The Second Cognitive Revolution: What AI Actually Means for Venture Capital

What entrepreneurs get paid for is not risk. They get paid for uncertainty for resolving the uncertainty. You know, if you have incredible growth and you're still working out your model and you don't know if something is going to work or not, let's go to Airbnb when people may stay at some stranger's house or they may not. But I don't know the probability. If it's high, I have a business. If it's zero, I don't have a business. Let's go resolve that probability. When someone does a startup and tests it, raises money, probes around it and gets feedback loops, the answer is yes. [MUSIC PLAYING] Opinions expressed by participants are their own and do not reflect the views of LGT capital partners, asylum ventures, magnetar capital, Q-star capital, or their affiliates. The content does not take into account your specific investment objectives, financial situation, or needs, and is not intended as a recommendation, an offer, solicitation of an offer, public advertisement, or recommendation, to buy or sell any investment or other specific product. Information is based on sources believed to be reliable, but no warranty is given as to accuracy or completeness, and it should not be relied upon. Alternative investments are speculative, involve complex instruments, and carry a high degree of risk. Investments and strategies discussed may fluctuate in value and may not be suitable for all investors. Listeners should make their own independent investment decisions. No funds are being discussed on this podcast. Welcome to Origins, the podcast that dives deep into the business of venture capital, where we learn how the people behind the capital, both GPs and LPs make decisions. I'm Neutral's partner at asylum ventures. And I'm Besar Clarkson, your LP co-host, Managing Director at LGBT Capital Partners. Today's guest is Alec Littowitz, founder of Magnetar Capital, one of the most respected multi-strategy hedge funds in the world, and founder and managing partner of QStar Capital, his single family office and investment platform. Alec's has spent over 30 years in alternative asset management, starting at JP Morgan, then as one of four founding partners at Citadel, as a global head of equities, and then building Magnetar from the ground up. With QStar, he's an inventor in two distinct ways, as a direct investor back in companies like CoreWeave, Poolside, and SpaceX, and as an LP investing in top-performing DC and private equity managers, through QStar's GP investments arm. All of it with no fund mandate, no LP constraints, and a genuinely long time horizon. Thank you, by the way. This is yet another awesome, Nick guest that you brought on. So appreciate you doing that. And what makes this combination so interesting for me personally, and I think for this show, is that Alec has sat on every side of the table as a fund manager himself, as a direct venture investor, and as an LP evaluating and backing managers. That's a vantage point very few people forget about very few of our guest bring, and the thread connecting all of it is a framework he's developed over 30 years called Adaptability quotient, or AQ. It's a process for making decisions under genuine uncertainty. How you think about your own thinking, how you map possibilities before committing, and how you test and adjust in real time. He applied it at Citadel, built Magnetar around it, and it's the foundation of how QStar selects investments today. He's also now written it down in a book, The Adaptability quotient, Out September 15th, and has been exploring the bigger implications through his newsletter, Early Adaptors. We'll dig into all of this. Let's bring them in. [Music] Alec, thank you so much for joining us. We're really excited to have you on Origins. So excited to be here. Excellent. Well, I still want to hear Alec's day one closing price prediction. You know, we probably will get into some aspects of what I'm about to say, but I do think that the markets, whether they're public or private, are really about resolving uncertainties. I think the fact that SpaceX has already resolved certain uncertainties from the time that I invested with it, right? So I invested, and there was just a launch business. There was this possibility of Starlink, but they hadn't put any birds up at all. And the question was, could they get it up there? What would happen with Falcon 9? Would it reduce the cost of getting a 1 kilogram up into space? Those things have been resolved. We're on the costs right now, would you consider Starship fully resolved? It's partially resolved. Elon Musk has done pretty good job throughout all of history of resolving technical challenges. So I would say that people, even though some of these things are unresolved, people are probably going to give him the benefit of the doubt that some of the technical aspects of it's within the bounds of physics, it'll probably get resolved. So I think that it's appropriate, to some extent, for a company that, and I could be wrong, I think the total amount of dollars raised is under $10 billion. Put another way, very few people have had access or exposure to the company. So I like the idea of it going public in the sense that I like that there's some pieces that are unresolved, and the public gets exposure to that. What the right price for that is is probably for someone else to argue. I think it depends on the timeline. So if you ask me to have a prediction about day one, which I'll come back to in a second, I'm not avoiding it totally. But if you ask me about that, it's harder to see that. Oftentimes, when you look out over a long period of time, it gets harder. I think it's harder to predict what happens on day one, and that it is, to think further out, and what does this company look like, and whether it'll be long term, a good bet, it will be a fun one to be involved in. I think the answer to that are both that long term, it'll be worth more. And it's part of supplying hope to humanity. So I'm a bullish long term on it. Most of these are structured. I've been building capital markets businesses literally for 20 to 30 years. Typically, if it's structured well, the companies are set to trade higher. You probably know this, but there is a somewhat liquid market. You can look at both Polymarket and Colchie. You can look at actually a future liquid token on HyperDash or otherwise. And you can see that both of those, all of those places are suggesting that the price will go up somewhere, maybe 10 to 20%. And we know that demand has exceeded supply. I know that, but this is a lot of supply, right? 75 billion. My gut would be that if you hold everything else constant, that you'll see it move up, it's not going to double. But I think whether once it goes public trades on Friday, what happens a week from now, two weeks from now, much harder to answer the question. Because now you're subject to what uncertainties is the market worried about? And does that sort of infect SpaceX? So SpaceX then becomes part of a overall public market ecosystem that has factors affecting it that people are going to correlate whether they should or shouldn't. They're just going to correlate with the market. Sometimes the market looks at future cash flows and discounts and more. Sometimes it looks at future cash flows, discounts and less. You're going to be subject to the vagaries of that in the public marketplace. And that's going to dictate movement until you get to moments in history going forward where space, you know, starship is proven out. And there's a launch cadence that increases and the cost of the one kilogram into space goes down by another factor of a thousand. And we get data centers in space and things like that. All of that, there's a lot to look forward to. There's a lot of future events that I think will be unlocks. But what happens day one is, you know, I'm sorry, I know I have a public market history of trading, but I never really tried to resolve too much of what's happening in one day. I had to look a little bit further out than that. So, but my gut is that it trades up some. I have one more public markets question that we can get into the proper interview mostly just because I'm curious. It's a nickname that we have a public markets person on the pod, which is very rare for us, by the way. I know you do a lot of private investment work to talk about that. How should folks think about just supply and aggregate coming to market? Between SpaceX and OpenAI and Anthropic this summer. And at some point is there like a digestibility issue? And then similar-ish question is how important do you think it is for OpenAI? It seems like Anthropic is going to go first. Like, how important do you think it is for those companies to be first to market? Well, so a couple things right just because I think it's easy. The math sometimes gets conflated so let's work backwards for a second. I doubt Elon Musk is going to sell any stock and he's going to own 40%. So that's never coming to market. I mean, he might use it for financing, but let's just effectively say it's unlikely to come to market. That say 10 to 20%, maybe more, over and much ultimately it's going to be owned by passive structures will be bought and then unlikely to come to market. So if it's a $2 trillion company, what really is coming- it's $2 trillion, but $2 trillion is not coming to market. So you're talking about a certain amount that's going to trade very liquid. So I think if you go look at in a pic in video, which $5 trillion market cap, how much of that is owned by insiders? That has a huge amount of liquid trademore. You could say supply is whoever wants to sell it at any given day. So I think that there's a little open eye as fairly concentrated ownership. I know that anthropic is too. So at 5%, SpaceX is only going to have 75 billion that free it up. He's structured it pretty cleverly, which is to have this function that matches and pairs an attempt to match and pair supply and demand so that there's an equal balance. Whether that's perfect, whether it's not or otherwise, I do think that this concept of an overhang of $2 trillion is not really how it works, really. So if you add, maybe you get, I haven't done the math, 40%, 30% over the course of a year that is available, take 40% times 2 trillion for the secularism, it's 800 billion. There's a lot more of NVIDIA subject to free trading than that. Go do the same analysis. So it's a lot. I'm not saying it's not a lot. There's a lot of of tradable market cap, ultimately, that's coming to market. I'm not saying it's small. It's not, but it's not, if these are all $2 trillion companies for the sake of the art, it's not $6 trillion of a tradable market cap that's coming. It just isn't. It's not the right way to look at it. The second thing was about the timing of the IPO. I think that there's, honestly, there's an absorption question, but based on what I just said, I mean, I really think that that's overdone. At the end of the day, you're going to have an IPO of a certain amount of a stock and the rest is going to be locked up. So in each of the 75 billion and then whatever it's going to be 75, 50, 100 billion of the other two, several hundred billions a lot, but it's not in an exorbitant amount. So whether open an eye or enthropic is one, two, either way, in my personal opinion, from what I've seen, I don't think there's so many other factors going on right now. macro factors are going to dwarf whether one was first or second. I just don't see that as being as being a big issue, to be honest with you. Sounds fun to talk about, but I don't see it as being a big issue. Cool. I'm glad they're not going to break the stock market. There's enough things in the world that are broken. We don't need one more, right? I don't think so. I don't think so. Good. All right. Well, I thought, Alec, your background is deeply, deeply impressive. And we want to hear about it, but I thought what I could do is start us off by asking you to talk about your careers, three distinct chapters with Citadel, founding Citadel, a founder as well of MagnaTar, and now Q-Star. And as a way of getting to know you think about when you look back at these, was there a through line through the whole time or did each chapter feel like a real genuine leap into the unknown and sort of use that as a way to unpack your background and share all the amazing things you've done with our audience? The best way probably to think about this actually is to, for a moment, start at Citadel and go backwards, and then we're then maybe we can go forwards after that, because I think what you're going to find is that these are these three distinct errors, if you will, of my career. But there's an underlying connectivity and through line for sure, as you just described. If you go back to that moment when I was hired, you would for sure sit and say, "What is Ken thinking?" Because I did not know what a hedge fund was. I didn't never trade it a day in my life. I was going to go on at first to do risk arbitrage, which is betting on the outcomes of murders and acquisitions. And I never did that before. In fact, if you had quizzed me, I probably didn't even know what it was. So the first thing would be what is Ken doing hiring this guy? And I think ultimately when I go back for a second, I think what I've only over time realized is what Ken saw on me was a person who thought a certain way, who had developed over time, a certain way of breaking things down, building them makeup to make decisions. My mother was a PhD in linguistics. That came a psychoanalyst. My dad was a psychoanalyst, so the sort of two psychoanalysts. Words weren't words. Things that you saw weren't what you thought they were. Everything was peeled back. Every onion was peeled back. There was always a solution. And the question was, what was the pattern? What was underneath that illusion? And that really altered the way I thought about things from the time I was very, very young on. If you apply that even in the concept, let's say, of business, if you will. I played monopoly before I could read because my monopoly was a system to be, you know, toward a part. My family was a system. And I could think about my brothers and how to think through that system. School was a system. So when I got to Citadel, now coming back all the way forward to these three areas, what did I do at Citadel? It was throwing to risk our, don't know what I'm doing. But because I don't know what I'm doing, my, you know, I don't have an expert cup that's already full. It's a beginner's mind. What did I do? Break it down. What's the system? How does this work? How do I build the system that is better able to determine whether these mergers are going to go through or whether they're going to break? And I wound up building, you know, one of the best systems to do that. I can go into a lot more detail, but I did it and eventually added that on to other equity related businesses, including long short equity business. So it was the same apparatus, the same thinking just applied differently to different and outputs. Then I got to Magdatar. And I thought about what is, what changes and what uncertainty is there in the world right now? And how do I build a mouse trap that resolves that uncertainty and build a systematic approach to it? And then the same thing accused our. So if you go through each of these and you look at the application of what I did it to underneath each is there's a system. There's some unresolved uncertainty that if you can figure it out, you get compensated to have solved that uncertainty. And I just repeated that methodology that I had sort of been raised in effectively and just applied it across all those different areas. Of course, there's changes and there's moments where you realize more than you did when you were younger. But underneath it's the same person with the same systematic approach to breaking down, being adaptive, probing with experiments, getting feedback and iterating incredibly fast. That was the same pattern the whole way through. You just wrote a new book, which I think I guess will not be out till this fall officially. Is that right? Correct. Yes, September 15th. One, it's called the adaptability quotient. So we'd love to understand what that means. And I think that'll lead us to lots of other places. And then two, I'm just curious about what you learned through the process of writing this book. I think my PR team would be remiss if I didn't say it is it is pre-orderable on Amazon. But the reality is is that I didn't set out to write a book. At the end of the day when I when I myself decided to move on and pass along magnetar to to my two partners, I was thinking about the moment that we're facing this what I think is a very big regime shift. There's just incredible amount of change happening. And I was trying to find some books, some tools to try to help me understand the moment we're in. And there are great books out there and books that I love and I would recommend all over the place. You know, there's outliers, you know, 10,000 hours being excerpt. There's a book on grit by Angela Duckworth. Amazing books. There's a whole bunch of great books. I just couldn't find the one book that would sit and go, hey, if you're going to face this world that's changing, how do I map it? How do I make decisions in this world that seems really, really uncertain? And that was the impetus to turn around and figure out, well, actually when I look back as I just described with you, I've kind of been using a methodology, if you will, to resolve uncertainty at various moments in time and various markets. What if I wrote that down? And so at the end of the day, I did wind up calling the adaptability quotient. And the reason why is because the argument is somewhat as follows, which is that the world is changing faster than our capability is to keep track of it. It's altering industries, careers, almost everything in its path. And we all make decisions by having some mental map of the world. That's the decision, you know, you have this map and you go into the territory and that map helps you make decisions. What happens when the map is changing so fast? What do you do? And it was my conjecture that it's not IQ that helps you do it. Or even EQ, that it's the ability to be adaptable. It's the not IQ intelligence quotient, emotional quotient, but the adaptability quotient. And part of the reason for that is we know IQ is going to be, you know, it's going to be, well, it's already downloadable. It might be implantable at some point. And EQ is super helpful if you're a person, you know, very good with people that helps you, but both IQ and EQ help you within a frame. The question is, what happened when the frame itself changes? That becomes sort of the big question. How do you know and recognize and remap a completely new frame? I think that that's what I was thinking at the time when I looked around because I couldn't find a book and I thought about, well, is there a group of people, almost like a control group, that historically has faced change and difference and didn't ever rule book? And when you think about it, people who are serially successful, serial entrepreneurs, for example, by default, they're going into a future that they don't see the rule book as being the same in the past. How are they making decisions, whoever they are in this world that's uncertain to resolve uncertainty? And ultimately, you know, this is all in the book, but three main sections of the book phases, which is metacognition. You don't perceive the world as it is, so know your lens because whatever decision you make, you have to see reality as close as possible. And then think in the subjunctive, which means think what if, like what possible routes are there to solving whatever problem as you have? And then turn around and figure out how to experiment with really fast feedback loops so that you can make micro adjustments toward the right answer. So it's this metacognition, this simulation and experimenting as three phases. And the idea The idea was that my whole goal was to unlock what is mostly within between the ears of X number of entrepreneurs and to democratize that because the world we're heading into right now, everybody's an entrepreneur. Either you are one, your business is disrupted, or you're a young person whose career plan and career path is disrupted, and you're an entrepreneur. So I think one of the defining skills of our era and that going forward is going to be the ability to learn, unlearn, and relearn. And the question is how do you do it when things constantly change under your feet? And my argument is there is a method. It doesn't guarantee you success, but it is learnable, unlike IQ and EQ, but I think that ACUE is teachable. Ooh, pin that thought. We'll come back to that. What I was curious about is the context for how you're using ACUE and investing conversation that we'd like to have with you is you chose to do it in a different firm to create Q-star. And when you're talking about changing frames, I'm wondering if there was something about the Q-star structure that is enabling you to invest that you couldn't do in your past at Magna Tarr, or maybe even at Citadel. So curious what you were setting up there that structurally was needed to then invest the way you want to, given the current market. I would say that there's two aspects to why this is happening as part of Q-star, which is my family office. The first is that when I built Magna Tarr, if you have anybody's ever heard me talk before, I consider that I'm in the business of building businesses. But something's not a business if when you leave it ends. Moving on was the test that it was their moment to shine, and it's the test of actually having a business. But the second reason why is I said this to the entire staff of Magna Tarr when I was leaving this was in the summer of '22, late summer, prior to the GPT moment in November, I think of '22. I said, I think we're coming into one of the most unique moments in history that data compute and material science are converging into almost like a biological punctuated equilibrium, a moment of extraordinary growth that we've never seen before. I wanted to be present for that. And that meant that I want to go map it. It's like a system again. I want to go map it. But I don't know where that's going to go. I don't know how I'm going to express that mapping. I could write about it. I could invest in it. Is it private market investing? Is it public market investing? I didn't know exactly how I was going to interact with my thoughts around that. And I know that no matter how flexible in Magna Tarr has got a great structure, great investors that give us a lot of opportunity to pursue new areas, there are always constraints. And your fiduciary duty is always, always first to your investors. This was that moment where I wanted to take my time. I didn't know how long it would take, sit, read everything, absorb. I'm pretty good at finding patterns, so synthesize across things. And then be unrestricted on in what way am I going to be exposed to it. And Magna Tarr gets restricted sometimes. I might get into something that I get restricted. And I didn't want to have that interference in any negative way. So I talked to them about my thoughts on things. And sometimes I invest alongside Magna Tarr. So ideally it's the best of both worlds. But that was really the original reason is that to hand off and let Magna Tarr flourish and see it flourish without me. And then map where we're going with no constraints put on it. I imagine this will evolve. But I'm curious just to understand how would you describe Q-Star today and the strategy today, given your explorations over the last, it sounds like maybe year two. Given that there is uncertainty in terms of how it evolves into the future. No, it's a good question. And the answer is going to be probably a little different than people expect. I think a lot of people that have family offices, it's kind of similar to an endowment or a pension. And you have your buckets and you allocate. And you might do some of it internally. You might offload all of it or some part of it externally. That's really not the way we work. And the reason why we don't work that way is because I really do believe we're in a moment that's very unique in its regime change. And therefore, those buckets are artifacts. They're artifacts of a prior system. I'm thinking more in the way we map things, we're very thematic. So I want to look at the themes going on. Top down, there's what we call the techno-centric side of things, which could be energy and transition, synthetic biology, a new financial rail system, and then frontier sciences, AI, quantum fusion space, quantum defense, et cetera. That's one side. That's the sort of non-human aspect. And then what we call the anthro-centric side, which is the human backlash part, sports teams or hospitality, music, things where people gather together to have a combined communal experience. So we're looking at both of those and think both of those have growth opportunities. But it's very much top down. And then once we figure out where we think what is most interesting, then it becomes bottoms up, how do we put on the most forgiving trade possible or investment possible? Where is the one with the least amount of downside in the most asymmetric right side? And what I don't want to do is stick with an old allocation model in a period that's changing drastically. So the one with an answer to your question is that a Q-star we think thematically top down. We have a belief about where the world is headed. And we try to then partner with the best companies, the best founders, whether that's public companies or private companies along with them. And then obviously we want to be alongside people or the highest AQ, right? We think that matters a lot in the future. And so we want to be in the areas in the industries we think are going to be growing with the most adaptive partners that we can in that and those businesses. I have to ask because Nick and I play an adventure capital world. So given you can do, my understanding is you can invest in any kind of instrument that you want public private in these areas. Is there an area that speaks to venture consistently or when you look through these different areas? Is it, who knows maybe not at all in certain areas and maybe a lot in others? I'm just sort of curious how that's, and I appreciate the snapshot of today and it could change in the future. Well, I think the beauty of venture for me and why it plays a pretty important role and maybe too little of a role historically and the traditional depending on which allocator you're looking at. It is a primary place where a lot of uncertainty is resolved, right? At the end of the day, there's a lot of people who has exposure to anthropic, look at the moment, anthropic, open AI, SpaceX, et cetera. Those are all in the venture world, right? So we can talk about the Mag 7, but what about the Mag 10? Where I even sometimes say there's this in P500 and then people break it out into the Mag 7 and the other 493. And then there's like the venture, you guys tell me, the venture 20, the venture 50, I don't know, right? It's like it's other index. There's all very viable public companies either sooner than later, sometimes, depends on the moment. And if I sit around and go, well, where is the disruption happening and how do I get exposure to that? Where is the future look like? Where is this regime change? If I don't utilize that, that, that is an access point venture. Now again, we might go into this later, but you could argue, and this is what people have done, well, I can play the pick and shovel part of that. I guess my answer back is that, that if you believe that this innovation is taking place, you have these choices of where do you want to play? I can play in the public market. I can play the private market. It has never been in my career, in my life, great to start with a constraint. Okay. I'm going to cut off the entire venture part for what reason. If I can access it and I can try to, you know, use my tools to break it down, understand it, I want that as part of my portfolio construction. I don't have to put all of it in it. But I think the answer, it's not, I mean, we can talk about sectors if you're going on what's private versus public. But I think it's more what type of uncertainty. There is a time when something can go public and the, are you, are people going to stay in strangers houses? That was a legitimate question, right? And that they don't, if they go now onto, well, is there marginal travel, you know, other aspects to someone staying in that city and that apartment? Maybe that's a different kind of uncertainty than the original kind of uncertainty of whether that'll work. So one takes place in private markets and one can take place in the public markets. So I just, my answer is there's a lot of excess return to be in a place where you're confident that you have the right strategy and the right person to resolve an uncertainty. And there is some chunk of that that is always going to take place early on privately in the venture world. We talk about risk and uncertainty. We've talked about, or I, you've mentioned uncertainty a lot on this podcast. I think many people think about risk and uncertainty interchangeably. I know you talk about this a lot in your book too. Could you talk about the framework, the differences between the two and, and how you utilize it? Yeah, actually, I think this is, this is a really, really important point for people. And I, I did a sub-stack on this and just said, if you think risking uncertainty are the same thing, please read this because they're not. And if you're making decisions in the world that I think is uncertain using the same tools as you use for risk, you will make mistakes. And so let me try to unpack it as cleanly as I can. So there's really three phases or three states I'm going to simplify the world, right? There's a risk state. And this is the one that probably everybody here and all your, you know, everybody who watches is very, very familiar with. the easiest example. is dice, right? So risk is a world where I know the possibilities and I know the probabilities. We all know that the dice can be a one, two, three, four, five or six. Of course, if I roll it, you don't know which one it's going to be, but those are the only possibilities. And you know that it's a one-sixth chance that it's going to be any of those unless it's a loaded dice, right? In other words, you price risk because you know whether what the odds are and you go take it on, sometimes you win, so you don't, but there's nothing that we don't know about. That's been really, really well-traumated. And then you've got a world of Black Swan, which you know, I think, you know, some of the best writing around that has been the scene to Leib, who's written some great books that I recommend for people. And what is a Black Swan? It's simply, I don't know the possibilities and I don't know the probabilities. That's it. You know, COVID didn't know what the probability of that was and didn't even know what was a possibility, right? And so he talks a lot about what you do in that environment. And the irony is great books on that. So at the end of the day, there's a huge middle ground. And I know that people don't think about it this way, but as soon as I say a few words, you're going to be like, oh, and that middle ground is, I know the possibilities, but I don't know the probabilities. So remember, risk, I know both. Black Swan, I don't know either. But if I know the possibilities, but I don't know the probabilities, you might say, well, wait a minute, I say, go on a date, you know the possibilities, you don't know the probabilities higher in employee, you know the possibilities, you don't know the probabilities. You have a fantasy basketball team and someone gets injured and they come back. Are they better than before? Equal, worse. I know the possibilities. I don't know the probabilities. That is most of life. And yet nobody talks about the fact that why is it different? Because I don't know the probabilities. And if I don't know the probabilities, I can't do expected value. I can't do mean variance optimization. And yet people keep trying to apply risk rules to that world when that you can't do that. And so the irony of this, by the way, is that the person who's written the most about this in 1921 was Frank Knight. And there's a name for this, which is called Nighteen with a K Nighteen uncertainty. And his whole premise was what entrepreneurs get paid for. So everybody listening, everybody who's focused on venture, his analysis was what entrepreneurs get paid for is not risk. You know, if you have incredible growth and you're still working out your model and you don't know if something is going to work or not, let's go to Airbnb when we don't know. I don't know. People may say it's some stranger's house or they may not, but I don't know the probability. And when someone does a startup and test it, raises money, probes around it and gets feedback loops. If it's in this condition, if it's presented this way, et cetera, et cetera, the answer is yes. That's what they get paid for for resolving that uncertainty. And I think with that framework, a lot of how I see what I did historically going back to those errors of magnetar and citadel and what we do a Q star is I go look and figure out, is there a method for how I resolve uncertainty, which is what my book is about. It's a hand guide or field guide to resolving uncertainty. It's a toolkit for it. And the idea is, is if I follow this methodology, I can resolve the uncertainty. And what does that mean? It means you convert it into risk. Then it could be priced. And then I can bet big. So I probe, I try to get answers and one side resolved it. And I know that hopefully before anybody else does, because I've jumped in, I've gone through this process to resolve it, then I get really big in that trade before anybody else, because I know, wow, I'm the one with the probabilities. I've now figured out something nobody else has. And that's when you jump on it. And so goes back to the same thing. If you have a founder who's resolving uncertainty, it's helpful for that person to be high a Q because they're going to have to pivot and probe. What is a pivot? What's an MVP? It's a probe, right? It's just a probe with feedback loops. It's all the same game effectively. There's a methodology for how this is done. And you're betting on someone who's resolving an uncertainty that way. So I use that framework, as you can tell, because we, before defining it, used it already in this in this podcast. But I think that's a really big differentiator is to think about things in that in that manner. Could you give an example of where you use this framework? Can we just give it an adventure context? Because, because we know everyone will get it, including me. And maybe where you know where someone wasn't using that kind of framework could have gotten it wrong, besides the obvious they didn't invest. Like, do you just make it a little bit more come to life? Sure. So there's an example of a company. You may people may figure out what it is, but there's an example of a company that had really, really talented people to venture about company, the West Coast. And they came out of great places and they amassed an incredible team. And they basically had an idea that the phone was not going to be the end form factor as we get into AI. And that there would be something better. And by the way, that's probably true. Maybe that does come true. At the time, maybe they were early, but they didn't come out with an MVP. They didn't get feedback loops. They had an opinion that they had the form factor right. And they raised the money and just produced this form factor. That form factor got rejected. It did not do well. People were unhappy with it. Right. And so when you go in without this feedback loop, if you will, if you believe, I don't that's not an uncertainty resolve. I've got it resolved right here in my head. Me and my team know the answer already. We know what everybody wants. That that's dangerous, right? That that may or may not be true. And I like to see people that are willing to question, where could I be wrong? What might I not know? How do I test it? We see AB tests. We see MVP's all those kind of things. These are, you know, what is it pivot? It's, oh, I tested that. That didn't work. I'm going to go test something else. Those aren't failures. Those are just feedback loops. There's nothing wrong with that. In fact, that's what I want someone doing is constantly iterating, going, didn't work, didn't work, didn't work. I mean, Thomas Edison. Like, how many times? It doesn't matter how many times you shallow fail. You wrote a post on substack. And you argue we're inside the most significant regime shift in modern history, which we've also mentioned a couple of times on this earlier on the pod. You call it the second, you call it the second cognitive revolution. Can you talk to us a little bit about that? There is an argument that I make that it is both the fourth industrial revolution and the second cognitive revolution. But I think the second part is the most important part. So, how could it be both and why is it both? Well, first, to get to the second cognitive revolution, which we'll talk about a second, you have to build it, the physical layer of it. And we're seeing an incredible change right in what's going on. And so, one of the defining elements of a regime change, I consider there to be four, basically four and a half, maybe. One is the method of production. Like, the production function changes. So, we're producing knowledge now. We did produce information with bits, but now we're producing knowledge and judgment, perhaps. The second is it flip flops. What was abundant at scarce, right? The third is that you see bottlenecks appear that you didn't before. And then the fourth is that the models that used to explain what you're seeing no longer work to explain what you're seeing. And so, if I think about this fourth industrial revolution, part of it is the production of knowledge looks different. It's energy going to produce what? We're not producing atoms. We're not producing bits. We're producing tokens. And that makes all the difference in the world. And let me tell you why. Because prior to tokens, all former, whether, you know, everything prior to that, every revolution prior to that was fixed. And it didn't matter what the context was. A bit is a bit. It doesn't matter what's next to it. And obviously, a machine is a machine. And it always produces the same thing, you know, a hammer is a hammer. I wield it, but a hammer is a hammer. A token means something different depending on its context. Not only that, but what AI is producing is generative. It's producing meaning. It's producing things that alter depending on the fact I could ask an AI the same question twice and get two different answers. You and I could just the way we comment a little differently, can produce a different answer. This is a participant in a way where prior revolutions were not. And I know a lot of people want to make analogies and say, we've seen this before. So the following is going to happen, right? As if it's a new tool. This isn't a tool. This is I like to say, AI is a tool at the interface. I use it like a tool, but it's a system changed. It's a regime change at the system level. Right? This is something much bigger. I can use it as a tool and go great. It changes how I work. It also changes so much more than that, right? You can just see what's happening. What happens when the cost of knowledge goes to zero? What happens? It changes careers. It changes businesses. It upends so much when you zoom out and think about the implications of it. I think that's why I'm not trying to shock people. I'm just saying that the production side of producing knowledge looks like the fourth industrial revolution, the change in energy and what we need and GPUs and power. You know, all of that is true and there is the physical part, but you have to ask the question, what are we producing up until right now? All of that narrative was human. This is not a post human period. It is a post human only narrative world. We now have a participant in the narrative. We now have a participant in the collective dialogue and judgment. It's a very, very different moment. The ramifications when you zoom out are drastic and incredibly important to think about. And if you stay at the layer of just the interface like, oh, it's another tool, great, you know, that's amazing. It's very productive. It's very productive to agree with that. That's not all it is. It has way bigger ramifications than just the tool. Are the areas in adventure context because I get your point that now are uninvestable in your mind from a, obviously you can invest, but the odds of making money on it are just so low because of this regime change and the addition of this participant that changes things as it goes, which is my weak way of paraphrasing. But really, I'm wondering if there are areas that become uninvestable because the world has changed so radically. This old plan is, isn't, we need to move on. Or you don't personally like if you don't want to say it's uninvestable. I think that you're heading down the right direction and I'm very happy to migrate over to venture, by the way. I think there are a lot of ramifications actually on not only what people are investing in, which is what you're asking me, but also what does it mean for the venture ecosystem itself, the people in it, not what they invest in. I think, again, in my system, you have to ask it at multiple levels, not just at one layer. But I think that you're already on to part of the answer is it doesn't, says as a symptom of bigger problem, when what was, what was scarce and what was abundant? It became abundant in the third industrial revolution, right? So much so that software and applications and SaaS rose to help us make sense of all that information and organize it, right? It was really, we still have the judgment. I still then used it myself for going and doing a function, but it organized all of it. It was just overwhelming. Ironically, what does AI do? It does the same disruptive thing. It makes a SaaS cost go to zero. Information cost was zero, but how we organize it wasn't. Now, coding, which was unique and getting the right engineer, which is always going to be the case, having, you know, there's great engineers and great engineers. But the reality is that a lot of, a lot of SaaS stuff, you know, applications and work is going to be done now at zero at very, very little cost, right? It becomes now abundant. What's scarce judgment? That becomes the scarce. I mean, ultimately, I think agency, but judgment becomes, you know, and this is that double edge sword. What is produced in abundance by AI and how do you want to use it? We'll unpack that later. But going directly to your question, it's not the reason why SaaS is, quote unquote, possibly uninvestable is because it just got commoditized. It just became abundant. And when you have something that's abundant, very often, it's cost goes to zero. That's why it's abundant. It's so easily produced. So the question becomes, what else is easily produced when you have something that actually is knowledge? I mean, you might say, I mean, it doesn't have to be, you want to keep it at the venture level, but look at careers for people that are coming out, right? Some functions are just not needed anymore, right? They're uninvestable careers. Leave aside as a company. They're just uninvestable careers now. So when that knowledge becomes ubiquitous and the cost of it goes down, leave aside the cost of it token for the moment, to very, very minimal, those become uninvestable paths. And so it is, it is for me, I mean, look, I care about venture, but I care about people. I mean, my book is meant to be an agency repair kit. It's a strap on this methodology and you will have a method for fearing out and planning where you uniquely have the ability to do something that AI cannot because I'm very optimistic on people. By the way, I'm not an anti-AI AI. I think AI is incredibly powerful tool and should be used, but how you use it determines whether you augment yourself or atrophy. And that's a very, very careful line. But in answer to your, you know, direct your question, there are areas that become abundant and those become very difficult to earn a return on. I'm curious like when you think about mapping out the structure, you know, what's bubbled up for you and how, how just personally and through the firm, Q star, you think you're well positioned to win or compete there. So I step back for a second and we talked about this a second ago. What does it mean that there's a regime change? And I think as we just talked about what was produced and what's now produced and that AI has effectively, and I'm, look, it can be AI robotics. You know, it could be defense, but you know, a lot of defenses AI, a lot of robotics is going to need AI. I'm going to use AI to encompass a number of things, not because it's the only change that we're seeing right now, but I'm going to, it's this, we'll call it the central change that drives things. If I think about AI and what that, what are the ramifications for what we see in venture, if you believe we're in a regime change and I go back to what I just described as the third and lesser revolution started with information with compute and the ultimate aspect of that was says as sort of this ultimate application of wow, you created all this data. What do you do with sa's and we knew how that played out, you know, a venture person would invest in there'd be an A and a B and a C in the company would either get bought or go public and it created this and then you do that with fund one and by fund three, you're getting DPI and it refunds things. We'll call that a regime. There was a regime, which was a very stable end of the third industrial revolution component. The minute you see something like this, that changes. And if you're not aware that it changes not only the things you're investing in, but your business of investing, then you're not thinking from the right scope level. And so let's break it apart. I'm going to break it apart into two pieces, if you will. One is the capital side and what is the time side because I think those are the two axes that I kind of want to think about venture on for my frame. So we'll go to the capital side. The capital side is this is an incredibly and we're going to hopefully by looking at these two axes be able to describe not only what we're seeing, but maybe why we're seeing those things. So the first thing we're seeing on the capital and 10 side is the dollars needed for production, for buying of tokens, for producing whether it's energy are so large that it has a couple of effects, right? This is not traditional ground for venture. These are these checks are too big. I have seen this before multiple times. I'll give you two times in the last 20 years. The first was hydraulic fracking horizontal drilling, which we did it, you know, which at magnetar we saw that change. What happened just like I described regimes change of production, change of what was scarce and what was abundant, right? bottlenecks. We stepped in and and and provided capital in there because there was a regime shift and there was no natural capital provider. Same thing happened in the great financial crisis. Banks were forced out of lending at a bunch of shadow banks private equity firms, big hedge fund stepped in. That's exactly what's happening here. In fact, magnetars involved, but so are other people, BlackRock and other firms like co-2 and others. What they're doing is they're sitting and saying, wow, this capital intensity is very high. But it's not just capital intensity. What is effectively, for example, I need to buy a bunch of GPUs to stand up a, you know, real cloud. What are you going to use those for? So it's not only capital intensity, but it has cash flow attached to it. Over here I funded a pipeline that had a stream of cash flows from an off take agreement with BP. That's an asset that I could use as collateral with a cash flow against it. And maybe if I do it right, I can get upside, you know, on the company that's putting all that together. What happens over here, right? So you start to see people that sit and go, eventually firm can resolve some uncertainty. And that's why they help both with the underlying business. They help with capital at the right time. But now with this massive capital need, there's other participants going, oh, I'm good at resolving that uncertainty. I've done it in other places. I'm going to go over here and I'm going to help do it in the same manner over here. So one of the things you see are entrants, right, that come in. And it opens up the capital stack. It used to be their equity, pre-equity, traditional venture. Now it can be a convert. It can be straight debt. It can be a host of things, right? It might be a blackstone or a blackrock might have a lot of sleeves to put the right, most efficient kind of capital for that particular underlying set of assets. So you see a very different capital stack than you did in the past. You see different entrants than you did in the past, you know, because of that. That also has the side effect of possibly changing IRRs because some of this physical asset takes longer to evolve than writing a piece of software. So that's one element than some of what we're seeing there. On the time side, and this gets to other things we're seeing, and very often gets to people asking a lot about liquidity or DPI and TVPI and things like that. I think let's take the same. framework and and and now apply it at that level and what are the implications of this alteration we're seeing in the capital intensity and and how it has something to do with the timeline. So I think that what when you see a regime change, you know, it upends timelines drastically. So if I invest in venture, the goal is that some kind of uncertainty is being unresolved within a timeline and that at some point enough uncertainties were resolved that I can go public or get to bought when the next buyer comes in and goes, "Great, I didn't want to take on that on certainty, but I'll take on this other piece of uncertainty." Traditionally, the public markets like to see profitability or a pretty good path to profitability. On the venture side, people will sit and say, "I care about growth. I do care eventually about unit economics, but I really want to see growth. I want to see unit economics. I'll take that for a while. Then I know that there's actually a customer and there's actual product market fit at scale. And then it goes public and I can see the rest of the runway. There are times where the public markets are willing to look further out and there's times where they don't want to look any further out. There's a bit of a cyclicality to it. So there's a little bit of the ying and yang in there. But there has always been this separation of you resolve that and then you go public. What happens when you in the middle of that, in the middle of this SaaS and the middle of what was going on in this prior regime, insert all of a sudden a regime change? This makes life really, really difficult. For a variety of reasons, first of all, a lot of the players that were bigger that we described earlier as participating in the large capital raises, they're also going early. And I think I hear from people that's upsetting because it's upsetting the valuations on some of these earlier stages and that's making some people angry. But think about it from their perspective and themselves as a system. They need to make sure that if they're going to build an index of the best private companies, it's like my fidelity S&P 500 missing something. I don't want it missing one of the elements of the S&P 500. So if you were going to do build that business, you would go early, even if you had to pay up a little bit, what are these? They're probes. They're just probes to resolve uncertainty. I need to figure out which of these is going to be the biggest, biggest unicorns, the one with the huge scale so that when there comes a time to invest in it at a bigger capital level, I make sure I get it. So that little probe cost is nothing compared to, I don't care if I, too much, if I spend some amount of money and they don't work, I just have to be very big in the biggest positions. So from the standpoint of the big players, what you see is rational. To me, it makes a lot of sense that they want to come down. They have sector experts. They can go, people know how to go to them. They have brand names, etc. That begins to mean that if you're a smaller venture player that, and this is a very capital intensive piece, you have to think about that ecosystem. And if you're sitting and saying, well, I would like to think that it's going to revert back. I've never seen these revert back ever. But that doesn't mean you have to sit there. What you have to do is sit and go, I should map this. I should think about this ecosystem and figure out where is it that I could provide something novel, unique. What is my value? How do I resolve some uncertainty in front of others? And there's lots of ways to do that. I can go earlier than other people do. I can find people before they even pop out inside of companies. There's a lot of aspects to doing that. But what happens is that all the people stuck in portfolios. So I have either a no DPI and pretty bad TVPI. Or I have no DPI, but I have pretty good TVPI. How does that play out right now? And this concept of liquidity and where does the damn break so to speak? Isn't liquidity just another way of saying that I have a capital for a timeline of resolution of uncertainty of this long? But now the resolution of uncertainty is not going to take that long. It's going to take longer. Otherwise, you don't have a liquidity problem. I just I have a mismatch. I told my investors I was going to resolve it. Here's my liquidity. I go and put it in things that resolve in that timeline. And now that timeline is not there anymore for a variety of reasons. Now I'm quite a what a liquid. What is the outlet for that? Secondary markets is one outlet for that. Why do you see a rise in that? Because it's a liquidity outlet for people that say, I've raised money and my capital can survive that duration. I did, but it was before I saw this disruption and I don't have the capital to resolve that uncertainty. And it's just a passing along from one set of people that can get more time to resolve it to another set that just doesn't have the timeline to do it. That's really all that is. One of the things I like to think about and why I tell I like to see people that I'm invested with. I like to see them think about DPI. Not because I you know, I have a timeline problem with my own capital. I like to see it for two reasons. What is DPI? It's the resolution of uncertainty. It converts uncertainty into cash. It says, I've now resolved it and here it is and this is a dollar back to you, right? I've ended my experiment or my my investment, my opportunity, my my partnership with that, you know, with that stake. I've given you back capital. So one is it's an actual real mark. It's a real mark. So TPI, we don't know and told it to real. So it's a real mark. It says is that real or not? So that question of, is it real or is it not? Do you have great names? That's part of it. And the second is that I like people who think about what they're doing as a business. So, you know, ultimate answer is back to the question around how does this impact and this regime change on on the venture world is this capital intensity and these new entrants are likely not going away anytime soon. I don't think it ever reverts. I've never seen it revert. The second thing is is that, you know, that the smaller players, you know, which the world needs, you don't have to think about either it could be a geographic niche. It could be an industry niche. It could be going earlier and using secondary markets. So if you go earlier that elongates your timeline, but maybe use more secondary than you used to in the past to get, you know, to just shorten the end of the timeline to get it back to the normal time cycle. There's a lot of things that might happen, but the one thing that doesn't work is sitting around being a resistor and saying, yeah, I don't think this is that big a change. I just, these things have an irreversibility to them in my opinion. Alec, final question. Given everything we've talked about today, given the upcoming book, I know this may be an impossible question, but for GPs, LPs founders that are trying to navigate the ecosystem today, the regime changes. What would you leave them? I would say my biggest advice that's written in my book, really, is to upgrade your operating system effectively, be open to doing it. You know, in a funny way, AI is coding on top of hardware that's a lever for your mind. Robots is coding on top of hardware that's a lever for your body. Synthetic biology is coding on top of your hardware that's a lever for your body. Where's your software upgrade? Right? In the middle of this regime change, like how you think and how you process, how you make decisions in a world of growing uncertainty, you need to be open to upgrading how you think about that because we're just not in a regime that's stable and as we talked about way earlier on, you may just have to continuously be learning, unlearning and relearning. I think being open to that and whatever capacity is really critical because it leads to sort of my final point on make, which is that when knowledge becomes closeless, the scarce item becomes agency, which is your ability and your desire to choose the path for yourself, make your own decisions through life. You don't get that taken away from you too often, depending on where you live, you might be in a geography where that is taken from you. But for a lot of people listening, it's just this thing that you slowly give it away over time until you just are lulled into giving it completely away. But I think we ran this experiment with social media before where we gave our attention away in the hopes that it would make us more connected than we were before. But it's a really thin connection in my opinion. You've seen a rise in loneliness, it'd be terrible to run that experiment cognitively as well and see my decision making. And sit and go, it's so complicated, so hard and overwhelming, I'm not going to think about enough grade. I'm just going to look at this new oracle that came along and it's so fluent. I'll just let it, I'll feed it in questions and get its answers back. And I'll just play out those answers in which case you've become an avatar. And I'm really a big believer that humans have unique judgment and that are still very capable of novelty and understanding, you know, AIs are trained on data within a system. They don't know when the system needs changing and how to change it. That's for humans to do. So my answer is, you know, stay adaptive, remain adaptive, use that gift that we've been given as humans and go forward, make your own choices. Some will be great, some won't. But the fact that you actually can choose and have choice is probably the most valuable thing you have. Oh, amazing answer and advice. I'm going to take it to heart. And thank you so much, Alex, for doing this. Really, really amazing conversation and so, so glad. to have you. I appreciate all the time you guys have given. Yeah. Well, thank you. Thank you. Thank you. Thank you, Alex. Cheers. Thanks for listening to Origins. The show where we've discussed the venture ecosystem, do the lens of myself, a GP, and BZR and LP. Be sure to tune in next time for a bonus mini-sode where Nick and I unpack our thoughts from today's conversation with Alec and the latest happenings in the market. You can find that right here in this feed, and while you're there, please rate and review the podcast. It's super helpful for other folks looking for venture insights to find our show. You can also keep an eye out for more by following Nick and I, as well as OpenLP on X and LinkedIn on BZR Clarkson. And I'm Nick Turls, and we'll be back very soon. Thanks for listening.