Eric Vishria - A Decade of Lessons Investing in Software & Hardware - [Invest Like the Best, EP.486]

My guest today is Eric Vishria, a General Partner at Benchmark. Eric has spent his career in software and cloud, and few people know the history of these markets as well as he does. What makes him special is his ability to use that history to make sense of today. We discuss what the rise of AWS teaches us about AI, what he has learned from investing in Fireworks, Sierra, and Cerebras, and how the criteria for winning have changed for founders and investors. Please enjoy my conversation with Eric Vishria. For the full show notes, transcript, and links to mentioned content, check out the episode page ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠here⁠⁠⁠⁠⁠. ----- Become a Colossus member to get our quarterly print magazine and private audio experience, including exclusive profiles and early access to select episodes. Subscribe at ⁠colossus.com/subscribe⁠. ----- ⁠Ramp’s⁠ mission is to help companies manage their spend in a way that reduces expenses and frees up time for teams to work on more valuable projects. Go to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠ramp.com/invest⁠⁠ to sign up for free and get a $250 welcome bonus. ----- Trusted by thousands of businesses, ⁠Vanta⁠ continuously monitors your security posture and streamlines audits so you can win enterprise deals and build customer trust without the traditional overhead. Invest Like the Best listeners get a special offer of $1,000 off Vanta when you go to ⁠vanta.com/invest⁠. ----- WorkOS⁠ is the infrastructure B2B and AI-native companies use to sell to enterprise. It covers everything enterprise security requires: SSO, SCIM, RBAC, Audit Logs, AI governance, and more. Trusted by 2,000+ fast-growing companies, including OpenAI, Anthropic, Cursor, and Vercel. ----- Rogo is the AI platform for finance. They're building agents for Wall Street that are trained to understand how bankers and investors actually do work: from diligence and modeling, to turning analysis into deliverables. To learn more, visit rogo.ai/invest. ----- ⁠Ridgeline⁠ has built a complete, real-time, modern operating system for investment managers. It handles trading, portfolio management, compliance, customer reporting, and much more through an all-in-one real-time cloud platform. Visit⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ridgeline.ai⁠. ----- Editing and post-production work for this episode was provided by The Podcast Consultant. Timestamps: (00:00:00) Welcome to Invest Like The Best (00:02:20) Learning the World Through Fireworks (00:05:42) AWS Was Going to Eat Everything (00:07:40) The Zero-Sum Thinking Trap (00:09:01) Comparing Cloud and AI Adoption (00:11:03) Becoming Enterprise's AI Sherpa (00:13:05) Building Sandcastles (00:14:55) The Return to Being Technical (00:17:13) The Shifting Competitive Frontier (00:22:10) Why the Old Playbook Fails (00:27:53) Energy as the Binding Constraint (00:29:38) The Cerebras Story (00:37:57) The Virtue of Productive Naivete (00:39:19) What Robotics Still Needs (00:45:58) What Makes a Great Board Partner (00:51:13) Raising A Growth Fund (00:55:39) What the Big Winners Taught Him (00:57:37) Hard Work Versus the Hole-in-One (00:58:38) The Best Reasons to Go Public (01:01:09) Debates Inside Benchmark (01:02:16) What If It All Works (01:03:35) What Geoff Hinton Got Wrong

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

• 0:01Patrick O'Shaughnessy?

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• 0:42Patrick O'Shaughnessy?

  draft SIMs, run buyer outreach, and do diligence on data rooms, all with full security and compliance handled. Every action feeds Rogo Intelligence, the firm's context layer, turning years of deal experience into a secure, governed, institutional memory that makes each new transaction stronger than the last. To learn more, visit rogo.com/invest. OpenAI, Cursor, Anthy, and Vercel all have something in common. They all use WorkOS. To achieve enterprise adoption at scale, you have to deliver on core capabilities like SSO, SCIM, RBAC, and audit logs. Instead of spending months building these mission-critical capabilities yourself, you can just use WorkOS APIs to gain all of them on day zero. Visit workos.com to get started.

• 1:30Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper, check out Colossus, our quarterly publication with in-depth profiles of the people shaping business and investing. You can find Colossus, along with all of our podcasts, at colossus.com.

• 1:54Speaker 01

  Patrick O'Neal is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc.

• 2:22Patrick O'Shaughnessy?

  I love asking you and all your partners this every time we hang out, which is, okay, you've got these singular investments. You don't do that many of investments each per year. And then the ones that go on to work, so far, Sierra and Fireworks certainly are. You get to learn so much about the world through the lens of the company. So I'd actually love to do both of those, maybe starting with Fireworks. What do you know, or what have you learned about the world and how it's reordering itself, based on watching the world through the lens of Fireworks, that would maybe be surprising or interesting?

• 2:51Speaker 02

  One really interesting thing is, these models are big. These are 2 trillion, 3 trillion, 4 trillion parameter models. It turns out, running those models is damn hard. And running them efficiently is like, super hard. The way to see this, and everybody can see this, which is, everybody from AWS to Azure to GCP to the Neo clouds to the fireworks-based ten togethers of the world, like all of them, they all run these stock, open-source models that are available in their developer pools and everything else. And that's what it is. The performance difference for a Fireworks versus a cloud provider

• 3:35Speaker 02

  is like 5X. And that is just the speed performance. Then you add on top of that throughput, which is not visible externally, that's only visible if you know the economics of these businesses. And you're like, wait a minute, this is the same open-source model with the same Nvidia hardware, and there's a 5X performance difference and a multiple X throughput difference? And the way to just simply understand that is, these companies are paying the margins of the cloud providers, and running on top, and making money. How can that be? My big takeaway on it was, wow, this stuff is actually really hard to run. It's just really hard to run. And there's a lot of expertise involved in doing that. And it's this very specific expertise that exists. And it is the kind of thing that, when you

• 4:20Speaker 02

  look at it as an investor from the outside, and we should talk about early days of AWS, but when you look at it from the outside, it's like, this is a commodity. This is just this like, pass-through resale.

• 4:29Patrick O'Shaughnessy?

  Scale game.

• 4:30Speaker 02

  Yeah, scale game, like, whatever. And you're like, oh, wait a minute. No, it turns out it isn't. It isn't at all.

• 4:35Patrick O'Shaughnessy?

  Do you think that's just a moment-in-time thing? And I'd love to just hear you riff on like, cloud. You watch cloud very carefully and closely. You know a lot about it. And the adoption curve there versus how people use these things, and the nature of those two businesses in comparison. It's tempting to say, there will be one or two scale winners, like there typically have been in the commodity market.

• 4:52Speaker 02

  Totally.

• 4:53Patrick O'Shaughnessy?

  Where cost to serve is everything, and scale drives cost to serve down, and like, that's the whole story.

• 4:57Speaker 02

  I think the AWS example is so good. Okay, so 2006, you have S3 and EC2 Watch, right? Their compute platform and their storage platform is the first two AWS offerings in 2006. And you kind of start talking about it in late 2006, or whatever. 2006, 2007, I think the 2007 annual letter, Bezos talks a lot about AWS and why it's important, why it's interesting, and everything else. And the investor reaction is just not good. I think if you put 30 of the smartest investors at that time in a room, and asked them, what's the probability that this AWS business is a good business with durable, long-term margins, and like, super interesting, and everything not commodity? I think you would have gone zero for 30, with really smart people that you and I know, who were around at that time

• 5:42Speaker 02

  in '07. Fast forward from '07 to 2014. I joined the venture business in 2014. And a really common narrative in 2014 was, oh my God, AWS is going to eat everything. There's no enterprise opportunity left. It's going to eat databases and infrastructure, but it's going to eat the apps too. And they're going to offer it the cheapest and best. And we all have these like, amazing SaaS and software businesses that we were involved with, or investors. And part of the reason people loved them was they were annuities, and they ran at 85% gross margins, and everything else. And so it was just like, oh my God, AWS, Amazon can offer things at 8% gross margin, and like, they're just going to crush their margins.

• 6:20Patrick O'Shaughnessy?

  My opportunity.

• 6:21Speaker 02

  Yeah, your margin, my opportunity, like, the whole thing, whole narrative. And think about from like, 2014 to now, in enterprise, of course, you have Snowflake, direct competitor to Amazon Redshift, ran on Amazon. You're out Amazoning Amazon on Amazon. But it's not just Snowflake. You had Confluent, and Elastic, and Mongo, Databricks, all of these companies, amazing. That's the infrastructure layer. Then you have the whole app layer. In the app layer, think about offerings that they offered at the beginning. Datadock, $100 billion company today. They had a competitive offer, and they did it. And of course, there was tons and tons of roadkill. There was tons of roadkill. They did run over a bunch

• 7:03Speaker 02

  of stuff. But even then, in 2014, the thesis was, the view that AWS was going to eat everything was massively wrong, not because of all the examples I just mentioned. It was massively wrong, because Azure and GCP were irrelevant then. And fast forward to 2026, and they're unbelievable businesses. Is AWS the biggest? I think it's like a 40, 30, 20 split. You ended up with an oligopoly of that. And even outside of those big three, you have Cloudflare, which is a cloud provider in a different sort, which is another $100 billion company. So you have these smaller players that emerge as $100 billion companies outside of it. So what's the takeaway? The takeaway to me is, oh, there's just a bunch of zero-sum thinking, and not realizing like, how big...

• 7:48Patrick O'Shaughnessy?

  What if it all works?

• 7:49Speaker 02

  What if it all works? It all worked. And of course, getting the relative winner right matters, and there was roadkill. And so it's, all those things still matters. I'm not saying spray and pray. I'm not saying that at all. But I'm just saying, the market was so big, that one vendor could not scale and consume it all. And they just couldn't consume the whole industry. It's different now, and like, all these things. But just that whole notion right now, with what you and I are seeing in AI, sure feels like it rhymes.

• 8:18Patrick O'Shaughnessy?

  Entropics is going to do everything.

• 8:20Speaker 02

  Right. Really? Is that really right? To me, that view that it's just like, oh, this one company is going to eat it all, doesn't hold. And I would tell you, that scaling, while cloud scaled very quickly, cloud did not scale anywhere close to as quick as what's happening right now. For that company to actually scale and deliver it, scaling in this case requires a ton of infrastructure buildup, from energy, power, shell, chips, memory, obviously, the algorithms, and everything else on top. It feels to me like we're going to end up with an oligopoly of winners. I really believe they will be these like, $100 billion crazy, smaller winners. Just feels like the same thing is kind of happening.

• 9:03Patrick O'Shaughnessy?

  Can you talk about it also from the demand side, and compare it to how you watched cloud get adopted in enterprise versus how you're seeing AI get adopted now?

• 9:11Speaker 02

  So if you go back to like, 2010, 2011, now you're like, three, four years into AWS being offering. Enterprises were super skeptical. Traditional enterprise, blue-chip enterprise. You had digital natives out here. You had new companies forming that were using the cloud. I think kind of famously, Snapchat was built on GCP. And I think at one point in this era, maybe 2012, 2013, 2014, Snapchat was like, 40% of GCP. Those kinds of things were happening.

• 9:41Patrick O'Shaughnessy?

  That's like Cursor being 30% of all these things.

• 9:44Speaker 02

  100%. Same exact thing happened?

• 9:45Patrick O'Shaughnessy?

  Yeah.

• 9:46Speaker 02

  Same exact thing happened. Enterprises were very skeptical, I think, of cloud, until by 2014, 2015, 2016, it's like, oh, yeah, yeah. Then I think, the big banks, and financial services, and insurance companies, and more conservative blue-chip enterprise were like, oh, wait a minute, this is actually different, and we're going to have to pay attention. And it became an issue in recruiting for them, because they couldn't get the best developers, because the best developers wanted to work on the easiest platforms, and all of these kinds of things happened. So the difference now feels profound to me, because while it is 100% the case that blue-chip enterprise AI is not well-absorbed and well-adopted, and not the same thing as going to Cursor, and walking the halls of Cursor, versus walking

• 10:28Speaker 02

  the halls of a big New York financial services firm, in terms of their AI use, they want it. They want to figure it out. They're running experiments. They are spending against it. They're trying to figure it out, talking about it. They're not being dismissive about it. And I think, they view it probably as more of an opportunity than they did the cloud, in terms of the potential impact on their business. I think they probably view it more as a threat than they did the cloud. And maybe they just also learned lessons from the cloud, in terms of what's possible here. I feel that they will continue to try to figure it out and absorb it. Having said all that, I do think one of the more interesting things, if you go from Silicon Valley

• 11:11Speaker 02

  out into the world and talk to these companies, these enterprise companies, and you realize what the pace of adoption is and what the barriers to adoption are and everything else, there's a ton of opportunity to help the enterprises get there. To be one of the things that I tell the companies I work on is, hey, let's be their AI Sherpa. If we're in that position to be their AI Sherpa, where we're crossing both worlds, that's very valuable, and I think that'll continue to work.

• 11:38Patrick O'Shaughnessy?

  What is Sierra teaching you about the adoption of this stuff? It's really interesting contrast to Fireworks, where Fireworks is the sort of infrastructure provider. Sierra is feeling its way through what are really cool things that we can do for end consumers, enable companies to do for end consumers, starting with customer service, but I know with Horizon now going beyond that. Again, same question as for Fireworks. What do you know that the world doesn't fully appreciate because of how you've seen that?

• 12:02Speaker 02

  My partner, Peter and Brett, I think this is their third company working together. So it's like a 20-year relationship, which is just like an amazing and great place to start. And one of the things that I think makes Brett so special and the team is they're technologists, but they actually have like lived in enterprise world for a long time and really understand it and everything else. And I think actually he's personified this whole idea of, hey, let's be their AI Sherpa. Let's start with customer service, we're very unamenable, and like be their AI Sherpa. And now we have these long-running agents with Horizon that can do more and more stuff. And one of the things that I think is most interesting about this to me is, yes, it's an application company on the surface, but they're doing real AI work. And they're experimenting with models and they're building agents.

• 12:47Speaker 02

  And they're very close to the metal of the models and the capability and the harnesses. And they're understanding the jagged edge of AI capabilities, which is very different than the human smooth arc that we understand intuitively. They understand that jagged edge of capability and they build around it. You saw the evolution of Cursor from IDE to like tab autocomplete to agentic work over and over and over again. They were obsoleting their work from six months ago. And it's what Brett Taylor calls like sandcastles. We used to be building castles, now we're building sandcastles that are getting washed away. And that's if you don't think software that way. Yeah, you have to embrace it. Because if you were an artisan and you were like, hey, I built this perfect foundation of castle,

• 13:32Speaker 02

  and there's the bricks and it was like perfect, and I really care about this and it's going to be here for 100 years, you're just not going to make it. So as you get emergent new properties in the models, which is, you know, every four weeks, you get new capabilities, they understand that jagged edge, they understand that application of that jagged edge or that valley to their customer base. They're filling in those gaps and translating it. You can't just be superficially applying things. I think it's actually a complete inversion of how product development used to work to how product development happens now. And product development, you'd also say like, hey, product manager, you're trained. Product manager should understand the technology, but like really shouldn't be thinking about implementation and shouldn't be specifying implementation, shouldn't be doing this and doing that.

• 14:16Speaker 02

  And the product manager's job is to really understand the customer and translate that problem to the engineer so that the engineers build a solution like that was traditional product management. Good luck doing that now. That's a horrible way to do it. You can't do it that way. You actually really need to understand the nuances of model capabilities, what they're great at and where they fail. And you need to understand the customer problem and put those together and bridge those gaps to build valuable solutions. I think that's one of the things that Michael and team at Cursor did so well from the very beginning is they really understood the jagged capability and built a product that allowed that translation from developer to that jagged capability and kept on iterating on that as the edge changed.

• 14:57Patrick O'Shaughnessy?

  It's kind of ironic that all that sounds like the returns to being technical are going up, even as models supposedly are taking away technical edge.

• 15:05Speaker 02

  Well, I think there's two things.

• 15:07Patrick O'Shaughnessy?

  Cut under.

• 15:08Speaker 02

  Yeah, 100%. And actually, I think there's this weird thing where there was this whole discussion about the traditional roles of product manager and designer and engineer, whatever it is. I think what there really are are people who understand customer problems, people who have taste, and people who understand the jagged edge of AI capabilities and are curious about it. Those are the three things.

• 15:29Patrick O'Shaughnessy?

  If you've got those three, you're going to do well.

• 15:31Speaker 02

  If you have those three things, you're going to do great. And it doesn't really matter if you are an engineer or a product manager or a designer. But if you have taste and understanding of customer problems and understanding the jagged edge, you're going to do well.

• 15:47Patrick O'Shaughnessy?

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• 16:31Patrick O'Shaughnessy?

  because of how far ahead RidgeLine's AI features are compared to anything else in investment management software. I've been hearing from a lot of investment managers about AI, and they fall roughly into two camps, with some unsure where to even start and others convinced that they can build their own order management system over a weekend. The reality is that running an investment firm will always require governance, controls, and a single source of truth for your data. And no amount of AI enthusiasm changes that requirement. RidgeLine is built on exactly that foundation, which is why I believe that the firms that come out ahead in the AI era will be the ones running on RidgeLine's unified platform. If you're serious about your firm's AI strategy, RidgeLine should be part of that conversation, and you can request a demo at ridgeline.ai.

• 17:15Patrick O'Shaughnessy?

  When we first did this so many years ago now, it's just crazy. It'd be fun to revisit some of the ideas that we talked about the first time with SaaS. But you use this term that I've used ever since, which you call it the competitive frontier, meaning like the things that will determine the winners and the losers. My partner, Bree, has this great idea that stuck in my head, which is that everything is a jump ball right now. I'm really curious, in addition to this idea of sandcastles versus real castles, what else you're seeing amongst the people that are becoming competitive winners? Are the traits different for winners now, personality-wise or business strategy-wise or business model-wise versus what you learned in the SaaS era?

• 17:49Speaker 02

  I'm very dismissive of this idea that people are going to vibe code their own shit and whatever. That isn't the issue at all at SaaS companies. The issue at SaaS companies is the competitive frontier completely shifted and everything they thought they were building against and it would make them win are not what's going to make them win. Let's take databases. Databases have been a phenomenal area for software for a long, long time. Great margins, why? You had app developers that would build against these specific database interfaces that existed for that database. You would have more and more data over time. Migrating an app from one database to another database was a giant project that was like very, very difficult to do. So these were unbelievably sticky businesses that you could generate a ton of margin in, right?

• 18:34Speaker 02

  Of course, you got Oracle and SQL Server and like, and a whole slew of smaller players like that did really, really well in databases. Well, let's think about that in the context of AI. Now, you don't have a developer building against the database interface. You have Claude or Codex building against the database interface, one. Two, the beauty of database interfaces is they're very, very well specified. Well, it turns out AI is very good, very good at things that are very, very well specified. Three, agents don't get tired of monotonous work of translating one specification to another. So it turns out that now all of a sudden, database migration, which used to be the like number one thing you would not do in software, is like kind of trivial.

• 19:17Patrick O'Shaughnessy?

  Yeah.

• 19:17Speaker 02

  Yeah, it's just like, yeah, put some money against it, move it. So what changed? Well, what changes is the criteria to be an amazing database company changed. It isn't that we don't need databases or that everyone's going to build their own database or whatever. That isn't what's going to happen. What's going to happen is the criteria changed. So now you're going to have a ton more applications that start, obviously, as we're seeing everywhere. People are going to experiment a lot more because it's much cheaper to experiment. It's much cheaper to start a new application. So now you need databases that scale from basically zero usage to if it works all the way through. Like that matters a lot more. Your cost matters a lot more. You want to be able to spin these things up, spin them

• 19:58Speaker 02

  down, tear them apart over and over again. So the iteration speed goes up in what you need on database. And ultimately, I think the cost becomes the arbiter of this. So the cost and then this zero to infinity scaling and transportability and everything else around that become like the arbiters of who wins and who doesn't. That's really different than, hey, I spec this database for our user thing and I procure a license and I ran it on this kind of hardware and everything else. There have been elements, of course, of these things over time, but I think that just criteria changed. And I think one of the big messages to these SaaS companies a few years ago was you have a choice. Get to AI or be worth three times revenue. That was a hard message to hear.

• 20:42Speaker 02

  You were just like, get to AI or three times revenue. Those are your choices. We say three times revenue now because a lot of these public SaaS companies are trading at six times or whatever. But keep in mind, in 21, they were going for 30 times. Like everybody, you're like, three times. Wow. I've grown 4X since then. This is a whole multiple compression is a bitch. Yeah. I've grown 4X. The multiple has gone down by a factor of six. So I'm worth less, even though I've grown 4X. Yeah. Few years. And gotten to break even and all these things. So like, that was the first message. But I think that even it became really visceral to me where you were in these meetings and you were like, hey, every single day that you are hitting your plan, you are destroying

• 21:21Speaker 02

  equity value. Think about that. Our whole careers, we learned you lay out a plan, you execute against it relentlessly and violently. You hit your plan or you exceed your plan and you keep on building that. And that's how you build equity value. That's what the whole management teams learned. That's what these CEOs learned, like pre-AI. This is like everything learned. And now you're going to hear just every day you hit that plan. You're fucking up. You're fucking up. You're destroying value. And the point of saying that to them was to set them free. Another articulation of this from my friend, Ann Lee Skates, was just the CEOs who were going through this transitory period and had a business that was at hundreds of millions. And they thought, you know, they're all ready. They were working on their business from

• 22:04Speaker 02

  8:00 AM to 5:00 PM and then trying to do AI from 5:00 to 8:00 in the evenings. And what they needed to be doing. The inverse. Was the inverse. Yeah. And it's so hard to do that because of all of the training and all of the muscle memory and all the inertia and everything that we learned about the hill that we were climbing. Like, we're all hill climbing in a way. The success model was set the plan, execute the plan, build value, compound value. And it's like, oh, no, no, no, stop that. You gotta completely invert. This is a very, very long way to get back to your question of what the profile or what the mentality of the winners are right now. But if we look at Brendan from Merkle or Lynn from Fireworks or Max or Brett, any of these

• 22:49Speaker 02

  people, they are so nimble about what the eval is. What are they optimizing against? They are so nimble on all of it. And if you look at every one of those companies, the evolution of the business, it's just the business is constantly evolving. And they've done such an excellent job at that. I think that is very, very different than the way I was taught.

• 23:15Patrick O'Shaughnessy?

  What's your sense of the disorienting nature of model progress? You're one step removed from that as an investor versus as a technical founder with your hands on the metal. Are we behaving differently than you would have three years ago or something because of the pace?

• 23:29Speaker 02

  Anytime that I'm talking to a founder about a problem in their company or what they're doing or move they're making or anything else, which is what I spend 80% of my day doing. I'm very, this is how we used to do it. This is what we would typically do. This would be the typical readout on this old school readout of why this candidate's better than this candidate. Let's reevaluate that in the context of today. Let's reevaluate that in the context of an unstable technology substrate. Let's reevaluate that in the context of a business model that's growing this way versus that way. I've really started to question every assumption and every lesson that I learned before, which of it translates and

• 24:11Speaker 02

  which of it doesn't. That's a huge difference. I'll give you a really concrete example, which has been very disruptive inside of these scaling AI companies. So these scaling AI companies, we've had a lot of leaders come from the prior generation with great experience and everything else come to these scaling AI companies and completely flame out. And you see it across the industry. And so the question is, why? These are some of the best leaders from four or five years ago. They had all the lessons. They learned it all. They're excellent. But somehow it's not translating. And there's some impedance mismatch between the AI founders potentially, the needs of the business and what these people are bringing. And I saw it really abruptly with a particular sales leader who

• 24:54Speaker 02

  we hired, who's like, hey, we can't hit any of these things because the way that software sales has been taught forever is a quota capacity model. You have a quota capacity model. Each rep does this. In the early days of a company, the quotas are 1.2, 1.5 million. Maybe the ISRs are at 750 or 850. And then over time, it scales up and enterprise gets to 2.5 million. And that's how all these financial models are built. You start with the quota capacity model. You take a discount on attainment. This is what we can do. Boom, boom, boom. Fundamentally, without realizing it, everybody was implementing something that was based on pushing demand, not pulling demand. And for so many of these companies,

• 25:36Speaker 02

  they're operating here, these customers, and there's a new AI-enabled product that comes along and it's just fucking magic. So these companies are selling magic. Well, it turns out if you're selling magic and you're the first one there.

• 25:49Patrick O'Shaughnessy?

  Sell a lot more than 2 million.

• 25:50Speaker 02

  You're gonna sell a lot more than 2 million. The whole notion of a quota capacity model and that being working, it's not that it doesn't matter. It matters kind of, but it's definitely not the first order thing or constraint. So you have these execs come over with this. It's like, here's our math and here's the territory assignment and here's what we would do. And first you do West Coast and then you do East Coast and then you do Central, like all of these things. Oh, wait, no, no, it doesn't work like that at all. One of my big things that I started to realize is last time interviewing these folks and talking to them is just like, hey, you need to check everything at the door. Check it all. Which is probably good practice anyway, but check all the baggage. Check everything that you learned and just learn this from first principles. How is it working? What are really the bottlenecks on delivery? What are the bottlenecks on demand? Because it

• 26:33Speaker 02

  turns out that in a lot of these companies, you have reps doing 10 or 20, 30 million.

• 26:39Patrick O'Shaughnessy?

  I saw 50 recently.

• 26:40Speaker 02

  It turns out that's different.

• 26:41Patrick O'Shaughnessy?

  What is like the best salesperson that you've seen that's doing it in a de novo way doing?

• 26:46Speaker 02

  Honestly, the best salesperson in any of these companies is a founder. And what they're doing is bridging the jagged edge to what the customer's capability is. And that's it. It sounds so simple, but it's not. But that's what they're doing. The market is just so big. Just like we were talking about with cloud, I think the biggest mistake everybody made was they just undersized the market. And it turns out the market's just really, really big. And this market is fair.

• 27:08Patrick O'Shaughnessy?

  It feels like right in this moment in time, actually just this morning, you and I are in this great group chat together where the discussion is the demand for intelligence seems kind of unlimited and it seems like the smarter the thing gets, the more demand there is. Maybe the bottleneck is just capital. The world just feels like it needs to take a breath. The RSI concept, if you apply it across technology, doesn't need to breathe. The agents don't get tired. But the world feels kind of like, oh, man, it sure would be nice to have three months just to like digest this a little bit. And for capital to form and evaluate its prospects and the scale is getting so big. Does it feel to you like this can just keep going? Or are we just going to get tapped out of money that can be invested in these things when it seems like we could consume like any amount

• 27:51Patrick O'Shaughnessy?

  of money to build any amount of stuff and serve any amount of inference?

• 27:55Speaker 02

  I'm not a macro economist. I am worried about energy. If you think about the models as translating compute into intelligence, quite simply, what do models do? They very effectively translate compute into intelligence. What's the demand for intelligence? Well, it seems like a lot. So then it follows that we will continue to have more and more demand on compute. I'm saying compute broadly, not chips, not storage, not whatever. But then like, what do we need for compute? We need energy. A lot of energy. There's all this topic of distillation and Chinese open source and all these things. But the bigger thing to me is that I think China's bringing on 10 times as much energy next year as we are

• 28:35Speaker 02

  in the US. If energy is what you need for compute and is the bottleneck and there's unlimited demand for intelligence, then it stands to reason that if we have a lot less energy. Then we will have a lot less intelligence or a lot less tokens or a lot more expensive tokens. If we have a lot more expensive tokens than supply and demand, you're going to end up with less. And that seems very bad. To me, I think the energy bottleneck, however that is, it'll manifest in 20 different ways. Gas turbines go up and down, natural gas get up and down and solar, whatever, all these different things, rare earths. That to me is probably more concerning.

• 29:16Speaker 02

  And if I'm thinking about it from a regulatory perspective or government perspective, and I think the administration is doing some things around this. Fostering investment and development of all energy, solar, nuclear, gas, like whatever, do it all. We should do it all and it'll work itself out. This is one of these things where, yes, one will be relatively better than the other. And I don't know, and I'm not smart enough to predict which one's which, but it'll all work.

• 29:40Patrick O'Shaughnessy?

  Speaking of compute, I would love to hear the Cerebras story. I haven't heard you tell the full version of this. The reason I'm asking about it is I'm deeply interested in compute. I have big investments in compute and I'm fascinated by it. It's just like the most magical thing to watch happen. It's mind boggling when you get close to one of these things, what humans have been able to do on these chips and in these systems. I think you invested in 2016 or thereabouts. I think it was your first foray into like extremely difficult hardware type investments.

• 30:08Speaker 02

  Shit, so hard.

• 30:08Patrick O'Shaughnessy?

  And now the world is full of opportunities like this, whereas back then it was a one off. Teach me everything you've learned about hardware investing through Cerebras.

• 30:18Speaker 02

  Mostly, it's really hard. It's an amazing example to me about the naivete required. The company came in 2016, it was five founders and a deck. I did not want to go to the pitch, but it's my job. Cause I'm like, why are we going to go to hardware investment like this crazy? Been 10 years since we'd made a semi investment. I think basically the team was excellent. And then the kind of first slide was just like GPUs actually suck for deep learning. They just happen to be a hundred times better than CPUs. You have to remember, this is pre transformer. OpenAI is this weird research lab at this time. Nvidia was worth like 40 billion, not four trillion. The TPU hadn't been announced, none of that.

• 30:59Speaker 02

  So this is early, but the whole idea, as soon as he said it, I was like, oh shit, of course, of course, like why? I had spent the last 18 months trying to figure out applications of deep learning and looking at the security thing and looking at this medical imaging thing and like all this other stuff. Thinking like, hey, there must be something here that's going to be really transformed by this stuff. Anyways, we go through this whole journey. We end up investing, which was amazing. We first met on Wednesday, partner meeting on Monday, had a bunch of meetings in between and just built a lot of conviction that this was a great swing. And I'll tell you what I understood and I really just understood so little. But basically there are three things that we know how to do to speed up deep learning and hardware still till this day.

• 31:41Speaker 02

  Increase the number of cores, increase the communication between cores, bring the memory closer to the computer. Those are the three things and that's it. Those are only three dimensions that we know in hardware. My articulation of what they said to me, honestly, all I understood was let's just take all three of those things to their logical maximum. You have a wafer scaled chip. At that time you would have 450,000 cores on it. You'd have something like 20 gig of SRAM on the chip. So you never have to go off chip to get to memory. And because they were all in the same wafer, the communication between cores is maximized. So this is the best you could do on that process. And I think for the first chip was seven nanometer or something. You're like, okay, that's it. That's what we do.

• 32:20Speaker 02

  And it turns out that in software, if you have that logical block diagram of like why it works and everything else, you're kind of 80% of the way there. And it's a matter of go to market execution. In hardware, you're like 2% of the way there. There's things like physics, entire supply chain of vendors. There's of course TSMC, which everyone knows, but it's not just TSMC. There's 30 other vendors that matter and putting all this stuff together and everything else. I didn't know any of that. Fast forward from 2016 to like 2019, I think they got their first parts back. You go through this like bring up and then it's like, bring up, oh yes, we got a part back. And then it's like, yeah, then you gotta go through like, wait, bring up. And there's like 14 steps of bring up and everything else.

• 33:03Speaker 02

  And then by like 2020, we had our like first thing that works. Then it's just this march of actually getting it to work. One of the lessons that I've learned on this stuff is basically you go through all these SIMs and everything else in hardware and semis in particular. That basically is your roof line. Best it's ever going to be is what that is. And then every bit of software and reality and compilers and internals takes away from that roof line. You might start at 10% of the roof line. Once you bring it up, these guys are grinding for months and years to like get closer and closer and closer to the roof line. It's really different and it's really hard. I'm astonishingly bullish.

• 33:45Speaker 02

  If I kind of rewind, part of the reason we made the investment was if you looked at the four prior generations of compute in my lifetime. So you had CPUs, you had graphics, the networking, the mobile. There was a new workload each time. So you had multipurpose compute and it led to the CPU. You had massive parallelism led to the graphics processor. Graphics processor offered massive parallelism, which led to graphics. Then with networking, you need really low latency chips. And so they had low latency chips. And then with mobile, you needed really power efficient chips. And in each case, we ended up with a new hundred billion dollar company. The first question going back to 2016 was, is AI that big a new workload?

• 34:26Speaker 02

  Because there've been many, many other attempts for specialized chips for other things that really just didn't end up mattering. There's some fine outcomes, but they just didn't really end up mattering.

• 34:34Patrick O'Shaughnessy?

  Et cetera.

• 34:35Speaker 02

  Right, exactly. And so it's just like, well, okay, well, you need something that's a really, really big workload. Okay. So that's one. We had a lot of conviction on that. And then two was the nature of the workload. Did it introduce a new constraint or problem in it? What I learned was basically the AI workload benefited from the parallelism of GPUs massively. But GPUs didn't solve the core to core communication, basically the layers of the network problem. You're like, okay, wait a minute, there is a new constraint, which is communications, communication bound problem. Then you're like, okay, is AI a new giant workload that is going to have specialized chips? Everything that I just said was the entire, everything I knew at that time. That's obviously played out.

• 35:18Speaker 02

  And in each prior generation, we got Intel, we got Nvidia, we got Broadcom, Avago, we got Qualcomm and ARM in each of these generations. And there will be these giant winners, standalone winners. Obviously the TPU itself is a winner, training is a winner. You've had Grok and Cerebras, etch. It'll keep getting fought out, but I think that wound up being big. And actually I think there's a new sixth one that's coming generation, which is, and I'm really excited. We've made an investment that's unannounced in this, but I think that for the first time in a long time, there's actually room for a new CPU approach.

• 35:54Speaker 02

  The thing that's happening right now, and you see this reflected in all the semi stocks and everything else is the LLMs, which are running on accelerators and GPUs, generate code. The code runs on CPUs. And right now it's running on classic CPUs we've had around forever. But there's a whole bunch of constraints on CPUs that have existed and CPUs have dragged all this baggage forward that you might not need to anymore. And so I'm actually really excited about that possibility.

• 36:24Patrick O'Shaughnessy?

  Next category.

• 36:25Speaker 02

  The next category.

• 36:25Patrick O'Shaughnessy?

  Does the experience with Cerebras make you want to do a lot more investing in companies?

• 36:31Speaker 02

  Fuck no.

• 36:32Patrick O'Shaughnessy?

  But why not?

• 36:33Speaker 02

  In 2019, we're sitting in a board meeting and this thing is melty. It's like fucking melty, okay? And we've raised $500 million or something. And it's like, wait, what? It's melting or burning or something and like we're looking at it and I'm like, holy shit. I realize like $500 million isn't that much in today's era, but I was just like, we're going to lose all this money. This is not going to work. And what that team did, insane. They're built differently and I have so much respect and thanks to them for what they've done. There are efforts that make you really proud to be a venture capitalist because you're funding something that makes a difference and matters.

• 37:12Speaker 02

  I'm an investor because that's a means to work with companies, not because I fundamentally love investing or something like that. I like working with companies. That's my favorite part of it. Working with teams like that and companies like that is so special on these giant ambitious efforts. And I said this well before 2018 or whatever, whether Cerebras worked or didn't, I think it was an effort that was worth venture capital. That was the kind of thing you should do. You should try to build something that people have tried for 50 years and have been unable to, but now we think we could do. And there's a reason and application for it and everything else. I love that. I do like those kinds of things, joking aside, and we do have a robotics company. And then this CPU project that we're talking about.

• 37:53Speaker 02

  I think these kinds of things are actually really fun and interesting and good use of venture capital, but they definitely aren't easy.

• 37:59Patrick O'Shaughnessy?

  The productive naivete that you described where it's probably a virtue that you didn't know more than you knew, otherwise you wouldn't have done it. This is certainly my experience with etch. Like in any of these fields, you ask experts, they're going to tell you, don't do it. It sucks, it's too hard, base rate is too low, young people can't do it, all the 47 reasons. Is there anywhere where that is just a bridge too far? That could be like bio or something like this, where you just are unwilling to invest if you're naive.

• 38:25Speaker 02

  You know what's so funny is the hard thing about investing is most of the time, all of these stereotypical statements are correct. They're not correct three times out of four. They're correct 19 times out of 20, maybe 99 times out of 100, like they are correct. The thing that Bruce, one of our founders always says, what could go right? We have to ask ourselves, what could go right? And do we see that path? Yeah. Young people can't build chips or you shouldn't do another semi company or you shouldn't do this or like whatever. All of that stuff is actually totally right, except when it isn't. Apparently there's a saying that someone said to one of my partners, which was if it doesn't work, it'll be for all of the reasons that your partner said. If it does work, it will be because those reasons didn't matter.

• 39:10Speaker 02

  It's just such a good example of this whole thing, which is, yeah, most of the time when we lay out the reasons that a company won't work, it's right. But then sometimes they just don't matter.

• 39:20Patrick O'Shaughnessy?

  You and I are both interested in robotics. It's not controversial that if robotics works, it might dwarf what we're currently living through. What do you think has to be true for it to work? Obviously it's exciting. I want a robot in my house following my laundry. It sounds great. It's kind of one of these classics. It's always 10 years away and it's been that way for a long time. What do you see happening? What has to happen for this to actually be a thing in the near to medium term?

• 39:45Speaker 02

  We've had classics robotics forever and they're all over the place and they're on assembly lines and manufacturing lines and all those things. Where you're doing repetitive tasks in controlled environments. Repetitive task in controlled environments is like more or less solved and like, you know, that'll continue to happen. But having tweaked tasks in real world environments, that's where you need the AI. That's where you need the AI plus the robots. The trick with it all is you need a model that can do that. Of course, the first problem is there is no internet scale data to bootstrap the whole thing, right? LLMs are all bootstrapped on the internet, which is a ton of human knowledge.

• 40:26Speaker 02

  And the equivalent for that for robots doesn't exist. And people are trying different things with videos and simulations and teleoperation. So like, there's a lot of different ways. But if you kind of think about, take teleop as an example, how much you need to telehop robots to get to an internet scale data. This first step is like getting a good set of data to bootstrap the model. One of the, I think, insights that you can have is with the internet, there's like a lot of slop data. Even before AI generated all this stuff, there was also a bunch of junk data. And some data was more valuable than others. Like you may value, okay, certain things on Reddit more valuable than other things.

• 41:10Speaker 02

  You might value Wikipedia more than like other forums. You might value GitHub more than other things. And all of the model companies did that, right? They prioritized data that was more valuable and less valuable and ran that through the model. I think one of the most interesting things that these AI robotics companies are doing are saying, okay, well, let's just go after the high value data to start. If we go after the high value data, then we can kind of bootstrap this model. Now, once you do that, then can you, through that pre-training process, get to a place where you can have very small auxiliary examples of data that you add in post-training and all of a sudden it works for that? That's the magic we have with LLMs is you have this giant pre-trained base

• 41:52Speaker 02

  and then you add a little magic on it in RL and post-training. And you teach it a new thing that it wasn't in the pre-training set and you kind of go from there. And I think the exact same thing is happening in robotics. We're investors in Sunday Robotics, which is going after this exact pipeline.

• 42:08Patrick O'Shaughnessy?

  It's a cool company.

• 42:08Speaker 02

  It's a cool company and they're doing household robots. But the key part before you get to household and all of that stuff matters much less actually, then can you get this training pipeline to work and how do you do that? And one of the lessons I learned and I look back, I try to learn from history because it doesn't repeat, but it rhymes. And if I look at autonomous vehicles as an example, which is they're robots, basically. They're AI plus robots. You look at Waymo and you look at Tesla. They were both designed vertically integrated in their own way. You have a Tesla, you have a fleet of Teslas that everybody owned. It was collecting data on the Teslas and it was used to train the models to drive the Teslas. The same thing with Waymo.

• 42:52Speaker 02

  I think part of the lessons is they gathered very, very high quality data. They did their pre-training and then they worked off of that. That was a simplification to allow you to get to a complete product or a complete solution, which of course is going to continue to improve and ultimately will generalize, I'm sure. It will generalize in some way. So you'll be able to strap it on any car and everything else. So I think the same thing is happening in robotics where you have companies like Sunday and others who are using techniques where they're vertically integrating the robot and the model, the data collection around the robot. Sunday uses gloves that are designed with the robot hands.

• 43:34Speaker 02

  So they're perfect. So you get very good data transferability from one to another. You do this pre-training and you have a great pre-training data set. You have a good model and then you start adding these examples in your RL and post-training on top and you get cool emergent behavior.

• 43:49Patrick O'Shaughnessy?

  Do you have a most visceral moment?

• 43:51Speaker 02

  When we invested in Sunday the first time, we saw them. Partner Peter arranged a demo. We went down into the basement at Stanford lab and they had like this totally janky cardboard glove thing. You see a few evolutions of it. The last time we saw a demo, we went down in the basement of their now office building and there was like a dozen robots just folding arbitrary laundry. It wasn't the demo, it was just trial and error. And then they have people like taking the clothes and then measuring them to make sure that they were folded properly and creating a rigorous baseline and evaluation criteria. And I was like, oh my God, this is happening.

• 44:30Patrick O'Shaughnessy?

  Do you ever worry about how to pick the right customer for these companies? Every one of these things folds laundry, which like, I don't think anyone likes folding laundry. So it seems like a good use case, but it feels like we don't actually understand the demand for what these things will be used to do. You're worried about that, that we're sort of building solutions that will then be in searches of problems?

• 44:51Speaker 02

  I don't, and I'll explain why, and it's certainly informed by watching the LLM evolution. Some of the people who were involved in the early LLM at OpenAI really understood that code was going to be important. And obviously, you know, the topic team had this perspective that you could get to RSI if you've got code generation going and automating AI research and whatnot. If you think about it, the first use cases were very much language oriented. They were very much essay writing and editing and marketing. Like, I think the first application that really took off was Jasper, which was just writing marketing copy. I think it's going to evolve a lot, basically. I think laundry is kind of a good task because it's arbitrary, it's complex. It requires dexterous manipulation.

• 45:36Speaker 02

  It isn't time sensitive. If it takes three times longer, so be it, who cares? It doesn't matter. Just let it run all day. So I think it has like some of those properties. I don't think the task is actually that important. What I think is much more important is are you pre-training an amazing model than being able to post-train on top of it and get that flywheel going? If you get that flywheel going, then the task capability will just keep multiplying.

• 46:00Patrick O'Shaughnessy?

  Maybe this question will be annoying or slightly uncomfortable for you, but if you ask basically every founder and critically other investors of your type, almost everyone, if I ask like, who's the best board partner, will say you. You come up way more often than anyone else that I've come across. And I'm curious why you think that is? What it is that you're doing that other people, the incentives are there to do a great job as a board partner. What do you think you're doing on the boards of these companies, partner with the founders, that's actually different from other really talented investors who are also nominally doing the same job, but don't come up nearly as often when asked that question?

• 46:39Speaker 02

  One of the things that I've realized is we each are attracted to different types of entrepreneurs where we have chemistry. I'm an investor second and I try to be a partner first. We'll see companies come in. We have one come in yesterday and it's what I would call an investment grade opportunity. You can invest, it probably works, you make money, it's good. And an investor would do that. A partner wouldn't because that's not sufficient for a partner. Unless you have real chemistry with that person where you feel like you're going to be able to work together really effectively and I'm going to learn a ton from them and they're going to learn something from me. Together, we're going to just feed each other's loops. Unless you feel that way, you can't be a partner. And so you pass on that.

• 47:23Speaker 02

  That's a really important like fit element to me. It kind of starts with this mutual selection, actually, weirdly. They want to partner with us and I want to partner with them. I'm really like looking forward to working with them together. And I'll give you a really good example of where this comes into play for me. If I take Saji and Benchling. Benchling is life sciences, SaaS, company's absolutely crushed, done really, really well. And then of course you have this biotech crash and everything else. And the company became grindy. The company had never had any churn for the longest time, such that even on their reports for every SaaS company, you have this like, okay, gross ARR added, churn line, net ARR added, like everybody does the same thing.

• 48:08Speaker 02

  They never had a churn line, never reported it for the first of like six years that I worked with the company. So then they got seven years of churn in like 12 months. Turns out, life sucks when you get seven years of churn in 12 months. Through that grind and through it all and related to the whole, wait a minute, the goalpost moved. We have to do something different, everything else. They kept thinking about how to apply AI for these biotech and pharma customers, which they're very close to. How can we make it better for them? How can we apply these models in their world in a way that they're excited about? And continued to iterate and it was grindy. And I was there for it. You're excited to work with that person because like, one, of course you think it's a really special opportunity and there's a way out, there's a path and we can find it.

• 48:53Speaker 02

  But two, because of the joy of the game, the relationship and like everything else, like that's part of it. It's very different. I've seen different models and lots of different models of venture capital work. Muritz was a writer, Door was a sales guy, Gurley was an engineer. Peter's a career venture capitalist. They're all different. Working with them, it's like when I call these people, I learn something and they push back on me. And then I ask them questions. And what I've realized is like so much of my job is they know the answer. They know what they want to do, they know the answer. And it's maybe asking questions of them to maybe help solidify their conviction or solidify their articulation of what they want to do and why. And you just keep doing that.

• 49:38Speaker 02

  Through that process, hopefully we get 1% better. A few times a year, we make a 1% better decision, 2% better decision, a few times a year. And if you do that over a decade, that compounds to real results. One of the questions that I ask myself before making an investment is there are all these people that I care about through my life, like you care about yours. Could I talk one of them into going to this company? And honestly, intellectually, honestly to myself, explain to them why this could be their life's work? And if I can't do that, I should not invest. It just means that the project doesn't line up in that way. And so as long as we have one of those things, it doesn't matter that much what it is to me.

• 50:23Speaker 02

  It's just, it's important. It could make a big dent and if it can make a big dent and it's a special person, I'd love to work on it.

• 50:31Patrick O'Shaughnessy?

  Are there any other questions like that that you ask yourself before investing? That's a particularly good one.

• 50:35Speaker 02

  The other question, if this person calls me at 9:00 PM on a Saturday night, will I pick up the phone?

• 50:40Patrick O'Shaughnessy?

  That was at the green button test.

• 50:41Speaker 02

  Yeah, yeah, yeah. It's a chemistry thing and they have to feel the same way, obviously. One of the other ones is if it's right, does it matter? Which is different than this like first one, but it's, there's so many things that we could be right on as a business. I looked at one last week and I told one entrepreneur, I was like, I really think that you can build an amazing company here and you just shouldn't raise venture capital. But there's like so many things that you can be right on, but they ultimately just don't matter. Like, nobody cares. That's a better way to say it. If we're right, well, we care. If they won't care, then you're just not going to build enough equity value. That's another useful one.

• 51:15Patrick O'Shaughnessy?

  One of the coolest things that's happening right now is all of that that you just described has higher stakes and more leverage attached to it, which is manifested most simply in more dollars and higher prices. You and I have talked about this notion of what high multiple on invested capital investing is like and what it has been like and what it's moving into. You did something recently, which was you raised a growth fund for the first time in a long time. I think that is related to this concept. These companies need more capital. The prices are higher. The outcomes are bigger. Maybe we can earn the same multiple on a billion dollar entry price that we could on a $50 million entry price 10 years ago or whatever. Can you talk through that evolution, talk through the partnerships, like way of thinking about it and talking about it? What you believe to be true that results in this decision to do this?

• 51:59Speaker 02

  Just go back to like, why did LPs, starting with Swenson and everyone else? Why did they start investing in venture capital? And fundamentally, it wasn't because they thought they could beat the NASDAQ or the index by like three percentage points a year, five or whatever. It's because there are situations where venture capital could drive these insane multiples on invested capital. From a financial perspective, that's what they're seeking. For the longest time, for most of the industry's history, two things were synonymous. Early-stage investing and high cash-on-cash multiples. The way to get high cash-on-cash multiples was to do early-stage. That's it. Those two circles in the Venn diagram like almost perfectly overlap.

• 52:40Speaker 02

  The thing that's changed is recently, relatively recently, in the last few years, because outcomes have gotten so much bigger and these markets are bigger and everything else, the circle of high cash-on-cash multiple opportunities is bigger than just early-stage. And it's not so, so big that there's a gazillion new companies in there that you can generate 100Xs on. That's not true. But there are certainly many outside of early-stage where you can generate high returns. That's it. Like, that's what we want to go after. You could argue we're a few years late. I think I'd take that criticism, but I think that opportunity exists on a go-forward basis. We should go do it.

• 53:23Speaker 02

  Everything else that we represent, which is the high conviction, high commitment, partnership, that has to still be there.

• 53:30Patrick O'Shaughnessy?

  As part of that discussion, what were like the other sides of the debate? Such as, maybe we would have said the same thing in 99 and halfway through 2020. As markets get exciting, the possibilities, we all knew this extrapolation error. What were the counterarguments to like, let's, despite all that, still not do it?

• 53:46Speaker 02

  I think the biggest counterargument that really made this time right versus two years ago or whatever was you need the team that can do it. It's just a different mentality. There are differences in how you evaluate and think about things. All the other stuff, or there's, you know, why not change and stay within your circle of competency? All those things are true, but that was like the biggest one. We had several examples over the last couple of years where we had, I think, the right intuition on a company or an opportunity. We didn't do it.

• 54:17Patrick O'Shaughnessy?

  Because it was outside the box.

• 54:18Speaker 02

  Because it was outside the box. That's obviously dumb. And I think it is quite different than a lot of, than she does. We are really chasing these very rare, special companies that have like very high cash-on-cash opportunities. Where we think there just can be runaway successes and we can invest in them.

• 54:34Patrick O'Shaughnessy?

  Is there any lesson to be pulled from the many, let's call it 20 to 100Xs that you personally have observed? I mean, it's such a crazy amount of return. Obviously, it doesn't pencil in the beginning. You can't make something pencil if it was that clear. The price would be different. What have the 20 to 100Xs taught you in aggregate, if anything?

• 54:54Speaker 02

  Work with really special people. You want to work really hard. You want to work smart and get lucky and you need it all. It really all has to come together. There's a lot of things that are timing-dependent. You have no control over as a company. And you take the Cerberus example as a good one, which is, this is our second, you know, we took it public this time in May, but we tried to take it public in 2024. And it would have been taken public at a much, much lower valuation and it didn't work out because of CFIUS and all this stuff. So, timing matters. The advancement of that 18 months made all the difference in the world. For a bunch of things that were honestly outside of our control, there were some things that are in our control, getting inference running and everything else, but there was a lot of stuff that was outside of our control. These are all the classic things. We've just got to focus on what you can control.

• 55:38Speaker 02

  That's one of the things that's really different than software companies. With software companies, aside from like building on AWS or whatever, you pretty much own your whole stack. And so you're really fully in control of your destiny in that way. With hardware companies, you don't. There's an entire supply chain and all. HBM's a thing, DRAM's a thing, and TSMC's a thing, and a lot of those cross geopolitical borders. And so geopolitics gets involved and that makes that complicated. That's a really big difference. And so you got to get lucky on the timing and macro and other stuff. But I think it really starts with working with these crazy people with unbounded opportunities. And if you work with these crazy special people on unbounded opportunities, you get lucky from time to time. You're bound to.

• 56:20Speaker 02

  When I was 20 years old, I was working at an investment bank, Ben Horowitz. Mark and Ben had started LoudCloud. It was still in stealth and Ben gave me an offer to be his assistant. I was talking to this associate who seemed like this elder at the time, he was probably 25. He said this thing to me which stuck with me. He was like, do golf? It's like classic banking question. Do golf? No, I don't fuck golf. But he's like, with golf, you keep on practicing, keep getting the ball in a three-parter, like close to the pen, close to the pen, close to the pen, close to the pen. You keep getting the ball close to the pen and you keep practicing. That's hard work. That's like working smart. That's what you want to keep doing. Getting the hole in one, that's luck. I kind of love that framing. I use it with my kids, actually. What it says is like, yeah, there's luck involved and there really is luck involved.

• 57:05Speaker 02

  But there is actually a way to increase your luck. And the way to increase your luck is get a lot of balls close to the pen. Eventually, one will drop. I'd like that. Each of us invests in one to two companies a year. I think in my 12 years, I've invested in 18 companies total.

• 57:18Patrick O'Shaughnessy?

  Crazy.

• 57:19Speaker 02

  Which is a relatively small number. So it's very high conviction and very high commitment. I have a lot of skin in the game. I believe in these companies. If you keep on working with these very special people in these opportunities, magic can happen.

• 57:34Patrick O'Shaughnessy?

  What have you learned about the best reasons and conditions for going public?

• 57:39Speaker 02

  Betfair does these Monday night dinners and so we had a CEO last night, multi-hundred-billion-dollar private company. And we had this whole conversation. It's just kind of fresh. I think that ultimately, when you go public, you have a range of new opportunities in what you can do. Public trust, because there's some transparency that comes with being a public company. You obviously have a currency that you can do things with. That ends up being there. You have an unbelievable ability to raise capital, which I think is why the labs will ultimately go. Although I think the trust thing is actually a really important element of why they should go and it's beneficial to the world and to America if they do go public.

• 58:19Patrick O'Shaughnessy?

  See what's going on.

• 58:20Speaker 02

  Yeah, see what's going on. Everyone can see it. I think that's like a really beneficial setup. There's another element of it, which is what does a collegiate athlete want to do? Go pro. They want to play at a higher level. Is it harder? Yeah, it's harder. Is the competition tougher? Yeah, the competition's tougher. They move faster. They're tougher. They're bigger. They're stronger. The stakes are bigger. The stage is bigger. The scrutiny is bigger. All of that's true. It's kind of the same thing with companies. There are a handful, and it really is a handful, three, four, whatever, that can get to this tremendous scale without going public because things have gone through their execution and excellence.

• 58:57Patrick O'Shaughnessy?

  Lots of free cash flow.

• 58:57Speaker 02

  They have lots of free cash flow and they've done really well over a really long time and I think that's fantastic. Good for them, but in general, for everyone else, get out there. The other thing that I would tell you is there are windows for a particular type of company. The SaaS companies that went public in 2021, a whole boat of them have struggled and it's been tough in the public markets because their stocks ripped to this multiple compression issue. They were trading at 30 times. They fouraxed in size, but now they're trading at six times. It turns out you're under still. That's a tough place to be. I will also tell you that there's 500-something.

• 59:35Speaker 02

  Probably SaaS companies that are between 100 million and 500 million that are private. What happens? Those employees never got a chance to sell. Those employees don't have annual tenders. Those employees don't have an opportunity to exit. Those investors don't have an opportunity to exit. They're stuck. I don't think they're all going away. And as I said, I don't think they're all getting vibe coded and everything else. But ultimately, the AI natives with their growth rates have sucked all the oxygen out of the room and all the interest. And the window was missed. That's tough.

• 1:00:05Patrick O'Shaughnessy?

  What are the biggest debates right now inside of the partnership? I always love coming here and talking to you guys when there's something interesting going on because you debate. It's healthy. It can be really fun to watch and I learn a lot from it. What are those debates today?

• 1:00:19Speaker 02

  There's a ton of debate around in this AI infra apps for foundational models, infra apps ecosystem. Where does value accrue and how does it accrue and where are the votes? And how do we think about that? But also the business model innovation, I think one of the things people don't understand about why SaaS did so well versus traditional software was it wasn't just that it was a better delivery model and everything else. There was actual business model innovation on it. You really did have this subscription element that ended up being fantastic for both the company and the customers. It was a win-win situation. That same thing actually exists in AI and selling by outcome and that piece of it.

• 1:00:59Speaker 02

  But then wrapped up into that debate discussion is how much value just accrues to the labs? Yes. How much of the value just accrues to the semis? That's a real discussion.

• 1:01:10Patrick O'Shaughnessy?

  What do you think?

• 1:01:10Speaker 02

  Like, I am of the view that it all works. It's a very weird thing. Will the CSPs do well?

• 1:01:18Patrick O'Shaughnessy?

  Yes.

• 1:01:18Speaker 02

  Yes. Not all of them, but will some of these Neo Clouds do well? Yes. Will the fireworks of the world do well? Yes. Will Nvidia do well? Yes. Will these chip startups do well? Some set of them. Yes. Are we going to have edge inference on our phones? Yes. Are we going to have near edge inference on POPS? Yes. Are we going to have big models in data centers? Yes. There's so much zero sum thinking, which is just like, okay, how do we cut up this pie? And they're going to eat this much and like, oh no, no, no, anthropic or whomever is going to eat 98% of the value. And they're going to do all the drug discovery. And I was like, come on, no, that's not what's going to happen. When I say like, I think everything's going to work and I listed off all these other things.

• 1:01:59Speaker 02

  It's really important to understand that doesn't mean that every company that's doing every one of those things is going to work. It actually means quite the opposite of that. Most companies in each of those areas are not going to work. And it's actually more important than ever to have real differentiation, to like really take each of these thoughts to their logical extreme and understand, wait a minute, you got to go all the way on these things and really be differentiated on it.

• 1:02:23Patrick O'Shaughnessy?

  Is there anything you have your eye on, whether it's in the funding market, in the technology world? Anything at all that you really are watching carefully?

• 1:02:30Speaker 02

  It's actually funny to me. Some of the people are so, so smart. And yet they're in this tech world where they're like reaching these deterministic, almost conclusions of like mass unemployment and all of these different things. I'm going to give you a really concrete example, which I think is just so good. Take Jeff Hinton in radiology. So I think it was 2016 where he was like, we should stop training radiologists. AI is going to do it all better. Jeff Hinton's three orders of magnitude smarter than I am could not have been more wrong. But the actual thing that led him to make that statement and that conclusion was 100% correct.

• 1:03:09Speaker 02

  If you look at these radiology images, we should be able to train AI to do a better job reading these things than humans. And that's probably true. And actually, I think the studies and areas have shown that to be true. And we have an investment in a company called New Lantern, which is approaching this. But the big hurdle and the big thing that it articulated was like, wait a minute. First off, all of the aggregated training data set doesn't exist anywhere. What you see is companies going after like chest CTs or like very specific elements. But your typical radiologist looks at a whole variety of things every single day, from X-rays to CTs to MRIs of all parts of the body and everything else. And so in AI climbing in specific areas like chest CTs is very marginally helpful

• 1:03:53Speaker 02

  because it's only doing that one thing, which could be one of 20 things or 40 scans that they read that day. Problem number one, you don't have the data, just like we talked about in robotics and everything else to train the AI. Problem number two, the whole healthcare industry is oriented around reimbursing doctors for making readouts. How is that going to work? And there's liability associated with that. And there's repercussions of getting something wrong or missing something. And there's medical malpractice and everything else. How are we going to avoid that? And how are we going to get around that? Problem number two, real world stickiness. We're going to end up with this application where AI really does help radiologists. It helps radiologists get more and more higher, higher throughput. Because they, I can do some parts and the radiologist does some parts and they're checking each other and everything else.

• 1:04:37Speaker 02

  And you do kind of weirdly end up in this co-pilot situation for some time. And then you're going to slowly have the AI read more and more of the scans and build up and build up and build up. But the actual duration to get from here to there is going to take a long time. And ensuing time, we need more radiologists, not less, because oh, by the way, everyone's getting more imaging than they used to get because the cost of imaging is going down in a Jevon's paradox kind of way. My point on it is you have someone very, very smart who really understands the capabilities, really understands what's happening, has the right data, but by not thinking of that data in the real world application comes to the wrong conclusion. And that's how I think of the unemployment thing. I think it's just, it's almost the exact same setup.

• 1:05:21Patrick O'Shaughnessy?

  Eric, I love talking about markets and markets with you. An absolute blast. Thanks for the time.

• 1:05:26Speaker 02

  Thank you.

• 1:05:28Patrick O'Shaughnessy?

  If you enjoyed this episode, visit colossus.com. You'll find every episode of this podcast complete with hand-edited transcripts. You can also subscribe to Colossus, our quarterly print, digital and private audio publication, featuring in-depth profiles of the founders, investors and companies that we admire most. Learn more at colossus.com/subscribe.

• 1:06:07Patrick O'Shaughnessy?

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