20VC: NVIDIA Bonanza: Buys Poolside & Invests in Mercor and Perplexity | Anthropic's $30TRN Revenue Assumption & OpenAI Confirms IPO | Why Customer Service, Defence and Robotics are Overinflated

Transcript from https://podmenti.com/t/a8d024a5cc1dca48

Nine billion doesn't clear the bar for seed investing in twenty twenty six. Let me tell you one thing I guarantee. If you get fifteen X on your failures eventually, you'll die a rich man.
The V C money went out on antropic
and open AI long ago, which is why no VC owns more than one or two percent of either of them.
What if it all goes right?
Entry price for any of these winners doesn't matter.
They'll go at whatever price they get in twenty seven,'cause they can't wait any longer. If danger can be described as the absence of choice.
They were now in danger.
It's all about code.
That's the only sounds that matter. Your time is, you know, the entire US G DP. Thanks. Thanks a bunch, Dow. Yeah. Good to know. I think you have to believe we're less than a third of the way through this cycle.
Jesus Christ, if thirty percent of my company leaves to go work for Harvey, I'm dead in the water.
Silicon Valley forgets every three years that the average American is not trying to be efficient.
Welcome back to another week with the trio. This is my favorite 20 VC of the week. So we have Jason Lamkin, Rory O'Driscill, and me discussing the biggest news that happened this week, and how NVIDIA are going fast. One, they're buying poolside for$12 billion.
Two, they're investing in McCall's$20 billion price round. Three, they're investing in Perplexity's$30 billion price round. Then we move to OpenAI, where CFO Sarah Fryer says, Hey, we're definitely going public this year. Well, they had no choice, science to Anthropic also doing the same. And then we discuss a really tough week in the public market.
Markets for a lot of the biggest AI names, what to expect moving forwards, and whether this is a short term or a long term, and how to think about that moving forwards.
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Guys, I am so excited for this. It's so nice to be back. I feel like locked in when I'm in the studio. I have my big table, I have the agenda, and we're gonna start with NVIDIA, moving across different layers of the stack. And we're gonna start with the model layer, where NVIDIA is paying six billion dollars.
to license Poolside's model factory and investing a billion dollars more at a twelve billion dollar pre-money valuation, moving 109 engineers over to Nemotron to help build it. Pretty big news, especially on the American open model front.
Agreed.
Man, the one that gave me the feels or that hit me was that letter that was um you know, the the the investor letter that was published on X.
Thanks, Leaking V C.
Or whomever it was, but basically saying, you know, we we couldn't raise the two billion to buy forty thousand GPUs. That deal that maybe we talked about half a year ago, it seemed like they were gonna build their own um
massive data center, they couldn't get the money and they wouldn't have compute going to next year. So they had no choice but to fail up for six billion
Plus topping off a billion to twelve billion, but
It read it read almost depressing, uh it's also maybe a reminder that despite
Nvidia seemingly funding everyone on planet Earth that you know the the gravy train
The V C gravy train can only last so long. There's only so much funding, right? From big funds. Maybe Rory sees it differently, but it seemed like uh
Tough they couldn't raise the two billion in in this environment. Not being critical, but it just showed that uh infinite capitalism is infinite it looks, even in the age of AI.
First of all, I thought it was an excellent letter. I mean I read it and I re read it.
And there was some really good phrases in there. One of them I want to pick up and it said
You know, we have found ourselves on the right side of prediction.
In a market which has scaled exponentially in terms of capital intensity.
Which is nicely but what they're basically saying is we were right three years ago
that there was a market for a new US open source model and we've built that model. We've done everything we said we'd do.
And the capital intensity for the next turn of the model crank is just, as you said, way beyond us.
It w nicely phrased. A couple of things here. You could look at that and go, I mean, they did something that
They took on a task, they weren't able to do with the capital. Oh, that's a negative. On the other hand, they made money for themselves and all their shareholders. And I think the lesson here is, and we talked about it last week.
In a market that's exploding.
Sometimes bets that on a standalone basis really just can't get to a positive DCF, and also they just couldn't make the math one on a standalone basis still have pretty significant value to the acquire.
Cause from the perspective of NVIDIA, they looked at exactly the same facts and said, Well, we have capital. W it turns out we have access to GPU'cause we make GPU.
And you've kind of carried the ball down the field this far. We'll take it from here and frankly we'll give you a pretty compelling return.
I mean I know you're small pool side show hallway, so all those guys made really good money.
And the company gets to go stand alone and continue on. So
In one kind of negative way the lesson is
It's almost impossible to compete now at the frontier. And by the way, that has positive implications for open AI and Anthropic, we should talk about in a second. So the negative lesson for everyone else is it is almost the next smartest people
who were really gone for just hit the Capitol wall, so probably all the other people behind them are gonna hit the same wall.
That's the negative implication. And the positive implication is
Sometimes trying and moving the ball
In a hypergrowth market.
you can still get a very compelling acquisition.
Yeah, in a different market. If you'd run out quote unquote run out of money, if you had reached the next generation where you can no longer finance the company.
In a time when the capital markets were the pressed and there was some feeling that the overall buoy around equity uh sorry around AI wasn't as strong, you might have had a very different outcome there.
'Cause your fate was outside your control.
But I think in this market.
It pays to take risks. It's what we're talking about last week in Cursor, and I'm sorry if I'm rambling a little. Even when you have this kind of all on a DCF, MBA basis, it's not quite great. It turns out if you're moving
in the right direction and you execute and build a product that's valuable.
Right now you're getting great exits. I think there's gonna be a ton more I think I said last week there's gonna be a ton more of these kind of exits.
I read that and I thought, hmm, as an investor.
If all the time you're saying is y sometimes doing things where there is a fair amount of
Capital raising risk can still pay off in the nut market. In a very different market it wouldn't have, but
He were dead.
The additions that I'd have is like unwaveringly common thing that I see across all investors that I engage with, friends, people we have on the show, is like Neo Labs just going out of favor and next generation model providers and companies going out of favor too. And I'm not surprised that Paul Side found it challenging to raise as much as they did. That's universal from everyone that I speak to.
Tech and founders are gonna make a billion each.
And then third.
Is that for me as an ambassador, I I don't know if I'm allowed to say this, but I get in trouble whatever I say these days. So fuck it. You know, it'll be like a fifteen X.
For us as a seat investor.
Pretty great.
Absolutely pretty amazing.
Agree.
I think I was very on crisp a few minutes ago at Chuck. When you're in the direction of travel.
Even when you're wrong you can make a ton of money because you've created something of value to the acquirer.
Does this really move the needle for NVIDIA in their ability to make Nemotron
Truly competitive.
There's two questions within that.
One is is this additive to Nematron? And then the second question is does Nematron even Nematron, even if it is competitive, does it move the needle?
But if you zoom out a level, right now there's a whole bunch of Chinese open source models.
That are getting a lot of the token volume.
Which means they're doing a lot of the compute, even if they're not getting a lot of the margin.
And if I'm the maker of compute.
It's
Awesome for NVIDIA.
If there's a viable US open source model running on NVIDIA chips.
Taking market share away from the frontier models at the margin.
So I totally get why they're doing this. An open source model is a compliment.
In the economic sense of the word for
NVIDIA'Cause the more open source market share there is, the more money goes to chips relative to the money that goes to foundational model builders.
So they're like yeah team.
I don't think fifteen X is good enough for a seed investor in Pullside.
Listen, first of all, let's step back. Seed has a weird definition today. Seeds could be at a billion or two billion
Pre or post, right? I you know, fifteen X sounds good for a later stage investor, and and I know for sc it's scales scale.
That's a good outcome, right?
But for a true seed investor, it's not gonna you're not gonna get a fund returner out of a fifteen X. Listen, if you're a personal investor, it's fine, but
If you've got a seed fund and you and you're investing it just a reminder, if you're investing at some of these valuations,
It may not be enough. You need your you're not gonna get your fifty or hundred X out of out of nine billion.
But Jason, play it back. I he I hear you, Math but what we're really saying is
You made a bet, and it didn't work.
It was not viable and you still made a 15x.
No, I'm saying nine billion isn't enough of an exit.
For seed investments today. I agree, but nine billion doesn't clear the bar for seed investing in twenty twenty six. That's the irony. So there's there's two things in that. I'm gonna push on it because I often use this as a way to refine my own thing. One, it is weird.
that you can have an exit at nine billion and only make fifteen times your money, which by definition would imply a six hundred million pre money.
Right. So yes. It turns out if you do a seed deal at six hundred
Not sixty.
Your return is fire also the dilution is epic these days, right? Effectively, it's what your point. It's ex post facto. Ex post facto the effective price was six hundred.
Because you took all the delusion. You're exactly right. Jason, I'm I'm gonna go back to is fifteen X a great return on your best deal?
For a seed fund.
No.
But if you're doing a series of bets, one of them is a hey I built I think I can build an American open source model and you can raise enough capital to do it. And it turns out that thesis is not correct.
And you can't raise capital.
to meet the capital intensity and you still get a 15x.
Let me tell you one thing I guarantee. If you get fifteen X on your failure as adventure, you'll die a rich man. And that's what happened. And I don't like calling it a failure because I know Jason, I think they're also I actually love the letter they wrote. I love the kind of vision they talked about, what they want to do in terms of open source. I think they just ran into
Economic reality of the capital intent and remember we say the V C is
The VC money went out. The VC money went out on Tropic.
and open AI long ago, which is why no V C owns more than one or two percent of either of them. The only people capable of financing a state of the art frontier model in the United States of America has been the hyperscalers themselves, the only reason Antropic and
Open AI exists is because Microsoft, Google, and Amazon gave them enough money to play, cause no one else on the planet.
Has enough money.
And the only other person who now has enough money
is NVIDIA. So they're doing the same thing with an open source model for the obvious reason that open source is good for them.
There are only four or five companies in the world that can finance a financial model and
And they are doing it and it v we the VCs have been along for the ride and to provide an occasional piece of pricing discipline. These are financed by the five largest companies on the planet.
Except for Apple, who sticks the money in the pocket and just has the stock go up.
Obviously, if you can get fifteen X out of your pull side, of course, was not a failure. It's a big win, right? But if you get fifteen X out of your failures, you're gonna be a wildly successful investor. Just
The only point and then let's move on.
Is it's just interesting. I do think
In unless it's a hyper concentrated investment, your best investment still need to do fifty X as a seed investor to make the math work.
If pullside return fifteen X with further dilution
What exit price would it have to be to be a good seed investment?
to return fifty X. Help me do the math, Rory. I think it's I think it's about seven X. So it need it would need to exit at about sixty three billion with dilution. If you think about it, Jase, uh the answer to that question is actually very noble. You're paying in the Frontier model game.
The two winners in that game in closed sauce are both worth a trillion.
The two or three kind ostensible open weight winners in China are each what fifty to a hundred billion, so it was a rational act. The win if you could have done it.
Was in fact large enough to be a you could have had a hundred to one return.
on a seed investment.
If you'd been able to be
Possibly if you've been able to be equivalent to the Chinese open source players, and definitely if you'd been a winner like OpenAI or Entopic. So my point is this, the potential was there for that debt.
Which is why you know at the time it was a rational bet.
And then
the capital markets were such that you couldn't get it and you still got a fifteen X. That's the movie. So
It was a good bet because it had it was one of the few businesses on the world. I mean there's only
Gonna be
one or two trillion dollar outcomes per decade and likely gonna be all concentrated for now in
Yeah, Frontier Models. And this was a play at a Frontier Model. And basically the aha is if first prize is a trillion dollars, turns out fifth prize is still nine billion. It's like the guys, you know in golf on the last day, when you don't win, you miss a few pots, you don't even come in second in the US Open, you come in seventh, and everyone goes oh poor you, and then you think to yourself, Oh,
It's five million bucks, I'll take it. On to next week. That's what happened here. You basically place
You know, high, but not in the top three in the US Open and you get a bunch of money.
I land in the bunker and I don't get out, so You landed in the bunker and you chipped out. You got out. You got out. You took two extra shots. Remember, this is a win.
J Jason, you said how big does it have to be? Next layer that NVIDIA's

playing heavily into is McCall's new funding round. I'm an investor in McCall. I never thought this would be as big as it has got as quickly as it has done. Crossing out two two and a half billion they are. They're doing a new round led by a general catalyst at twenty billion. And then there's rumors, suggestions, reports
that NVIDIA is joining that round in a significant way. How do we think about this? Next layer of the start for NVIDIA.
I think one of the things we saw with Intel back in the
The closer you are to having a hundred percent market share
the more you spend your time trying to move the whole ecosystem along. And clearly that's where NVIDIA is now. They're using their capital to fund the neo clouds.
Fund open AI.
fund as we just discussed, poor side and for s whatever reason also fund more car. I will admit, when I think about all the things that NVIDIA should be doing with its money, it wasn't obvious to me
that funding Merker made as much sense as some of the other bets.
Because the other bets are all about time expansion. If I fund the Neo Cloud, they can buy more chips, I'm happy. If I fund Poolside, I can sell more open source, I'm happy.
I don't get why if iPhone Mercor they can do more training, but my probably my unless there's some kind of strategic deal around needing that training information, from a purely financial perspective, it doesn't directly lead to more chips being sold. So it wasn't as obvious to me as the others and maybe it is as simple as we think it's a good business at twenty billion and stop thinking about it or it.
There's an investment bank called Kroll. I'm embarrassed to say I don't even know them. Do you know them? No, I thought they were detective agencies. No, a different one. They published their report this week looking at all MA and big transactions over the last uh six months of the year and
I guess this is not that just it's a micro point to your point, but the the analysis they basically made is gross margins above thirty percent don't matter anymore. You don't get a you don't get any benefit.
In MA or other exits, like for for an agentix stock. They're not looking like there is a penalty if you look at all deals below thirty, but there is no penalty. So if you can value Mercore at eight classic multiples for eighty percent gross margins and grow, it's uh, you know, it's it's not expensive. I don't know why NVIDIA would do it per se. They've got massive strategic goals here, right?
But the tactical basically kinda seems to me we'll spend all our free cash flow on our ecosystem.
Yeah. This is our budget. Jensen says there's a budget. Our free I don't know what's gonna be seventy billion this year. Maybe I've gotten that wrong, right? And we're gonna spend it all on our customers and ecosystem. And the scratch team and the top VPs probably get around a room and they decide what's our best ideas.
And there's some guy that
That thinks data labeling is important. And his best idea was Mercore. And so they put a few billion of the 75 billion. And you think I'm kidding, but I'm confident they go around the room and everyone has their best ideas and the budget's 75 billion.
And you know, open AI and friends are gonna get a big chunk of it and there's gonna be off balance sheet guarantees, but
I think they've decided to just spend it all one for one, and it I I would do the same.
If you can get away with it.
Adding cash to the balance sheet other than being defensive does nothing for you as a CO of a profitable company, right? If the Wall Street lets you get away with spending it, I would spend a hundred percent of my cash too. First of all, I think you're totally right, Jason. It is as simple as that. It's like, you know,'cause
Yeah, and the by the way, NVIDIA will have reported between the time we make this video and the time we distribute it on Thursday. So there could be a data point that makes us t tot like total buffoons by Thursday and that's just life. But on the basic assumption that the trend continues a pace.
Which I think it does, which is, you know, strong growing quarters, you know, with sixty or seventy percent up last quarter and similar quarter last
year widely profitable,'cause the demand signals are still strong from the hyperscalers. So let's assume on Thursday the hypothesis of Tuesday continues correct. Then Jason, you're right. They're kicking off. I mean I just looked at it, you know, they make
Huge operating margins.
One out of a hundred billion of gold cash flow and then you have they do a lot of buybacks. We'll talk about that in a second. So they have yonks of money to invest every year.
Anyway, they just make a list of what can we do to move the ecosystem along.
Now I make two negative comments on that. You know what one it's worth remembering that only four years ago, their cash flow was one tenth of what it is today.
And I think the free cash flow after CapEx and everything is something like and I think some of the CapEx is really investments, so it's a little misleading.
it's kinda gone from four billion to fifty billion. You know the gross profitability is well over hundred, it's wily profitable. But you know, you say to yourself
And you do get you I guess and you get no points for cash on the balance sheet, but they only have
Only fifty billion of cash on the balance sheet?
Right, cash and investments. There's a little part of me that says I might keep more for a rainy day.
than just doing share buybacks, but I agree.
you do have to do something with it and they're clearly th the best use for it is to spend the money
with people who will in turn enhance the ecosystem, which is why you know, which is why open AI gets a big watch with their money all the time.
If you invest right, it's brilliant. You get a customer. Not only you get circular revenue, but you but you ensure the success of your ecosystem, the viability, you get a twofer out of it.
So you just have to play the game really well. But if you play the game well, it's a lot better than making three percent.
Yeah, it's interesting they're doing such a lot. Thinking in real time here,'cause
The pull side acquisition is time expansion via buying an adjacent product.
The Merco acquisition is I think as you say, Jason, straight investing. It it's kinda just, hey, it's a related space, we know somehow here's some money.
And then something like perplexity investment or open AI investment is literally
Especially the open AI is vendor financing, where you as the vendor of the chips are choosing to give your customer money.
It's not like that's a nefarious'cause a lot of oh my god it's circular. It's not like that's nefarious.
It's just exactly what you said, Jason, you gotta get it right. If you overextend credit
And on the right
projections that aren't realistic, that stuff comes back to you and you look like an idiot in two years.
And we all remember the telecom crash in two thousand Well, we don't all remember, but some of us remember the telecom crash in oh two, where all those ninety nine deals unwound.
And and the b
that NVIDIA's taking here is it's not gonna happen this time.
Yeah, you're not gonna find that
the open AIs and the anthropics, if they don't suddenly need a hundred billion dollars worth of compute.
You might regret some of this vendor financing, but right now it looks smart.
I think it's a good investment. I consistently
regret not putting more money in over time. I think your largest data providers will be two hundred billion dollar companies. If you think about OpenAI and Anthropic being two to five trillion dollar businesses, is it crazy to think that the data provider that
Provides them their core data assets will be a a ten percent of their market cap.
I don't think so.
I don't know. I mean I think you have to think about it in terms of revenue rather than market cap.
And then you start saying to yourself, you know, what's the training budget?
for the frontier models at scale if they're doing I mean watch this. And I I let me give you the negative math. We know that
Yeah, open AI is running at uh
eighteen billion a H one, call it twenty five billion, thirty billion years, atropics at sixty billion year.
Together, let's call it a hundred billion, round out, right?
You know, most of that spend goes on half of that spend goes on compute and inference. What's the training budget? Is it ten percent of revenue? Is it five percent of revenue? That's a yeah, it's a five to ten billion dollar market.
Way more, way more.
Do you think it's Oh I know it's way more because Sarge are doing three, three and a half, McCor doing two and a half, Hand Shaker doing one, Micro Juan are doing half, but the question you're right. So my point is uh so it's predicated on con i i if that hundred billion to spend this year goes to four, five hundred billion, then you're right. Then five percent of that is twenty five billion.
divided four or five ways. I don't think you get ten percent of the market cap of the Frontier models, but you still get it
Healthy
twenty billion a year revenue spend.
Divide that up three ways and then as Jason said, actually turns out the most important question is the one Jason asked, which is what multiple do you attach to that?
Do you attach the AI multiple or do you attach the
Lower cost margin multiple.
That's really what will swing it.
The related thing I was thinking on that croll data, you know, you if you go back to cursor, right? Uh sixty billion we talked about last week.
This was one of the classic ones where the VCisms were right. It worked itself out.
You started off with something with negative gross margins. You start off with something that
radically subsidized its cost. I forget what cursor cost initially two hundred bucks a month for unlimited use, right?
But it didn't have but it didn't it had no way to defend that, right? And so then it had to cap it for and then it had to stop doing it, and then it had to develop its own o models, and then it had to do it had to do and it but the VCism is
These are the some of the smartest kids ever. They have a strong market position. The wind is at their sales. They'll the kids will figure it out the negative gross margins. And more or less they did, and they got to the sixty billion. And so
It's kind of freeing for models like Mercour that we maybe make we made fun of, right? Okay, this is a a commodity, low margin business, but the kids are figuring it out, man. The kids are figuring it out. So guns are blazing.
Yeah, no I
I I I think though there is a bit of survivor first of all, I agree with you and I think it gets to the when when as a venture investor you're doing in something you're investing in something that has troubling gross margins, it is rational to say for certain bets the gross margins will come right over time and you add cursor as an example of that. Just in in the interest of completeness. I don't know why I'm the Debbie Downer today.
Not every negative gross margin company makes it. And in the end, I think you want and strong gross margin companies are the best investments. So don't
Don't don't just look at the sample of deals where you started with negative gross margin and it all worked.
I can think of plenty of deals including some we've done where you started with shitty gross margins and you ended with shitty gross margins and you were just wrong.
I think Jason to your point.
The thing is
Having negative gross margins is not a reason
Clearly not a reason not to do a deal. I mean if if every part of the financials were pristine, they wouldn't need venture capital'cause they'd be profitable.
It's a question of in which cases is it rational to underwrite massive improvement.
And it has been for the foundation models themselves. I mean
Anthropic went from negative ninety one to positive thirty in a year. It has been, as you say, Jason, for Cursor. It'll be interesting to see what the sustaining long term markings for something like Merco are. I don't know if they have the same dynamics
In terms of the ability to approve those margins
That's a Cursor did'cause
The training companies only have
Twe to five big customers.
Whereas the cursor has literally hundreds of thousands.
So I'm not as convinced.
those margins go as well as the cursor ones, but you're right, the cursor
Carson beat the margin club.
And Rora, and as I tell my partners and and subordinates
On Monday meetings, what if it all goes well? What if it all goes better than we expected? What if it all goes right? I challenge my team.
What if it all goes right?
Entry price for any of these winners doesn't matter.
What if it all goes What if it all goes right, guys? That's and I've coined that term and I've noticed many, many of my colleagues in the industry have copied it. What if it all goes right? You know what I mean?
It goes back to the optimists make money and pessimists are right.
That we often say.
And I s and the only reason I say it is because I admit that I can be naturally a pessimist. So I actually th I've I'm trying to learn to retrain the model to do that mode. Jason, I love the sentence and what if it all goes right and I'm not the first to have said it. I know. I know that, of course. But the ancillary point interesting going back to Pulsar is it turns out even
What if it all doesn't quite go right, but you're in a great market, it turns out that can be okay too.
If enough goes right, you can all do fine. There's been a lot of cynicism, scepticism
around our intrinivas and perplexity. It's a company that actually people like to dislike for whatever reason. We've done shows with him. We're a small investor in the company. So NVIDIA is actually propping up most of my portfolio. Thank you. Uh our friends at OpenAI, never a dull day at OpenAI, CFO Sarah Fryer told employees
at OpenAI. We will be a public company in 2027. This is when AI trades cracked. I don't know if it's interesting timing. It's kind of what we expected to be quite honest. They've got pressure on them from Manthropic, who obviously are going public in reportedly the next few months. Is there anything surprising here about Sarah Fryer's statement to the team?
I think they had no choice but to make those statements and I'll tell you why.
If you look at Q one and Q two for them, I I now I can't remember it's like five point something billion to six point something billion, which was a Q one Q growth rate of eighteen percent, which would have turned into an annualized
growth rate of you on slightly under a hundred, depending on compounding. And it would have mean that when they went from twelve and a half
billion last year of gap revenue to roughly probably under thirty this year.
If that Q two number
was sustained.
It would put them obviously A we put them so far behind on Tropic at
sixty billion runway at mid year. And again, we haven't seen gap numbers for Antropic, but clearly bigger and clearly growing faster.
That A it would be terribly bad for open AI and kinda how'cause anyone would run that math and go, Ooh, two more years of this and you're in irrelevance. You have perplexity too. And then the second thing that didn't happen but
What happens, all those people like Broadcom, NVIDIA that were expecting to sell$200 billion worth of chips to open AI might suddenly go, hmm, maybe if they're not growing quickly, they won't need.
Two billion dollars chips.
So that so that's kinda what if if all you had was the Q H one numbers, that was a conclusion you could draw. I'm not saying it'd be correct. If in fact open AI is massively accelerating in early Q three, they had no choice but to share that information with the world, because otherwise everyone would assume the worst. What they're not gonna do is sit in their thumb and say
Well, I'll give you a Q three update in three months. Meanwhile you should just sweat it out. So I really detected a very concerted attempt to tell a
Q two is an anomaly. Q three is exploding story. You could see it in the comments
that they made to their internal team. You can see in the stuff that's coming out and there's been a whole, you know, massive reacceleration story. And again, I know nothing except
Until you see it in gap numbers, it's hard to be sure on it.
But
To me, the the reason for pushing that agenda was you had no choice because otherwise.
you were just gonna be left behind. If you're going two X, it's amazing.
Growing two X at twelve billion is amazing, but if your competitor is growing 10x or 8x,
At sixty billion
You know, you're staring at
you know, relative market share of twenty or thirty percent.
In two years if that continues. So there's simply no way the Q two trend
Could stand unchallenged.
And still leave open AI.
As a credible.
Close number two, which is where they are now.
to a topic. That's why it leaked because it's existential for them.
I mean I was stunned when I saw the eighteen percent gap revenue numbers,'cause I I go back to my comment.
At one level.
If I had a company growing
Eighteen percent Q and Q doubling U at
Forget it, at one tenth that size, two and a half, I'd be ecstatic.
But
that level of growth relative to expectations
would have disappointed massively everyone, including all the people planning to sell to them.
Chip to them for a much higher growth rate. If Anthropic goes out at two trillion.
What price does OpenAI go out at?
I have no clue, Harvey.
But the most important point you have to say is this. It will be lower than the other guys now.
At the high level in terms of report card, yeah there's a concept of math, I can't remember what it is, where you
Well you can't do
Accurate grading, but you can rank things.
The big picture fact is the ranking has changed.
And you're now number two.
So you will go out later then and a lower price than the other guys. Unless you change the trajectory massively.
What that is, I don't know.
I I just think it'll be interesting
By the end of the year to see
Where open AI is positioned in the platform the Enterprise versus Enthropic because
At the beginning of the year, there were two choices, right? There was anthropic and open air for the most part, and
You had a default choice and then uh but people wanted to be to have multi-models. They'd wanted to have at least two, but but you'd often use the cheaper version. You might use Sonnet and Opus or whatever it was.
Now peop we we definitely want different LLMs. Everyone wants multiple LLMs in their stack one way or the other. But
If anthropic
Is number one in platform, which it clearly is. You can't argue with the numbers, Perori's point. Now the number two could be, it could be, there could be there's five choices.
So open I position in a sense
And we'll see. There's so much change, guys, but it could be at no matter what the numbers are, it could be getting perpetually weaker because there's so many choices for number two.
There's so many choices.
There's so many
Open weight models where the performance is close. And obviously we've talked about open router, we've talked about other routers. You can use seventy eight models if you want, but it's tough when there's seven choices for number two.
It's just tougher. It's just tougher, right? Especially if you're a premium product.
Right. And you're saying then the material impact on the EV of Open AI then is considerably less because of the I think there's more pressure on them because
Merely because bad being number two, there's more pressure on you from from open weights and open source competitors than there than there was otherwise.
You're just battling out for that second spot.
You can't compete on price and you can compete on brand and security, but
Man, uh, you wanna just you wanna at least be the d be plugged into to every workflow, right? You wanna at least have b that would be the nice thing if you had Claude and Open AI and then and then you just get a nice oligopical bake off sales team. Then you hire a bunch of folks from Salesforce that walk in for the oligopical thing and they put up a PowerPoint slide and it's just us versus them. They know how to sell that.
It's anthropic versus us. You don't want the the crazy guy who uh you want the guy the government trusts. That's us. But with eleven competitors or twelve competitors running
On open source running running inference on on new platforms, man. It's just it's a hyper competitive world for number two. Yeah.
I mean I I I think that even if they are in a I don't think they get pushed into that.
compared with all the open source things. I don't think it's quite as dire as that. But I do agree there was a push.
From underneath from that.
But I think to your question on
What?
Royd Royd Royd sorry to just interrupt just going on that. Do you not Vassel
Obviously opened their data sixty eight percent open weights.
Increasing. I mean it shows the tidal wave moving
towards what Jason's saying. I th yes, I think that the vast predominance of tokens process will be open weight.
And obviously, yes, keep reiterating, the significant majority of revenue will still be frontier state of the art'cause it can command more value than just the price of inference. So yeah. And so I suppose at some level Jason is correct because if there's five or six
And I don't see them as being peers, but I think if there's five or six
open weight companies dragging down everyone's gross you' bas basically trying to steal gross margin away from the closed
frontier models, especially if one of those op remind you, if one of those open weight companies is now funded by NVIDIA.
So it gets rid of all the all the all Chinese comments, right? Jason is right. In a situation where a low cost competitor
with nearly equivalent functionalities attempting to enter your industry, you would far prefer it to be number one than number two.
'Cause number one can say, You gotta just buy us'cause we're number one, but you're right, J number two has to say please buy us as well and don't buy the cheapo guys.
I'm I'm recounting my position and agreeing with Jason. It would be okay
Bad enough to be number two in an industry you invented.
Right, which is where they are now. But to be number two with a whole bunch of ankle biters on top that you have to deal with, that's a total pain in the ass.
Which gets back to your question, how I will answer your question on what price do they go out in twenty twenty seven. They'll go out whatever price they get in twenty seven because they can't wait any longer. It's as simple as that.
If a traffic goes out this year
At the scale they're talking about now.
I can't imagine a world where when I says we're gonna hunker down and get cash flow. Right, and then we'll go out in 2028, but they have to go out. So to some extent again, it's a destiny outside your control, Comment. If Entropic trades at two, then they might get one and a half. If Antropic trades at one, they might get seven hundred. But they'll do what they have to do.
I mean it's a great quote in uh what was it come on the the book the the the the the storm Sebastian Younger's book
Superbug.
But when the guys finally realize they're gonna die at sea, right?
And it says something like if danger can be described as the absence of choice
They were now in danger.
Right, and I think for open AI what you're seeing here is the absence of choice.
is starting to pile up. The other guys who are had
The other guys are profitable.
Correctly the CFO says they're not gonna write the only narrative, but to some extent your narrative is getting written.
You gotta get profitable'cause the other guys are profitable. You gotta get public cause the other guys are profitable. So
They have less options than they did a year ago by a lot. And that will translate as in twenty twenty seven
We're gonna go public.
And if the markets are slightly down then this year we'll take our medicine and keep moving.
Don't you love that book, The Storm, Jason? I I loved it.
My my favorite.
Super water.
Kinda sad, obviously, but wow.
That line always struck with me. Absence of choices, that's how you know you're in danger.
I think listen, we can move on to the next topic I the other thing when I when I'm listening to Rory and the IPO, the other thing maybe it's minor and we can move on, but I I'm getting confused today.
What open AI's differentiated mission is.
Why open AI? I mean we can all look at Evals and we can read
what Ramp says and what Ripley's report says, and we can view this as a just an LLM paying top of market, right? Paying eight figures per engineer.
But these were companies on on very specific missions, right? When we started this pod. I don't know what OpenAI's mission is. I think Dario is is not so a lot of the time, right? Yeah, apparently interviewing folks today asking them if they'd be happy joining Anthropic if it all went to zero.
Cool question actually, but but not so.
I think Sam is a much more approachable CEO now. He got through all the the the scam Altman crap and and he's got the sweaters out and uh he's the more likable guy, but I don't know
What is the differentiated mission?
of open AI today.
that I would rally around as an employee, as a shareholder, or is it just a piece of just a piece of infrastructure plus some software? I just don't know.
What is special about the mission.
Visa Vanthropic or now all these strong competitors. I just don't know. Or is it just an eval? Is it just three lines on an eval? I honestly don't know.
And these have been very mission based organizations from inception.
Right, the most we've ever seen in our lifetimes, right? There's mission these crazy missions. For me, the the astonishing thing is the consumer brand that chat GPT has and the penetration it has in audiences that no other LM has to most of actual the general population in large majorities of the world.
AI is chat GPT.
I am in awe that Sam is not going we are
Then that is Google.
Our business is gonna be advertising.
And we're gonna see Jevan's paradox like never before when we have a consumer hardware device that actually partners with consumers.
And you see you see. But that was the plan. He just got outraced.
He just got lapped. It was a good plan. It was and Sora was in it and cool videos. It just was not the highest ROI for c for limited compute. It just wasn't the the best. Up until then it was all babbling stuff yourselves, guys, but Jason nailed it. It turns out
I mean op you right, open AI is the name and ch ChatGPT is the name ever associates with AI, right? They have massive consumer market share. And at some point intuitively you say to yourself, that turns into a pretty big business. We can circle back on how much. But Jason's right, it turns out, again, I repeat.
It turns out that it wasn't the highest ROI use for compute and I often believe I believe this is sometimes when you look back at outcomes, you realize, oh, only one sentence matters.
And if you just internalize that sentence you've been with. The example I always use is if you've been on the board of Yahoo and for 10 years all you've done is screamed, it's all about search.
you could have made them a hundred billion dollars. Today
Well on traffic guard it's all about code.
That's the sentence. That's the only sentence that matter because to make it concrete in what Jason said.
Coding is the fastest adopting market.
It's the hardest ROI market.
It's the mother load.
You know, it's as simple as open air. I was focused here on a topic
Focus there.
But it could end up being even worse. We'll we'll see in the financials, right? But
The problem with the consumer businesses for open AI and Anthropic is they're for power users, they're massively subsidized, right? You you can spend two hundred dollars on Anthropic or a hundred and some odd dollars on open AI and get eight to twelve thousand dollars worth of tokens. And that that's fine for for when chat GPT was proof of concept for a platform. Like
We talk about Open AI being a consumer company, but it's not where it started. ChatGPT was just a proof of concept app, right? And Claude was just the same, but it worked much better for Anthropic, right? Anthropic can lose.
You know, a couple thousand dollars on some consumers and it won't impact them, but um it's tougher for open AI. It's a crappy business, the consumers t selling ten thousand dollars worth of tokens for two hundred dollars is one of the worst business models of our lifetimes, right? If that was the only business, these guys would be dead in the water. It's a pretty bad business.
I mean look, on the other hand I'm just gonna argue
Google is one of the best businesses on the planet'cause the cost to serve is low. And it may well be in the full just to put it, I I kinda I don't want to kind of veer from, you know, open air love'em, hate'em to Yeah, it may well be over the next five years that if you can continue to be the dominant consumer brand f in AI
As a cost of serve goes down, as you manage that cost to serve, as you build an advertising business, I could totally see a business plus or minus
You know, fifty percent.
to the same size as the Google consumer business, may maybe over the next decade. So it's not like it's nothing.
It's just that the S curve in the adoption sense for coding was super high. The S curve of adopt in adoption for consumers was super high for chat GPT, but unfortunately the propensity to pay was almost zero. You know, relatively zero. Whereas on the coding side, the propensity to pay is high.
And yeah, I'm just gonna say it'cause I just saw the thing come true as I was as we were talking here.
to jump on the other side for I just say I'm trapping in the Wall Street Journal, they believe their time is thirty trillion. And then I say to myself, Oh, I remember everyone when they're doing really well gets slightly delusional.
Your time is, you know, the entire US G D P. Thanks. Thanks a bunch, Dao. Good to know. It's it's one of those overreaching statements that you get at this time of the
Yeah. Well he needs it to be a pretty big number. He's got two percent. So

Thank you. If you're claiming a TAM that's the size of the US economy, yeah, that's a high bar. Let's just go with that.
Do you want to go upper layer into public's and actual performance of a lot of the cool AI names falling off? Worst run since April are raising eight hundred and twenty billion of value, or we can go back down to Hugging Face potentially being bought, and what that does in terms of a neutral platform sudden becoming potentially
Bias.
Let's not do hugging face because I'm not smart enough to understand why anyone would pay thirteen billion for it. I I just don't get it. I'm just not smart enough to understand the goal for precisely that reason. I I I agree you just pays me in the comments, friends, if you're watching,'cause I I am not smart enough to to understand why it's worth thirteen billion. But uh I I guess.
It's kind of a muchness with, frankly, the pool side.
And the open water thing, which is everyone's I mean, look, I think it all goes together. Everyone's looking at a world where I mean, I might think it's delusional, but OpenAI and Antropic are claiming TAMs that are larger than the entire US GDP. And if I'm running an if an IT company in the US, I'm saying, let me get this straight. They're claiming they're going to take everything.
Shit, I better get me something. And if I wanna be relevant in
Models that aren't.
closed source frontier models. So you're getting this whole trend for enterprise having their own models.
Yeah, starting with open weight models and then adopt and hugging face is the place.
where you can access loads of those models.
revenue is relatively light at the moment, relative to a fifteen billion dollar outcome. I think it's roughly 150 million. But if you think of strategic assets
That an IT company might want to own.
If they were trying
Two
Build a counterbalance.
to the closed weight frontier models.
This would be a super interesting asset. Now I don't know.
If it'll sell at that price, I can't make head on tail. I'm what you guys, I can't make head on tail of the price.
But if you think about assets, you know, if you were Microsoft IBM it you'd love to own to be relevant.
This would be one, absolutely one.
I don't get it other than it seems intuitively to me if right now this is open router too, right now is the moment in time to benefit from the lift of open weights, right? The demand is so strong. Just like Elod Gill said, sell if you have an AI asset right now, right? I think even better, if you have a AI product that's benefiting from the transition to open weights.
There can't be a better time to sell than plus or minus ninety days from today. It's just a phase transition and your numbers are gonna look amazing for nine like they said open router was growing fifteen percent at a hundred and fifty million, right? The information said when Stripe bought it in.
Breathtaking if that fifteen percent accelerates in scales, right? But it might not, right? This is the moment when all of a sudden every you know, open weights and and these models went from experiments to mainstream. Cell, baby.
Right, if you can get north at seven billion, ten billion, I'd probably sell. I mean, even if I only got fifteen X, I'd probably sell.
It's not gonna last. This transition's gonna it's not gonna be a transition anymore. I agree. It may well be that remember you have to have the founders of Hugging Face.
also have mission objectives beyond financial enrichment. So they may choose not to sell because they may have angst about that. But yes, from a valuation peak perspective.
I mean it started with the Satya comments on every enterprise needs to have its own knowledge and not give it up to the frontier, to which you wanna say no shit, Satya, well thank for funding Open AI for three years. But yes, everyone in IT has woken up and realized that
These two frontier models could steal a lot of their time.
And everyone is saying we better have a different story. And the enterprises are saying it, Palantir is saying it. And you're right, Jason, if you are an enabling technology,
For open weight models, now is peak moment. On the Hugging Face thing, I don't think it's sort of for what it's worth to Rory's point and the mission thing, I would say one small thing. If if someone does buy Hugging Face for for whatever reason, the deal's gotta be you don't touch it.
Because if you touch it, you break it, right? If you promote it's a much bigger version of the TNPN challenge. If it becomes an open AI commercial, TBN has no value. I know we're probably the only people that are gonna compare TBPN to Hugging Face, but it if you mess with this marketplace for ten thousand models
You know, even if even if you put a little ad at the top, you you destroy it so
It look it's never fun to get acquired, but I can I'm almost confident if anyone actually spends three billion, let alone thirteen billion, they're gonna ninety five percent leave it alone for twenty four to thirty six months, right?
Why hugging face could suffer like TPPN.
And then lay it out.
It's too obscure.
'Cause true a as Jason correctly says, no one other than us is tracking that anymore.
You know, my favorite news from the public's was Cat Griffin's Citadel Unwinds eighty percent of Leopold Ashenbrenner's four soul book. I'm like, man, never fight with Cannon Griffin.
Mam will come out on top.
Eighty percent sold already.
Again, I don't think it's surprising, but
No, it it wasn't. I mean yes, they're not in the business of holding those kind of assets long term. Yeah, they're a market maker and a short term trader and this was a great short term trade. Exactly. It's funny'cause about a month or two ago
He had kind of did something about starting to add to their kind of stable of investment options, you know, longer term, you know, multi-month holds.
And clearly that was a conceptual idea, but it turns out when you buy a bunch of stuff at ten percent below market and then that market jumps an extra five percent or ten percent just'cause you've put the assets out of weak hands into strong hands.
then the correct response is to take a money and run.
Look, it's great. It's just you can't do that every month. So to me it's not that as impressive. It's incredibly impressive. It's just not interesting because you just have to have the balance sheet and the cojones to wait so that every couple of years, like Warren Buffett used to do, you could pounce on one of these special situations, right? Yeah. Every few years someone
gets confused about how leverage works in the public markets, they screw up and you're ready to price and buy.
And yes, on top of your nice business, which you're still earning good money, every three years some idiot gives you three or four billion of free money and you politely take it and put it into uh real estate in Miami.
It's good to be can exactly right, J and that's how I mean there's nothing surprising in there. And you know by the way, it does get to the
It's kinda going to circle back to NVIDIA and all the investment and vendor financing, because in both ways, both of situational awareness and NVIDIA, the the aha here is when you're dealing with money and leverage, you don't just have to be right in the long term. You also have to be right every step along the way. Right? If you don't have leverage, all you have to do is be right in the long term and hold.
And it's probably a situation where it was right in the long term. But when you put four to one leverage on it, you have to be right every step along the way. And the same is true about vendor financing. As long as you're in the business of selling chips, all you have to do is write in the in the end people want to buy chips. If you choose to lend against those chips, then you're basically saying you gotta be right all along. The company's gotta grow next year, they gotta pay their debt back next year.
Leverage does that.
It raises the return from being right and raises the importance of being right all the time.
And situational awareness just got the other side of that. He doesn't try in his business to be right all the time. He's not trying to make five year bets. He's like stocks are worth ten percent more today than yesterday we should sell. Moving right along.
The other thing on the other side of the stocks for what it are, I know this is a Captain Obvious, but if we look at Cosby as sort of like AI and steroids, right, with risk or Korean exchange, it's still up fifty six point four six percent for the year.
I'm not I'm not a day trader. I I pull up my Goldman and Morgan Stanley accounts and look how they're doing. I'm still feeling pretty like I'm some genius in my public market stock because overall
Plus forty six is pretty good. It's just boy, what whatever Leo got just trapped in a dagger when I look at the chart, right? Sorry, you can laugh at me and tell me I should know what is in Cosby? Wha what is driving this? Oh Korea. Memory
Sam's rounding error now, Korea now equals yeah, two memory providers with a bunch of other stuff attached.
Right. Yeah. And it's a very volatile market, so it's on steroids, but it's still just like Nasdaq is tech on steroids, Cosby's like uh all the components of AI on steroids, right? And the peak was um nine thousand in June.
And then boom, poor Leo, the dagger, fifty six hundred in July twenty ninth, and the guy had a generational loss. If it were even bigger, it might have brought down our financial s ecosystem, but it's it's you know, it's rebounded twenty something percent since then and is up fifty six percent of the year. Crimea river.
If it's up fifty six point four six percent a year, I mean you gotta be a day trader or whatever to to not love up being up fifty-six percent a year. It's okay. But all these headlines are like, Oh, Cosby's down six percent today, and it just it's just hyper volatile. The growth and margins, we've never seen margins like this in semiconductors, so the volatility and expectations
There was an article I I think it was in the Wall Street Journal where in Korea now the the most eligible bachelors are Samsung and engineers. They wanna they all everyone wants to marry a a a memory guy.
It's the first time in the history of the nation when being a a memory guy was like made you one of the most eligible bachelors in the country. Did you not see that like fifty percent of NVIDIA employees are now worth over twenty five million dollars? Yeah. Pretty inevitable. I see it walking down the block when nothing's for sale.
Yeah. Well I think it's a different I mean, we could talk about I I just think overall AI inflation and craziness is uh
Yeah, it is it is what it is. What happens though?
I is that like a persistent continued new world, or is that a temporary moment of inflation?
Rents in the mediocre apartments just in Dogpatch are ten thousand dollars a month now.
Mediocre apartments down the street from from Y C the Avalon.
I used to work in Dog Patch pre-YC and it was gritty and fun. And I remember when they built this Avalon and you know, you didn't really want to live there. It was new, and now it's over$10,000 a month, and you got to wait. You gotta apply, and you're not allowed to run your startup out of it. You have to sign a document that you won't run a business out of it. Two blocks from from YC. If it's$10,000 a month to rent a
You know, one bedroom at the Avalon, how much do you have to make to feel rich?
A lot.
That's one twenty just in a rent to not to just have an apartment at the Avalon in Dog Patch. You need two forty K in California pre-tax to pay the rent. You probably need four eighty to feel good about yourself, right?
It's just so interesting for me sitting in London though because the money's not here.
I hear you and I hear you say that. And yes, there are some fortunate people like me in venture who are thrilled to be doing what we're doing, but it's just not here. That
Dispersion of wealth is just
Nell.
Yeah,'cause it's it's tech wealth and it's all con I mean like I saw at California, it didn't just
outperform everywhere else. It got three quarters of the total dollars. Now that's invention, that's skewed by the fact that Anthropic and OpenAI together got probably sixty percent of the total dollars. I'm doing it math in my head and everyone else got fifteen. But yes, this is a wall of money flowing into a very small area.
Where yeah, reminder, the population of San Francisco is seven hundred and fifty, probably seven hundred and eighty thousand people. It's a teeny tiny town. London's eight nine million.
The whole barrier Bay Area is only seven million. This is a wall of money falling into a tiny place that's a peninsula, which sea on three sides.
And a little bit of mountains on a tiny valley called Silicon Valley on the Fort Side.
Property is not plentiful and it's hard to build. What's gonna happen is prices are gonna go up.
Most everyone else are gonna get priced out. When they get priced out, they're gonna get pissed off.
So
Probably it doesn't last at this level because you know I've been around in ninety nine, two thousand, and two thousand and seven. Yeah. There will be some kind of correction and there will be some kind of reset, but it's not going back to where it was, because it never does. It ratchets up.
Yeah, fast forward five years, at that point yeah, the AI boom has been digested. It's not as crazy it is now, but the base level of prices has gone up and the cost
What it means is that the cost for anyone else to live in San Francisco goes up. The cost
That you pay, you know, anyone in your organization, the cost that you pay anyone that you want to act with all has to go up because the cost of living here's gonna be higher. I genuinely appreciate doing the show with you guys so much because I I learned from you and it's the first time for me seeing cycles like this. Does the floor fall from our feet in this
AI wave or do f for the next five years, do we just continue to see more money, more up and to the right, more mega exits?
I think it's it's just more concentrated. We need fewer people to generate more revenue than ever for for a variety of reasons. And it's going to concentrate exit size. It's going to concentrate wealth. It's going to allow, you know, the salaries at Anthropic and Open AI seem crazy, but some of it's normalizing now because if you can do it with half the people.
Or a third of the people, you really can pay them two to three times as much, right? So eventually, of course, and where we can pick the date like Babe Ruth, this this will end. But uh, you know, I I think you have to believe we're less than a third of the way through this cycle.
Mm.
Even though the even that little tiny cloud thing lasted nine years. We're just getting going here. Will the companies make enough money, Jason, fast enough to keep the cloud cycle going? If the revenue training is a little bit more. Honestly, that will help.
Let me try because I'm trying to figure this out too,'cause obviously it is actually the only question that kinda my mental model is this on the supply side, no one's gonna blink.
The hyperscale is not gonna blink, only I and Fob is gonna blink. Right. Not gonna blink. That's why I think even though we're recording this on Tuesday,
The video's reporting on Wednesday, it's gonna appear on Thursday.
It's possible, but I think highly unlikely that Nvidia gets on tomorrow and says, Compute the man to slow down. That sentence is not gonna happen. So to your question it's gonna keep on going on the supply side,'cause it's not likely to blink and no one's gonna blink. So the only two things that stop it are, you know,
You run out of capital or you run out of demand?
When you say capital, my gut is, until the public markets get in on the game, you kinda haven't exhausted all the all the money that's there. Which is why in many respects these two big IPOs have to happen. Typically financial crashes go when you run out of marginal buyers, there's still a whole bunch of on tap demand to play in the AI game, because these companies haven't gone public.
You've clear on the capital side got one more turn of the crank, which is when the Tropic goes out and open AI goes out, that's gonna keep it going. And then the other thing is demand for the actual end product. I think that's the real question is can corporate America spend the kind of money
Quickly enough.
to feed the beast. To make these guys revenue numbers for twenty seven. I think it
Somewhere in twenty I mean Tropic is talking about 200 billion of gap revenue in 2028. Interestingly, by the way, that in itself is a significant slowdown, which makes sense.
from where they are now. It's not ten Xing anymore, but is there two, three hundred, four hundred billion of demand for this stuff and cob That to me is
the question that will determine, you know, when the train stops. I don't have an opinion yet.
on where that is,'cause right now the demand is there in coding.
But that's what's going to be the weight limiting factor. It's not going to be
You know, the CEO of Google waking up tomorrow and saying, Maybe we should be more cautious, or the CEO of Nvidia saying maybe we should take those with that's not a thing. I do think at a meta level that next year will be the year
And I think this this is why I think we're in a f at least a five year cycle, where we we reckon with the fact that we are addicted to tokens.
We're addicted. And so we went, we started this year on token maxing. Prove yourself that we started this year with performative AI. Guys, the more tokens you spend, the better an employee you are, right? Then they did it, and we all got whiplash because we started to get these twenty thousand dollar uh bills per employee, right? So then we said, Oh
We've gotta manage our budgets. Let's look at open weights. Let's cap it. Let's cap it at two hundred dollars for five hundred dollars for non engineers and ten th we've going through this this token balancing thing.
Next year, there there's gonna be backlash. I can see it in my best portfolio companies where we we can't go back anymore. We can't go back in time.
I need my ten sub agents running twenty four hours a day to do my job or I quit.
I would quit.
Take away my agents, I quit. So I do believe as businesses and in society we are token addicted. We will have to find a way to feed that addiction over the next five years. We don't even realize how addicted we are to tokens. Agreeing on the addiction, but disagreeing you on the manage statement. I'm gonna cite some I thought this I read the stripe letter.
And I thought it was really, really good.
And those guys are smart. And it's not just because they're Irish, but that helps.
The comment they made was that near the end of the letter they made a comment that we've internalized I'm paraphrasing here for me, we've internalized that intelligence is like capital. It's fungible, there's demand for and it has to be managed and allocated. In other words, what they're saying is
Seat base SaaS, I sold five seats to Harry's organization. I'm done, and Harry's done allocating it to There's no
Follow on work required for you within your organization. You either buy five seats or you don't.
But to Jason's point.
If you're buying intelligence on an uncapped basis, in theory
your employees could go on spending that forever and you're going to have to manage it. And and that's why the analogy of saying it's like money. You have spending controls on your money, but you also recognize money is the lifeblood of your business. So you can say to your employees, don't spend money, because that's stupid. I think that what they were saying and why they bought open router is people are gonna have to control intelligence.
in a way that's more like how you control money and less like how you think about software licensing. And that really resonated with me. Cause
You can't just cut it off, but you can't just let everyone go. And it's going to be the big systemic problem for an I agree with you guys. Twenty twenty seven is the year
When enterprises are gonna have to say WTF
Do we just let this thing rip and hope the ROI is there? We can't go back to where it was before. How do we manage it?
So is it can you just drill one layer deeper for a layman like me? What does that mean then? If we control intelligence as we control money, it means you're going to have to
price it and allocate it. To Jason's point. Jason is widely productive. If you're running an organization, you should give him all you can. But you give everyone all they can and they're ill disciplined about it.
You could spend a lot of money. I mean remember, one of the amazing things right now is the kind of money
that we're talking about as revenues for these two companies are an appreciable percentage of total US corporate profits. You can't say as the CFO of pick a mid a US midstream bank
Hey, we make a billion a year.
I'm okay with running up a hundred million dollar token bill.
I just decrease DPS ten percent. That's not a thing.
I've changed my mind is the addiction. When a society is addicted to something, even if it's a positive thing, right? Like caffeine. We're addicted to caffeine, it's not destroying our society, is it? Right? You cannot go back. We cannot go back. Yeah, you can't go back. But if you're gonna allow them to spend a hundred million dollars, ten percent of your budget of your profits on tokens.
you're gonna have to say spend 10% less on something else.
Yeah, we may we may have fewer employees, but the back half of this year is managing the budget, for sure. It's already happening. It will drill dribble into next year. And next year will be the backlash.
Next year will be I need to run five to ten agents twenty four hours a day, or I quit.
I quit. I won't do my crappy job. I won't edit your goddamn podcast. I won't write your code. I won't fix your endless bugs. If I can't have 10 agents running twenty four seven, I just won't do it, Rory. I won't do the job. We're doing a CFO event to see it. And I think you're exactly right. And you're with a high performing employee, right? But you gotta put yourself in the CFO's shoes.
He's gonna say, I get it. I don't wanna lose Jason, I'm gonna get Mr. And by the way, he's productive, but this is why the striped ladder is so smart. Then I gotta say to myself, hmm.
Before we had these tokens, we were doing all this stuff and we had ten people. Now Jason's doing the work of four people.
Who are the other three people we need to let go? Because what you're not gonna do is say, we've invented this new automation device.
That's making us wildly productive, Mr Wall Street.
And the net result of our wild productivity is our EPS is going down ten percent. Because Wall Street is going to say you're a fucking moron. We'd like to hire someone else to run your bank or your industrial company. You can't introduce
automation and say the net result of automation is reduce profits. So if you're spending more on automation, you have to spend less on something else. And someone's gonna have to make that decision. And that's what I think Stripe was saying. It was very clear. And I say the analogy of comparing it to capital was really good to me. It's like
If you're the CFO, where do I invest? Do I invest in Jason's token budget because he's a winner? But do I cut off Harry's token budget because all he's doing is asking dumb questions of clothes? I don't know. Well look, I'm glad you're having a CFO dinner. I want you to ask them a second question. Cause this is what I hear. This is and this is the challenge today.
The CFO challenge for the first going into summer was my God, these teams spending so much. I I uh every CFO under budgeted for tokens. What the hell are they gonna do? But the but we didn't go out of business. So that was the that was the discussion of the last scale CFO summit going in tonight.
I bet you're gonna hear a second conversation, and this is about addiction.
Retention. The CFOs I talk to talk about nothing but retention, at least the empowered CFOs.
They are terrified that our stock price is down and we can't retain employees. They are terrified that the AI leaders have so much stock based comp, so much other sources of comp that all of their best people are gonna be sucked up.
By the companies we spent the first two thirds of this conversation talking about. CFOs are terrified about this because they're often responsible for that KPI, even if they're not doing it. And so there's this massive tension, which is if I don't give these people what they need for AI, I'm gonna lose all of them. And it is true.
You'll be just be stuck with the folks that are still AI skeptics. Your organization will be full of the moldy oldies of SAS. That's what you'll be end up if you don't retain them. And so yeah, the CFOs have to manage your token, but
Jesus Christ, if thirty percent of my company leaves to go work for Harvey, I'm dead in the water.
No, I I think this is still you're exactly right. But I'm gonna edit the statement to I think we're agreeing with you more precisely. If the long thirty percent of your company leave
Then you're screwed. And you're right. But it's all the best people. It's not even thirty percent. It's ninety percent of the ones that matter. But I think what you're not you we're saying the same thing, but you're not confronting the nasty bit. But you normally are good at confronting the nasty bit. If Jason is the best employee and he needs 3x spend in tokens, and there's five more like Jason, and we give them all the
then that money's gone there, right? And my revenue mightn't have gone up by that much if I'm a not if I'm a software company, but if I'm a mainstream US corporate. I'm probably not gonna double my revenue'cause of this.
So I've just gotta find a way to pay for that.
And Harry, this is going back to kind of what does
intelligence allocation look like. This is what it looks like. I just think listen, we can move on. I think the Stripe thing is great. And I think before we want to time we want to talk about the reaccelation. I think it's super interesting. But I do think to use Rory's term they're talking their book. And Stripe wants to think about intelligence as this asset that flows through routers.
And flows through things like finance, and of course, it's true.
But both the best and the worst of us are addicted to tokens. The worst of us are just uh we we
ChatGPD, we think is alive in our therapist, and we talk to it like a human. That's what the worst of the air quotes, the worst of us do. We think it's alive. I used to fall victim to that maybe a year ago. And and the best of us want to run 20 agents twenty four hours a day. And so you have you have to feed them.
This is the bull case for everything, including Mercore and everything, is we're addicted. You say we're addicted, we're addicted, Jason. I mean I I mean this in the nice way. You are and small numbers of people in Silicon Valley are the majority of the population, I don't think are quite as addicted, just the cabin. Only because they're I'm just I'm just twelve months further along. It's everyone's gonna end up doing the same crap that we're doing.
What if you can just talk to your agent and say, I want a fulfill VC ready in one hour?
Jason talked way too much about this goddamn addiction thing. Take that out.
Rory rambled a l about this one a bit a bit. P Give me more of me, and you don't even need your team and it's magical in an hour. You're gonna be addicted in in a in this.
For media and cold time.
Today. And it was a year ago and it's still it doesn't even do that. A year ago Hicks still couldn't work and today it's at seven hundred million a weapon. Pause, pause, pause, pause one. I'm I'm actually agreeing with you because I had this conversation with my girlfriend last night who uses Lagora.
And she said six months ago, I was like, What a joke. This will never do. I'm a law student, graduated, I work at one of the best. Now she's like, I just verify documents.
Yeah, she if as long as she has options, she will never go back. She's addicted. Never. Never. But but my point is, look at how large markets are now, the numbers that we're seeing. This is basically just on coding. Imagine if that translates into your CFOs, FP and A and Legal and And the question is pace of the fusion.
But if it happens everywhere as quick as coding, we're in one world. If it takes ten years we're in a different world, you have to know which which world you believe you're in impacts almost everything.
I think it's hit the titing point in legal.
Probably next. It's look, there's no doubt that it's the next dance adapter.
Andreessen had their chart of the day of the week that it was the fastest growing year over year segment, which isn't obvious, but but it but it was verified, right? Jason, you said it, let's dig on it. Stripe accelerates to forty one percent. Accelerating to forty one percent at Stripe scale is a phenomenal achievement. What do you want to unpack there?
And billing's up seventy one percent. So it's getting better.
The only thing to say is it's it's it's just it's just becoming a derivative of AI, like the other sweet. Stripe scale is so massive, it is a little bit like a chip manufacturer, right? It is benefiting so much from every agent, every agentic product using them. You really literally have to argue with an agent to get it not to use stripe. You have to like argue. Please, I just want to try.
I just want to try adding or something else? No. As a random comment on that, you know. The interesting website is I kind of half agree with you in a sense of.
All the differential growth is coming from AI. And what's attractive about that, if you think about owning that stock, which I don't because it's private, is it's lovely because you have a core business that's much more diversified than just AI. And then you're getting this growth lift from AI. So it's kind of a s if this was a public stock, it would be killing it. Because it's a safe way to get some kind of AI factor lift.
on growth, while at the same time being able to save yourself shit, if it all goes to crap and they slow down to ten percent
Because the AI stuff peters out, they're still gonna kick off cash like crazy. No, it's it's in a wonderfully advantageous position, you're kinda the best of the kind of cloud economy with a nice AI acceleration on top.
Which is why they've been able it's noticeable. They've been able to use that stock for their acquisition. It sounds like some of the open router stuff was stock, so
Yeah, they're in a golden place.
You know what else I think it does, I'd be curious to get your guys' thought. I I I don't want to talk too much about the past, but I I think it will be the nail in the coffin for almost every
public software company. And what I mean is when Stripe and Data like okay, there's open AI, there's Anthropic, we can put them in a different category, right? They clear on many levels. When open AI and data breaks go public at at eighty percent growth and f you know Stripe accelerating forty one percent and seventy one percent billings.
Nothing except Palantir approaches these, right? Even Cloudflare isn't this good, right? And so you you almost just want to take everything below the line and just almost erase it as just a distant memory of the past because these are slightly more traditional companies, but massive AI tailwinds, right? That are have growth rates like almost no public comp.
They're just gonna rework the the leaderboard.
I think the two documents I most enjoyed reading in prep for this were the pool side letter and the stripe letter. And they reiterated at the end at one point in the letter, We're really happy being private was the summary. Thank you for sharing, but we're doing what we're doing. But I think Jason's also correct, and it must be frustrating to be a public investor.
When you if these assets were public, they would be so far up the rankings of good that you're right, everyone else would just get pushed down. It'd be great to get that over with for what it's worth, because I think then you could start really figuring out
What three hundred, four hundred million dollar revenue companies can they exist in the public markets. But right now it's got the promise
And it's hanging out there kind of the un if you're a public small and mid-cap investor, these are the unattainables that you just don't have in your portfolio yet, which is why some men in one doing crossovers. It's a funny world and no obvious reason to change yet.
The imperative for open AI and a topic to go out is the vast capital needs.
But Stripe is I mean another stunning fact on the Stripe ladder, their share count is down on three years ago, four years ago, which means they've been buying back stock. They're like doing everything a public company can do while private. They're like, we have so much money that we're just gonna buy new fun things, we're gonna reinvest in a business and we're gonna buy shares back.
I'm gonna email that to some portfolio companies to be a thoughtful board member. I'm gonna y email them that quote. Yeah, I know, exactly. Please get your share count down, that would help me.
It does. Okay.
I don't want no fifteen X, guys. Get that share count down.
But blow out the number. Guys, you can choose. We have the GitHub Buckling under AI agent commit tsunamis. We have base forty-four really saving Wix, hitting over two hundred million there, our stock up a hundred percent. Fractile reportedly raising you round at six and a half billion.
recently following at shroud at twenty billion, which we discussed last week.
Shmug is board of options.
I like Grockbot and Instinct leaking everybody's information and I knew you like that. I like A. Instinct is the kind of uh it kind of reminded me of um Clubhouse in the early days, like seeping out over Twitter through like VC inner circles. And Instinct, for those that don't know, is an AI assistant that many VCs are tweeting about.
And it got a lot of attention because one ambassador basically shared and then another person now, his coen, shared how
There were data security problems with giving access to everything. The sentence alo alone is laughable. We we phrase it. There are data security problems about giving it access to anything. Well duh there's data security act problems about giving anyone access to anything. You're right. But that's just me.
You're right. That was just moving Side. I uh J uh I'm gonna defer to Jason more here. Yes. But to your point, I interrupt you, but yes. So as listeners are listening, think of this as a next generation agent that was kinda start launching, raising a V C round
Rather than focusing on just a negative the may the idea here is obviously that this is an agent that can look at your email, do your work on your behalf, and if you give it lots of authority, it's kinda like having your own chief of staff and that's the idea. And Jason, what did you think? Because you've lived the open clock street. I just think it's interesting. I I don't think it it this shouldn't be a surprise to anybody working with agents, but
These aren't a set of issues that have been solved in the last year. They weren't solved with open claw leaking everybody's confidence information. Now we have better guardrails, we have better harnesses. It's not solved with Grok bot, which looks like it may be wildly successful, right? Because it's part of Grok. Wasn't solved with instinct. So it is the the flip side of this addiction, but we we can't we still can't trust agents today.
We can't trust him with an anything. And uh it's just very interesting that the next gener OpenClaw two point oh can't be trusted either. It's it's not a surprise. I mean we all have we all have these issues, but um I would like to invest in the instinct that actually can honestly solve these issues. That one I I would I would do at six hundred pre, but it's gotta actually solve
Existential issues that no no one else at the moment can solve, including Grockbot or them or anybody else. Do you know Do you know I think this is inevitable? Do you guys remember you guys remember when it was like we'll never put our credit cards online. We'll never put our credit cards online. It was unthinkable. I think it will be very obvious that we will trust agents with credit cards.
Financial data, passwords. Sure's guardrails. This feels inevitable. Smarter people than me will explain when it's solvable, but it is interesting that it isn't well solved with guardrails today.
We've had so many inch incidents. I've had multiple incidents. Everyone's had incidents. And we live through the Mac Mini open claw drama, and the new entrance can't solve the goal seeking nature.
of the LLMs they're running on. The open weight models have fewer guardrails. You can just figure out how to like build bombs and how to do illegal acts on these models. So we're also have a vector that's having fewer guardrails and limitations.
And these goal seeking probabilistic LLMs are truth is, it's not that they they just make mistakes with your data, just like a junior engineer, just like people on your team would make. Just like if you had a personal assistant.
He might give out your credit card to the wrong person.
You know, when I was running the dumb Multbook thing, it attempted to buy six AP watches for the team, right? For three hundred and sixty thousand dollars. It just didn't work. So the it's just the nature of the beast.
They're gonna do what humans do too, but they could do it a thousand times more.
Is it solvable? In theory, yes. But what's in just interesting is that in practice, not as of today.
As of today you can't tr you still can't trust these agents. Maybe maybe in a year. I'm kinda which is I think the direction of travel feels correct.
But I think the question is, is an individual's kind of idiosyncratic workload the best place to apply a genet technology versus the boring ass corporate jobs like it i you know, my idiosyncratic calendar management and email replies, yeah, I would love to automate that. I would love to have people go through it and get it right.
But is that the sweet spot to spend money versus on the other hand an enterprise automates loan processing where there's much less discretion, there's much more expense.
And there's much of a budget about it. So yes, I I think but look, Silicon Valley in particular, we all fall in love with personal productivity tools. We love them. Because we're all hyper personally productive, right? And I think Ben Thompson as faculty has one great comment is Silicon Valley forgets every three years that the average American is not trying to be efficient.
No one wakes up in the morning and says I need to grind down my to-do list in the hardland. They're just living life. Yeah, they're doing their job and then they're going home and they're done. Solve my inbox. I have too many founders reaching out to me every day. I shouldn't say my wife doesn't clear her inbox. He's like thirty thousand inbox. And she's over it. She doesn't care.
Move up.
She just checks the stuff and such as the stuff she needs, right? Not everyone wants to be productive. So it's an interesting market, but you've seen in Evernote, you've seen in a bunch of other things that it's
It's real, but it's fairly nichey and it's hard to get right. I mean, remind them other companies in the space that are and I wildly interesting and I love'em. Right? You got superhuman, you know, which is now part of Gramally.
Yep. Harry and I are proud shareholders there. Yes.
You've got Calendly, right, which is an interesting product too. A whole bunch of attempts at personal obviously um the air table and notion discussed, but Notion did a good job of getting more corporate, right? The whole productivity
Sweet. And then you say to yourself, yeah, AI can do something interesting there. I mean, it's always there, but always just a little bit out of reach. It's a tricky market. I mean look, I wanna believe in it, but the two things that worry me are one, can you get it quite right?
You know, to this day I find my Google recommendations to be fairly mediocre. Now, obviously that's the lowest of the low and you can do a lot better. And then secondly, even when you can get it right.
What's the market size for this kind of product? It's real, but it's met.
But that doesn't sound negative.
Found that category super interesting, but I'm just saying it's it's very challenging. I mean, you asked a question.
Is it inevitable?
It's inevitable, but
It's not as low hanging a fruit as some of the other areas where you just go, We'll automate this, it's repetitious work, we'll take away
Ten back office.
Steps will save a bunch of money, move on.
Guys.
Any that I have missed. Well, let me ask you each a related question before we close, if you want, Harry. What do you think is the dumbest category of investing we're doing in the I era? Like we're just we're just throwing cash at a category that we'll look back on and just say, Why why the hell are we doing this in the I era? I think a huge amount of money is gonna get burnt in customer support.
Because it becomes a commodity? Because support doesn't exist as a unique surface? Why do you think that I think one or two players will win a large
portion of the market. I don't think it'll be as distributed as prior generations. Two, I think actually for m the majority of the most sophisticated providers they're building their own systems. Every large technology company I know who's sophisticated in any way has their own systems. You might be correct. Obviously we have a number of investments in that space. I think even if I I think we'll do fine and I think even if not it won't be the biggest
Math. It's a good it's a good answer though I like I like just to to moder to be flip it around. I like the answer though. It's a good thing. I'm gonna answer it in the negative. An area where despite it being amazing for America
And important for the world.
I think the venture returns of the March market will be defense, not because we don't need all these products
But because I think there's an element of that business
that you have to have account control and I think the two or three largest companies like Anduel will end up doing a bunch of scooping up over the next two decades because
Unlike tech where a single product can kill it.
I think in these markets.
I think it's a portfolio of products that it takes to survive the interaction with the Pentagon and just have enough diversification to make it. So I think you'll see a bunch of consolidation, not negative not losses, but
I think there'll be two or three companies that get critical mass in public at huge scale and they'll hoover up the rest of us.
I'm gonna add one more, which is I think robotics. Yes, humanoids in particular.
Why do you think they're so VCs are so excited about it, Harry? Do you think it's the V C productivity thing? They think robots are cool? Well, listen, the the visionary time is exciting. If we replace X and it's it's super exciting the vision that they sell, but I think the vision and the reality and the requirements and dexterity and touch and
It's a good candidate. It's a good candidate. No, it it is'cause look, we have a bunch of successful law I mean, I mentioned I'm on the board of locus robotics.
We have 15,000 robots in the field, but it's a specific purpose robot. It's uh the best example of that, and I totally agree now that I think about it. There was this video over the weekend, there's two videos on robots. One of them the one where the robot blew up, which was kind of funny. He ran and then disintegrated into. That was cute. But the one that said, you know, here's a robot running faster than you say in bolt.
Right, and he does the hundred meters really quickly. And I'm looking at going, you know something? If I want a machine to do a hundred meters really quickly, I'll get a frickin' Tesla. To your point, Harry, I think the human use case is real, but I don't think it's nearly as big as people think. So I I kind of agree with you, I think that more focused robotics
There's a ton that's going on as positive in that space, but overreaching on human is I think would be a tough slot. I could be wrong.
Jason, you'll go.
Final one, you gotta you gotta join the crew. Great question, but you gotta throw your hat in.
I'll I'll answer mine. Uh I will say first I didn't think of expression it the way you did Harry, but I but I agree customer sports software is dead. And I think even a lot of CX
Is dead because it's merging into other categories. It's agents surface area changes so much. It's not that there won't be dollars in CX, but a classic CS and CX won't won't even exist in twenty four months. There's there's really no there'll be commodity cheap products.
But we won't even need it. It's it's already dying and merging into marketing sales, every everything's becoming one agent. But I guess the one uh one I just listen, I you guys have the better ones. I like human robotics and the and the the CXCS, but uh I still just don't believe
And I guess I'm not a P guy as I was pointed out the last show or made fun of, which is fine. I just don't believe you can throw a bunch of venture money into accounting firms or law firms.
And magically turn them into the next Mercur hugging face or any of these things. I believe that there's an element of craziness in the business model where you're creating these sister companies where where some of the folks have ownership in them. It's too convoluted.
It makes too much sense on a spreadsheet. And I I'm waiting to see the twenty billion dollar outcome from turning a bunch of, you know, Ivy League grouchy grads working a hundred hours a week into uh an AI driven services. I'm not saying it's not possible, but this is the one that I think is just gonna gonna lead to no exits.
It's funny. I'm just gonna admit something that makes me feel like an idiot, but I'm just gonna say it'cause it going back to something you said earlier, what if it works, right? All these categories
we've answered about and talked about internally. Yeah, and I kind of share some of the opinions articulated, but in every case I do find myself looking at an individual going, maybe this is the deal that can acknowledge those issues and transcend them and work.
And I think it just speaks to the nature of the job. And going back to what if it works? Right? In every one of these categories, I kinda have the mental model you guys are taking out of a bodies, the phantom are kinda a mental model I have. And as yet, I am I'm just saying I'm open in every one of these categories and some of my partners have come in and said, You're just goddamn wrong here. I hear you were this is the issue.
But this is how this team is gonna get rounded and I think
I've learned enough to to have my biases, but to be absolutely overcomable by, you know, a combination of facts.
Great entrepreneur. And frankly, cynical comment and portfolio construction.
So you just don't have one of them and nothing else.
Well we are in an area of unbounded creativity like we've never seen in our careers. It's A AI created it, def you know, defense budgets enhanced it. Elon Musk is part of it, but we've never seen the type of creativity from founders and on like we've seen today. It is it is two orders of magnitude bigger. So if you are gonna rewrite the rules and make things that didn't work.
Four years ago work today. Now now's the moment, man. We're just we're just it's epic creativity. The the shots you could take at these models were right a few years ago. We don't know if we don't know today. Now is the moment, man. I love it.
What a way to finish. And I didn't get cut off though.
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