continuously monitoring your controls so your deals keep moving and your engineers really keep building now access the vanta agent everywhere you work even if your team lives in claude or cursor and that's why vanta is trusted by more than 16 000 companies like ramp harvey and writer so prove you're ready for business and get one thousand dollars off vanta when you go to vanta.com forward slash 20 vc that's vanta.com 20 vc while vanta keeps compliance covered deal helps you hire globally we get it global i.t can be a headache new hire in tokyo but the laptop well it's stuck in london someone left the company last week wait is that access already revoked deal i.t handles hardware software and access to across 130 countries from one system you have the right to be impressed brands like 11 labs are already managing their global i.t at scale with deal it's one system one source of truth with zero vendor gaps or manual workarounds so build your global team with deal visit deel.com 20 vc and start expanding your business today while deal builds the team framer builds the site when a new landing page turns into a pile of tickets and handoffs framer helps your team move faster here's what i love framer is the pro ai website builder for creators teams and businesses that really care enough to get every detail right the agents close the gap between ai generated ideas and production ready website work because it all happens where the site actually lives it lands on the canvas it stays editable and it can be published when the team is ready build custom code components create and manage cms content optimize seo settings and ship everything all in one place the agents bring speed and scale you bring taste judgment and control it's an enterprise level solution premium hosting enterprise-grade security and 99.99 uptime slas which is why the world's leading brands like perplexity and miro build in framer learn how you can get more out of your site from a framer specialist or get started building for free today at framer.com 20vc for 30 off a framer pro annual plan that's framer.com 20vc for 30 off framer.com 20vc rules and restrictions may apply
PodcastTranscript AI