a16zSteven Sinofsky & Balaji Srinivasan on the Future of M&A, AI & Tech
EVERY SPOKEN WORD
80 min read · 15,773 words- 0:00 – 1:00
Introduction
- BSBalaji Srinivasan
For four years, it was just a desert. A bunch of companies silently died. The state blocked IPOs. They're blocking M&As. There's just an all-out anti-tech assault.
- SSSteven Sinofsky
DC is this zero-sum game. There's something positive out there, so it has to accrue to the, the DC power base.
- BSBalaji Srinivasan
Figma managed to make its way through that, absolutely no thanks to, you know, the state attacking it. And then Lina Khan decides to take a victory lap on this which was, as I said, it's like the assassin congratulating themselves for helping to elect Trump. [upbeat music]
- ETErik Torenberg
There's been a lot going on in the world of M&A in the last, you know, month et cetera. There's been the, you know, uh, Meta, um, acqui- acqui-hire Scale. There's been, uh, the Windsurf saga. There's been, uh, you know, sort of the discord, Lina Khan discourse surrounding Figma. And I, I wanted to bring both Balaji and Steven together g- to kind of reflect a- and, uh, discuss at a higher level how we make sense of what's happening in, in M&A land. And Ba- Balaji, I know you've had some, some thoughts recently, so I thought I'd let you, let you open.
- 1:00 – 2:25
Three Key Issues in US Capital Markets
- BSBalaji Srinivasan
Yeah. So there's actually, like, there's like three, I think, separate issues that are all kind of interrelated. Um, and they're all kind of related to how US capital markets are becoming tougher, um, but the internet capital markets are opening up. And those are the Windsurf Scale character and so on, uh, this new kind of deal structure, then the Figma IPO, and then finally the new Genius Act. And to briefly summarize, uh, since Sarbox, uh, Sar- Sarbanes-Oxley in the early 2000s, uh, which was passed in the wake of Enron, that was the intent was to stop Enrons, but actually didn't stop IPOs. So the number of public companies has just declined, the number of IPOs has declined and, and tech companies started going private for longer. And then now with the FTC antitrust harassment of the last several years, uh, that also started to cut off the M&A window. So for four years it was just a desert. And, um, DOJ went and interfered, for example, with JetBlue's acquisition of Spirit. Spirit went bust. Uh, Roblox had issues. A bunch of companies-
- SSSteven Sinofsky
Roomba
- BSBalaji Srinivasan
... silently died bec- Go ahead. Uh, Roomba, Roomba.
- SSSteven Sinofsky
Roomba.
- BSBalaji Srinivasan
Sorry, not Roblox.
- SSSteven Sinofsky
I mean, kill a robot vacuum-
- BSBalaji Srinivasan
Yeah, my bad. Go ahead
- SSSteven Sinofsky
... company.
- BSBalaji Srinivasan
Yes, as I said, Roblox is fine. Sorry. Roomba. You're, you're right. I, I misheard. Um, so the first, the state blocked IPOs, and so we had to go private for longer and build a whole, uh, you know, PE kind of, you know, model. And then they're blocking M&As
- 2:25 – 3:23
The All-Out Anti-Tech Assault
- BSBalaji Srinivasan
and, uh, so essentially that just caused, I mean, among other things, there's also the assault on AI with, you know, limiting the number of FLOPs. There's the assault on crypto with the SEC essentially doing lawfare against the whole space and debanking companies. There's just an all-out anti-tech assault. And, uh, and then the amazing thing was Figma managed to make its way through that and actually get to IPO. W- Absolutely no thanks to, you know, the state attacking it. And then Lina Khan decides to take a victory lap on this, which was, as I said, it's like the assassin congratulating themselves for helping to elect Trump.
- SSSteven Sinofsky
It was quite a remarkable statement. But it, it really gets to the heart of, of sort of the way that it... You know, DC is this zero-sum game. And so it's like there's, there's something positive out there, so it has to accrue to, to the, the DC power base.
- BSBalaji Srinivasan
Yeah.
- SSSteven Sinofsky
Because otherwise there's not enough positive left over.
- 3:23 – 6:04
The Rise of Computing Without Regulation
- SSSteven Sinofsky
And so it was sort of this-
- BSBalaji Srinivasan
[laughs]
- SSSteven Sinofsky
... absorbing the one glimmer of hope that's out there and ignoring the, the long, long tail of, of carnage that they've recently caused.
- BSBalaji Srinivasan
Uh, that's right. And basically the thing is they take credit for the good things and the bad things, "Oh, well, that company must have sucked anyway," or something like that, right? And actually, you know, the DC thing, I, I'm not sure if this is apocryphal, but I remember I think Gates said something in the late '90s, early 2000s, actually before the whole antitrust thing, which you guys actually had to go through. You had to go through the whole thing. Um, something like, uh, you know, he wanted just nothing to do with Washington at all and just wanted to code. And they said, "Well, that's fine," but, uh, you know, some politician said, "But we're just gonna hold hearings on you, and then you're gonna have to donate to us." And it was something... Uh, uh, do you remember that? I-
- SSSteven Sinofsky
Well-
- BSBalaji Srinivasan
I, I remember somebody wrote that up. Go ahead.
- SSSteven Sinofsky
I, I think that there's just... I mean, part of what, what you said brought up two things in, in... for me. One is, is that y- yeah. I mean, like, the whole thing about computing is that except for the IBM antitrust case which started in the late 1960s and pretty much lasted through me in high school, the, the whole role... Computing just kind of arose without, like, government regulation, without government oversight, without... And, and even with the internet, with actual, with just government funding it. And so it's this-
- BSBalaji Srinivasan
Yeah
- SSSteven Sinofsky
... very weird thing if you're in the business of, of governing and regulating that the, this giant, giant thing that swallowed the economy happened without you. And that's what-
- BSBalaji Srinivasan
Yeah. And-
- SSSteven Sinofsky
The, the, the... What's interesting is that's what the... And, and also, to be fair, the entire software industry in a sense happened that way. You never needed to be licensed to be a software engineer. There was never approval to sell software. I mean, the most approval that the government got involved in was it used to prevent mail order laptops and desktop computers because they had radios in them and, and so they needed FCC-
- BSBalaji Srinivasan
Is that right?
- SSSteven Sinofsky
Yeah, they needed FCC-
- BSBalaji Srinivasan
Hmm
- SSSteven Sinofsky
... approval in order to finally ship computers to home, which is something that a guy named Dan Lewin, who ran the Computer History Museum, he really cracked that working for Apple in the, in the early 1980s. And that's how Macintosh made it to campuses was that they figured out how to work around the FCC. And then Michael Dell had to do the same thing i- in the PC world. So you had this whole-
- BSBalaji Srinivasan
Yeah. Yeah
- SSSteven Sinofsky
... this whole industry that swallowed the economy basically happen without any hearings. I mean, like, there were just no hearings even. And so it, it, it's remarkable when you think about it.
- 6:04 – 25:02
Network vs State: The Fundamental Conflict
- BSBalaji Srinivasan
Yeah. So, you know, my framework on that actually, and I, and I, not that I use this for everything, but I think it's a useful framework, is network versus state, and, uh, like the network, the internet, and the state, you know, the regulations and, and the government, also informal things that are aligned with the state, um, the, uh, because network's intangible, uh, the, the scale of the internet and how quickly it grew is still something that even today, um-- You know, Orwell had this saying which is like, "It takes an enormous effort to see what's in front of one's own face," right? And what's in front of one's own face? Well, it's a phone, it's a screen, right? The internet is simply the most popular thing in the world, perhaps in human history. It's completely ubiquitous. It's upstream of AI, it's upstream of phones, upstream of drones, upstream of everything, you know, on social media and so on and so forth, upstream of the election. Twitter elected Trump, and then Twitter deplatformed Trump, and then X elected Trump. You know, like the internet's like upstream of everything, and yet because it's invisible, we don't think of it as a primary actor, uh, yet, you know, which is I think the whole other point. The other thing is to your, you know, uh... I, I think one of the most remarkable, you know, future historians when writing about this era will say something like, "You need a license to cut hair, and you need a license to do this, and you need a license to do that, but you didn't need a license to own a computer, the most powerful device ever created." Right? Thank God. What an oversight.
- SSSteven Sinofsky
Well, you know, it's, it's super-
- BSBalaji Srinivasan
You know? [laughs]
- SSSteven Sinofsky
It, it-- You raise a really good point, and I, and I, uh, look, I'm on... I'm not gonna try to be the other side, but I can sort of defend that side, which is, is it is true you, you needed a license to apply, you know, makeup in a salon or give a massage, but, you know, not to write software to change the, change the world. And, and I think it's just, it, it's so interesting to think about the mindset of, of the regulator because, of course, all of the antitrust laws, if you go back, you know, whether you start with the Sherman Act or the Clayton Act, they, they were based on like these very tangible distribution-constrained, resource-constrained world where, where like well, you can't own the railroad tracks, the railroad cars, and the coal that ships on all of them because that's like this vertical integration thing. And, and like the PC industry just, it, it didn't have any of those constraints, and the computing industry-
- BSBalaji Srinivasan
Yeah
- SSSteven Sinofsky
... only for that brief time with IBM where it cost tens of millions of dollars and, and IBM actually chose to only lease them, not to sell them, which of course it makes a ton of sense in the world of technology because owning a depreciating asset that doesn't matter in a year i-is actually a bad idea. And so, but the, all of those laws came about for that. I mean, even these crazy elements of it like, like when they do merger and acquisition analysis and they un- they try to understand market share, like which is not in the law. Th-there's nowhere in the law that it says this, but they, they go and they hire these people and they compute like the HHI index, which is this way of like they take all the players in a market. So right away you presume that the market is well-defined and has N players in it.
- BSBalaji Srinivasan
Right. Right. Right. Right.
- SSSteven Sinofsky
And then they take each one's share, meaning you can actually measure it, and then they square the share and add those all up and, and divide by the number of players and decide if that's like greater than .25, less than .75 or so, and then they go, "Oh, monopoly." This has been the challenge in computing forever. Like even just take like what is the market for word processors? Well, is it, is it like the thing called a word processor? Is it everywhere you can type? Is it only if you print it? And you very quickly can't figure out like even, you know, what's the email, the share of email? Is it the client? Is it the server? Does it depend on features? Is it mainframe-hosted, mini-computer-hosted, PC-hosted and, and or now cloud? And so all of these things, you know, Steve Jobs like put up a s- a, a slide at the iPhone launch of mobile phone share, but he very deliberately chose to measure it by the manufacturer of phones so that it diminished the f- the share of Windows phone. But he also could have just done it by operating system, which would have made a completely different chart. But what was the right-
- BSBalaji Srinivasan
Right
- SSSteven Sinofsky
... way to define it? When Microsoft was going through its, its antitrust, we had 100% share of the Windows market. Well, duh. A-and, and this is what you get into like when you're, when you look at a deal like, like, like not, you know, not even to pick up, but to pick, you know, robot vacuum cleaners. Like what is... Like do you count Optimus in the line, the share of robot vacuum cleaners, or is it only the spinning ones that cats sit on top of that dock in your living room corner? 'Cause th-then that... And, and they've always, always struggled with this, but they don't admit it, and so they, they apply this sort of econometrics to the whole thing that make it seem like it's this perfectly well-defined, well-reasoned thing. And even to this day, like I don't think people... They, they would say you... It would be incorrect to define the phone market as iOS versus Android because China would have-
- BSBalaji Srinivasan
Yeah
- SSSteven Sinofsky
... something to say about that. Android itself, it's just not the same product across them. And do you count-
- BSBalaji Srinivasan
Yeah. Actually, I, I give, I give three reactions to that 'cause I think there's a bunch of... I just wanna shoot at that-
- SSSteven Sinofsky
Yeah. Yeah
- BSBalaji Srinivasan
... and then you know, and then shoot it again. So the first is on like definition of markets, actually Eric Schmidt's also talked to us, but basically, um, you know, for example, when the iPhone came out, people didn't think of it as a competitor, uh, uh, in terms of, uh, being a camera, but it was one of the most popular cameras 'cause it was ubiquitous and it was, uh, essentially zero incremental cost, and it was internet connected, and it was programmable. And so even though the image quality was very poor and the number of pixels was, was low relative to a DL- DSLR or whatever, um, it was a very popular camera. But it wasn't thought of as a camera as a primary access. And often, you know, the Christensen framework, you know, the, the late great Clayton ChristensenThe whole, whole disruptive innovation concept is something comes in, and it's not really recognizable as a peer to the existing products in the marketplace, but it's better on some critical axis, and it gains adoption on that, on that, in that way, and then eventually it's a substitute. But it takes a while for people to even acknowledge it's coming in there. And um, and then you also have like a fuzzy set sort of thing where, for example, Google and Apple compete on operating systems, and Google and Facebook compete on, uh, ads, and then Facebook and Apple compete on, you know, headsets and so on and so forth. And so there's lots of fuzzy set overlap kinds of things. And another point is the entire concept of, oh, look at all the... You know, Bennett Devin said this good saying, which is, "Think about all the tech monopolies. There's so many of them." Haha. Right?
- ETErik Torenberg
Yeah. Yeah.
- BSBalaji Srinivasan
Which is really, you know... And, and, and the issue is they try to use these formulas as sometimes a substitute for jud-judgment and sometimes a mask for animus, right? Where really, you know, Elizabeth Warren was saying she wants to build an anti-crypto army, but really she wanted to build an anti-tech army. And that's just like a particularly explicit thing where it's like she's in a tribe that's against our tribe. And, you know, as you said, put yourself in their shoes. Like first... At, at first order, like, as people of the network versus them as people of the state. People of the state, it took me a while to understand them, but fundamentally what they want more than anything else is to get a piece of the state, to, like, get a baton, to be able to be like assemblyman of this or, you know, undersecretary of that, to have a piece of the state, this baton, and they can allocate capital and start doing things for the good of the world and making you do this and forcing you to do that, and it's all about coercion, power over others, status, and, and the use of force implicitly or explicitly. Whereas our framework is the total opposite. We don't want anyone to have power over us. We're not asking to s- tell anybody what to do who didn't consent to being in our organization. We just want like a bare domain name like reddit.com, like a field that we can build up on ourselves, and no one tells us what to do, uh, you know, that's, that hasn't, um, you know, maybe been an investment or something. Okay, maybe it's a board seat or something. But in general, you're just able to build on your own. And these two kinds of things can coexist for a long time, so long as we're just typing and doing math, and they're off regulating, you know, bombing countries or whatever it is. But as the network grew and grew and grew and became... got to tens of... This is funny, Eric, right? [laughs] Yeah. A-as the network grew to tens of millions and hundreds of millions and, and then eventually billions of people, we were like, uh, you know, this thing just grew to state level. And now when it was... These two things started conflict because we felt, you know, legitimately that we're the CEOs, the founders of these companies. We built them from scratch. We should be able to have authority on what happens on these networks. And these guys started to see, wait a second, their authority, whatever it is on paper, is actually being limited in practice because, for example, let's say you're a taxi medallion regulator. The actual regulator of taxis is Uber or, or Lyft because they have real-time tracking, they have star ratings on both sides. Or you're, um, you know, some, you know, the FCC or something like s- who issued licenses. Well, the actual regulator of speech or what have you is then YouTube or, or Facebook. So our expansion, our peaceful, you know, invisible internet expansion started implicitly taking market share away from them in the sense of regulatory power. So the empire struck back, they attacked us hard. And I can actually, if I squint, I can actually also understand, uh, how we would think like them and then vice versa, right? So how would they think they don't want others to have power of them? Well, they don't like the fact the network is getting so big it's able to dwarf them or whatever. How would, uh, we want to have power over something? Well, within our organizations, we want to be able to flip a switch and make something happen. And if, if there's a resistance to that, that's a huge pain, and we wanna make, be able to make that happen. We'll, you know, reorganize the, the company or something so that, you know, it c- it can be, it can be better and more, more functional. But there's another way I've actually... Uh, you know, have you guys ever seen the political compass?
- ETErik Torenberg
Yeah. Yeah.
- BSBalaji Srinivasan
Yeah. So it's like, you know, top left, authoritarian left, authoritarian right, libertarian left, libertarian right. And so i- if you roughly, roughly, roughly sit in the lower right corner, I can, I c- you know, adjacents are often allied, but diagonals don't get along, you know? So a libertarian right, I can sometimes understand the nationalists, and I can understand the libertarian left, but the Elizabeth Warren quadrant always seemed foreign to me until I ran a large tech platform. You know why? And of course, you probably have. So 'cause, you know, so, uh, Steve, you probably had this experience as well, but the libertarian right framework is everybody has consent, and you pay them to do something, and it's a market-based process and so and so. And that works for many things. But let's say you're running a giant tech platform with hundreds of millions or even billions of people, and you wanna change some parameter setting. You cannot put that up for auction or discussion with everybody on everything, right? Instead, you're gonna just flip a switch, and they're all gonna be basically opted into this, and they're not gonna get paid, and they're just gonna do, right? Because otherwise, there would literally be no way you could possibly have, like... And, you know, the, the complexity of these systems, every algorithm change, every update, every this, every that cannot be something that's like, you know, there, there's five... You have five million parameter settings in, in any... You know, even, even Chrome, as complicated as it is, it sets like, you know, a zillion of those settings for defaults, right? So you have to pick defaults, and for the most part, the state, the platform will actually know better than the people 'cause it's got all these analytics and so on and so forth. So you can put yourself into the Elizabeth Warren headspace if you think of yourself as a system administrator of a platform where you have lawful authority over it, and you built it from scratch and so on and so forth. I think the difference then boils down to the competence law, right? See, the thing is these platforms are at least competing with other platforms, and if Apple or Microsoft or Google makes two bad decision, then the people on those platforms have exit, they have choice, they can move between platforms, so there's ultimately a market constraint. But the actual monopoly is at the DC level, where there wasn't a practical switching option between things, so they could just mess up the platform choices all the time, and us being the apps on that platform, if you think of the state as a platform andcompanies as the apps on that platform, we would not have that much choice. Let me pause there, give your thoughts.
- SSSteven Sinofsky
Well, the, I think that's a, a fantastic observation. I mean, one way to think about that is you, you know, and, and we probably won't even agree on, on some of this, but if you look at what, what the European Union has done with app stores, y- you actually see that dynamic playing out precisely, which is-
- BSBalaji Srinivasan
Hmm
- SSSteven Sinofsky
... y- you know, you have Apple who basically said, "Look, we want to build a platform that... We built PC platforms. We understand what it was like to build a Mac. We know how security violations happen. We know how privacy violations happen. We know how quality degrades over time due to software and third parties and apps. We know kernel mode versus user mode. We know all of this stuff. So when we built the iPhone and the platform for the iPhone, including the App Store, we actually were like, we whiteboarded out, and we deliberately said, 'Well, we're gonna constrain the API so that apps can't steal information from other apps. We're gonna be secure, and so we're not gonna run a bunch of stuff in system mode. There's not gonna be third-party drivers, so there's no kernel mode,' all these things." And then the European Union comes along after the success of that and then says, "You know, good idea, but we actually want to return the phones to being PCs again. So now here's our Digital Markets Act, which basically says phones have to be back like PCs." And Apple's like, "Time, time. You, you do understand we, we literally set out to be more secure and to be private. You, the GDPR people, we actually wanted to solve this problem on the phone, and we wanted to be secure." And they're like, "You know, you're right. So we're gonna put in a thing that says, 'And vendors should be allowed to be secure.'" A- and you're like, "Well, what does that mean?" And they're like, "Well, you have to actually go figure that out, but just know that as the regulators, we're demanding that you be as open and free as the PC and secure." And you're like, "We did that once already. That is precisely what we went and did."
- BSBalaji Srinivasan
Why we locked it down. Yeah.
- SSSteven Sinofsky
And, and so you get in these kind of crazy loops, and it, it's actually not unlike the loop that the, the media had with the internet, which was, you know, we, we believe in curation and editorial and control and own the distribution, and the internet's like, "Well, we have a way of doing distribution, and we have a different view on curation and control." And then you get in these loops where then the, the media decide, "Well, we like the distribution that comes, but now we wanna constrain the distribution. But we like the distribution, but we wanna editorialize the distribution." And then the regulators come in-
- BSBalaji Srinivasan
Yeah, yeah, yeah
- SSSteven Sinofsky
... and, and so you-- the, that diagonal on the political compass is really just I'm actually walking in your shoes right now, and I realize what it is that you did, but I wanna want that, and I don't wanna be tyranny of the or. I actually just want security and openness. So-
- BSBalaji Srinivasan
They, they just... The, I, I think a big part of it actually honestly boils down to the fact that they are simply not numerical, and they're like AI agents. AI agents were helpful because they allowed me to model like a, like a... You know, I think all three of us are actually fairly verbal people, right? So we can write and so on and so forth, but we also have the system two thinking, you know, in Kahneman's, you know, phrase or what have you, where you can just go heads down, you can program, you can do the math. The numbers actually have to add up, right? You have to do the spreadsheets. You know, the, it has to be a numerical thing. And one of the things that, you know, I've realized is a good chunk of the people who are in the American state, not the Chinese state, that's a different thing, and we could talk about that, but the American state, a good chunk of them are those who are selected for having verbal and not numerical/mathematical ability. A- as distinct from, let's say, in the '50s or something like that, where in the '50s, because marginal tax rates were at 90% in America, they were 100% in Soviet Russia, you know, go to jail, do not pass go, do not collect $200 or 200 rubles, um, they were at, they were at 90%, though, in FDR's America. So, you know, there's this book by William White called The Organization Man where it was this extremely centralized environment, very corporate. You, you know, you couldn't really found a company or anything like that. It was very hard for Shockley and, and, and, uh, Fairchild and so on to, to do what they did. But at that time, the Elons of the world would have worked at NASA or run NASA, and the Patrick Hollisons would have probably run the Federal Trade Commission and so on, and whatever was written down legally, they would just call each other and make it work, right? You'd have a bunch of CEO-level people, founder-level people, because they couldn't found companies, they were channeled into the government to make it work. Similarly, in the Soviet Union, when you couldn't, those guys couldn't do entrepreneurship, they put all their energies in just pure math and science, and that's why there are some amazing Soviet mathematicians and physicists and so on, if you're familiar with that. 'Cause that was an area where, okay, you know, that kind of technical mindset could at least do something, you know? Anyway, so, um, because they're selected for this... One example of this, uh, I, I, you know, do you remember this, uh, Lorena Sanchez or Lorena Gonzalez who, uh, told Michael, Michael Solana that he was a billionaire? Right? Or, or how Bernie Sanders is like, "Millionaires and billionaires," right? Which is like saying meters and kilometers, right? 'Cause they're actually, it's like 1000X difference. Um, or, or like, uh, you know, when Brian Williams, Mara Gay of the NYT editorial board said that, like, Bloomberg, um, could give his fortune and divide it and, and give-
- SSSteven Sinofsky
Oh, yeah, yeah, yeah
- BSBalaji Srinivasan
... a million dollars to everybody, right? So, so that's like three examples where I really start to think they don't... They think, like, billion means, like, big number. You know, like a primitive tribe will have numbers for like one, two, and many, right? So, like, they just don't understand, like, one E9, you know, like the difference between a billion and a million, uh, or, or the difference between, for example, someone who has a billion dollars liquid, someone who has a billion dollars net worth, a billion dollar fund, a billion dollar valuation, and this leads to... Like, they literally can't do... It's not like they can't do machine learning and they can't do gradient descent and so... They can't, like, divide or like, you know. And I, I mean, to have some sympathy for them, ifUm, if I was to say what's the difference between a picofarad and a microfarad, right? Unless you've done something with hardware, you know, like, what's a lot of capacitance and a little capacitance. Like, there's a scale there for capacitance or inductance or something like that, that unless you're actually done electrical engineering, you wouldn't have an intuition for it. So, but they just have no intuition for scales of money beyond their personal experience, like 1,000 bucks. Bey-beyond something that's in their bank account or checking account, they have no... They, they just don't know what's above that 'cause they haven't run organizations or done investments. Like, a billion might as well be a trillion might as well be a quadrillion.
- 25:02 – 32:04
The Evolution of M&A Deal Structures
- SSSteven Sinofsky
Why don't we bubble it up a little bit and talk a little bit-
- BSBalaji Srinivasan
Sure
- SSSteven Sinofsky
... more about, about this M&A stuff? Because I, I just-
- BSBalaji Srinivasan
Yes
- SSSteven Sinofsky
... I'm completely, I'm completely fascinated by, by... Let's just take it in general, not about Figma, but just this, this kind of crazy revisionist thing that goes on with, with M&A. Like, for me, like, one of the big things is you have to just start from the premise that when a giant corporation does M&A, it's literally like a speculative investment that has-
- BSBalaji Srinivasan
It's a power law, but for M&A. Exactly.
- SSSteven Sinofsky
That has-
- BSBalaji Srinivasan
I love that you said that. Go, go, go. Yeah
- SSSteven Sinofsky
... Right, that has a power law return. Like, there's only two truisms about, about corporate M&A. One is it literally, it, you provably a net destroyer of value. Like, you, you, no matter how many studies get done at HBS or at MIT Sloan, I, I literally went and when I was teaching at HBS, I spent hours in the library and pulled all these, like, papers with math and calculus and stuff in them that were against M&A because I found M&A at Microsoft very, very difficult to pull off. Because Bill was mandating this constant synergy and s- and, and synchronicity across products, and M&A was, like, a huge perturbation to that whole-
- BSBalaji Srinivasan
Yeah
- SSSteven Sinofsky
... system.
- BSBalaji Srinivasan
Uh, with the exception of, like, something like PowerPoint, which was-
- SSSteven Sinofsky
Well
- BSBalaji Srinivasan
... a huge one.
- SSSteven Sinofsky
I, I'll get to PowerPoint 'cause that's-
- BSBalaji Srinivasan
Yeah. Sure, sure
- SSSteven Sinofsky
... near and dear to me. But, but there, it, all the business literature on M&A is it's a destroyer of value. So you would think that the regulators would be out there against M&A, not because of the success it has, but because of the failure. Like, they, they should be out there. The regulators should be saying, "Hey, companies, you shouldn't buy companies 'cause you just destroy them." But you never, ever hear them doing that. And no company sets out to destroy it. And so I actually did in the biology, I actually brought my visual aid this time, which we'll put up on the screen.
- BSBalaji Srinivasan
Oh, wow.
- SSSteven Sinofsky
But this is-
- BSBalaji Srinivasan
Amazing
- SSSteven Sinofsky
... this is, like, what The New York Times, your favorite, NYT, what-
- BSBalaji Srinivasan
Ha ha ha ha. Yeah
- SSSteven Sinofsky
... what they said when Google acquired YouTube. And so the, the headline on the front page of The New York Times is, "Dot-com boom is echoed in the deal for YouTube," followed by, like-
- BSBalaji Srinivasan
Ha ha ha ha ha
- SSSteven Sinofsky
... 500 words about copyright infringement, and they're overpaid, and it's just five guys and kitten videos. And it's got, like, pull quotes from all these people explaining what a disaster it's gonna be. So then you-
- BSBalaji Srinivasan
All right. Well, I've got, I've got... I love that because I want... Can you put this one on screen? So Instagram, uh, you know, Instagram was something where, at the time, John Stewart said, 'cause Instagram had no revenue, right, at the time that Facebook bought it.
- SSSteven Sinofsky
Little square pictures too.
- BSBalaji Srinivasan
And-
- SSSteven Sinofsky
Like retro-
- BSBalaji Srinivasan
Go ahead
- 32:04 – 44:05
The Power Law of M&A Success
- BSBalaji Srinivasan
transform your company, and a lot of veterans essentially fail, and sometimes it's a little bit unpredictable. Um, number two, I think, is in general, a company usually needs, in my view, and you may disagree, you-- needs to be about a hundred X the size of the small company in order to acquire them. And the reason is if it's even only ten X the size, I've only th-- I can only think about one deal where it was about ten X the size and it worked, and that was, uh, Illumina's acquisition of Solexa, where it's, like, a must-win. That's in the geno-genomic sequencing space, but that... or genome sequencing space. That's where, uh, there was, like, a really important technology that became, like, the basis for everything Illumina did for the next decade, and the entire executive team was bought in on it, because ten percent of your cap table, ten percent of your equity is, like, a huge amount.
- SSSteven Sinofsky
Right.
- BSBalaji Srinivasan
It's basically more than you're gonna spend for the whole year, maybe for multiple years at a time. And so a ten percent bite is massive. It has to really be one percent, and that's still a whole integration effort. That's number two. And the reason I say that is lots of founders at various stages will be like, "Oh, I'm acquiring another startup." And I'm like, "Startup-startup deals never work in general 'cause neither of them have money. Maybe one of them can shut down and join the other one. That sometimes works once in a while, but in general, they don't work." Um, that's why M doesn't work, but A works. Like merger usually doesn't work-
- SSSteven Sinofsky
Right. Right.
- BSBalaji Srinivasan
But acquisition works.
- SSSteven Sinofsky
Well, AOL-
- BSBalaji Srinivasan
Right?
- SSSteven Sinofsky
AOL and, and Time Warner and stuff. What a huge disaster that was.
- BSBalaji Srinivasan
Yeah. Well, exactly. A-again, once in a while, it's something like, you know, Steve Jobs, Pixar, and all the ones that work are s- are sweet generes where it's like they, they really acquired some amazing founder as part of that who then leads the company or something. Um, the third thing about M&A, as you again said, is that the, the smart big company values them on the basis of the big company's distribution, right? Um, and it's this product times that distribution is something. However, uh, the dumb big company just thinks they can just roll up anything and sell it, and that just doesn't work, right? Um, I think one of the, the huge... I mean, uh, the, the response is by the way, on this Figma thing, and then let's get to actually Windsurf. I wanna talk about that as well, and then also the Genius hack. The response on the Figma thing I think fell into one of three categories. Um, the first was the Elizabeth Warren School, which is just anti-crypto army, anti-tech army. They hate tech guys. And I actually like that because that's just like pure tribal animus, "Okay, meet me on the fifty-yard line. You bring your guys, we bring our guys. Let's, you know, win the battle through the ideas. Let's go," right? I actually prefer that because that's like explicit conflict and it's just, you know, tribe versus tribe, you know, got the war paint on. Okay. Then you've got the, like, well-meaning maybe, uh, but, but, you know, I q- I, I often can't tell if they're trying to kill us or they're just actually arsonists or what have you, right? Um, which is, "Oh, we're gonna have more startups if we allow them to become big and not be eaten by these other, you know, companies or what have you." And I st- I struggle for the, the analogy or what have you, but it's, it's like, um, I don't know. You, you can't hire somebody un- till you interview twenty people because then they'll be, like, the best of twenty people, and we're gonna let you hire the best of twenty people. What it does is, first of all, you know, you shouldn't be interfering in that choice. Second is that if you cut off the flow of M&As, obviously most companies aren't, you know, either good enough or it's really tough to make it all the way to IPO. Like Oculus, for example, now ten years ago, they were burning a lot of cash. They probably couldn't have made it to IPO. A lot of companies are like that. They're burning cash where they're valuable to a big deep-pocketed acquirer, and there's, like, maybe one of five guys who could buy them, ten guys, twenty guys, whatever the number is, but they really can't operate as a standalone company. They got to proof of concept enough, right? So in that circumstance, you know, a-airlines are often like this where there's a ton of fixed costs that go into it and, you know, like, mergers make sense because they add routes and stuff like that, the JetBlue Spirit one, right? So when they block those deals, they are actually destroying value, right? And moreover, they... One of the biggest issues, and this is related to regulation in general, is they think of it as, "Oh, this is punishing the big tech companies. They're punishing the big companies." It's actually, even though it's an annoyance to them in the short run, in the medium to longer, it makes them stronger because if the big companies can't buy, well, well, first they'll figure out other things as we'll get to these complex deal structures. But second is that means less money for startups 'cause when a big company makes a big acquisition, that's a big surrender.Because it means a big company couldn't have built it themselves. Like Google had Google Video, but it had to buy YouTube for one point six bill, which certainly caused, I'm sure, some churning internally by the Google Video guys, right? And most of the time at big companies, there's, there's some faction inside who's like, "We could build it ourselves," or, you know, "No, no, we're paying too much," or something like that. So it's often a surrender for a big company to do this. It's not what they wanted to do. They didn't wanna pay a billion dollars or whatever for this. And then that surrender money, it goes and excites everybody. They're like, "Let's make a million Instagrams," when you see a big billion dollars for the Instagram acquisition. And then you get Snapchat, and then you get TikTok, and you get all these other competitors. So Facebook, it's like throwing fertilizer on, you know, a thing to spring up 1,000 competitors that, you know, all start attacking you, right? And so the actual way of regulating big companies is with 1,000 startup piranhas, not by this regulation. Let me pause there, I have, there's more I can say.
- SSSteven Sinofsky
No, that's, that's a fantastic observation, because you always remember that in a big company, whenever something new that's adjacent pops up, the immediate reaction is, "Okay, we're selling this giant blob of so- in software. We're selling this giant blob of software, and this thing is adjacent to it, so our blob needs to have that thing." And that's-
- BSBalaji Srinivasan
Yeah
- SSSteven Sinofsky
... what immediately gets the antitrust regulators, "Oh, but that's in, that's, that's expansion by leverage or, or by tying or something like that."
- BSBalaji Srinivasan
Tying, oh my God.
- SSSteven Sinofsky
But it, it is-
- BSBalaji Srinivasan
But what does tying mean? Tying means you're tying peanut butter and jelly together in a sandwich. Tying is like Business Strategy 101. Now, 10 years later, the truth can be told. I'll tell you.
- SSSteven Sinofsky
Right.
- BSBalaji Srinivasan
[laughs] But-
- SSSteven Sinofsky
And, but-
- BSBalaji Srinivasan
Microsoft did not think about it
- SSSteven Sinofsky
... but it is-
- BSBalaji Srinivasan
Go ahead, yeah.
- SSSteven Sinofsky
But, and so you have all these meetings at a big company which is, "Well, should we make it or should we buy it?" And it's just make versus buy, and that's the conversation that you're gonna have. And of course-
- BSBalaji Srinivasan
Yeah
- SSSteven Sinofsky
... this is the funny part about-
- BSBalaji Srinivasan
Big companies, they har- find it hard to make, though. But go ahead, yeah.
- SSSteven Sinofsky
But, but this is the funny thing, 'cause, you know, if the regulators get involved, then they get all the memos and all the emails, and it turns out, inside the company, half the people said we could make it, and half the people said we could buy it, and all the people said we have to have this thing. And they said it with varying levels of hysteria. And, and like, it's like, "We have to have this. This is gonna put us out of business," or, "Well, this would be really nice, and we have some customers on the peripheral asking for it." So which one of those enters the discovery for, for the regulators? The hysterical person who's probably the person on point losing a deal in sales, or the engineer that just is, is mesmerized by the exciting implementation of something? And-
- BSBalaji Srinivasan
Right
- SSSteven Sinofsky
... and, and like that's exactly what... That's the psychology. But then they still go back and have the make versus buy. They always make one of two choices. They, they, they almost never really just try to make it. But if they have to, because the one that they want, there's only one, they can't buy it or whatever, they, they... It's very, very hard to succeed on the, the make versus buy when you go to choose make. So then you go buy, and they, there's a fork in the road. About two-thirds of the time, the big company says, "Wow, the leader is really expensive. But we have our magic distribution beans-"
- BSBalaji Srinivasan
Yeah, yeah, yeah
- SSSteven Sinofsky
... "so we're gonna, we're gonna-"
- 44:05 – 1:03:17
Windsurf Case Study: Status vs Money and M&A Optics
- BSBalaji Srinivasan
Okay. Yes. In general, one of the things that's been happening is due to the, not just past, people... One of the things-- People can only remember maybe a name. It's like a fleeting kind of thing. They're like, "Well, Linacon is gone, so therefore nothing has changed." US vs. Google is a giant antitrust case still going. FTC vs. Meta is still going. All the antitrust stuff is also not just the US, it's all these other countries that ganged up on this Figma thing. There's this, uh, every lawyer at all of these companies, like, their number one priority is, "Do not get us into some, you know, antitrust situation." So because of that, a lot of the big companies have been forced to, quote, "innovate on deal structures" and do things that are new. Scale, Character, Inflection, Adept, Covariant are all... and Windsurf. They're all very similar, right? Where essentially they are, uh, they're not all the same, but, uh, you know, we have a... So there's a typical acquisition where you have an acquirer, let's call it Google, and it buys a company, and what it does when it buys a company, there's a process which, you know, most people watching this show will know, but if they don't, there's something called the capitalization table, which says who owns what shares, and there's something associated with it called the liquidation waterfall that says who gets what money when. And so, you know, for example, if there's debt providers, how they get paid and who gets paid in the middle, who gets paid at the top, the preference stack, who's at the bottom, common holders, and so on and so forth, right? So the capitalization table and liquidation waterfall give a real very well-defined process for who gets paid when you just buy the whole company, right? Eat the whole thing. Okay. Then you've got something which is like an acquihire. An acquihire is something where, uh, and I'm just describing these base things just to set the context for what the, this Windsurf thing was. So an acquihire is something where, uh, the acquired company doesn't really get any money. It's not usually done through the liquidation waterfall. Instead, the company just shuts down, but there is a press release that says it was acquired, and then the team goes and gets jobs at the new company. Maybe there's some cash that's given to the investors, but essentially the... it's way better to at least get an acquihire than to have a total go to zero moment because you get the status, if not the money, right? That's one way of thinking about it, right? And now we get to the third thing, which is what these deal structures have, where they have an acquihire component, but they also have what I'm calling the acquifire. Okay? So the acquifire, what is, what's... The acquihire component is, uh, in, in these, like, six deals in Scale, Character, Inflection, Adept, Covariant, and Windsurf, the big company basically bought, uh, a, the, uh, the, the top AI researchers and engineers out of the smaller company and paid a huge sum for that. But then it wasn't actually buying the company. The company was left as a shell or as actually an existing entity and then, let's say for example, the case of Windsurf, you had forty people go to Google and about two hundred people were left behind. But there was a huge chunk of money that was left in the bank account of the left behind entity, and it's usually set up, and it was in the case of Windsurf, uh, in such a way that the money that was left in the company is what they would have received through the liquidation waterfall, right? And so the point is that an acquihire, you get the status, but not the money. In an acquifire, you get the money, but not the status, okay? So that leads to the whole Windsurf drama. In the other five acquisitions, uh, you, you know, you, you guys seen the, the Dark Knight. You know Bane, he's like, "We need one of us to be in the wreckage, brother," right? So whoever was in the left behind, you know, company, right, was, um, was somebody who was well-behaved enough to basically be like, "Okay, salute. I'm gonna go kind of down with the vehicle. I'm gonna dividend the money out, you know, deal with it silently," and so on and so forth, right? It was, uh... You know, you know, like, uh, there's a line of succession for the presidency, and it's like president, vice president, like, I think it's like the s- speaker of the house, blah, blah, and you get to like number thirty-seven, it's like the secretary of interior or something like that.
- SSSteven Sinofsky
It's Kiefer Sutherland, the Housing and Urban Development.
- BSBalaji Srinivasan
Kiefer Sutherland.
- SSSteven Sinofsky
Yeah. [laughs]
- BSBalaji Srinivasan
Right, right. Exactly, right? So the Kiefer Sutherland is the designated successor if the entire leadership structure is decapitated or, in this case, acquired, right? If they're all raptured, right, th- that, that is the person who s- who's behind who's now the president. Now, one of the things I think we need to do in our contracts is we need to have... You know the concept of a key man provision?
- SSSteven Sinofsky
Yeah, yeah.
- BSBalaji Srinivasan
We need to have a non-key man provision, which is this is the designated executive who, uh, is in the event of an acquifire-like thing, and we can decide how to describe it. It's not an acquisition, because if it was an acquisition, then you have all the FTC blah, blah, blah, blah, blah stuff, right? But in the event of an acquifire, this non-key manStays behind. He gets maybe a little more money than he-- or a lot more money, whatever, they renegotiates, uh, because he's not getting the status of being acquired, okay? But he executes an orderly shutdown of the company, doesn't have any drama, and just dividends out the money, okay? The issue is that this deal structure was new enough that the other five times it went fairly well, but in this context, what had happened, and just to give you some details that I'm aware of. First, most of the Windsurf employees had just been hired within the last few months because they were all sales guys. Second, Google, when acquiring the company, didn't wanna acquire these sales guys 'cause Google has its own sales team. Google just wanted the engineers, right? Third, Google put a hundred million plus in the bank account of Windsurf, where the intent was to dividend it out. But the guys who were left behind didn't understand what was happening 'cause they're sales guys, they just think about money or whatever. And, uh, the, the problem was it was, it was so constrained in terms of what could be said about what was going on, since it's not an acquisition, guys, right? Since, since, since they couldn't say anything about what was actually happening, uh, the people who were doing the deal couldn't communicate clearly about what was happening. So it just looked like, "Oh my God, the founders left, and they left everybody in the lurch. Oh, they broke the social contract." And so that's not actually what happened at all. What happened was the FTC and others had made acquisitions so difficult that they had to do this other structure, and it resulted in the people left behind not getting the hint about this. That's one, that's one interpretation. The other interpretation is the people left behind got money, but not status. So after all, if you put yourselves in their position, like normally in an acquisition, Google might have acquired a two hundred and fifty person company, and they might have kept forty people, and the other two hundred people they said, "Hey, we're not acquiring you."
- SSSteven Sinofsky
Right. Right.
- BSBalaji Srinivasan
But, but, but, but those people would've had a face-saving thing, and they would've had a line on their CV saying, "My company was bought by Google. You know, I decided to do something else afterwards."
- SSSteven Sinofsky
Right. Right.
- BSBalaji Srinivasan
And you know what? That's actually a common thing 'cause it has to be... both parties have to agree. Both the big company and the small guy, you know, have to agree, "Hey, I wanna still work at Google rather than do another startup." And it's very common. Everybody has a, a broad, warm halo. Your exact exit number isn't published online. You, you know, whether you've got an offer letter isn't published online. So everybody who is acquired has a junction point where they can choose to go to the big company or not, and they have the status and the money, right? So the issue with the FTC interference in that is it broke the status part of the transaction, where the guys left behind didn't get status. So but they did have money. So what do they do rationally for them? They negotiate a second acquisition with Cognition, where they got the status of being acquired. Now, the issue is Cognition's like sixty people, and the acquiring the two hundred people of Windsurf, that's, that gets back to our earlier point. Usually, a company can't buy something-
- SSSteven Sinofsky
Right
- BSBalaji Srinivasan
... that it's not ten X greater than. So it'll be very challenging for Cog, I think. You know, by the way, I have nothing against Cognition, nothing against Windsurf, nothing against any of the people here. I wish everybody the best. Cognition's an awesome company. Uh, Windsurf's awesome. Varun is awesome. Ev- I have nothing, nothing bad to say about anybody. Just describing the incentives, right? So Cognition will find it challenging, I think, to integrate those two hundred people, and it'll be also challenging for them to lay anybody off 'cause they, you know, said, "Oh, we, we, we brought e-everybody on." I think, um, on the, on the Windsurf side, basically, like Varun's side, he's muzzled, so he can't say anything. And in general, my view is usually the guy who's getting pummeled on social media and can't speak is usually not as bad a guy as it's made out to be. He just literally can't defend himself, right? Uh, but, but to defend him, it's this deal is essentially the same as the other five deals. The difference is the people left behind, you know, didn't wanna play the Kiefer Sutherland role or what have you, just because, you know, for, for no reason, which is, which is their prerogative. The way we solve it in the future is a non-key man clause, and there's somebody who's maybe paid more to shut down the company, turn off the lights, because that does suck. I, I grant that that sucks, and I understand why th-their egos are wounded and, and so on and so forth. But ultimately, the person to blame... One of the other things that happens here is in something like this, the last person with a face is the one who's blamed, right?
- SSSteven Sinofsky
Oh, yeah, yeah.
- BSBalaji Srinivasan
'Cause Varun has a face, but Google doesn't, and the FTC doesn't, and then the general anti-tech, antitrust, US versus Google, FTC versus Meta kind of stuff doesn't, right? So the last guy with a face is blamed, but the faceless stuff isn't. You know, it's almost like Bastiat's seen and unseen, right? But blame the FTC, blame Lina Khan, and, and there's one other thing, which is someone asked, "Well, why isn't the current administration reversing this?" And the answer is the current administration, for totally different reasons, I think they have a legitimate bone to pick with Big Tech because of the censorship and, and so on and so forth. But as a consequence of that, many of the cases that were started have been continued, right? So it's not like this thing's just completely went away. The new administration is friendly to Little Tech mostly, but unfriendly to Big Tech, um, and continuing those cases. And then this is the Big Tech, Little Tech interaction effect that's going on there. All right, that's a lot I just said. Let me pause there. There's more I can say.
- SSSteven Sinofsky
Well, those, those are super, I mean, very tough stories to hear, and I... Two things really jump out at me. One is just purely on the shaping of the landscape and what's going on. I, I think these are extremely important, let's just call them deals. And, and the reason they're extremely important deals is because the, the way our-- we're-- I, I would say with near certainty, uh, or i-in general, but for me personally, we're undergoing a platform shift now with, with AI. We don't know... I, I can't say who the winner is. I don't wanna say. It's not really important. But there is a shift in where the nexus of the broad tech ecosystem energy is going to be from mobile and cloud to AI. Now, whether or not that's a complete break or the same players move to that transition, don't know. But, but that, what that means is, first and foremost, the most exciting things that are gonna be going on in the near term are in the tooling to enable the platform.And, and that's especially true because the way that the AI and platform shift is happening is there's just a lot of players and there's a lot of people. And it reminds me a great deal of the consolidation of the PC operating system world, which was there were dozens of PC operating systems in, in 1980. And when IBM came out with the PC and Microsoft came out with DOS, part of the consolidation was due to the, the implementation of the basic programming language that had already gained strength across many of the platforms. But this consolidation that on boot-up, there was basic, and then this proliferation of tooling that appeared on DOS because Microsoft invested irrationally in tooling, IBM invested irrationally in tooling, far more than there were any independent tool makers. And I think what's happening in AI right now, when you look at all of the energy around coding, is that this is really building the tooling for the AI era. And, and so it's gonna be an irrational investment because tooling itself is never a really huge business because you have to have it. And so it's sort of this, well, if you have to have it, then there's gonna be... there are gonna be many alternatives, and there are gonna be some low-priced ones, some high-priced ones. But the people that wanna have the predominant platform will invest irrationally in tooling. And so that's why you're getting these deals that don't look rational, because there, there's just a bunch of tooling. The, the second thing is, it's really important to put this in perspective if you're one of those people who think that this is kind of gross or hacking the rules in some way, which is antitrust law was itself designed... If you go back to the Sherman Act, it was this very vague... It was barely three pages of legislation, and it was really designed to attack one specific thing. And i-i, the, the word trust in that context just meant contract. And so what was happening is between the railroads and manufacturing and resources and stuff, the, the way that interstate commerce happened, a company in one geography would sign a contract with a company, a provider, or a vertical partner in another geography. And there were-- The interstate commerce laws had not yet really been established. And so it was sort of this free-for-all of, like, these exclusive contracts by geography, by resource type, by train tracks, and it was locking out whole parts of the country from, from the availability of, of those things. So, so this antitrust became break up these vertically integrated or these horizontally constrained entities. And then when the Clayton Antitrust Act came along, it said, "Oh, you know, the real problem is pricing and tying." And so then all the laws became about how much you can charge, can you have exclusive deals, not exclusive deals? And at each step, well, you know, the first time... Well, then Delaware came along and started being really favorable to companies that were doing business in multiple states. And so you ended up with this sort of-- And I'm... I, I don't wanna get criticized by, by legal historians or business historians or whatever. Like, I'm, I'm not playing fast and loose. I'm trying to be abstract about what took place over 30 years. But then, you know, then when pricing came along, well, businesses just started to develop all of these different ways of dealing with pricing. Like, like one of the most common things people know is, like, if you buy a lot of something, you get a better price. But if you actually read the Clayton Act, like, that doesn't appear to be legal. And so then it took a whole bunch of court cases to just make this very basic premise, which is the more you buy, the better price you get, 'cause I like good customers. Or if you commit to not buying my competitor's products, we'll give you a good price. And the Clayton Act was like, "You cannot do that." And you're like, "But that seems to be a fairly reasonable constraint." Like, you're not gonna buy it from me and play that off my competitor, and I'll be nice to you. And, and so all of these things. And so at each juncture in the evolution of regulatory oversight, like, the next step of it was what could be viewed as a hack to the systems that got put in place, which generates this animosity with regulators. And of course, you can go back. Banking is a classic one where, like, checking accounts didn't have interest. And so someone clever with software invented this notion that you have a checking account and a savings account, and your savings account has all your money in it, and the minute you write a check, we move money from your savings account to your checking account, so it stops earning interest, we pay the check, and you're covered. And that was called a now account. And that innovation allowed you to have interest on a checking account, which turned out to be a really, a really big thing. When MCI came out with like, "We want you to use our deregulated long distance, but we want you to, you know, like, only get a really good price when you call 10 friends and family. We'll give you a really good price." So everybody around the country signed up for MCI when phones were deregulated and had to make a list of all of their friends, which of course turned out to be this massively great marketing tool because then they would take that list you gave them, give you a discount for calling those 10 people, and then hit those 10 people up to be part of friends and family. But that was just, like, a software innovation that completely worked around this idea that the price of long distance should be the same for everyone everywhere. And then AT&T did it with free minutes up to unlimited long distance calling. And so what's happening now is just like, okay, the regulations have been fixed for a long time. We want to invest irrationally in platforms. You're making this part of it very difficult, so we're just gonna go figure out an innovative way. And so we have to be careful because of course they are gonna circle back and make this difficult in some way. And that's the cycle that you, you get in with, with regulatory overtight- oversight. And you know, you could be... Like, I've always... The guy... I used to stand up a- and fight about, like, this feels like the guy in basketball who decided that when there's seven seconds left, you should intentionally foul someone. I always thought that is, like, the most unsportsmanlike thing. 'Cause I'm like, they didn't invent fouls-
- SPSpeaker
Right
- SSSteven Sinofsky
... to, like, be executed on purpose. They did it so you wouldn't poke the other guy's eyes out.But it became part of the strategy, and that is like the ultimate American capitalism is exploiting the rules that way. And there, you-
- BSBalaji Srinivasan
Well, so, so also Silicon Valley-
- SSSteven Sinofsky
And it's one of the issues is this. It's also Silicon Valley.
- BSBalaji Srinivasan
Yeah. Yeah. So, so I think that what happens is, is following, is that you start out in a totally honorable, I, I think fairly honorable, you know, uh, capitalistic way, and then what happens is when the government attacks you enough, then sometimes the companies that survive that get a taste for the One Ring.
- SSSteven Sinofsky
Yeah. Yeah.
- BSBalaji Srinivasan
Right? And they're like, "Okay. Well, you know what? We just built this huge lobbying team to defend ourselves. What if we go on offense," right? And they're kind of corrupted by it in a certain way. And the one issue... Th- there's like, I think, you know, i-i-in chemistry, if you think about like reaction kinetics, sometimes you can have a bunch of time constants where you have this reaction, this reaction, this reaction, they're all going, and you have to actually do the math to figure out which one goes first, you know. And so I think there's several things that are all hitting at the same time in this space that I'll just give them in quick succession. The first is these big companies are now getting the taste. They're forced to. They wouldn't actually wanna consider this in the first place, but of, you know, getting like, uh, rather than buying the cow, they're getting the milk for free, right? Decapitation rather than acquisition, right? Now they know that that's a thing. Actually, it's faster than an acquisition, just leave the money in the car. You know, it's like, it's almost like a deal. You're just buying something from somebody. Um, it's closer to just like a big, big purchase order almost than it is to an acquisition with all the complexities that are involved in that. So now they're like, "Oh, I can do that faster and less overhead. Mm, let me have five of those," right?
- SSSteven Sinofsky
Yeah. Yeah. Yeah.
- BSBalaji Srinivasan
So that's, that's like, that's like one thing that's happening where you're giving big companies now a taste of this and it's like, you know. So we'll have to figure out our deal terms to account for that as something that counts as a, as an exit, but doesn't count as an exit. You know? We'll figure it out. Okay. The second thing is, um, AI is making it so that you can do more with less, more with fewer people, right? So this will be a more common thing where there's an internal, um, you know, amplified intelligence rather than artificial intelligence. You're gonna have this stratification within every company and between companies where the top people will become more and more and
- 1:03:17 – 1:14:16
AI’s Impact on Talent, Team Structure, and Scale
- BSBalaji Srinivasan
more valuable 'cause they can just do, do so much more, so much more quickly, right? Um, and the third thing is, you know, o- one thing people say about AI that I actually don't agree wi- didn't agree with then and actually I don't agree with now is this is the worst it'll ever be. You know, th-this, that was used to say, right? But I remember with Napster, Napster was actually the best it was, and then the, all the copyright lawsuits and attacks on it made it worse and worse over time. Google Books, Books was amazing, and then all these copyright lawsuits gelded it enough so that y-you could get like some little snippet preview, and then you couldn't see the whole thing, right? And so it's quite possible, I would even say probable, that the combination of all the copyright laws... These are desperate lawsuits, by the way, desperate attacks by all these journalists and, you know, authors, writers, et cetera, who hate AI. And I understand why they hate it, but they just hate it. So they just wanna kill the thing, and, you know, they, you know what they'll say? They'll say, "Are you an AI supporter?" With like venom in their voice. It's like... Have, have you not heard that one?
- SSSteven Sinofsky
I, I, yeah. Go ahead. [laughs] I, I'll, I'll follow up.
- BSBalaji Srinivasan
Yeah, yeah.
- SSSteven Sinofsky
I promise. I, I won't let you just get away with that.
- BSBalaji Srinivasan
Okay. Okay. Yeah. So, so it's like, because like, you know, they, they'd say like, "Are you a, a Trump supporter? Are you an AI supporter?" Ugh. You know, and, and some, uh, uh, there was some company, there's a few that it's similar to actually like when Discord tried to roll out crypto. People are like, "You, you're doing crypto? Grr" You know, people got super, super mad, right? And, uh, that is a building thing of an anti-AI, anti-crypto, anti-tech into setting fire to the Waymos. It's a real thing that we should not just watch out for. I think it's gonna become actually the future political axis between futurism and primitivism. That's gonna be the new left-right after the whole thing finishes rotating. But, so the issue is that those attacks from a copyright standpoint, and also the energy constraints, 'cause data center build-outs are gonna just start hitting, you know, spare energy constraints, um, and the, the fact that the Chinese models are open, and they're actually pretty good, and they're distributing them quickly, and China's... D- did you see my post on AI overproduction a few months ago?
- SSSteven Sinofsky
Yeah.
- BSBalaji Srinivasan
Right? That's happening now. You've got Kimi, you've got Qwen, you've got DeepSeek. These are good models, and they're open. I shouldn't say fully open source, 'cause they're open coefficients, but not open source because the, they, they haven't released the full source code to build them and all the complexity that that involves and so on and so forth. Um, but they are open coefficients. And so the combination of those three things means it's quite possible... And then the fourth is, uh, you know, I already saw something where some, you know, uh, government restriction on using hosted DeepSeek. Okay, I can understand that hosted DeepSeek is going to China. But I, I wouldn't be surprised to see something where it all combines such that, A, USAI companies are hit with copyright lawsuits, B, they're blocked by the lack of energy, C, the Chinese open models are out there, and D, US regulations prohibit people from using the Chinese open models so that actually that lead in AI is actually lost, and it becomes harder to do AI in the US, and it's similar to what happened with crypto, where crypto had to decentralize outside the US in the 2020 and '24, '24 range. I don't think that's the intent, but I can see those storm clouds coming. And the one other thing I'd say is, um, because AI does it middle to middle, not end to end, it doesn't do everything, but it does do a lot of... There's a lot of, you know, bureaucratic jobs, you know, jobs that lawyers do, that doctors do, that teachers do, professors, artists, journalists. This is going after, like, the blue base, really going after them. And, uh, and so, you know, doing all of this AI in San Francisco and publicly making millions or even billions of dollars and being demographically different with all these immigrants and being very publicly rich and recognizable in the blue state, in the, in, a blue city in the blue state in the union, to me is not a goodLong-term recipe for peace and prosperity, right? It results in accumulating too much capital too publicly, and then you just start to see, uh, some very, very nasty things happening. So, so because of all that, I think, uh, I am bullish on decentralized AI, but I'm not so sure how, how centralized American AI is gonna
- SSSteven Sinofsky
I think this is a good way to, to close. I'm gonna, I'm gonna do the-
- BSBalaji Srinivasan
Give, give, give pushback. Yeah
- SSSteven Sinofsky
... I'm gonna do the impossible thing with, with you, Balaji, which is I'm gonna try to get the last word in and let Erik just say-
- BSBalaji Srinivasan
No, no, no, no, no
- SSSteven Sinofsky
... thank you very much.
- BSBalaji Srinivasan
Go, go, go.
- SSSteven Sinofsky
No, I-
- BSBalaji Srinivasan
Thoughts cast, go
- SSSteven Sinofsky
... like, the, we opened up a lot of topics, and I, and I, I, I would encourage comments and dialogue out on X for where we should take the next part of this 'cause we should keep going.
- BSBalaji Srinivasan
Yeah.
- SSSteven Sinofsky
But, but, like, I, I wanna say broadly and deeply, I agree on the, the biggest issue we all face right now in, in the technology sector of the economy is the risk to, um, to the AI innovation trajectory in the US. Like, and you can look at that from a technology perspective, a regulatory perspective, a business practices perspective, um, an immigration perspective, like a, a research funding. Any way you wanna look at it, there are arrows aimed at from various perspectives, uh, from, from preventing it, when the right answer is we need, we just need to let the market work, the market for talent, the market for technology, the market for people. There- there's, there's just a very strong market that can, can really, really work, because from the Clay Christensen perspective, what China is trying to do is commoditizing our strength. And so the, the-
- BSBalaji Srinivasan
Yes
- SSSteven Sinofsky
... the release of a bunch of open so- pure open source, open weight models coming from China is specifically designed to go after a rigid or complacent American view of AI, which is, you know, cloud hosted by a few big players, you know, closed source. You know, that, that... So China is just doing, and I can look at this very emotionally and personally, which is this is Google releasing Google Docs for free.
- BSBalaji Srinivasan
Yeah, yeah, yeah, exactly.
- SSSteven Sinofsky
And, and, and I'm running-
- BSBalaji Srinivasan
That's right
- SSSteven Sinofsky
... Microsoft Office, and Google is just like, "We're never gonna make money from this." And here we are in 220, 2025, they still don't make any money from it. But they d-
- BSBalaji Srinivasan
Yeah
- SSSteven Sinofsky
... they, and what Microsoft had to end up relying on is the worst part of the business, which is just enterprise distribution lock-in as your-
- BSBalaji Srinivasan
Yeah. [laughs]
- SSSteven Sinofsky
... core part of your business-
- BSBalaji Srinivasan
Right
- SSSteven Sinofsky
... not innovation, not moving forward, which bums me out. Um, uh-
- 1:14:16 – 1:17:58
A New Proactive Approach to Tech Regulation
- BSBalaji Srinivasan
it actually had to build its own platform, right? And like, essentially Google, you know, with Chrome, it kind of became its own thing. It's as, as Steve is aware, it built, uh, uh, things. And so what we have to do is we have to stop being reactive to Lina Khan or like Scott Wiener on the AI bill or things like that, and we have to be proactive in the following way: A, for every space that we're in, we figure out what is the ideal set of laws. B, we write model legislation for all fifty states and all hundred ninety sovereign countries, and AI can help with this, but obviously it's-- it'll just give you a first draft, but it'll get you on base. C, we build a sales team that goes down and knocks on the doors of those fifty states and hundred ninety countries, and of course, there's subdivisions. There's cities and counties and all kinds of stuff, both within and outside the US. Next, we actually find politicians, and of course you can rank... Before you go and knock on the doors, you can rank that list by those that are the most pro tech, the most amenable to tech, right? Um, for example, Jared Polis in Colorado is, is friendly to, like, accepting Bitcoin for payments there. Or, uh, you have, you know, somebody who's posted about AI, and they clearly, you know, they're, they're conversant with it. And often you'll find some state senator or, you know, some, some governor, like obviously, like there's Bukele, before he became who he is today, was a very pro tech, you know, person in government in El Salvador. And so we identify all the pro tech politicians around the world, and in particular in this process, small states are the friends of little tech because they're the ones who don't take anything for granted. They want to build their economy and so on and so forth. And so if we go to them, we say, "Here's a draft of a bill, and then here's ten COs or ten founders or ten investors or whatever, fifty representing X billion dollars in AUM or Y billion dollars in revenue or some combined thing. And if you pass this legislation, then we will invest in your country," right? Because then that, that is now unlocked, right? Now we can build the speed of physics, not permits, right? I should write an article on this, Elon Salvador. Okay? Elon Salvador is what it sounds like, which is the tie-up where in an American time zone, Elon gets some space where he can build the speed of physics, not permits, right? All twentieth-century barriers go away. You keep the common sense stuff like, you know, thou shall not kill, you know, assault, murder, blah, blah, whatever, all those nor-- You, you don't have to sunset every law, obviously, right? There's some laws that are just eternal laws. But lots of twentieth-century regulations are just very stupid. You know, as Ari Pape said, you know, after the internet, you have to kind of go back and look at a lot of laws and see if they still make sense, right? Patenting laws, this laws, you know, do, do they still make sense when you can build in different ways with robots or other things? Um, so the answer is, I don't think it, it would be a micro answer, Eric, which is it wouldn't just be like, you know, advise Lina Khan or a different than Khan. It's a macro answer of like, go between countries. Essentially, you know what it is? Rather than... Here's a flip. Rather than say, "Oh, you know, how do we deci-- how do we let them decide whether we're a monopoly or not?" Assume the US government was a monopoly, the federal government, and how do we build competition to that, right? How do we build jurisdictional competition? How do we build choice? 'Cause ninety-six percent of the world is non-American, and, you know, only, and fifty percent is non-blue even within the US. You've got lots of jurisdictional choice. So how do we do antitrust on them? That's how, that's how we do it differently.
- ETErik Torenberg
Maybe, maybe that's how, maybe we'll wrap on, uh, on that big idea. Uh, Balaji Srinivasan, this has been a fantastic conversation. Thanks so much.
- BSBalaji Srinivasan
Thank you. [upbeat music]
Episode duration: 1:18:08
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