Ep19. State of Venture, AI Scaling, Elections | BG2 w/ Bill Gurley, Brad Gerstner, & Jamin Ball

Open Source bi-weekly convo w/ Bill Gurley and Brad Gerstner on all things tech, markets, investing & capitalism. This week they are joined by Jamin Ball (Partner at Altimeter) to discuss the state of venture capital and incentives, implications of overcapitalization, the future of power law returns, AI’s impact on investment strategies, the future of AI and CapEx, the market’s reactions to the 2024 election, the evolution of search and AI integration, Nasa, SpaceX, & more. Enjoy another episode of BG2. Timestamps: (00:00) Intro (00:52) Bill’s Dad | from Nasa to SpaceX (06:20) State of VC and Incentives w/ Jamin Ball (12:31) Implications of Overcapitalization (25:08) The Future of Power Law Returns (38:28) The Impact of AI on Investment Strategies (46:00) Future of AI and Capital Expenditure (52:21) Market Reactions to 2024 Election (01:00:45) Evolution of Search and AI Integration Produced by Benny Beausoleil Music by Yung Spielberg Available on Apple, Spotify, www.bg2pod.com http://www.bg2pod.com Follow: Brad Gerstner @altcap https://x.com/altcap Bill Gurley @bgurley https://x.com/bgurley BG2 Pod @bg2pod https://x.com/BG2Pod Jamin Ball @jaminball⁠ https://x.com/jaminball Shownotes Clouded Judgement Substack https://cloudedjudgement.substack.com/⁠ #BillGurley #BradGerstner #Bg2Pod

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Brad Gerstner?

  If you're on a run rate where you're raising $5 billion bucks every two years. Okay, so give or take, that's, you know, $50 billion over a 10-year period of time. A 2% on 50 billion, it's a billion. Okay.

• 0:13Bill Gurley?

  A billion a year.

• 0:15Brad Gerstner?

  Right.

• 0:15Bill Gurley?

  Let's just be clear.

• 0:16Brad Gerstner?

  Right, right, right. So underscore that for everybody, Bill.

• 0:32Brad Gerstner?

  Great to have you here. Great to see you in Austin this weekend. Congrats on 25 years of marriage.

• 0:37Bill Gurley?

  Thank you very much.

• 0:37Brad Gerstner?

  That was, it was a really fun time.

• 0:39Bill Gurley?

  Great time.

• 0:40Brad Gerstner?

  And, you know, I went by J. Cal's, saw his new place. Saw so many friends when I was there. Austin's really, really bumping right now.

• 0:48Bill Gurley?

  I agree.

• 0:49Brad Gerstner?

  Seriously, just an amazing number of people now calling at home. And I know that, you know, you recently took your dad, who worked at NASA, down to see the launch of Starship 5.

• 1:01Bill Gurley?

  Yeah, and I'm, look, I'm so grateful that SpaceX was able to make this happen for my dad's 88. And we'd been talking about getting him down there to see a launch. And they put us in this VIP section, which made it easy for him to move around. And he was just in awe. You know, I'd maybe start this discussion by telling you, on the way home from the launch, I did a search for my dad's name and NASA, and I found this document. It says, "A sketch prepared by John Gurley demonstrates the spacecraft's skip when entering the Earth's atmosphere." So this was hand drawn by my dad.

• 1:37Brad Gerstner?

  Come on.

• 1:38Bill Gurley?

  And if you look here, memorandum, John R. Gurley to Chief Flight Operations. That's Chris Kraft. So my dad wrote this to Chris Kraft. "A study of skip range sensitivities and allowable errors in exit conditions applicable to Apollo mentions."

• 1:56Brad Gerstner?

  How cool is that?

• 1:57Bill Gurley?

  June 12th, 1963.

• 1:59Brad Gerstner?

  And you just took him down to Boca Chica?

• 2:01Bill Gurley?

  He was 26 years old when he wrote down.

• 2:04Brad Gerstner?

  What's the average age of the guys down in Boca Chica?

• 2:07Bill Gurley?

  26, oh, 29.

• 2:09Brad Gerstner?

  Yeah.

• 2:10Bill Gurley?

  Yeah.

• 2:10Brad Gerstner?

  Yeah. What was it like being down there with your pops?

• 2:13Bill Gurley?

  It was awesome. It was awesome. So I, I grew up in, um, in a town called Dickinson, which was near Clear Lake. And my father worked for, for NASA and he worked there from a very early, the, uh, when they commissioned NASA, they took 50 people from NACA, I think it was called, which was on the Langley Air Force Base. And that's where he had started his career. And they moved him to Houston. So I, I'm a Texan, probably because of LBJ's pork barrel politics. But, but we grew up on a space street. Half the fathers on the street were NASA. And the Apollo launches, it's just like you see in the move Apollo 13 movie. You go over to someone's house, if you didn't drive 16 hours to the launch.

• 2:56Brad Gerstner?

  Yeah.

• 2:57Bill Gurley?

  And, uh, yeah, it was just part of our lives. We had a wall in the house with all the Apollo launch things. And it was really like until he took early retirement in the late eighties, it was just part of our lives. And so to have him down there and, and he's.

• 3:14Brad Gerstner?

  So you went for Starship Five, the launch?

• 3:16Bill Gurley?

  Yeah. And, and I'd been trying to do it for a while because he's 88. And all of his, you know, former colleagues that are still alive are kind of in awe of what Elon's doing. And super appreciative because for them, you know, the space mission was something that meant a lot to them. And they kind of felt like the government quit trying.

• 3:39Brad Gerstner?

  Yeah.

• 3:39Bill Gurley?

  And so to see it rebirth just gets them like super excited. And of course we were there to witness. It was very lucky that this was the one I took him to because we witnessed the, uh, the booster coming back.

• 3:51Brad Gerstner?

  Yeah.

• 3:52Bill Gurley?

  Which was.

• 3:53Brad Gerstner?

  How was that? Was it emotional for your dad?

• 3:55Bill Gurley?

  Yeah. Oh, definitely.

• 3:57Brad Gerstner?

  Yeah.

• 3:57Bill Gurley?

  Definitely. Yeah.

• 3:58Brad Gerstner?

  Yeah. And you look at it today, the average age at SpaceX, probably about the same age as your dad was when he wrote that.

• 4:04Bill Gurley?

  Yeah, he talked about that. We went to an after party and all the SpaceX, not all of them, some of them were SpaceX employees were there. And it was a very young crowd.

• 4:13Brad Gerstner?

  Yeah. But that's a, you know, that, that to me is part of the magic.

• 4:17Bill Gurley?

  Yeah.

• 4:17Brad Gerstner?

  Right? That, that, you know, believing, you know, you can see how mission driven they are. And we have lots of friends who work there, work there, and it's great to see America cheering for it again.

• 4:28Bill Gurley?

  I've even heard stories that people, you know, just because you, you know, you start looking around like I've heard stories, people leave SpaceX and go work somewhere else and just inevitably come back, you know?

• 4:41Brad Gerstner?

  You know, Elon has said that we need aspirations, we need dreams, we need to think about the stars in order to inspire us to invent. And, you know, like, that's part of the purpose of being human.

• 4:54Bill Gurley?

  Yeah.

• 4:54Brad Gerstner?

  And I certainly know with my kids and my family, um, you know, we feel that way. So super cool. You're able to take your dad down there.

• 5:02Bill Gurley?

  It was great. Great.

• 5:03Brad Gerstner?

  On Sunday morning, I went on a walk with, with our friend Michael Dell. You know, I always learned something when, you know, from him and, and the thing that dawned on me, you know, he's not one to get hyperbolic about things. He's been at this a really long time. And he's like, you know, we're in that grindy phase now where he's really starting to see the benefits of AI, right? Inside Dell, inside his customers, other enterprises, finding ways to take, you know, to find efficiencies in their business. You know, I think we're entering that, that what could be a really golden era where there's market leaders extend their lead, where their margins expand. You know, I just saw a headline today that Visa, you know, is finding more efficiencies from AI,

• 5:48Brad Gerstner?

  is letting 1,400 contractors and, you know, and workers go. And I just think this is the beginning of a drumbeat that we're going to hear for, for a decade. You know, he said, he said, just at the very beginning of companies really starting to think about ways they can improve their business. And it's not the, it's not the sexy, you know, chat GPT stuff. This is the real pedestrian stuff. By using, you know, AI to basically translate documents, you know, into a hundred different countries. One of my observations and a fun, a fun thing to come out of that walk, but there are a few topics I want to hit on today, including the latest on AI and GPU scaling. And, you know, I want to hit on the topic of how we're thinking about the markets heading into the election.

• 6:32Brad Gerstner?

  But I want to start with a topic that I know is near and dear to your heart, which is the state of venture capital.

• 6:37Bill Gurley?

  Yeah.

• 6:38Brad Gerstner?

  Okay. So my partner, Jam and Ball, who we're going to bring in here in just a minute.

• 6:43Brad Gerstner?

  Who wrote this week on his blog that VC funding sizes have ballooned, that the incentives for VCs have shifted perhaps a bit, maybe now focused a little bit more on this cadence of raising and deploying every couple of years as much money as possible, which may create some incentive alignment problems with founders. The key question he told founders they need to ask is, are you partnering with a 2% or a 20% venture firm, which I thought was clever. So you then retweeted his post and said, "It's a must read for all LPs and money managers", and called it "The single most important issue in the VC landscape today." So first, welcome, Jamin. You know, I thought maybe just start with you.

• 7:28Brad Gerstner?

  Summarize for us the blog post and kind of maybe why you wrote it.

• 7:36Speaker 02

  Yeah, well, so I write this blog, Clouded Judgment, and it has many goals. One goal is to increase the transparency to founders of what goes on in the venture markets. The venture markets have changed a lot over the last 10, 15 years. I think Bill, it was maybe you or someone else, many people have said this, right? The venture markets have transitioned from a high-margin cottage industry to an institutionalized lower-margin industry. And that has a lot of implications, implications for LPs, implications for GPs, and implications for founders. This post focused more on the founder GP leg of the stool. And I wanted to focus on that leg because I do think that the implications of this

• 8:18Speaker 02

  transition to an institutionalized asset class, it changes the game for founders that I don't think they're fully aware of all the implications. And I had a lot of, I've had a lot of conversations with founders over the last few months that really highlighted that to me. So before diving into how have the incentives changed and how are they diverging a bit more amongst founders and GPs, you know, first we'll just describe what the incentives are for the audience, just to make it quite clear. So in venture funds, I'm sure folks have heard of the 2 and 20 model. That is a 2% management fee and 20% carry. There's a guaranteed portion of funds comp, which is the management fee. It's a percent of the fund size that you'll collect every year.

• 9:02Speaker 02

  And then there's the carry, which is the fund's share of profits. So take a $100 million fund that you 3X. You'll take 2 million a year in management fees. You generate 200 million of profits, which is 40 million of carry. 10, 15 years ago, the funds were smaller. And as a GP, as an investor, you'll make money on that guaranteed portion, but not necessarily, right, as I call it, get rich money.

• 9:28Brad Gerstner?

  Bill, what were you making when you started, per year? When you started in the business? No, but I would say on the average, people were making a couple hundred thousand bucks a year.

• 9:37Bill Gurley?

  Correct.

• 9:38Brad Gerstner?

  Working in the venture business, nobody was getting rich on that management fee. Keep going, Jim.

• 9:42Speaker 02

  That's right. If you wanted to get rich, you had to maximize your carry. The way to maximize your carry was to maximize the value of the underlying investments that you made, which resulted in a path of getting rich for founders, which also resulted in getting rich for investors, right? The incentives, the incentives are aligned. Let's fast forward to today. Funds are much bigger. That $400 million fund is now 4 billion. That guaranteed portion of comp, the 2%, the management fee, you can now get rich on. And the reality is, is a path exists today.

• 10:15Bill Gurley?

  In that case, roughly 80 million a year.

• 10:18Speaker 02

  That's right.

• 10:18Bill Gurley?

  For a $4 billion fund.

• 10:20Speaker 02

  That's right. And so there now exists.

• 10:22Bill Gurley?

  And you could imagine like the managing partner taking a quarter of that, a third of that.

• 10:27Brad Gerstner?

  Yes.

• 10:27Bill Gurley?

  You know.

• 10:28Brad Gerstner?

  10, 15 million bucks a year.

• 10:29Bill Gurley?

  Yeah.

• 10:30Speaker 02

  Right. And so now there's a path where investors, GPs get rich, where the outcome of the founders and their companies is irrelevant. Not to say they are aligned in opposite directions, but they're no longer aligned. And now, as a rational actor, you could say, why not maximize the guaranteed portion of the comp, the 2% versus caring about the 20%? And that leads to some pervasive incentives where funds incentives are more about deploying dollars quickly as opposed to maximizing the value of those deployed dollars. There's a lot of downstream implications of that. It leads to companies, early companies that show early traction, get flooded with offers and investment dollars.

• 11:14Speaker 02

  And we can talk about why over capitalizing and overvaluing your business actually can pose a risk. I think, you know, one of the reasons I wanted to write this post was I thought we would have learned a lot of lessons coming out of 2021, that it's very clear we haven't, or we just choose to ignore because the incentives are no longer there. But for founders, I think, understanding and appreciating, are you partnering? Are you kind of marrying a firm that is more focused and caring about maximizing the value of your company together? Or are you partnering with a firm that just wants to deploy dollars as quickly as possible? And there's lots of things we can double click on, but that was kind of the broad rationale for the post, or the quick summary of it.

• 11:54Bill Gurley?

  And by the way, I mean, rather than say they only care about the management fee, they may view the other one, there's a phrase in poker called a free roll. They may view it as a free roll.

• 12:04Speaker 02

  Right.

• 12:05Bill Gurley?

  I'm getting rich, no matter what.

• 12:06Speaker 02

  It's a lottery ticket.

• 12:07Bill Gurley?

  Right.

• 12:07Speaker 02

  Yeah.

• 12:08Bill Gurley?

  Exactly.

• 12:08Speaker 02

  It's a call option.

• 12:09Bill Gurley?

  But this other, it's a call option.

• 12:10Speaker 02

  Yeah.

• 12:11Bill Gurley?

  And if this company happens to be, you know, the next Google, the next Meta, we've seen how those compound over 20 years, and it'll work out.

• 12:20Speaker 02

  Right.

• 12:21Bill Gurley?

  It'll work out.

• 12:22Speaker 02

  Right.

• 12:22Bill Gurley?

  Or maybe it'll work out for one of the 10 that I'm putting 400 million in, and then I'll be okay.

• 12:27Speaker 02

  Right. As investors, we get to make many bets. As founders, you have one.

• 12:30Bill Gurley?

  Right. Exactly.

• 12:31Speaker 02

  And, you know, one of the things we were talking about just earlier today is for founders, there are implicit things you are signing up for by taking a round that is too much money at too high of a valuation. I think the preference stack and preference in general is something that is sometimes understood by founders in the founding community, but not always understood. There are companies that can be sold for 100, 200 million dollars that results in life-changing outcomes for founders and early employees. If you raised 100 million dollars too early, that exit path is no longer on the table. You can't sell the business for 100 million dollars and make any money because that just returns the preference stack. As the call option investor, Your call option didn't hit, but you get your money back.

• 13:14Bill Gurley?

  Well, let's, let's drill down. Let's split this into two sections because I think that this thing that's happening, and the reason I retweeted it, has implications for both founders and companies, but the asset class also.

• 13:30Brad Gerstner?

  That's right.

• 13:30Bill Gurley?

  So we started down this path. Let's do it first.

• 13:33Brad Gerstner?

  Sure.

• 13:34Bill Gurley?

  What does it mean for a company to have maybe too much money crammed into it at too high a price?

• 13:41Speaker 02

  Yeah, there's, there's, there's many reasons. There's, there's many deep implications of this. One thing that I've learned that I hold, you know, that I will argue with anyone on is every founder and every company and every board will tell you, if we raise money, we're not going to spend it. We're going to stay frugal. That never happens.

• 13:58Bill Gurley?

  Yep, never.

• 13:59Speaker 02

  And instead of focusing on, you might ask a founder, what are the three things that matter most this year that are critical for your success? If you only focused on those three things, you might maximize your chance of success. When you have lots of money, you're going to do six things at once, which means you are diluting the three things that matter.

• 14:15Bill Gurley?

  Let's stay on this for a long time. So many, many, many great people have said that constraints drive creativity. I think, you know, I've heard famous stories about Steve Jobs where he felt his job was just to say, I wanted this, then go figure it out. And by saying that, he limited the space, right? We're not going to build a phone and then, and then people can focus and be creative. You, you've constantly heard, you know, we're going to make a better decision because we're going to have constraints and we're only going to be in two markets, not five. You know, if you're in five, guess what happens when revenue starts to slow?

• 14:58Bill Gurley?

  You've, you've, you've built some of your revenue in these places where you don't have as strong a competitive advantage. Those had, those, those churn out.

• 15:08Brad Gerstner?

  That's right.

• 15:09Bill Gurley?

  Right? And so you, you, you've grown revenue faster, but it's, it's less sustainable revenue.

• 15:15Brad Gerstner?

  Right.

• 15:15Bill Gurley?

  You know, is another thing that can happen. I mean, there's so many.

• 15:18Brad Gerstner?

  Well, you know, when I look at this, you know, if we, if we look at the poster. Child or children for like what were wrong during peak zerp. Okay, so if your incentive is to deploy so that you can raise again in two years, then you're going to want to get maximum dollars into the business. Well, there may be only so many primary dollars you can get into the business. And then we started to see this desire to buy secondary shares. Because I wanted to get more dollars into the business. I wanted to deploy more in the company, even though you're buying common shares that were much riskier. And then oftentimes, Bill, something I know you love, the founders or founding team were taking big dollars off the table, oftentimes before product market fit.

• 16:03Brad Gerstner?

  And I think, you know, Jamin and I have discussed that we came out of this 20 to 22 period. And we would have thought that we would have seen less of that. Right? Because we have, as you've discussed, 1,400 companies, right? That 90% of which are going to have to do a down round IPO or otherwise in order to get through the system. But somehow the echoes of that period have not reverberated that loud, right? The incentives to deploy much bigger rounds into these companies continue to persist. And so, you know, it gets back to your point about scarcity. Not only are you putting so much money in the business that perhaps they're not being as focused

• 16:47Brad Gerstner?

  as they would otherwise be, but you really question whether or not the incentives for the founder are there. If you're taking 10, 20, 50, 100 million dollars off the table before the company has achieved profitability, then do you really have the fire in the belly needed to get, you know, both parties?

• 17:03Bill Gurley?

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

• 17:33Brad Gerstner?

  Right.

• 17:34Bill Gurley?

  Taking shots.

• 17:35Brad Gerstner?

  So it's not only too much money within the firm that's causing the firm to be less fit, less efficient, less inventive, but it's also creating this dynamic where you used to talk about capital as a weapon of economic destruction. Do you have excess capital causing excess competition? So the natural market winner does not emerge as fast as they otherwise would. Well, maybe to level set the conversation.

• 18:00Bill Gurley?

  Can I mention one more thing?

• 18:02Brad Gerstner?

  Sure, sure.

• 18:02Bill Gurley?

  That I think becomes a reality. And we've talked about this before, but I find far too often that founders think about raising money at a particular valuation as if they've earned an award. They've won a prize. They've proven their company is worth this thing and they can then show the world the trophy and say, we've achieved X. And I always try and remind them that valuations represent discounted future expectations.

• 18:33Brad Gerstner?

  Right.

• 18:33Bill Gurley?

  And so you may feel like you've won a prize, but you've really increased everyone's expectation for what this company can achieve. And in order to raise that up around from here, it's way harder than it would have been otherwise.

• 18:51Brad Gerstner?

  Right, right. And perhaps way more dilutive, right? I mean, the reality is even if you're getting what appears to be a high valuation, if you truly think you're one of those seminal businesses, right? You look at the ownership today that Zuckerberg has or Bezos had because they raised so little capital, you know, in those businesses and they compounded over a much longer period of time in the public market.

• 19:16Bill Gurley?

  And let me drive home this point, I think in a very, very stark way, which is we're borrowing a number from the Code Two presentation, but they said there were, what, 1,400 unicorns that are still private from what I like to call the pre-LLM period?

• 19:32Brad Gerstner?

  Yes.

• 19:33Bill Gurley?

  What percentage of those could raise enough round right now?

• 19:36Brad Gerstner?

  Yeah.

• 19:36Bill Gurley?

  What is enough?

• 19:37Brad Gerstner?

  I think it's less than 10%.

• 19:39Bill Gurley?

  It might be less than 5%.

• 19:40Brad Gerstner?

  Yeah. Today, yes.

• 19:42Bill Gurley?

  So that means there's over 1,000 private unicorns that are somewhat stuck right now and could not raise enough round. So this risk I'm talking about, about putting too high evaluation on your company. We've just had this experience in this massive fact pattern.

• 19:58Brad Gerstner?

  Right.

• 19:59Bill Gurley?

  But you're right, we're still doing it. AI came along and it has so much potential and all the things you're excited about.

• 20:06Brad Gerstner?

  For sure.

• 20:07Bill Gurley?

  That brought the money in and the money's back in. And, and I'm seeing activity that is at, at, at, at least no different than what we saw in the past. And maybe, maybe even more frothy.

• 20:21Brad Gerstner?

  Let's, let's, let's come back to that. But I do want to, I do want to level set to the total amount of VC that's actually being raised and deployed. Right. And this first slide we have here just shows that we peaked in key, in, in Zerp in 2021. At over 700 billion deployed, right? We've come back down to about 300 billion deployed, which is still meaningfully above where we were in 2014, 2015. But we're back to about 2017, 2018 levels. But it, it kind of hides a couple of things. Number one, the number of first time funds raising a second time fund has plummeted. The number of first time funds have plummeted.

• 21:02Brad Gerstner?

  And so really what's happening is you have the consolidation among a few big platforms. You know, just this week, we saw that General Catalyst has raised eight billion in new capital. Now, of course, you know, I love my friends at General Catalyst, but you know, just, just 24 months ago, they raised four and a half billion. So that's 13 billion raised in that 24 month period. Similarly, right, Lightspeed recently announced that they raised seven billion after raising about six and a half billion. So another 13 or 14 billion over kind of that 28, 30 month period of time. Clearly LPs are raising their hands and saying, we don't mind, you know, these, these larger funds. The capital is available for, for them.

• 21:48Brad Gerstner?

  What do you think that they're? They're concluding, if you believe that this is going to fundamentally reduce the returns of the entire asset class, then what must be going through the minds of those LPs to want to back those much larger businesses?

• 22:04Bill Gurley?

  That raises so many different questions. One thing I would highlight is that when, you know, my whole career in the venture industry and prior, because I read about the history before I joined, the industry was inherently cyclical and there would be these boom bust periods. And they're very long waves, partially because of the construct of the agreement between the GPs and LPs, which used to be a 10-year thing and now it's like a 15, 16-year thing. And so the window for which you would evaluate whether someone can accurately or successfully deploy a $4 billion fund might be 20 years.

• 22:47Brad Gerstner?

  Right.

• 22:48Bill Gurley?

  And we just started raising them that big. So no one knows.

• 22:53Brad Gerstner?

  Right.

• 22:54Bill Gurley?

  Like, no one knows. Like, they're raising money off of paper marks, you know, from this period.

• 23:00Brad Gerstner?

  Yeah.

• 23:01Bill Gurley?

  And it's just the cycles forever.

• 23:03Brad Gerstner?

  Well, if you think about it.

• 23:04Bill Gurley?

  It's beyond the lifetime of most GPs' career left to be done.

• 23:10Brad Gerstner?

  That's a...

• 23:11Bill Gurley?

  Which gets back to the 2%, 20%.

• 23:13Speaker 02

  And I think it kind of depends. I think one way to, one argument or one lens to look through when trying to predict will it work is everyone will look at venture funds and there's kind of this view and belief that the bigger you get, the later stage you invest, you can more evenly distribute your returns in a fund to achieve a top quartile return. That I would say I strongly disagree with and I'd say all of the numbers that we've seen suggest that to have a top quartile fund, you need to have outlier power law outcomes within the fund. You won't evenly distribute them. So I think one way to look at this is to say, and this is the way we talk internally, what does it take to have a power law outcome at a certain stage?

• 23:56Speaker 02

  At the seed stage, you might have this many companies that could get you a power law outcome. Return your fund, series A, series B, series C, and it's just, it's a downward funnel of the number of companies that could give you power law outcomes. I think one of the challenges is if you're investing just in growth stage, there's only so many companies you can invest in that can give you power law outcomes. And so you are almost inherently widening the aperture to do more than what could be a power law outcome, the larger and larger you get.

• 24:25Brad Gerstner?

  I agree with that.

• 24:26Speaker 02

  So I think the, the burden of proof is on the picking of the large funds to say, we will pick and hit those power law outcomes, but then have a much higher hit rate on the rest. And so it won't be this big power law outcome. It will have the power law and then be more evenly distributed in the long tail, which it can't happen. It's just really hard, especially when your incentives are just to deploy to raise the next fund. It's, are you giving up or saying, hey, I don't care. Picking is too hard. I don't need to do it. In which case, maybe you get the power law, maybe you don't, but you're just naturally going to capture more of the long tail, which I think ultimately will dilute a lot of those returns. And so it's, we'll see how it plays out. That's the fun part.

• 25:11Brad Gerstner?

  Or not, or not. I mean, this is kind of Bill's point.

• 25:14Speaker 02

  Yeah.

• 25:14Brad Gerstner?

  So if you, if you're on a run rate where you're raising $5 billion bucks every two years, okay? So give or take, that's, you know, $50 billion over a 10 year period of time, a 2% on 50 billion. It's a billion. Okay. So now it just. A billion a year. Right. Let's just be clear. Right, right, right. So, so underscore that for everybody, Bill, right? Because these funds layer on top of one another. So you're getting paid on multiple funds. Correct. And that's the guaranteed portion. Yeah. Now, these, these firms are much larger firms, much more institutionalized. To Jamin's point, they're going to have to spread their bets over a much, much wider field.

• 25:55Brad Gerstner?

  So the potential that you're going to have enough ownership in a power law business to earn venture-like returns is much lower. But I think you, you also made the point that maybe what you're doing is your mortality rate goes. Was down and so you're giving more confidence, but Bill's point is we don't know.

• 26:15Bill Gurley?

  You remember.

• 26:15Brad Gerstner?

  The experiment's never really been run in venture at this scale and we would have thought that coming out of the vision fund experiment. Right. We had all these comments during vision fund that we wouldn't see, you know, kind of this cadence of these size of funds. And then if you want to take some targeted big bets, say in an open AI or something like that, there may be only one that one or two of those that come around every couple of years.

• 26:42Bill Gurley?

  Every maybe every 10 years.

• 26:44Brad Gerstner?

  And so you place a lot of wood behind a couple of big bets. But then your traditional venture fund is smaller such that it can generate those historical venture like returns. But I haven't seen any math that I find compelling, how you can get to a four to five X fund on right that $5 billion pool of capital.

• 27:05Bill Gurley?

  Well, in fact, yeah, I mean, in 2011, there was this famous report by the Kaufman Foundation that argued that that billion dollar plus funds had never had good returns. And of course, after that, everyone raised billion dollar funds. But I have this story I want to share with you that relates to this in a funny way. I was at one point in time invited into the office of this PE firm. I didn't know PE very well, but they had had back double click and and Google bought it for 3.1 billion. And this particular firm may, I forget, they made, they had a lot of it. So they made like a billion or a billion two. And I said to him, I want to say, congratulations, man, that's incredible. He goes, well, it's in a $4 billion fund.

• 27:51Bill Gurley?

  You know, so you have an incredible outcome.

• 27:55Brad Gerstner?

  Right.

• 27:56Bill Gurley?

  But the denominator is so big.

• 27:59Brad Gerstner?

  Right.

• 27:59Bill Gurley?

  That that you, it's just hard to claw it back. It's hard to get back to that.

• 28:04Brad Gerstner?

  Which is why you can't, can't get to the four or five X because you have a, you have a power law outcome and it returns 25% or a third of the fund.

• 28:13Bill Gurley?

  Correct.

• 28:13Brad Gerstner?

  Right. What we've witnessed is kind of this bill coming out of the 22 period, these two paths. Effectively, you know, the firms have followed. We've seen some firms downsize. Founders Fund, Altimeter, a few others have downsized the fund size. But we've seen other funds that just said, you know, we're going to consolidate and we're going to get way bigger. And so I do think that, you know, if we look at a little bit of returns math on this. So we have a few slides. But, you know, I love, you know, Fred Wilson's rule of thumb. You know, a third of companies fail, a third basically underperform. And then a third gets you your five to 10x returns.

• 28:54Brad Gerstner?

  And Drayson breaks it down even more, which, you know, says it all comes down to the 10% that produce, you know, kind of that 10x fund. And if you look at this stepstone data, you know, it actually shows that, you know, basically what differentiates those top tier funds. And by top tier, what I mean is that the top 5% of decile funds, they're earning about a four and a half X, you know, cash on cash return in their funds. You know, and you go back and you can look across all of these vintages over the last 20 years. Now, I think there's a question whether or not any of these mega funds on these four or five billion dollar funds are going to be able to, you know, generate those returns.

• 29:38Brad Gerstner?

  And maybe the reality is that these new LPs, pension funds, sovereign wealth funds and others, look at these as strategically important and they, you know, they're less concerned about venture-like returns and they want to protect the downside more. And so maybe you can sell the fact that you're going to have less mortality. Right. And you're going to have less downside risk to the funds. But I mean, I think that that is really where the rubber meets the road. You know, when we look back at this, you know, this analysis, whether or not these funds are going to be able to generate returns that are equivalent to the top decile of historical.

• 30:17Bill Gurley?

  One of the things we don't know that it would be really hard to gather data and prove, but this zombie unicorn class, pre LLM zombie unicorn class, you know,

• 30:30Bill Gurley?

  Had it not been flooded with money and you know, there's a, there's a notion in science called the observer effect, you know, where, where if, you know, VCs are too big and like, do you actually impact the results of the game on the field? And, you know, had that not happened, then these companies grew up on a normal way, you know, in a more organic, you know, growth path, would they have had more liquidity? Would they have had more investor returns? Would, would they have been more acquirable without these high marks on their head? And so did you, did you take out, you know, you're so, we're so focused on the outlier, you know, breakout, Google meta types. Did you ruin?

• 31:16Brad Gerstner?

  The two, three, four X returns.

• 31:17Bill Gurley?

  Yes. Did those go away?

• 31:19Brad Gerstner?

  Yeah.

• 31:20Speaker 02

  I think you, you totally removed it as an outcome path, right? Which is to say, when you are investing in these companies at high prices, the only thing as an investor you care about is, are you an outlier outcome? Are you a 10x plus?

• 31:32Bill Gurley?

  Right.

• 31:33Speaker 02

  As a founder, you might say, I don't need that. As employees, you might say, I might, I don't need that. And if I was sitting on a $600 million valuation, not six billion, it's going to be much different to go and sell the business for $2 billion when the prep stack isn't one and a half, right? So I think we've just, we removed a thick middle of an outcomes that would be relevant to everyone outside of the investors where now the only outcome that's relevant to anyone is, are you a 10x or are you a zero? And you made it a binary outcome.

• 32:05Bill Gurley?

  I agree.

• 32:06Speaker 02

  For all constituents.

• 32:07Bill Gurley?

  And you force everyone into that game.

• 32:09Speaker 02

  Right.

• 32:10Brad Gerstner?

  Obviously, all three of us are in an industry, we believe it's the engine, you know, that provides the fuel for, you know, incredible founders to go innovate the future. And it's really just a question of, of whether or not we're over capitalizing the business, whether funds are getting too big. But what recommendations, Bill, might you have or, or, or Jamin for founders? Or funders, right? Jamin, what I hear you saying is founders, just be aware, right? Ask the questions.

• 32:45Speaker 02

  And know what you're signing up for.

• 32:47Brad Gerstner?

  People you're putting in your, in your capital structure and like what their incentives are. Are they sitting on 20 different boards? Are they clearly in the deployment mode rather than the investment mode? And if they're in the deployment mode, just know that.

• 33:03Speaker 02

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

• 33:24Bill Gurley?

  Yeah, I mean, to that point, like, this is super simple math. But if you raise 400 million, or let's just say 100 million,

• 33:37Bill Gurley?

  even if you're being conservative, what are you going to spend that over 36 months? You know, something like that. You're still signing up for a three, four million a month burn rate. And there's no way that doesn't represent risk in some way. And the bigger you take that number, I used to always think about venture capital as, you know, you, you, you invest in a company and you, you grow that burn up until a point. And then you, the job is to converge back against it.

• 34:08Brad Gerstner?

  Right.

• 34:09Bill Gurley?

  And go to profitability.

• 34:10Brad Gerstner?

  Right.

• 34:10Bill Gurley?

  And with all this money, I mean, we're taking that point up to 10 million a month, 20 million a month. And this gets into who can grow out of that.

• 34:22Brad Gerstner?

  Right.

• 34:23Bill Gurley?

  And it ties into, did you destroy that, that middle? Because some of them just can't ever get there.

• 34:29Speaker 02

  Yeah, and you then rely on the beneficence of the capital markets to keep feeding that machine. And sometimes it runs out.

• 34:37Bill Gurley?

  Yeah.

• 34:37Speaker 02

  And then

• 34:37Bill Gurley?

  Yeah.

• 34:38Speaker 02

  You're in a massive course correction.

• 34:39Bill Gurley?

  But, but, but, but my, my general response is, is unfortunately,

• 34:46Bill Gurley?

  More sanguine, which is, I think these systems are emergent. I don't think any one person made a willful decision to force this reality.

• 34:57Brad Gerstner?

  Correct.

• 34:57Bill Gurley?

  I think it emerged out of a combination of what was happening with interest rates in ZIRP and then the rise of AI and maybe the globalization of fundraising that brought sovereign wealth in. And it all kind of combined and created this mix that we're living with. And for the most part, I think we're all actors stuck in the game.

• 35:21Brad Gerstner?

  Right, right.

• 35:22Bill Gurley?

  I'm not sure you can escape it.

• 35:25Brad Gerstner?

  You know, a couple of observations.

• 35:27Speaker 02

  Is that the positive take?

• 35:28Bill Gurley?

  No, I know he wanted one. I apologize.

• 35:32Brad Gerstner?

  Well, I mean, I'll give you my spin on that. Number one is, you know, I do think that pensions and sovereign wealth funds have, you know, stepped in to replace some of the money that came out of the endowment ecosystem, right? Because endowments, you know, I think about the legends of that business who were allocating those dollars, you know, the Phil Rotners of the world or the Swinsons of the world, right? Like, they would phone up everybody on Sand Hill Road and they would say, you're getting over your skis. You need to back it off a little bit, right? That industry is long gone. But I would also say, I just, you know, I saw news this morning, you know, at FII, which is doing, you know,

• 36:16Brad Gerstner?

  like, I think an incredible convening of investors and leaders from around the world. I think they're doing incredible stuff, you know, in the GCC and Saudi in particular. But they said, we're going to deploy more of PIFs dollars on investments inside of Saudi Arabia than outside of Saudi Arabia, right? So I think there was like, and I've heard this as well from, you know, the UAE, they're going to consolidate the number of GPs. And so I think there is increasing focus coming out of sovereigns as well. I hear the same. I was just down in Texas, talking to the Texas pensions, the same thing happening there. But when they consolidate, that probably means more dollars into fewer.

• 36:57Brad Gerstner?

  Right.

• 36:57Bill Gurley?

  Right, so maybe it's starting to correct that, I don't know.

• 37:00Brad Gerstner?

  And so I don't know, you know, we we've seen from that slide that I showed, the total amount of funding has definitely come down by about thirty or forty percent over the course of the last couple of years. So that's one half of it. The other half is, there is no doubt that the outcomes that we're now talking about are much bigger than the outcomes we were talking about ten or twenty years ago. So it would make sense to me, if you looked at a trend line for the industry, the industry and the number of dollars deployed and the size of funds should be much bigger today, because companies are scaling much faster today and the outcomes are much faster. OpenAI got to, you know, four and a half billion dollars of revenue in a fraction of the time it took Google and Meta. And, you know, and

• 37:43Brad Gerstner?

  so like, that to me supports more dollars, larger funds, but I do think the law of economic gravity prevails. There's a, there's a certain fund size I think it can deploy. If you're aiming for traditional venture-like returns, then I don't think there are a hundred growth companies, right, that you can go put in a fund of five or ten billion dollars, equally weight them and get a four to five X over any reasonable period of time.

• 38:10Bill Gurley?

  And we can, I mean, let's move into that. I mean, I think the enthusiasm around AI is part of what led to that reality. And, and if it didn't feel spectacular, it wouldn't have happened, right?

• 38:24Brad Gerstner?

  Right.

• 38:24Bill Gurley?

  So it's tautological that those two things contribute to one another.

• 38:28Brad Gerstner?

  Well, it's a, you know, so one of the topics we've been talking about all year is a, you know, is, is, is AI and GPU scaling. Will these AI models continue to scale? Will GPUs continue to scale? There was a lot of question whether or not Nvidia would grow in twenty five, twenty five. But just this week, we saw a few announcements. First, we saw out of XAI, the Colossus cluster in Memphis, which I discussed at length with Jensen.

• 38:53Bill Gurley?

  Yeah.

• 38:54Brad Gerstner?

  They announced this week that they're scaling, Elon said, we're now going to go from a hundred thousand GPUs to two hundred thousand GPUs in that facility. Did you see the, the video that Super Micro put out on this?

• 39:08Bill Gurley?

  You told me about it, though.

• 39:09Brad Gerstner?

  Right. So it's.

• 39:11Bill Gurley?

  Describe it.

• 39:11Brad Gerstner?

  So, well, it's just.

• 39:12Bill Gurley?

  We put a link in.

• 39:13Brad Gerstner?

  It's, it's incredible to watch what they built.

• 39:16Bill Gurley?

  Yeah.

• 39:17Brad Gerstner?

  And if I think about for the last decade, data center engineering and construction has been in the background. Right? Like, you know, Meta had breakthroughs, Google had breakthroughs. Like, we'd talk about it, but it wasn't something that people were posting videos on.

• 39:34Bill Gurley?

  I think there's some Equinox shareholders that might disagree with you.

• 39:39Brad Gerstner?

  But I would say we generally took it for granted, but now it's clearly becoming a much more important source of competitive advantage. And I would just say, you know, it's super impressive what they pulled off in Memphis. It all gets to this question of, you know, you were asking at the beginning of the year, will we need or will we get to clusters of 200,000? Now those questions are clearly off the table. And so we have all these mega caps reporting this week. It's expected that capex will continue to, you know, continue on at this $250 billion run rate. Google came in tonight at $13 billion,

• 40:19Brad Gerstner?

  just above the 12.7 billion that was expected. So they revised that higher a bit. But what do you just make out of, you know, as we sit here toward the end of 2024? Do you expect that this is going to, you know, continue at this pace? Is this a sort of, you know, I've heard people describe it as a Pascal's bet sort of situation? You know, how are you thinking about, you know, where this all leads?

• 40:49Bill Gurley?

  I'd love to drill down on that. But, but let's come to it in a bit. Look, it's something we've never seen before. I, you know, if I think back to, and you and I were discussing this, but if I think back to the breakout companies of, of the previous generation of VC-backed companies, none of them had, I mean, massive capex. The biggest one was, was Amazon, actually, with their, with their distribution facilities. And it caused, it caused a lot of skepticism. And they raised a lot of debt and they did things other people hadn't done before. And, you know, I've discussed it. I don't think we've ever seen kind of a capex race before.

• 41:34Bill Gurley?

  And it's, it's, it's pretty mind boggling that these are being built at this scale. It's interesting, you know, to try and count how many people are going to want to do it. Like, you know, the hyperscares obviously are reselling this. So, so they're in, they're like an arms merchant to everyone else. You know, in, in Tesla's case, in X that AI's case and, and Meta's case, they're consuming this, you know, for their own.

• 42:03Brad Gerstner?

  That's right.

• 42:03Bill Gurley?

  For their own good and, you know, it, do, and I throw this back at you. Do you think there'll eventually be 50 of those that, that are, that are Tesla like? That'll want to build these out for themselves?

• 42:17Brad Gerstner?

  No, I think there're going to be a handful of companies, you know, like take Mag7.

• 42:21Bill Gurley?

  Because the scale's too high.

• 42:22Brad Gerstner?

  Yeah, it's, it, it, think about it this way. You know, if you look at Google in the quarter, GCP has accelerated its revenues by 30, up to plus 35% year on year. Okay. So just to put that in perspective, they added about two and a half billion of new ARR in the quarter. That's like adding a Databricks in the quarter. Right? So it's only companies of that scale that can afford to spend $50 billion a year. And, you know, I do think there are increasing advantages to scale, both when it comes to data and compute. And so, you know, I, I found this Pascal's bet to be a good framing of this, which is if I were running any one of those companies, it would now be sufficiently clear to me.

• 43:07Bill Gurley?

  Explain, explain.

• 43:08Brad Gerstner?

  Yeah. So, so, you know, so Pascal's this French philosopher. He says, I don't know whether God exists or not, but if he does exist and I don't believe, then it's going to be a really bad outcome for me. And if he does exist, I do believe I have eternal life. So if you believe that the upside of AI, right, is infinite, is eternal, right? Is some really big outcome and all your competitors are doing it. What else are you going to invest your money in? You have, we said, we said here several weeks ago, you can buy back your shares, you can issue a dividend or you can buy GPUs, right? Do you think any one of these founders or leaders of these companies?

• 43:44Bill Gurley?

  You can do license deals with companies you want to acquire.

• 43:48Brad Gerstner?

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

• 44:25Bill Gurley?

  Yeah. And another thing that I think the law of large numbers just starts to catch up as well. I think there's some capex spend from even a mag seven. I'd mentioned that maybe the CFO's voice goes up a little bit, but the investors will start asking as well. And there was another data point this week that may seem trivial, but there was something that just came out yesterday that OpenAI is talking to TSMC about building a chip and has put their foundry ambitions on hold.

• 44:58Brad Gerstner?

  Right.

• 44:59Bill Gurley?

  I always thought the foundry ambitions were a little too ambitious, but in some ways, that's an odd recognition that, oh, well, that may have been too much money. And with the burn rate that's rumored that they have, like, oh, okay, maybe, you know. And so there is, there is, there is some, right. So one thing I would say about the Pascal thing is if that's truly what's on everyone's mind, that's exactly how you would go over the top.

• 45:25Brad Gerstner?

  Right.

• 45:26Bill Gurley?

  It's the exact formula.

• 45:27Brad Gerstner?

  First, I mean, listen, there is some non-zero probability, just as Elon says, there's a non-zero probability that AI is going to end up being bad for humanity. There is a non-zero probability here that at least for some of the players, they don't see a return on that investment.

• 45:44Bill Gurley?

  Or that you get a supply, demand imbalance in the middle.

• 45:47Brad Gerstner?

  Or you get a diluted return, right? That you all overspend and had you just waited and spent slower, the cost of the technology would come down and it would cost you less over time.

• 45:58Bill Gurley?

  There are, there are, there are people that will argue that the, you know, we're going to get in here and the first pass is we're going to place a bunch of programmers, but then we're going to replace a bunch of paralegals and then we're going to replace, you know, a bunch of, you know. Imaging analyst and then, you know, and the longer that list gets, and if you are successfully fine tuning models specifically for those particular task and that gets longer and longer and longer, that's big.

• 46:35Brad Gerstner?

  So it leads me perfectly into this comment out of Masa Sun today, you know, that we couldn't not talk about, but at any rate, Masa at FII today said nine trillion of cumulative capex on 200 million GPUs is very reasonable. He said, in fact, I think it may be too small. And he went on to say, you know, that if you took the most critical estimate, so of the value of AI. So he said, the lowest estimate that he's seen on the value of AI is that it could do the, you know, what he calls artificial superintelligence, which is what he thinks

• 47:18Brad Gerstner?

  we'll have if we spend $9 trillion is that it would replace 5% of the global workforce. And it just so happens, if you do the math on that, 5% of the global workforce costs about $9 trillion a year. So he said, imagine you were a single entity, single enterprise, the global workforce was your workforce and you could spend $9 trillion cumulatively over the next seven years that you would then recoup in a single year through the efficiencies gained in that workforce. It would obviously be an NPV positive investment. Bill, is Masa's $9 trillion the top? Is it where all this, you know?

• 47:57Bill Gurley?

  I think the key math for that number is that it was bigger than any number anyone else has said.

• 48:03Brad Gerstner?

  There you go.

• 48:04Speaker 02

  I do think though, there's, I mean, many have made this argument, right? You look at IT budgets as a whole, about half of that generally goes to headcount and people. A smaller percentage of that goes to software and even smaller percentage of that goes to new spend in the year. Most of the software spend is just renewal. You spent it last year, you're going to spend it this year.

• 48:24Speaker 02

  A lot of people have written about this, but it's the great services to software rotation. Services markets usually 10x bigger than software markets. If we look at how can spend attack IT budgets as a whole, it's not just let's replace this software spend with this software spend. It's let's replace these call center agents. Let's replace these insurance people filling out forms in the back office. It's let's replace a lot of this.

• 48:47Brad Gerstner?

  I mean, most of these firms replace, you know, employ hundreds and hundreds of thousands of people. And we're seeing those numbers. That's where, you know, I started, you know, the conversation about my walk with Michael. And, you know, again, this is looking over a 30 to 40 year period of time. Never have has he seen, or have I seen, the ability for companies to take out 10,000 people and actually see customer satisfaction scores increase, right? There's, there's always a cost to letting people go. But in this case, you know, you hear Zuckerberg talk about take out 20,000 people. Flatter is faster, leaner is better.

• 49:30Brad Gerstner?

  We're getting more done with less, right? When you look at span of control in companies, right? There are some companies, you know, that still have, and that's the number of employees per manager, right? So you can imagine that will widen, you know, because AI will allow you to, you know, have more people, you know, who you can effectively manage.

• 49:51Bill Gurley?

  It'll be interesting. I do think that some of the fine tuning and of the math is still to come. And I'll use the coding example, you know, when we started, you know, everyone, oh, we're going to replace engineers. But, but if you talk to someone, a CIO type, and say, what kind of lift do you get from a copilot product? They're kind of generally in the 15 to 30% range, which isn't. You know, if you're replacing somebody, it's a hundred percent or infinite percent. And so whether or not, and maybe customer service is different than coding in this case,

• 50:31Bill Gurley?

  where you can, you know, replace a hundred percent or ninety percent of the people. But it'll be interesting to see as the analysis come out of these things, what those different numbers look like for each of these different verticals, so that you can get a better sense of that. But if, if, if you really can, you know, if, if Sierra Brett Taylor's company is right, and you can replace a hundred percent of your customer service agents with this technology and get a more satisfied customer. And if there are multiple verticals like that, then you're right. This could, this could go on for a long, long time.

• 51:09Brad Gerstner?

  I, you know, and I'm, I, you know, there's no doubt in my mind that there's some sloppy spending going on, right? Like, you can't, you can't add this magnitude of spending without there being a little bit of waste, okay? But it's also clear to me that the reward on the other side, there is nobody taking their foot off the accelerator.

• 51:30Bill Gurley?

  Yeah.

• 51:30Brad Gerstner?

  Right? When I talk to CoreWeave, when I talk to Azure, when I talk to OpenAI, when I talk to Amazon, Google, et cetera, not one of them is talking about anything other than how do we find the facilities that can support a gigawatt or two gigawatts or three gigawatts of power to power up the clusters that they wanna, you know, they want to invest in. And these, remember, these are three, four, five year long investments.

• 51:56Bill Gurley?

  Another thing that came out this morning that I was kind of waiting on as a proof point, because it didn't make sense to me that it hadn't happened yet. TSMC said they're gonna do across the board twenty percent price increase. And that's, I was like, this should be happening. And so seeing that is also indicative of this, right?

• 52:14Brad Gerstner?

  Indeed, indeed. And maybe we, we can, we could close out here by talking about the markets a little bit. We always talk about the markets at the close. But one of the questions I keep getting asked, Bill, is whether or not this allows Election is priced in. I mean, you know, in a lot of our text threads we have with our friends, everybody's trying to figure this out. All eyes on the election, which is here in seven or eight days. And, and, and the question is like, a lot of people looking at the prediction markets saying increased probability that Trump wins the election. So they're wondering, do, is there still time for me to adjust my portfolio, right ahead of this? And so you heard Druckenmiller

• 52:56Brad Gerstner?

  talk about this, this week. Paul Tudor Jones talked about it. I think Ray Dalio all said the market is fully banking on a Trump victory at this point in time. I probably wouldn't put the market is at 100%, but you know, there's 70 to 80% baked into the cake. You can see that a lot of stocks have moved a lot. And I peeled this back a little bit.

• 53:17Bill Gurley?

  This is unbelievable. I'd love to see what's in this Democratic spread trade bucket. It's, it's down 20% in 30 days.

• 53:24Brad Gerstner?

  I'll tell, I'll tell you, you know, I looked at it, you know, some companies in the solar complex like Mphase, et cetera, down 25%. Companies-

• 53:32Bill Gurley?

  In 30 days.

• 53:33Brad Gerstner?

  In 30 days. You know, companies like in the healthcare trade, Humana and others down significantly because obviously they provide Medicare Advantage and other, other products that will get hurt, that are expected to get hurt under a Trump presidency. And so if you look at the, the, the policy consequences of these two candidates, they're very stark, right? And I would argue that most-

• 53:58Bill Gurley?

  He's also talked about an MFN clause for drug prices inside versus outside of US.

• 54:03Brad Gerstner?

  So at this point, would I sit here and I try to find to my portfolio for the election? Probably not. You know, I think that markets are, have been quite efficient on this over the last 30 days. And my own sense is that the bigger surprise, right? If you thought that it wasn't 60 or 70% likelihood that Trump was going to win, let's say you thought it was actually even odds and you believe the polls that are out there, right? That whole trade there will unwind if Harris wins. So there would be a massive move in the other direction, right? If Harris were to win, I put both of them in the too hard bucket, but I thought I'd put them out there because we get a, you know, certainly a lot of chatter about it.

• 54:47Bill Gurley?

  All right. We're, we're into earnings season, Brad.

• 54:51Bill Gurley?

  So, so, and we had a couple, like, right before we just started today, I guess, Google and AMD. What, uh, what do you, what do you, what do you, what's your quick interpretation of what you're seeing? And what do you expect?

• 55:03Brad Gerstner?

  Well, I think we came into this week, um, we and lots of others, like, if you look over the course of the past several weeks, the Mag 5 has underperformed, um, software and other categories. And I think people are pretty concerned about the CapEx guides. There's been a lot of talk about that. I came into this week and said to my team, I think it's largely priced in at this point in time. I said, I thought the whole Mag 5 would probably trade up 3% to 5% this week, including Google. Google came out tonight, um, you know, they grew their, uh, search revenues by 12%. They grew YouTube revenues by 12%. The stock's up, I think, 4% or 5% after hours. That all smells right to me. It had traded off a lot, uh, you know, going into this period.

• 55:48Brad Gerstner?

  I think the more interesting thing, Bill, is if you look at kind of-

• 55:51Bill Gurley?

  Hey, can I ask you just a quick follow up? When, when you said they were worried about the CapEx guide, which way were they worried?

• 55:57Brad Gerstner?

  They were worried that it was going to be even higher.

• 56:00Bill Gurley?

  Yeah.

• 56:00Brad Gerstner?

  Okay, so-

• 56:01Bill Gurley?

  But, but from your analysis earlier, it's a good thing if they want to spend more.

• 56:04Brad Gerstner?

  Well, no, I, I, I, I think that, you know, there is, I mean, remember, these CapEx, um, expenses have gone fairly parabolic in the last couple of years. But, operating income, so margin expansion and top line growth have outpaced the increase in CapEx. So people have tolerated it. What won't work well, right? Let's say we had a recession next year and then, you know, earnings were, came in a lot lower than people expected, or top line growth came in lower, but that there was, uh, you were unhinged on CapEx. I don't think that would be a particularly good equation for the stock. So, some people were, were quite worried about this.

• 56:47Brad Gerstner?

  But I think, uh, let's talk about Google in, in, in particular, right? I think there's a lot of concern and chatter in the world. I've been out, out there talking about it. ChatGPT has consumed an extraordinary- Percentage of the time and energy that I used to spend in search. So it's kind of, you know, hard to believe that it's not really having an impact on search revenues, but it's not. And so if you look at this chart that shows the search revenue growth over the course of last eight quarters, I mean, they've accelerated search revenue growth from twenty, you know, end of twenty two and early twenty three. From like, you know, two percent, five percent, all the way up to fourteen percent, still at twelve percent today.

• 57:30Brad Gerstner?

  So part of the question is, how long can search revenue growth stay at this level? And one of the key questions there was whether or not the AI enhanced search results were going to monetize at the same level as non-AI enhanced search results. So they call these SGE.

• 57:49Brad Gerstner?

  And it turns out that they they they said on the call tonight that they're monetizing at the same level. So that's a really good data point for Google, if true, which is they can layer in the answer at the top, push the blue links down the page without losing a lot of revenue.

• 58:07Bill Gurley?

  Although, I mean,

• 58:10Bill Gurley?

  this has been argued both as a positive and negative, but the the searches that were, I guess, stolen most quickly by a chat engine or more of these kind of encyclopedic type searches where you're looking for information. Whereas the big money searches for Google are travel and new car and a home and those kind of things, big purchases. And so those may not in fact be the ones where they're inserting much of this. And so you may be, you may be talking about the long tail of their searches anyway, that aren't that relevant to the big dollars. You know what I'm saying?

• 58:47Brad Gerstner?

  No, for for sure. I mean, a lot of people think of these as the knowledge graph searches. You know, I've been using, you know, all last night I was using ChatGPT to study, help, help Lincoln study for his AP history exam. There's not a lot of monetization of that in Google anyway.

• 59:01Bill Gurley?

  So that page could be the same.

• 59:03Brad Gerstner?

  Right. So so that monetization is about the same. Now, we've also, as you know, we saw this week that anthrop- Release computer use, right, to take control of my browser to, you know, what we've been discussing, book that hotel or book that airline ticket. It's kluge, you know, a lot of people, you know, but it's, but it's a step in the direction. A lot of people thought that Google was going to release Jarvis this week, which is their version of this.

• 59:30Bill Gurley?

  Someone just funded a new browser company, Kleiner did, I think.

• 59:33Brad Gerstner?

  OpenAI will certainly do this.

• 59:35Bill Gurley?

  Agentic.

• 59:36Brad Gerstner?

  So, you know, the fact of the matter is Google is already discounting this. It's trading at the lowest multiple, you know, in the mag five. So I think people are saying at some point it's going to have some effect. We don't know exactly when, but I would just say for this quarter, you know, super solid quarter out of the company. And then you asked about AMD. AMD is down about 10% after hours despite, you know, continuing to have blistering growth. And I think what's going on there is there was some talk at the beginning of the year. The AMD could capture maybe 10% of the data center market. And the fact of the matter is when you, they gave some forward guidance tonight that suggests

• 1:00:15Brad Gerstner?

  they're going to stay at about 3% of the GPU kind of data center market relative to Nvidia at about 90%. The company's done extraordinarily well. Lisa is an amazing, you know, CEO, and I think there are a lot of good things in the works. But, you know, they're not closing the gap in terms of share of market. The tide is rising for both parties, but the opportunity clearly for them.

• 1:00:40Bill Gurley?

  And it's, and it's off big now.

• 1:00:41Brad Gerstner?

  Right, is to, is to try to, to try to pierce a larger share of that market. But we didn't see any, any.

• 1:00:49Bill Gurley?

  You know, back on the Google thing real quick. I just have a really hard time, like in my brain, separating kind of my own user experience shift and how fewer Google searches I do. To accepting the idea that, oh, well, they're going to add it in too. Like, I don't, I don't go back there and say, oh, this is better, like with it added in and the ads and stuff. I, I prefer the

• 1:01:16Brad Gerstner?

  Perplexity or ChatGPT.

• 1:01:18Bill Gurley?

  I really do.

• 1:01:19Brad Gerstner?

  Yeah.

• 1:01:19Bill Gurley?

  So I don't, I don't feel any

• 1:01:21Brad Gerstner?

  Right. And so that to me is the leading edge, right? Like, at the end of the day, could Google give you that same clean experience that ChatGPT gives you? Of course they could, right? But they cannibalize, that's what innovator's dilemma means. They cannibalize their core business. And so they either have to, you know, have a product that looks different, that still has the blue links, that still has the sponsored ads, right? And you risk losing user affinity, right? Or, you know, so to me, it's

• 1:01:50Bill Gurley?

  Well, they have this other challenge that I've, that I think is hard for people to understand, but I've explained it a couple of times, which is their revenue per visit is going to fall if they complete the transaction. Because someone is spending marketing dollars to take that customer to their website and run the transaction with the hopes that they'll come directly back to that website. So they'll spend 50 to 100% of first transaction. There's no one that's going to, if, if, if Google or ChatGPT or whoever convinces Kayak or whoever to be a white label rails in the background, the amount of money they're going to give you for that's going to be like 5% of the transaction.

• 1:02:35Speaker 02

  Bill, you brought up, you brought something interesting. So like this new browser, right? It's a company called Browserbase. And I think this is a really interesting concept to think about kind of transitionary states versus end states, right? The transitionary state today is we're going to have agents that essentially can scrape websites and view it as if I'm doing it. They're going to recognize the button and click the button. They're going to go here. What if we reinvented the browser and built it in a way where it's not a button for a human eye, but everything is some composable API that an agent can recognize and an agent can go interact with. And so you're not scraping the website where you would lose the eyeballs. You're building a new browser for agents versus humans. Is that the end state? There's lots, I don't know the answer, but it's a

• 1:03:19Bill Gurley?

  It could be, you have to rebuild all the rails too. I mean, everything has to start to look like Stripe. There has to be a, you know, a travel, the Stripe, there has to be like, you have, you, you, you need You need a transactional network and that's not what we have today. Yeah. Like, like we have this, this browser based, you know, world that sits between the consumer and, and all these businesses. But it could happen. And boy, we've talked about voice. Like if you just start talking to your computer, it's a very different world. That's not a browser or, or it's not the browser we know. Yeah. It could very well be a different, you know, entity. Yeah.

• 1:04:01Brad Gerstner?

  Well, I think the way you go over the top and why I'm so, so excited about, you know, the equivalent of computer use across the board is, you know, in the same reason perhaps that Elon says you use a humanoid versus a non-humanoid robotic form, because a humanoid works in a world that was designed for humans, right? And the thing about computer use, you don't have to build all these new rails and everything, which takes a really long time to negotiate all of that stuff. Instead, you just give it ubiquitous use of the world that already exists, you know, straight out of the gate. So.

• 1:04:38Bill Gurley?

  I think this, this is something I really wanted to make a point on. I think this will be super interesting to watch which categories and which verticals fall into place first and why. There was an article out this week that was looking at, I think, OpenAI as a scribe and they highlighted that it failed like a lot. And so if, you know, and, and this is also an issue with like self-driving, like, like if the cost of a 5% error or 10% error is super high, it's going to take AI, AI a long time to get there. I would argue programming is that way. You can't have five or 10%. Self-driving cars. Self-driving. The error rate is death.

• 1:05:21Bill Gurley?

  It may, it may turn out that customer service, that's just fine because the best in class today already has that error rate, just because of human, you know, failure. And so it, it, it will take AI a while to get to where it has the kind of nines you need to solve certain problems. And that's why I'm, I'm so intrigued by which verticals are going to line up first and get knocked over.

• 1:05:47Brad Gerstner?

  Well, another good conversation, Jamin. Great blog. Thanks for joining us. Yeah, great. Thanks for having me. Great blog. And I imagine you're, we're going to get a lot of feedback on this one from LPs and founders. So we'll make sure to put it in the notes. Great to see you both. Thanks for being here. Good to see you. Take care.

• 1:06:14Brad Gerstner?

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