E129: The Number #1 Predictor of Startup Success w/Ken Smythe

In this episode of How I Invest, I connect with Ken Smythe, founder of Next Round Capital, to discuss his journey in private markets, lessons from hedge fund management, and the future of thematic investing. Ken shares insightful stories about spotting talent, using key executive moves as signals for investment opportunities, and the rise of AI and defense technology. We also explore the challenges facing venture capital and private equity in today’s market, including liquidity bottlenecks and the hunt for alpha in a rapidly evolving landscape. Ken's personal story of resilience and his passion for innovation shine through in this inspiring conversation.

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

• 0:01David Weisburd?

  Last time when we spoke, you told me about the strongest signal that you see for a new company. What is that signal?

• 0:07Speaker 01

  The signal for us has, especially in recent times, has been key executives that leave large private companies to join early-stage startups. If the head of engineering at Apple is leaving for a startup and has been there 17 years, we want to know about that company. And because we have the relationship with that executive, we oftentimes get introduced to them by the management team and start understanding what that early-stage startup is doing and get a very good look inside. Where other investors mainly haven't even heard about the company. And I think the best example of that was in 2019, we were approached by an executive to help him liquidate $35 million worth of Stripe.

• 0:49Speaker 01

  We asked them, well, why are you selling and why are you selling this much? He goes, well, I'm leaving the company. I'm joining something pretty exciting called OpenAI. And at the time, people had not really heard of OpenAI yet. It was a completely new concept. We did some work on it and actually started getting to know what OpenAI was all about and ChatGPT. Had we not had that signal from the executive, I mean, VCs weren't even really heavily involved at that point. There was very little knowledge of this company. And due to the fact that we were able to build a relationship over our many-month period, we started to understand that OpenAI and ChatGPT was going to be a very, very big thing. And the only reason why people would go there and leave such a successful startup as Stripe

• 1:32Speaker 01

  would be that they figured this opportunity was much larger and had much more upside than staying where they were.

• 1:36David Weisburd?

  You mentioned that a Sequoia or Andreessen Horowitz may not be as strong of a signal. Why is that?

• 1:45Speaker 01

  The large VC funds are managing 10, 20, 30 billion dollars. So to say that you're leading around with, say, a $5 million check when you're writing many multiples of those $5 million checks across your portfolio. Sometimes isn't a strong signal because the VC firms themselves are so overcapitalized. If that bet doesn't work out, it generally does not affect their returns. It's really kind of a drop in the bucket for them. But it's a lot riskier for an individual who has a very large amount of equity and stock options in a startup to go lead to go to a Series A. And that to us means real risk-taking, right? The risk that a VC is taking by leading a $5 million Series A or putting in a $5 million check or $10 million check into a Series A

• 2:28Speaker 01

  is much, much less than a key executive who owns 100 million of equity in a very established account in many cases to go to a company with 100 million dollar valuation that's pre-revenue, right? That executive is taking real calculated career risk on that move. They know something even the VCs don't know.

• 2:47David Weisburd?

  And there's not only the career risk of leaving one company and putting all of your career baskets into an untested company. There's also the fact that oftentimes at these large companies, you get refreshed in your equity pools oftentimes every year, sometimes every couple of years. So they're giving up this future equity.

• 3:09Speaker 01

  When we look back historically, those moves have meant a lot more to us than who's actually leading the round. In fact, many of these executives are leaving to go to these companies before there's even a lead and a significant round. And what we found is those with the engineering background and those that are highly technical people that actually know the technology better than any VC ever will because they're internal and need to understand that the next wave of what they're doing.

• 3:38David Weisburd?

  You alluded to it, there's so much capital and venture capital today chasing, you know, a few really good deals. How do you know that you're not being adversely selected in terms of the companies that you invest in?

• 3:49Speaker 01

  In addition to tracking fundamentals and metrics and what's really going on underneath the hood. I mean, we just invested in an AI chip startup, which is pre-revenue, right? But our leading indicator on that one is key engineer from Apple that was there 17 years, just joined. One of the key engineers from SpaceX that was managing 30 engineers at SpaceX, one of the head of design engineering, just joined the company. And also a key executive from Walmart. Now, they haven't even raised their Series B yet. But with that kind of firepower on the executive team already.

• 4:24Speaker 01

  We're thinking this is an opportunity that we really need to dig into. And now it's just understanding what the revenue traction is, what the commercialization is. From a product perspective, we think they're, you know, they're way ahead and that's a very strong signal there.

• 4:35David Weisburd?

  You're a thematic investor. Tell me about one or two themes that you're excited about for 2025.

• 4:42Speaker 01

  We're thematic, but we also have to be pragmatic that we don't know, you know, the technologies that are out there today. I don't think that we could have guessed three years ago that perplexity was going to be a $9 billion company. Right? And that's why the signaling that we keep talking about is so important because the true technology execs at these companies and the people that are actually building these products are the ones that we want to follow. Right now, we think AI chatbot agents are going to be a huge business. And that's where you're seeing executives from OpenAI and Thropic leading to these chat, leading to these chatbot startups. And they get it exactly right, which they're about 80% there, being able to actually duplicate what a human does in a certain task.

• 5:23Speaker 01

  We think that that's going to be a massive, massive business for corporations to reduce costs and increase efficiency. So we're very focused on that. We're also given the new administration focus a lot on defense tech. And we think that that business is just, you know, going from a true transformation where you have the old guard of the Lockheed Martins, the General Dynamics, those types of companies which had old technologies like the F-35, which is basically already on the chopping block by the, uh, the new Doge administration. And, and now is, is really leaning into technologies on the battlefield that are being developed by very innovative startups. I mean, Android is obviously the blue chip

• 6:04Speaker 01

  name in that space, but Shield AI is doing very interesting things and other even earlier stage startups than that that are bringing technologies that we didn't even know possible, you know, two to three years ago. So we're paying attention to these broad thematic themes, but you know, it all comes down, especially in early stage investing, to the people, the team and their track record and what they've built at other organizations as the true litmus test of whether we're really interested or not.

• 6:27David Weisburd?

  We've seen a complete 180 in terms of venture funds investing into defense tech over the last one, really two years, but in the last year, dramatic change in activity. In terms of the institutional secondary market, who is accessing the Elon companies or these kind of companies? Who is that is out there in the market buying these shares?

• 6:50Speaker 01

  It's a wide mix, but I would say it's obviously the large institutional investors. It's the VCs, it's the hedge funds that are getting.

• 6:56David Weisburd?

  So you have VCs going to you and saying, I want to buy on the open market more exposure to my name.

• 7:01Speaker 01

  That's right. Once they get into a company, they come to us and say, look, we're trying to size up and we're trying to build a bigger position in this company. And we've done that multiple times this year. I think that they also are cognizant of the fact that they use us for liquidity and the other parts of their portfolio. So one of the biggest issues that VCs are having is DPI, right? So as much money as they're putting into these new L M companies, all the AI startups, the military logistics companies like Anduril and the robotics companies are also trying to exit a lot of legacy things that they invested in from 2017 to 2021 and trying to get DPI for their investors, right? So their investors are saying, look, this is great that you're putting a lot of money to work in AI

• 7:45Speaker 01

  and names like Co2 have deployed and raised a billion dollars just to focus on AI recently. But they're also looking at the rest of their portfolio and saying, well, what happened to that hot fintech company you were talking about in 2019 and that hot SaaS name that you did in 2020? What happened to those? Because all of a sudden, nobody's talking about those, right? So they're kind of forgotten zombies in many cases, right? The companies have slowed their growth. They had to cut burn during the tech crisis. And a lot of VCs feel a little bit stuck, right? So a lot of our job has become, help us get DPI on this part of our portfolio. And then hopefully we can recycle that cash into other AI opportunities or things that we're looking towards the future on. So it's, but it's really become lopsided in that regard.

• 8:29Speaker 01

  Cash is not the problem for VCs right now or fresh cash that they've raised. Ideas is not a problem. There's a ton of companies to invest in right now. But it's really liquidity in the rest of the portfolio. So when you're talking to an endowment and they're saying, give me fresh new money, they're saying, well, we have none yet. And obviously VC is a big part of the problem, but the biggest part of the problem is private equity. So there's a massive liquidity problem right now. It's creating really a bottleneck in the industry. But in terms of innovation and the pace of innovation, it's faster than I've ever seen it. It is really truly astonishing what's going on and what companies are developing and how it's affecting society.

• 9:03David Weisburd?

  So you see from one side, VCs buying secondary to add to their positions. You see some VCs selling in order to generate DPI. What other types of investors, whether institutional or non-institutional investors, do you see regularly in the secondary market?

• 9:20Speaker 01

  Family offices have been an interesting one. I think family offices are a little bit less self-guided than a VC fund or a hedge fund would or an institution. Because a lot of times, they don't have access to the level of diligence that some of these institutions do. So they tend to follow a lot of their managers into opportunities. So what we see sometimes is, hey, we own this company through a fund that, you know, one of the large VC owns, but if you offer it to us, we would size up and buy more. You know, we would go into an SPV that has that name because we're really bullish on it, and it'll add to our position, which is somewhat diluted across this fund. So we see that. And then, obviously, and this is where markets get very frothy, is retail, right? And so the high net worth investor is being pitched a lot of these deals through the

• 10:04Speaker 01

  typical Morgan Stanley, Goldman Sachs platforms, Merrill Lynch. And they're saying, look, buy SpaceX, right? Everyone wants to say at the cocktail party that they own SpaceX. It's a terrific name to own. Obviously, they're doing very, very well. But it shows you that the retail market is focused on several names. And if that name becomes available across one of these back platforms, they're literally devouring it.

• 10:25David Weisburd?

  Interesting. SpaceX used to be strictly a family office trade, almost like a cocktail trade. And then it went to an institutional trade. Maybe again, it'll be so expensive via family office trade again.

• 10:36Speaker 01

  Yeah, yeah. Look, institutions are looking at it. Obviously SpaceX, the business model is an interesting one. About 65% of the projected revenues in communications and the satellite business, which is a $99 a month product, which is focused on the maritime industry, emerging markets, frontier markets, which, to be honest, many of them can't afford a $99 subscription. So Elon has really built a great business with the military payload business and obviously Starship, which is the best business of SpaceX because it's really long-term government contracts. And that's what everybody wants to see is long-term revenue visibility. And so that's what investors are really focused on. But the communications business, although it will grow very fast, you know, things tend to trade in an AT&T Verizon multiple.

• 11:18Speaker 01

  So it'll be interesting to see when these companies hit, or SpaceX hits the public market, what is the public market going to value the communications business, what it's, you know, going to value the Starship and PayLaunch business?

• 11:30David Weisburd?

  SpaceX really is, and we're shareholders, is many different companies in one. Like you said, high revenue, low multiple, some low revenue, high multiple. Never thought about it that way. Previously, you were the president of a $5 billion hedge fund. Tell me about that experience.

• 11:45Speaker 01

  It was great. I mean, we were, you know, this was during a period that the multi-manager business was really taking off. And this is when really Citadel, Millennium and others were really raising a lot of capital and really starting to take off. And we were trying to do the same. It's a very capital-intensive business. It's a very leverage-intensive business. And finding the right portfolio managers is a very challenging thing to do. They expect, you know, large upfront payouts before they've even generated $1. And so, you know, for me, it was more of a personal decision that I thought the private markets were going to generate a lot more alpha in the future. It was a good time for me to segue into private markets.

• 12:22David Weisburd?

  Explain to me as a third grader, why it makes sense to have multiple strategies at a single hedge fund? Thank you for listening. To join our community and to make sure you do not miss any future episodes, please click the follow button above to subscribe.

• 12:34Speaker 01

  It's, you know, these strategies all trade with different risk characteristics, right? And, you know, what we call in the hedge fund world, factors, right? And they're all driven by different factors. Some people factor, some strategies are growth factors, some strategies are EM factor, some factors are currency-related, and some factors are just unmeasurable. And so you always have to have a variety of factors in your portfolio that you can recognize and hedge. And that's why you want a strategy where you have multiple factors going on to deliver a smooth return profile on the strategy. A lot of times, portfolio managers get very, very stuck in their own strategy. Managers so focused on generating returns from that one segment of the market, which may be out of favor.

• 13:17Speaker 01

  And so that's why a lot of money has been raised to these multi-manager strategies. It's just been able to smooth out the volatility, smooth out the returns and smooth out the risks. Now, that being said, they're telling portfolio managers, please join Citadel or any other multi-manager fund. Here's $2 billion and make 3% and we're going to lever it, you know, 15 to 1. And that's how these firms generate a lot of returns. So it's not without risk. Everyone looks at the Millennium fact sheet, you know, punching out a nice 12% annual return. But if you look at the overall leverage that Millennium is managing, it's massive. I mean, it's billions of dollars when stated AUM is $60 billion. And so it's a very interesting strategy and I think investors have become very enamored with it.

• 13:58David Weisburd?

  Is that leverage somehow isolated? Or can one strategy blow up the entire fund?

• 14:04Speaker 01

  Look, it'll go unnamed, but there was one fund that they generated 60% of their return in 2023 from European natural gas. Had that trade gone wrong, you could have seen a major firm go under. When we look at some of these funds, it's taking on a lot of risk to generate a small measure of return that then the firm can control at the top level and manage the risk and manage the leverage. And so far, they've done a great job, but you know, who knows what's going to happen? You know, if all the factors unwind and everything basically melts down at the same time, it'll be interesting to watch.

• 14:37David Weisburd?

  While you were at the hedge fund, you were recruiting portfolio managers. You were essentially scout for talent. What did you look for in portfolio managers?

• 14:44Speaker 01

  A lot of it was, you know, a specific skill in a specific market. When you're building a platform like that, you really need to focus on guys that understand a market very, very well. And not only is they understand 20 names extremely well, they understand the industry very, very well. It was very hard to find a portfolio manager that was good across all industries, geography.

• 15:06David Weisburd?

  You're looking for the best individual player at that position?

• 15:08Speaker 01

  Really, we're looking for that best individual player that necessarily wasn't the best. He had to be a great stock picker, but he had to really understand and be able to do great research. One of the guys that we interviewed, I remember during the bird flu days, he was literally flying to farms and the egg farms to understand how many queen chickens were being affected by the avian bird flu. You know, it was that type of research, just getting such great primary data and investing in things that they had only the most granular data in. And that, to me, is a great portfolio manager. A great portfolio manager these days, you know, cannot sit behind a Bloomberg and understand what his portfolio is doing. You really had to get in there, had another portfolio manager. He was an expert in the battery space.

• 15:51Speaker 01

  He would go to China and translating headset while BYD was presenting because his company in the US that was a battery company was literally about to announce earnings the following weeks. He wanted to understand in Chinese, but literally in person and go meet management and sit there with a headset. And understand what the dynamics were in China. So before it hit the US market for earnings, he would know how to hedge it and what to do. And those were the kind of guys you were looking for. This is like above and way and beyond what any other.

• 16:19David Weisburd?

  It's analogous to the high-frequency traders that shut up the stops across from the exchange, trying to get that data. Point one second, but this one was doing it through a translator.

• 16:30Speaker 01

  And at the end of the day, it all came down to fundamental research. And a lot of these guys were really, you know, some of them were just way above the crowd in terms of understanding their companies.

• 16:40David Weisburd?

  What were some mistakes that you made around portfolio managers that looked like they could be really good and ended up being poor choices?

• 16:47Speaker 01

  We had one guy that was doing commodities and he was rolling contracts and commodities. And it was kind of a year based on buying contracts on oil. And he ended up just losing so much premium rolling these contracts that his strategy went from being able to deliver, call it 10 to 12% annually, pretty consistently, to really only delivering 1 to 2% because he was losing so much in the role of the yield in oil contracts. And so his numbers looked great, but when the market changed and volatility got a lot more expensive, the premium he was paying was prohibitive and he was just not able to make money. So when market factors change, a lot of you have to really look, well, how do you actually make money?

• 17:28Speaker 01

  And what market factor is really driving your returns, right? And for him, it was a premium of volatility. And when you're selling volatility or buying volatility, the cost of volatility is going to affect your returns significantly. And so that's one thing that he thought he was going to be, he said, look, it's not a problem. I know how to adjust to this, but he was never able to adjust to it. So he didn't lose money, but he didn't make any money either.

• 17:52David Weisburd?

  What do you find in terms of clear thinking and the ability to sell a simple story? Is that positively correlated to returns? Or does that mean that somebody's on a strategy that's pretty commoditized?

• 18:04Speaker 01

  If you look at the top guys, right, it's very rare that you find one guy that's doing one thing very well without a great team behind him, right? Most of these guys have...

• 18:14David Weisburd?

  That's what Ken Griffin will say. He'll say Citadel, his number one skill is actually recruiting.

• 18:19Speaker 01

  Absolutely, because the guy that's really good at industrials, right? Or really good at, you know, some subset of industrials, has really generally two to three great analysts with him. He's got two research guys, he's got a data scientist. It's very difficult to be good without a team around you, and that's why it's become so hard to launch these individual hedge funds, right? Because they require so much data, so much risk, so much technology, so much talent to really do it properly, that you as one person, it's impossible, right? And so these guys really have to develop a real infrastructure around them to deliver market beating returns, and it really comes down to that. And that's why a lot of these guys end up at major pods, is because they'd rather have the capital, the infrastructure, and the team at these pods, rather than go out and

• 19:03Speaker 01

  try to build it on their own, and have to raise the money, and deal with LPs, and all the rest of the headache.

• 19:08David Weisburd?

  Given the current regulatory climate, and hedge funds getting more and more complicated from a compliance standpoint, what is the true minimum viable size for a hedge fund today?

• 19:17Speaker 01

  I mean, I've seen hedge funds launch at, you know, 100, 200, then it was 500. I really think it's a billion now. Problem is, is that you're trying to attract people from other funds, and generally when you're attracting people from other funds, and you're trying to attract senior investors, the issue is, is there's got to be enough carry to go around. So if the main PM is getting, call it 40%, right, of $300 million, and the fund is flattish, and there's only management fees to feed the team, you really don't have a lot to work with. Yes, because they know they're not going to make any money, right? So they basically aren't leaving anything on the table, right? I saw a really surprising move the other day, where I saw a pretty senior hedge fund

• 19:57Speaker 01

  PM go to a large secondaries fund, right, in the private markets. He was a technology investor, a multi-billion dollar fund, and I think these guys are realizing, look, it's difficult right now. When indexes are ripping, when technology in the NASDAQ is... Up 25, 30% and you're going to your investors and saying, hey, guys, we have this short book. We're 25% hedged and a lot of it's index hedges and a lot of it's just not attributable to to real shorts because there just isn't a lot of good shorts out there. Investors start questioning, what am I paying you for? I'm paying you two and 20 plus expenses, plus pass through, plus all this and you're, you know, giving me returns that are 60% below the NASDAQ.

• 20:39Speaker 01

  What is this all about? So that's why a lot of investors have gone passive into ETFs and are just saying, look, hedge funds just aren't worth it. The alpha is just not there like it used to be. There used to be a lot of seams and there was a lot more accounting fraud. There was these big world calm, there was Tyco, there was, you know, every year there was like these big blowups, right? And hedge funds would just clean up on these things. Regular regulation has gotten more stricter and obviously and much more and compliance is so much more of an issue in terms of audits and all of this, you're just seeing less of that, right? And you're just seeing that shorts are just much harder to find on an individual basis. And so for a regular, true hedge fund, where's the short alpha? It's hard for them to prove where it is because it's just non-existent.

• 21:23David Weisburd?

  When you're pulling these, you know, genius level quants and portfolio managers, how much of the time are they leaving for primarily economic reasons versus cultural reasons? They hate their boss or other less rational reasons?

• 21:38Speaker 01

  You know what? We see a lot of different things. I would say one of them is, at some of these firms, it's very, very difficult to work there, right? Because single move you make.

• 21:47David Weisburd?

  Is that a feature or?

• 21:49Speaker 01

  I think it's a feature and I think, you know, it's funny because I talked to a lot of LPs as well and they're like, that's great. I love that they get rid of guys really quickly, you know? This guy, you know, he's not performing, so he's out.

• 22:00David Weisburd?

  I think turnover rate across the board is the most silly metric for a successful startup. I think a successful startup should have somewhere, should not have, you know, 100% retention rate. I think that's a, that's a sign that it's too.

• 22:13Speaker 01

  Yeah, that's right. That's right. And I think a lot, you know, investors are saying, be strict, you know, pull the trigger when you see that something's not working.

• 22:19David Weisburd?

  Standards.

• 22:20Speaker 01

  Now, you know, but when you're the portfolio manager, right? And I know an example, a friend of mine was at one of the multi-manager firms and he says, if I, and he was a billion dollar industrials portfolio, says if I went to the bathroom and they saw one thing in my portfolio, it was already hedged and they would close me out of, you know, 60, 70% of my positions. Right? So that's how tightly this is being controlled, right? And if you got one thing wrong, you know, that developed your returns from being 3% down to, you know, 2.7, you know, that's, that's a factor to get fired. And so it's a, it's a really cutthroat world. So a lot of guys are saying, look, from a lifestyle perspective, this is a lot of pressure. Um, this is a tough way to live. And so they, they decide to want to go out and

• 23:04David Weisburd?

  And I think people will, will live in that tough way while they're in there. And the moment the money goes away, they're like, why am I doing?

• 23:10Speaker 01

  But you are seeing a lot of spin outs now, you know, because once they build that reputation, the track record and the, you know, the, the celebrity around what they're it's a lot easier to go out and raise, not 1 billion, but you know, 5 billion.

• 23:22David Weisburd?

  I have a big thesis on spin outs and I think spin outs will continuously produce a lot of really interesting opportunities. And a lot of people say, well, what about consolidation? And when will spin outs stop stopping a thing? And most people don't realize spin outs are an arbitrage between talent and economics. So you might be at firm, the top talent, the top two PMs might have 90%. Maybe they founded the firm. In some cases, they're providing 90% of the value or 90% of the alpha. In most cases, they are not. So the question is, how uneconomic could it be before the top talent decides to move out? Or how much money do they need for cushion in order to, to have the comfort to spin out?

• 24:01Speaker 01

  It is the age old question. And I think, uh, you know, you're dealing with some massive egos. I just had a firm the other day. It's a $3 billion technology hedge fund on the West Coast. And, uh, one of their main, uh, producers since they launched in 2018 was let go. He was a significant partner in the firm, uh, the main partner let him go. He had, you know, gotten a couple of ideas wrong. Uh, he always wanted to get paid pretty much the same as the founder and they pushed him out. Kind of that cutthroat. Now, he obviously made a lot of money during the last five years. Uh, but you know, this was an example where, you know, they were up 50% in 2020. Um, the Nasdaq was up 50%. They all took home several hundred million dollars and investors were like, well, gee, that's great, but I didn't even beat the Nasdaq.

• 24:47David Weisburd?

  Yeah.

• 24:47Speaker 01

  That's what investors are, you know, kind of pushing.

• 24:50David Weisburd?

  Hey, look, you had to diligence a lot of portfolio managers. They may have had egomaniacs at the firm. How did you go about referencing? Do you all, did you ever give them both benefit of the doubt? Or did we say, you know, if the previous firm didn't like the manager, there's probably something wrong with them?

• 25:05Speaker 01

  You know, it's pretty interesting. We would back channel a lot and I think back channel is always the best. The references they give are not the ones that you want to speak. Yeah, it's the off list, right? It's LinkedIn. It's asking people at the firm. And one guy, he was ultra successful, was running $3 billion at one of the big multi-manager firms. I mean, the guy was a rock star and he just said, every single person we spoke to, he is the biggest jerk in the world to work for. And if he comes to your firm, he's going to ruin your culture. And, you know, so you can have everything look perfect on paper. He even interviewed well. And he was very charming in the interview, but then when people are like, literally, there was a rumor that he like tried to stick a pencil through one guy's hand. Because he was so upset that he got something wrong.

• 25:48Speaker 01

  And so, you know, you have these stories and you're like, oh my God, you would never know that if you just called standard references.

• 25:54David Weisburd?

  Thank God for references. So tell me about Next Round Capital. What do you guys currently do? And what's the future for Next Round?

• 26:01Speaker 01

  Yeah. So we're really, you know, we're very, very busy right now. Let's say 50% of what we do is on the secondary side. The other, you know, call it 40% is on co-investments and then 10% is, is really kind of very niche. Sometimes even credit oriented or ideas that we get, that we work on and that we'll invest in ourselves. So, you know, on the co-invest side, a lot of it's technology, a lot of it's AI. We're working on a data center deal that we're launching in a few weeks.

• 26:26David Weisburd?

  And here you're like following Andreessen's doing the round, you're co-investing alongside.

• 26:30Speaker 01

  Yeah. I mean, either, you know, Andreessen's doing the round or somebody that we've been, been introduced to. Again, there's a lot of connectivity between, you know, you know, the, the, the network that we built in Silicon Valley. And some of the rounds that we, that we participated in. One example is Drizly, which got, they had, you know, a group of executives that just. And, uh, you know, and the guys that built the whole logistics network around that just left and started a new startup. And I was extremely interested in what they're doing. And so we're going to invest in, in that. And so, you know, we get these ideas and some of them are great. Some of them are, hey, this guy's got this great new AI idea. And he's using very differentiated sources and asking, well, what's that source? He says, well, Wikipedia. And I said, well, Wikipedia is really a source for, you know, XAI and OpenAI and Anthropic.

• 27:15Speaker 01

  So why is it unique? Well, we can scrape it, you know, a lot more efficiently than they do. And so you have to start to wonder like, you know, what's really the edge here, right? Because everybody right now is really, you know, we're in the days right now of the Netscape browser, the AOL, Lycos, when, you know, everybody sort of was trying to build the technology and these companies and everyone was just pouring money into each technology. If you think about it, that's where AI is right now. It's really a money loser. And the technology is just being built to make it the most efficient. The next wave of this is going to be the monetization. How do you make money from it? Right? And it really wasn't until Google figured out how to make money from search. The search really took off and that's really when the internet and e-commerce took off is really because you were able to search.

• 27:57Speaker 01

  And you would see ads and they were able to make money from search. And so that's where we are today because the only way you make money right now. Is OpenAI is saying, hey, pay $21.99 for OpenAI plus. Great. That's not going to create a massive business, right? While you're still losing $8 billion. So until the enterprise side is figure out. How you can charge companies a lot of money to, to use your service. That's when AI will become really, really valuable. Today it's valuable because we've discovered the technology. But it's just going to so much more money lost and VC money burned. During this period while everybody figures out, okay, so what's the business model, right? How does this actually generate a lot of revenue? And how do you actually get profit margins out of it? Right? I, I, you know, made a comparison yesterday, Tesla versus Ford.

• 28:41Speaker 01

  Um, you know, Tesla in 2010 was worth, uh, you know, a billion dollars. Uh, Ford was worth $44 billion. Today Tesla is worth a trillion. Ford is worth 56 billion. Right? Why? But Tesla's not the only one EV, uh, EV maker out there. There's Lucid, there's Rivian. Well, Tesla figured out a way to make each car profitable. So Tesla makes $9,000 per vehicle, 9,200. So it's profitable unit economics. Rivian loses $37 per vehicle. And Lucid loses $137,000 per vehicle. So it can be a great idea, but it's the business model. Because Elon integrated production. He integrated acquisition and streamlined the manufacturing process. He created giga factories.

• 29:26Speaker 01

  He did things that he knew would, would create a business and that he could make money from it. Right? So futures just went bankrupt. Because it's all a great idea and that's where we are today in AI. It's a great idea. It's going to revolutionize everything. But the problem is, is people have to figure out the business model first. So it survives. At the end of the day, investors are going to one day wake up and say, I'm no longer going to fund these losses. And that's where the rubber is going to meet the road.

• 29:52David Weisburd?

  What would you like our listeners to know about you, about Next Round Capital, or anything else you'd like to share?

• 29:56Speaker 01

  You know, just have a lot of fun with what we're doing. We're always, you know, looking to see what's next, obviously, in the name. And we're really excited about what's coming in the future. I got to tell you, when I started the business in 2020, just a few months before I launched, my brother had been diagnosed with pancreatic cancer. And so for me, it was always a goal to have my own firm, nameplate on the door. We brought him to treatments around the world, trying to really see what we could do for him. And unfortunately, he passed away in 2020. And that's where I really felt like life is, you know, you got to take the opportunities that you see now. Because it can all end in a flash. And that really taught me that life is very fragile. And, you know, thank every day that we're here and, you know, enjoying what we do.

• 30:38David Weisburd?

  Absolutely. Well, we've known each other since 2016. We partnered together on DraftKings and it's been great to partner together and look forward to continuing the conversation.

• 30:46Speaker 01

  Great. Thanks for having me, David.

• 30:48David Weisburd?

  Thanks, Ken.

• 30:48Speaker 01

  Take care.