Ep19. State of Venture, AI Scaling, Elections | BG2 w/ Bill Gurley, Brad Gerstner, & Jamin Ball
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If you're going to run rate where you're raising five billion box every two years, okay, so give take that, you know fifty billion dollars over a ten year period of time. A two percent on fifty billion, six billion, okay, a billion .

a right.

right. So, so, so underscore that for everybody built.

Great to have you here. Great to see an Austin. And this weekend, congrats on twenty five years of marriage.

Thank you very much. A really fun time. And no, I I went by j cos, saw his new place, saw so many friends when I was there.

Aston, really, really bumping right now. Seriously, it's just an amazing number of people now calling at home. And I know that, you know, you recently took your dad who worked at NASA down to see the the launches starship five.

And I am so grateful that the space ex was able to make this happen for my dad. A D and we'd been talking about getting him down there to see a launch. And they put us in this V I P.

Section, which made IT easy for him to move around. And um he was just in all you know i'd maybe start this discussion by tell on the way home from the launch. I did a search for my dada's name and NASA and I found this document he says a sketch prepared by john girly demonstrates the spacecraft skip when entering earth atmosphere so this was handled by my dad.

Come on. And if you look here, memorandum john argument to cheap flight Operations as chis crap. So my dad wrote this to Chris crap. A study of skipped rained sensitivities and allowable areas in exit conditions applicable to Apollo .

mentions .

june twelve, nineteen sixty three. And you just .

down a boker .

he was twenty six. Is the .

verge a choice out?

Twenty nine? Yeah, yeah.

yeah. What was that like being down there with your pop?

He was awe. He was awesome. So I I grew up in um in a talk caught dickinson which was near clear lake and my father worked for for an asset for any work there from a very early the when they commissioned as a they took fifty people from N A, C, A.

I think he was called which was on the lengthy air force base, and that's where he had started his career. And they moved on to houston. So I am a taxi, probably because of L, B.

J. Port world politics. But we grew up on a space street, half fathers on the street, or NASA. And the Apollo launches is just like you see in the mop team movie.

You go over to someone s house if you didn't drive sixteen hours, still want yeah and yeah, was this part of our lives? We a wall in the house with all the polo launch things. And IT was really a like until he took early retirement in the late eighties. He was just part of our lives. And so to have him down there.

he said, yes. And i've been .

trying to do IT for a while because his A D eight and all of his, you know, former colleagues are still alive, are kind of in all of what ellan doing and super appreciative because for them, you know, the space mission was something that meant a lot to them. And I kind of felt like the government quit trying. yeah. And so to see a rebirth, just get some like, super excited. And of course, we were there to witness is very lucky that this was the one I took him to, because we witness the the booster coming back here, which was.

I was, I was emotional for dad.

Yeah.

oh yes. Yeah, yeah, yeah. And you look at IT today, the average at SpaceX probably about the same age as your dad was when he .

he talked about that we went to an after party and all the space x am, not all of them. Some of more space section employees were there.

And IT was a very Young crowd yeah but that you know to me is part of the magic right that that you know believing, you know you can see how mission driven they are. And we have lots of friends who work there, work there. And it's great to see amErica cheering force.

I've even heard stories that people people yeah just because you you know you start looking around like i've heard stories, people leave space sex and go work somewhere else and just an everybody come back, right?

You know, elan has said that we need aspirations. We need dreams. We need to think about the stars in order to inspire us to invent, and you know, like that part of the purpose of being human. And I certainly know with my kids and my family, you know, we feel that way. So super cool.

You're able to take you here.

On sunday morning, I went on a walk with with our friend Michael dell. You know, I always learn something when you know from him the thing that dawn on me yeah, he's not one to get hyperbolic about things.

She's been at this a really long time and he's like, you know, wearing that gRandy face now where he's really starting to see the benefits of a ee right inside dell, inside his customers, other enterprises finding ways to take you know to find efficiencies in their business. You know, I think we're entering ing that that what could be a really golden era where there's market leaders extend their lead, where their margins expand. You know, I just saw a headline today that VISA was finding more efficiencies from my eye is letting fourteen hundred contractors and you know when workers go.

And I just think this is the beginning of a rubie that we're gona hear for for a decade. You know, he said, he said just at the very beginning of companies really starting to think about ways they can improve their business. And it's not it's not the sexy you know ChatGPT stuff.

This is the real pedestrian stuff by using, you know, A I to basically translate documents, you know, into one hundred different countries. One of my observations in a fun, a fun thing to come out of that walk. But there are few topics I want to hit on today, including the latest on A I and GPU scaling.

And you know, I went to hit on the topic of how we're thinking about the market setting into the election. But I want to start with the topic that I know is near in their to your heart, which is the state of venture capital. You okay. So my partner James ball, who we're going to bring in here in just a minute, wrote this week um on his blog that V C funny sizes have balloon, that the incentives for VC have shifted perhaps a bit maybe now focus a little bit more on the cats of raising and deploying every couple years as much money as possible, which may create some intent of alignment problems with founders. The key question he told founders they need to ask is, are you partnering with a two percent or a twenty percent venture firm, which I thought was clever so you then retweet his post and said, it's a must read for all our peas and money managers and called IT the single most important issue in the VC landscape today so first welcome german you know I thought maybe just start with you summarize for us um the blog post and and kind of maybe why you wrote IT yeah well so I read .

this blog clouded judgment and that has many goals. One goal is to increase the transparency to founders of what goes on in the venture markets. The venture Marks have changed a lot over the last ten, fifteen years.

Bill was maybe you or someone else. Many people have said this, right? The venture markets of transition from a high margin cottage industry to a institutionalize ed, lower margin industry. And that has a lot of implications, implications for L P S, implications for G, P, S and implications for founders. This post focus more on the founder G P, uh, leg of the store.

And I wanted to focus on that leg because I do think the implications of this transition to an institutionalize asset class IT changes the game for founders that I don't think they're fully aware of. What of all the implications. And I had a lot I had a lot of conversation with founders over the last few months that really highlighted that to me.

So before diving into how have the incentive change and how are they diverging a bit more amongst founders and GPS, you know, first, we will just describe what the incentives are for the audience. Just to make IT quite clear. Venture funds, i'm sure folks have heard of the two and twenty model that is a two percent management fee and twenty percent Carry.

There's a guan a guaranteed portion of uh funds comp, which is the management fee is a percent of the fun size that you'll collect every year and then there's the Carry, which is the the funds share of profits. So take a hundred million dot fund that you three x you'll take two million years in managment fees, generate two hundred million of profits, which is forty million of Carrier ten fifteen years ago. The funds are smaller. And as A G P, as an investor, you'll make money on that guaranteed portion, but not necessarily right, as I call IT get rich money.

What are you making when you start a per year 2 in the now？ But I would say on the average, people are making a couple hundred thousand box a year working in the venture business. Nobody was getting rich on that management. He get on that .

if you wanted to get rich to maximize your career, the way to maximized your career was to maximize the value of the underlying investments that you may, which resulted in a path of getting rich for founders, which also resulted in getting rich for investors, right? But the the incentives are aligned. Let's fast forward to today.

Funds are much bigger than four hundred million. Doll fund is now four billion. That guaranteed portion of comp, the two percent, the managment fee you can now get rich on.

And the reality is, is a path exists today, and roughly.

gan managing .

partner, million box .

here.

right? And so now there's a path where investors GPS get rich, where the outcome of the founders and their companies is irrelevant. Not to say they are aligned opposite directions, but there no longer a line.

And now as a rational actor, you could say, why not maximize the guaranteed portion of the comp, the two percent versus caring about the twenty? And that leads to some private incentives where funds incentives are more about deploying dollars quickly as opposed to maxi zing, the value of those deployed dollars. There's a lot of downstream implications of that.

IT leads to companies, early companies that show early traction get flooded with offers and investment dollars. And we can talk about why over capitalizing and overvaluing your business actually can pose a risk. I think you know, one of the reasons I wanted to write this post was I thought we would have earned a lot of lessons coming out of twenty, twenty one that it's it's very clear we haven't or we just choose to ignore because the incentives are no longer there.

But for founders, I think, understanding and appreciating, are you partnering? Are you kind of marrying a firm that is more focused and caring about maxims ing the value of your company together? Or are you partner with the firm that just wants to deploy dogs as quickly as possible? And there's lots of things we can double click on, but that was kind of the road rationally for the post or the quick summary of IT in the way.

I mean, rather than say they only care about the management feel they may view the other one is a phrase and poker called a free role.

They may view IT is a free role.

I'm getting rich. It's and and if this company happens to be, you know, the next google, the next matter, we've seen how those compound over twenty years and they will work out, work out, right, maybe to work out for one of the ten putting four .

hundred million as s and one of the things .

we were talking .

about just earlier today is for founders, there are implicit things you are signing up for by taking around that is too much money, too high evaluation.

I think the the preference stack and preference in general is something that is sometimes understood by founders in the founding community, but not always understand there are companies that could be sold for one hundred, two hundred million dollars that results in life changing outcomes for founders in early employees. If you raise one hundred million dollars too early, that eggs at path is no longer on the table. You can't sell the business for a hundred million dollars to make any money because I just returns the preference stack as the call option investor. Your call option didn't .

hit but you get your money back well down this in the two sections because I think the the this thing that is happening um and the reason I retweet IT has implications for both founders and companies with the ash also. So we started down this let's do IT first. You know what does that mean for a company to have maybe too much money crammed ed into IT is too higher Price?

Yeah there's many ways there's many deep implications of this. One thing that i've learned that I hold you know that I will argue with anyone on is every founder and every company in every board will tell you if we raise money were not gonna end IT, we're gona stay frugal. That never happens.

never. And instead of focusing on, you might ask a founder, what are the three things that matter most this year that are critical for your success? If you only focused on those three things, you might maximize your chance of success. When you have lots of money, you're going to do six things at once, which means you are deluding the three .

things that matter, like a long time. So so many, many, many great people have said that that can strange drive creativity. And i've heard famous stories about Steve jobs where he felt his job was just to say, I want of this, then go figure IT out. And by saying that he limited the space, we're not got built up a phone and then and then people can focus and be creative.

Um you you've constantly heard know we're going to make a Better decision because we're gona have constraints and we're only gonna be in two markets, not by you know if you're in five, yes, what happens when revenue starts to slow? You you build some of your revenue in these places where you don't have a stronger competitive advantage. Those those turn out, right? And so you you've grown revenue faster, but if it's less sustainable, right, there's another thing that can happen. I mean.

so what I like if if we look at the poster child or children for like what we're wrong during peak erp, okay. So if you're incentives to deploy so that you can raise again in two years, then you're going to want to get maximum dollars into the business. Well, there may be only so many primary dollars you can get into the business.

And then we started to see this desire to buy secondary shares because I wanted to get more dollars into the business. I wanted to deploy more in the company even though you're buying common chairs that were much riskier. And then often times, bill, something I know you love, the founders are founding team, were taking big dollars off the table, often times before a product market fit.

And I think, you know, german and I have discussed that we came out of this twenty to twenty two period, and we would have thought that we would have seen less of that, right? Because we have, as you've discussed, fourteen hundred companies, right, the in ninety percent of which are gonna, have to do a downward IPO or otherwise in order to get through the system. But somehow the echoes of that period have not reverberated that loud, right? The incentives to deploy much bigger rounds into these companies continue to persist. And so you know, gets back to your point about scarce city, not only are you putting so much money in the business that perhaps they're not being in a focused as they would otherwise be, but you really question whether not the incentive for the founder or there if you're taking ten, twenty, fifty, one hundred million dollars off the table before the company is a chee profitability, then do you really have the fire in the belly needed to get.

you know, both parties? And without picking on anybody, there are numerous examples from previous waves of even the founders, like not being in the building or not showing up so that they can definitely right, there's so much more that can happen. I mean, one thing that happens is you you create a prisons delima with your competitors where they feel forced to raise the same amount of money and now you have multiple overfunded companies in a single category, right just taking shot.

So it's not only too much money within the firm that's causing the firm to be less fit, less efficient, less um you know inventive, but is also creating this dynamic where used to talk talk about you know capital is a weapon of economic destruction. You have access capital causing access competition. So though natural market winner does not emerge as fast as the otherwise would, well, maybe the levels at the conversation.

I think becomes a reality. And we've talked about this before. But but I find far too often that founders think about raising money in a particular valuation as as if you've earned in award.

They were on a Price. They proven their company is worth this thing. And they can then show the world the trophy and say, we've achieved decks.

And I always try remind them the valuations represent discount of future expectation, right? And so you, you, you, you may feel like you've on a prize, but you really increased everyone's expectation for what this company can achieve. And in order to raise that up around from here, it's wave harder than would have been otherwise, right?

And perhaps way more deluded, right. I mean, the reality is even if you're getting what appears to be a high valuation, if you truly think you're one of those um you know seminal businesses, right, you look at the ownership today that zuker berg has or bassos had because they raise so little people you know in those businesses and they compounded over a much longer period of time in the public.

And me let me drive home this point H I think in a very, very stark way, which is born a number from the code to presentation. But they said there were fourteen hundred unicorns that are still private. From what I like to call, the percent of of those could raise up around, right? Yeah.

what is in up? I think .

it's last today.

yes.

So so that means there's over a thousand private money there are somewhat stuck right now and could not raise N N up ground. So this risk i'm talking about, about putting too high evaluation on your company. We've just had this experience in this massive fact planner.

But you're right， we're still doing IT. A I came along and IT has so much potential and all the things you're excited about brought the money in and the money back in. And and i'm seeing activity that is at at at least no different than what we saw on the past and maybe maybe even more frothy.

Let let's come back to that. But I do I do want to level set to the total amount of VC that's actually being raised and deployed, right? And this first slide we have here just shows that we picked in key in insert in twenty twenty one at over seven hundred billion deployed.

We come back down to about three hundred billion deployed, which is still meaningly above where we were in two thousand and fourteen, two thousand and fifteen. But we're back to about two thousand and seventeen, two thousand and eighteen levels. But IT kind of hides a couple things.

Number one, the number of first time funds raising, a second time fund has plummeted. The number of first time funds have plummeted. And so really what's happening is you have the consolidation among a few big platforms.

You know, just this week, we saw that general catalyst has raised billion in new capital. Now of course, I love my friends of general catalyst, but you know, just twenty four months ago, they raised four and a half million. So that thirteen billion raised in that twenty four months period, similarly right.

Light speed recently announced that they raise seven billion after raising about six and a half billion. So another thirteen or fourteen billion over a kind of that twenty eight thirty months period of time. Clearly lp s are raising their hands and saying, we don't mind, you know, these these larger funds, the capital is available for for them. What do you think that there uh h they're concluding? If you believe that this is going to fundamentally reduce the returns of the entire asset class, then what must be going through the minds of those L, P, S, to want to back those much larger businesses?

So many different questions. One thing I would highlight is that when in my whole career in the venture industry and prior because I read about the history before I joined um the industry was inherently cynical. And there be these boom bus periods and they're very long waves, partially because of the construct of the agreement between the GPS and L P.

S, which used to be a ten year thing and now it's like a fifteen, sixteen year thing. And so the window for which you would evaluate whether someone can accurate later or successfully deploy a four billion dollars und might be twenty years, right? And we just started raising on that big.

So no one knows, right? Like no one knows like the raise of money off of of paper Marks from this period. Yeah and it's just the .

cycles .

forever of most GPS career left to be done, which gets back to .

the two percent.

twenty percent. And I think .

IT kind depends, I think, one way to one argument or one lens to look through and trying to predict will at work, everyone will look at venture funds. And there's kind of is view and belief that the bigger you get, the later stage you invent you, the later stage you invest, you can more evenly distribute your returns in a fund to achieve a top quote return. That I would say I strongly disagree with.

And all of the numbers that we've seen suggest that to have a top cortile fund, you need to have outlier power light outcomes within the fund. You won't evenly distribute them. So I think one way to look at this is to say, and this is way we talk internally, what does that take to a power that outcome at a certain stage, at the seed stage, you might have this many companies that could get you a power that outcome and return your fund series a, series b, series c.

And it's just it's a downward function of the number of companies that could give you power outcomes. I think one of the chAllenges is if you're investing just in growth stage, there's only so many companies you can invest in that can give you power of outcomes. And so you are almost inherently widening the appeal to do more than what could be a power that outcome, the larger and larger.

So I think the burden of proof is on the picking of the large funds to say we will pick and hit those power light outcomes, but then have a much higher hit rate on the rest. And so IT won't be this big power low outcome. IT will have the power law and then be more evenly distributed in the long tail, which I can happen.

It's just really hard, especially when your incentives are just to deploy to raise the next fun. It's are you giving up or saying, hey, I don't care pickings too hard. I don't need to do IT, in which case maybe you get the power law, maybe you don't, but you're just naturally gona capture more of the long tail, which I think ultimately will delete a lot of those returns. And so it'll see how a place out that .

the fun point of I think this is a bills point. Yeah so you if you're going to run rate where you're raising five billion box every two years, okay, so give or take that you know fifty billion dollars over a ten year period of time, a two percent on fifty billion, the billions. okay. So now .

I just .

right.

right.

right. So so, so underscore that for everybody, bill. right? Because these funds layer er on top of one another.

So you're getting paid on multiple funds, and that's the guarantee ed portion. Now these these firms are much larger firms, much more institutionalize ed. To german's point, they're going to have to spread their bets over a much, much wider field.

So the potential that you're going to have enough ownership in a power law business to earn venture like returns is much lower. But I think you you also made the point that maybe what you're doing is your mortality rate goes down and so you're giving more confidence. But bills point is, we don't know the experiments never really been run in venture at the scale. And we would have thought that coming out of the vision fund experiment, right, we had all these comments during invision fund that we wouldn't see, you know, kind of this kid's of these sides of funds. And then if you want to take some targeted big bet, say, in an OpenAI or something like that, there may be only one, one or two or those that .

come around every couple years.

and you place a lot of wood behind a couple big bets, but then your traditional venture fund is smaller, such that I can generate those historical venture like returns. But I I haven't seen any math that I find compelling how you can get to a four to five x fund on, right? That five billion dollar pool of capital.

fact. yeah. I mean, in two thousand and eleven, there was a famous report by the cover foundation, argued that the billion doll plus funds had never had good returns.

But and of course, after that, everyone raised billion our funds. But I have the story I want to share with you that that relates to this in a funny way. I was at one point time invited into the office of this P E.

From, I did no P E very well, but they had had back double click and and google bard IT for three point one billion. And this particular firm, may I forget, they they had a lot of IT, so they made like a billion or billion two. And I said to was a congratulations, man.

And that incredible. He goes, well, ten or four billion of fun. No, so you have an incredible outcome. But the omatla is so big, right? The you is just hard to claw back, is hard to get back to that now.

which is why you can get to the four, five years because you have a power law outcome and IT returns twenty five percent or a third of fun, right? What we've witnessed is kind of this bill coming out of the twenty two period. These two pass are effectively, you know, the firms have followed.

We've seen some firms downsize founders fun or timed. Few others have downsize the fun size. But we see other funds that just said, you know, we're going to consolidate.

We're gonna get way bigger. And so I do think that you know if we look at a little bit of of returns math on this, so we have a few slides. But you know I love, you know fred Wilson's rule of thumb.

A third of companies fail, a third basically under perform, and then a third get to your five to ten x returns in recent breaks IT down even more, which you know says that all comes down to the ten percent produce, you know, kind of that ten x fund. And if you look at this step stone data, you know IT actually shows that you know basically what differentiates those top tier funds and and buy top tier. What I mean is the top five percent desi funds that they're earning about a four and and a half x you know cash on cash return in their funds.

You go back and you can look across all of these villages over the last twenty years. Now I think there's a question whether or not any of these mega funds on these four, five billion doll funds are going to be able to, you know, generate those returns. And maybe the reality is that these new L P S, pension funds, sovereign funds and others look at these are strategically important.

And they know they are less concerned about venture like returns and they want to protect the downside more. And so maybe you can sell the fact that you're gonna have less mortality, right? Onna, have less downside rise to the funds. But I mean, I think that that is really where the rubber meets the road. You you know when we look back at this, know this analysis, whether or not these funds are going to be able to generate returns that are equivalent to the the top of history.

one of the things don't know that that I would be really hard to gather data, improve. But this zombie unicorn class, P L M zombie unicorn class, you know, had had not been flooded with money.

And there a notion and science called the observer effect, you know where where, if, you know, VC are too big, like, do you actually impact the result to the game on the field? And, you know, had that not happened and these companies grew up on a Normal way, you know, in a more organic, no growth path, would they have had more liquidity? Would they have ve had more investor returns? Would would y've been more acquired without these high Marks on that? And so did you did you take out you know your so we're so focused on the outlier, you know break out google meta types. Did you ruin .

the I think .

you you totally removed .

IT as an outcome path, right? Which is to say, when you are investing in these companies at high Prices, the only thing as an investor you care about is, are you an outlier outcome? Are you a ten x plus, right? As a founder, you might say I don't need that. As employees, you might say I might. I don't need that if I was sitting on a six hundred million dollar valuation, not six billion, it's gonna much different to go and sell the business for two billion when the press stack isn't one a hf. So I think we've just we removed a thick middle of an outcomes that would be relevant to everyone outside of the investors where now the only outcome that's relevant anyone is, are you a ten x or are you a zero? And you made IT a binary outcome for all constituents and .

force everyone into that game, right?

Obviously, all three of us are in an industry. We believe it's the engine, you know that provides the fuel for you know incredible founders to go innovate the future. And it's really just a question of of whether or not we're over capitalizing the business, whether funds are getting too big.

But what recommendations bill might you have or or, or jam. And for founders or founders, right, I german. What I hear you saying is founders just be aware, right, asked the questions number of people you're putting in your in your capital structure and like what their incentives are IT? Are they sitting on twenty different boards? Are they clearly in the deployment mode rather than the investment mode? And if they're in the deployment mode, just know that I know what you're .

implicated signing up for. What bets are you making not just on your behalf, but on your entire employee basis behalf? Where do they want the binary bet, binary beat? Okay, for investors, I don't think early employees founders necessarily want that. But I say that you know know what implicit bets you're making by the rounds that you're raising you.

I mean, to that point, like this is super simple math, but if you raise four hundred million, let's to say one hundred million, even if you're being conservative, what are you going to spend that over thirty six months? You know something like that, you're still signing up for a three, four million a month burn rate. And there's no way that doesn't represent risk in some way.

And the bigger you take that number, I used to always think about venture capital is you know you you you invest in a company and you you grow that burn up until point and then the job is to convert back against IT and go to profitability. And with all this money, I mean, we are taking that point up to ten million a month, twenty million a month. And this get into who can grow out of that, right? And IT is into, did you destroy that that medal? 嗯， because someone just can get.

And you then rely on the beneficence of the capital markets to keep feeding that machine in sometimes IT runs out and then yeah you're .

in a massive course. General responses is unfortunately um more singing, which is I I think these systems are emerging. I don't think anyone person made a willful decision to force this reality, correct?

I think IT emerged out of combination of what was happening with interest strates in serpa and the ray rise of A I and maybe the global aliza of a fund raising that brought Simon wealth in and. IT all kinds combined and created this this mix that we're living with. And for the most part, I think we're all actors stuck in the game, right? You know, not sure you can escape IT.

You know, a couple of observation .

sites take.

no, I I know he wanted what I found. I know .

I give you my spin on that. Number one is, you know I do think that pensions and our and well funds have you know stepped into replace some of the money that came out of the endowment ecosystem, right? Because in downtown, you know, I think about the legends of that business who were allocating those dollars.

You know, the film rotters of the world are the sense of the world, right? Like they would phone up everybody on santa road and they would say, you're getting over your skies. You need to back IT off a little bit, right? That industry is long on.

But I would also say, I just, you know, I saw news this morning, you know, fii, which is doing you like, I think, an incredible convenience of investors and leaders from around the world. I think they're doing incredible stuff, you know, in the gcc, in saudi and in particular. But they said we're going to deploy more of piece dollars on investments inside a saudi arabia, then outside a saudi arabia, right? So I think there was like, and i've heard this as well from you know the U A.

E, they're going to consolidating the number of GPS. And so I think there is increasing focus coming out of sovereign. Well, I hear the same. I was just down in texas talking to the texas pensions, the same thing happening there. But when they consolidate, that probably means more dollars into fewer, right?

May be it's starting to care.

And so I don't know. You know we've seen from that slide that I showed the total amount of funding um has definitely come down by about thirty or forty percent over the course of the last couple years. So that's one half of the the other half is there is no doubt that the outcomes that we're now talking about are much bigger than the outcomes we are talking about ten or twenty years ago.

So IT would make sense to me if you looked at a trend line for the industry. The industry in the number of dollars deployed in the size of funds should be much bigger today because companies are scaling much faster today and the outcomes are much faster. OpenAI got to four and a half billion dollars of revenue in a fraction of the time I took google in meta.

And you know and so like that to me, supports more dollars, larger funds. But I do think the law of economic gravity prevails. There are there a certain fund size, I think, that can deploy if you're aiming for traditional venture like returns, then I don't think there are hundred growth companies, right, that you can go put in A F O N D of five or ten billion dollars equally, wait them and get a four to five acts over any reasonable period of time.

And we can, I mean, let's move into that. I mean, I think the enthusiasm around the eye is part of what LED to that reality. And and if I didn't feel spectacular, IT wouldn't have happened. Right, right, right. So it's tautological that those two things contribute.

Well, one of the topics we've been talking about all you know is, is A I in GPU scaling. Will these AI models continue to scale with GPU continue to scale? There is a lot of question whether or not a video would grow in twenty twenty five.

But just as week, we saw a few announcements. First, we saw out of the X A I, the glosses cluster and months, which I discussed at length with jenson, they announced this week that there's scaling. Elon said we're not going to go from one hundred thousand gp to two hundred thousand thousand gp s in that a facility. Did you see the video the .

super micro o put?

So it's decried IT. It's .

incredible .

to watch what they built. And if I think about for the last decade, data center engineering and construction has been in the background, right, like you know meta head breakthrough, google head breakthrough, like we talk about IT, but wasn't something that people are posting videos.

There's some mrs. Shareholder might disco, but I would say we generally .

took IT for granted, but now it's clearly becoming a much more important source of competitive advantage. And I would just say, you know, it's super impressive what they pulled off in members IT all gets to this question of, you know, you are asking the beginning, you're, will we need or will we get two clusters of two hundred thousand? Now those questions are clearly off the table.

And so we have all these make a caps reporting this week. It's expected that capex will continue to continue on at this two hundred fifty billion dollars n rate, google came in denied at thirteen billion dollars, just above the twelve point seven billion that was expected. So they revised that hired a bit but what you've just make out of you know, as we sit here toward the end of twenty twenty four, um do you expect that this is going to you continue at this pace? Is this a sort of you know i've heard people describe IT as a pascals bet sort of situation. Um you know, how are you thinking about? Know .

where let's come. Do IT a bit. Um look at is something we've never seen before. I know, you know if I think back to and you are discussing this, but if I think back to the break out companies of of the previous generation of V C back companies, none of them had amid massive capex.

The biggest was was amazon actually with their with with their distribution facilities and IT caused IT caused a lot of skepticism and they raised a lot of debt and they did things other people had been done before. Um and you know i've discussed, I don't think we ve ever seen kind of a capex race before. Um and it's a it's it's pretty mind bugger that these are being built at this scale.

It's interesting, you know, to try count how many people are gonna wanted. Do IT like, you know, the hyper scares i've see are reselling this. So so there they're like an arms merchant.

Everyone else you know in in text, less case, an x that a ice case in and medcath, they're consuming this, you know, for their own, for their own good. And you know, IT do. And I throw this back at you. Do you think they'll eventually be fifty of those that they are tested like they want to build these out for themselves?

No, I think they're onto a handful companies. Take mag seven .

because the scales too high.

Yeah, think about IT this way. You know if you look at google in the corner, gcp acceleration venues by to plus thirty five percent year on year. okay.

So just to put that in perspective, they added about two and a half billion of new year in the quarter. That's like adding a data bricks in the quarter, right? So it's only companies of that scale that can afford to spend fifty billion dollars a year. And you know, I do think they're increasing advantages to scale both when IT comes to data in compute. And so you know, I found this past scale bet to be a good framing of this, which is if I were run in any one of those companies, they would now be sufficiently .

cleared to me.

Expensed out is french, philosophe says. I don't know whether god exists or not, but if he does exist, and I don't believe, then it's going to be a really bad outcome for me. And if he does exist, I do believe I have eternal life.

So if you believe that the upside of A I right is infinite, is eternal, right is some really big outcome, and all your competitors are doing IT, what else are you going to invest your money? And you have, we said, we said here several weeks ago, you can buy back your shares, you can issue a divide or you can buy GPU, right? Do you think any .

one of these founders licence deals?

You know, so I think but I think most of these people are in this game for this moment. But I think IT IT raises a really interesting alternative question, which is it's pretty clear to me now that there are very few new entrance that are going to be able to play in that game, right? You may be able to build an application that rides on those rails, but the idea that you are going to be able to build that level of compute or build a frontier model that's going to require that level of computer on an annual basis and compete with those companies is very, very difficult.

yeah. And another thing that I think the law of large numbers just starts to catch up as well. I think there is some capex been from even a man seven.

The i'd mention that maybe the CFO voice goes up a little bit, but but the investors will start asking as well. And and there was another data point this week that may seem trivial, but um there is there is some that just came out yesterday. The OpenAI is talking to T S M C about building a chip and has put their foundry ambitions on old right I have to founding ambitions. There are a little too ambitious, but but in some ways that are not recognition that, oh, well, that may have been too much money and and with the burn rate, this room, where did they have like, oh, okay, maybe you know and so there is is there is some one thing I would say about to pass out. Thing is if if that truly what's on everyone's mind, that's exactly how you would go over the top exact form for.

And there is some non zero probability, just as elon says, there's a non zero probability that a is going to end up being bad for humanity. There is a non zero probability here that at least for some of the players, they don't see a return on that email.

Or did you get a supply demand and bounding the the?

Or are you get a deluded return, right, that that you all overspend? And had you just waited and spent slower, the cost of the technology would come down. Cost less over there .

are there are there are people they will argue that the, you know, we're going to get in here and the first passes, we're gonna place a bunch of programmer, but they we're going to replace a bunch parolees als and we're to replace, you know a bunch of, you know, imaging analyst. And then and and the longer that list gets, and if you are successfully tuning models specifically for those particular task and that gets longer and longer and longer, it's big. So lead .

perfectly into this common at amasa sun today know that we couldn't not talk about, but he rate masa at fii today said, nine trillion of cumulative capex on two hundred million GPU is very reasonable, he said. In fact, I think IT may be too small. And he went on to say, you know that if you took the most critical estimate of the value of A I, he said, the lowest estimate that he seen on the value of A I is that you could do that.

You know what? He cause an artificial super intelligence, which is what he thinks we will have if we spend nine trillion dollars, is that IT would replace five percent of the global workforce. And IT, just so happens, if you do the math on that, five percent of the global workforce cost about nine trillion dollars year.

So he said, imagine you were a single entity, single enterprise. The global workforce was your workforce. And you could spend nine trillion cumulatively over the next seven years that you would then recoup in a single year through the efficiency is gained.

That workforce that would obviously be an N P V positive investment bill is moses nine trillion. The top is IT. We're all this you know.

I think the key math h for for that number is IT was bigger than any and .

anyone else.

I do think there's many of made this argument right. You look at I T budgets as a whole. About half of that generally goes to head count people.

A smaller percent that goes the software and even smaller percentage of that goes to new spend in the year. Most of the software spend is just renewal. You spend IT last year, you're going spend IT this year.

A lot of people have written about this, but it's the great services as software rotation services markets are usually turn next speakers and software markets. If we look at how can spend attack IT budget as a whole, it's not just let's replace this soft spend with this software. Spend is less replaced calls and agents. Let's replace these insurance people filling out forms in the back off IT. Let's replace a lot of this.

I mean, most of these firms release you know, employee hundreds and hundreds of thousands of people, and we're seeing those numbers. That's where no, I started, you know the conversation about my walk with Michael um and you know again, this is looking over thirty to forty year period of time.

Never have has he seen or have I seen the ability for companies to take out ten thousand people and actually see customer satisfaction scores increase right there? There's always a cost to letting people go. But in this case, you know you hear zuckerberg talk about take out twenty thousand people. Flat is faster, leaner is Better. We're getting more done with less, right?

When you look at span of control in companies, right? There are some companies you know this stuff and that's the number of employees per manager, right? So you can imagine that will widen, you know because A I will allow you to you know have more people, uh, you know, who you can effectively .

mean IT IT. I I do think that some of the fine turning and of the man is still to come. And i'll use the coding example. You know, when we started, I oh replace engineers. But but if you talk to someone A C I O type and say what kind of lift do you get from a copilot, they're kind of generally in the fifteen and the thirty percent range, which isn't you know if you're replacing somebody to hundred percent are infinite percent.

And so um whether or not and maybe customer services different than coding in this case where you can you know replace one hundred percent or ninety percent of the people um but are you 允 shing to see as the analysis come out of these things with those different numbers look like for each of these different vertical so that you can get a Better sense of that。 But if if you really can, you know if if c err, ret tailer company is right and you can replace one hundred percent of your customer service agents with this technology and get a more satisfied customer. And if there are multiple vertical like that, then you're right. This could this no out .

in my mind that there's some sloppy spending going, right? Like you can you can add this magnitude of spending without there being a little bit of waste, okay. But it's also clear to me that the reward on the other side, there is nobody taking their foot off the acceleration.

I talk to core weave, when I talk to azure, when I talk to open a eye, when I talk to amazon, a google ETC. Not one of them is talking about anything other than how do we find the facilities that can support a gigolo or two gigolos or three gigolos of power to power up the clusters that they want, they want to invest in. And these, remember, these are three, four, five year long investments.

Another thing that came out this morning that I was kind of waiting on as a proof point because I didn't make sense to me that IT hadn't happened yet. Uh, T, S, C, said they're going to do across the board twenty percent present case. And that I was like, this should be happening and so I also indicated .

inde indeed. And maybe we um we we can close out here by talking about um the markets a little bit. We always talk about the markets at the close, but one of the questions I keep getting as well is whether not this election is Priced in.

I mean, you know in a lot of our text threads we have with our friends everybodys trying to figure this out all eyes on the election, which is here in seven, eight days um and and and the question is like a lot of people looking at the prediction markets in increased probability that trump wins the election. So they're wondering do is they're still time for me to adjust my portfolio right ahead of this. And so um you heard rock and Miller talk about this this week.

Paul or Jones talked about IT. I think great, dalia, all said the market is fully banking on a trump Victory at this point time. I probably wouldn't put the market is at one hundred percent, but you know there's seventy to eighty percent back into the cake. You can see the lot of stocks and move a lot. And I feel this back .

a little believe i'd love to see in this democratic bucket, it's down .

twenty percent. Then I looked at some companies in the solar complex, like in phase that settled down twenty five percent. Companies thirty days in thirty days, you know companies like in the health care trade, uh, humana and others down significantly because obviously, they provide medicare advantage and other uh other products that will get hurt.

They were are expected to get hurt under a trump presidency. And so if you look at the the policy consequences of these two candidates, they're very stark, right? And I would .

argue that most also talked about A M F for drug Prices right outside. So at this point.

what I sit here and i'd try to find to my portfolio for the election, probably not um you know I think that markets are have been quite efficient on this over the last thirty days um and my own sense is that the bigger surprise, right? If you thought that IT wasn't sixty or seventy percent likelihood that trump was gone to win, let's say you thought I was actually even odd.

And you believe the polls that are out there, right, that whole trade there will unwind if Harris wins. So there will be a massive move in the other direction, right? If Harris were to win. I put both of in the two hard bucket, but I thought i'd put him out there um because we get a you know certainly a lot of chatter about IT.

We're in the earning season brand. So so and we had a couple like right before we just started today, I guess google and AMD what what what your interpretation of what you're seeing and what .

do you expect what I think we came into this week, we and lots of others like if you look over the course of past several weeks, uh the mag five has under performed um software and other categories. And I think people are pretty concerned about the capex guides. There's been a lot of talk about that.

I came into this week and said in my team, I think it's largely Priced in at this point time. I said I thought the whole mag five would probably trade up three to five percent this week, including google. Google came out tonight.

Um, you know, they grew the, uh, search revenues by twelve percent. They grew youtube reviews by twelve percent. The stocks up, I think, four, five percent after hours.

That all smells right to me. IT had trade IT off a lot. Uh, you know, going into this period, I think the .

more interesting thing, bill, is if you look at the world about they .

were worried that I was gonna be even higher.

yeah. okay. So a good thing if they want to be.

well, no, I think you know there is. I mean, remember these capex um expenses have gone fairly parabolic in the last couple years, but Operating income so margin expansion and top line growth have outpaced the increase in capex. So people have tolerated IT what won't work well, right?

Let's say we had a recession next year and then you know, earnings were came in a lot lower than people expected or top line growth came in lower. But that there was you were unhinged on capex. I don't think that would be a particularly good equation for the stocks.

So some people were quite worried about this, but I think let's talk about google in in particular, right? I think there's a lot of concern and chatter in the world. I've been out out they're talking about IT um ChatGPT is consumed an extraordinary percentage, the time and energy that I used to spend in search. So it's kind of you know hard to believe that is not really having an impact on search revenues, but it's not.

And so if you look at this chart that shows the search revenue growth over the course last state quarters, I mean, they've accelerated search revenue growth um from twenty you know and twenty two and in early twenty three from like you know two percent, five percent all the way up to fourteen percent, still at twelve percent today. So part of the question is how long can search revenue growth stay at this level? And one of the key questions there was whether or not the A I enhanced search results.

We're gonna otis at the same level as non A I enhances searches. So they call these S G E um and IT turns out that they said on the call tonight that they're monetizing at the same level. So that's a really good data point for google, if true, which is they can layer in the answer at the top, push the blue links down the page without losing .

a lot of american. This has been argued both as a positive negative, but the the searches that were, I guess, stolen most quickly by a chAllenging or more of these kind of synthetic c type searches where you're looking for information, whether the big money searches for google are travel and new car home and those kind of things, big purchases. And so. Those may not, in fact, be the ones where they're inserting much of this. So you you may be you may be talking about the long tale of their searches aren't meant the for sure.

I mean, a lot of people think of these as the knowledge graph searches. You know, i've been using, you know, all last night I was using ChatGPT 的 study help making study for his ap history exam。 There's not a lot of monodist .

ation of that in google anyway, so that .

moniz ation is about the same. Now we've also, as you know, we saw this week that anthropic released computer use right to take control of my browser to you know what we've been discussing. Booked that hotel or book that airline ticket. It's clue uh, you know a lot of people ah you know but but it's a step in the direction. A lot of people thought that google was gona release jarvis this week, which is the version .

of this in A I will certainly do this.

So you know the fact .

of the matter .

is google is already discounting. This is trading at the lowest multiple, you know in the mag five. So I think people are saying at some point it's going to have some effect.

We don't know exactly when, but I would just say for this quarter um you know super solid quarter out of the company. Then you asked about AMD, these down about ten percent after hours despite you know continuing to have blistering growth. And I think what's going on there is there was some talk, the beginning of the year, the AMD could capture maybe ten percent of the data center market.

And the fact of the matter is when you they gave some forward guidance tonight that suggest they're gonna stay IT, about three percent of the GPU kind of data center market relative to NVIDIA, about ninety percent the companies done extraordinary ily. Well, lisa is an amazing you know, CEO, and I think there are a lot of good things in the works, but they're not closing the gap in terms of share market. The tide is rising for both parties, but the .

opportunity clearly for .

them right is to is to try to try to peers a larger share that market. But we didn't see any .

I have a really hard time like in my brain separating kind of my own user experience shift and how fewer google searches I do to accepting the idea that oh, they're going to add IT in to like I I don't I don't go back there and say this is Better like with IT added in and ads and stuff fer. So I I don't .

feel right. And so that to me is the leading age, right? Like at the end of the day, could google give you that same clean experience that ChatGPT gives you? Of course they could, right? But they can abilities.

That's what innovators dilema means. They cannot lize their core business. And so they either have to you a heavy product that looks different, that stores the blues, that does the sponge ads, right? And you risk losing user affinity, right? Or you that I think .

is hard for people understand. But i've explaining a couple times, which is their revenue per visit fall if they complete the transaction because someone is spending marketing dollars to take that customer to their website and run the transaction with the hopes that they'll come directly back to that website. So you'll spend fifty to one hundred percent of first transaction. There's no one that's gona if if if google or ChatGPT or whoever convinces kayak or whoever to be a White label rails in the background, the amount of money they're gona give you for that it's gonna a be like five percent of the transaction.

something interest. So like this new brother, it's going to called browser base. And I think this is a really interesting concept to think about kind of transitioning states verses and states, right? The transitioning state today is we're going have agents that essentially can scrape websites and view IT as if i'm doing IT.

They're going to recognize the button and click the button. They are ongoing to go here. What if we reinvented the browser in built IT in a way where it's not a button for a human eye, but everything is some composer API that an agent can recognize, an agent can go in iraq with.

So you're not scraping the website where you would lose the eyeballs, you're building a new browser for agent versus humans. Is that the end state? There's lots I don't know the answer.

but it's a first you have to rebuild all the rails too. I mean, everything has to start to look like strike. There has to be you know travel the stripe. There has to be like you have you you need you need a transaction network and that's not what we have today.

Yeah yes, we have browser based world that sits between the consumer and and all these businesses um but IT could happen and boy, we've talked about voice like if you just start talking to your computer, uh it's a very different world. It's not a brothers. It's not the brothers we know IT could very well be a different to yeah well I think .

the way you go over the top um and why am so can so so excited about you know the equivalent of computer use across the board is you know in the same reason perhaps that elon says you use a humanoid versus a non humanoid robotic form because a human odd works in a world that was designed for humans, right?

The thing about computer use, you don't have to build all these new rails and everything, which takes a really long time to negotiate all of that stuff. Instead, you just give a ubiquitous use of the world that already exists. Um you know a straight out of the gate. So I think .

I really wanted to make point on I think we super interesting to watch which categories in which particles fall in the place first and why there was an article out this week that was looking at, I think, OpenAI as describe, and they highlighted that IT failed like a lot.

And so if this is also an issue, would like self driving, like like if the cost of a five percent air, ten percent air is super high, it's gonna take A I, A I A long time IT may may turn out to customer service. That's just fine because the best in class today already has. So just because of human you know, failure. And so I will take A I A while to get to where IT has the kind of nine you need to solve certain problems. And that's why i'm i'm so intrigued by which verticals are going to line up first and get knocked over.

Well, another good conversation, gm and .

great people, great plot.

And and I I imagine you we're going to to get a lot of feedback on this one for malpas and founders. So we'll make sure to put in the notes.

Great to see. thanks. Thank you.

As a reminder, everybody just our opinions, not investment advice.