a16zThe AI Opportunity that goes beyond Models
EVERY SPOKEN WORD
75 min read · 15,481 words- 0:00 – 2:17
The AI Opportunity: Apps, Distribution, and Platform Shifts
- ARAlex Rampell
So for everyone that I haven't met before, I'm Alex Rampell. I'm the Apps Fund. I've been at the firm for 10 years. I stole this from Chris Dixon, who published a post like this about probably 12 or 13 years ago, and the whole premise is that product cycles drive growth. And, you know, the top of the chart here is the Nasdaq from 1977 to, to present. It goes up sometimes, it goes down sometimes. Over the long run, it has gone up, but there have been some very scary down points. So there really, there have been four major product cycles. There was the PC, and obviously before the PC, there was the semiconductor. But we gotta start somewhere. We'll start with the PC. Um, there's always a, an infrastructure layer of companies that are building the back end. There's the application layer of people that are building, you know, things that actually are used. So, you know, Lotus was one of the first infrastructure... Oh, sorry, application companies. Adobe, Symantec, all of these companies that kind of grew out of the 1980s. But the, the infra players, if you were, were Apple and Microsoft. Then you had the internet. Um, that was enormous. Lots of bubbles along the way, but, uh, some very, very enduring infrastructure companies like Cisco and Akamai, enduring companies in the application space like eBay and Amazon that were built on top of that. Then you had cloud, so AWS accounts for the vast majority of market cap of Amazon. You've got Workday, Shopify, Veeva, others that were the application layer. Um, mobile took all of these things that came before and now put a supercomputer in everybody's pocket. So the vast majority of humans on planet Earth have a smartphone, which is pretty amazing. Um, and that was the mobile era, which is still, still actually kind of, uh, playing out. Like, I just bought an Android phone to test things with. It was $40, and this was more powerful than like a super... Than the ENIAC in 1946 or whenever the ENIAC came out. And then two years ago was that this AI era is coming out as well. And, uh, you know, the Nasdaq is higher. We, we know that. But the AI era really is playing out. And the cool thing is this is not a net new thing. This is building on everything before. Like, if we didn't have smartphones and we didn't have cloud, but we just had the ENIAC, AI would be pr- pretty cool, like you could go check it out in a museum. But the fact is you now have, you know, eight billion humans on planet Earth, the vast majority of whom have smartphones, and the adoption of this new technology is taking off like never before. So the AI layer... The, the AI era is here. The, the vast majority of, uh, net new revenue that's happening in software land is actually coming from AI, both at the application layer and the infrastructure
- 2:17 – 5:03
AI's Role in Enterprise and Consumer Applications
- ARAlex Rampell
layer.
- JKJen Kha
It's hard to, to actually think back two years ago. At that point in time, of course, ChatGPT, uh, three had launched. I think ChatGPT-4 had also launched, but it was all just text and, and imaging and some basic reasoning. But none of the native audio stuff, obviously real life, uh, real-time interaction, none of that actually, um, had happened yet. It's hard to even imagine how far we've come, even in just the two-year timeframe as a, as a part of that.
- ARAlex Rampell
Yeah. I mean, it, it's, it's really remarkable, like what these things have done. I mean, one of the ways of kind of joking about this is that, you know, we have this idea of artificial general intelligence or the Turing test. Like when can we tell the difference between a computer and a human if we don't know who our interlocutor is? And the answer is like, if you were to take a person 10 years ago and show them, or 20 years ago, or 30, they're like, "Oh my God, this is like a fully sentient... This is smarter than any kind of human out there." We, we kinda keep changing the goalpost a little bit on, on what exactly is AGI, but yes, the, the, the pace of innovation here is just remarkable. And the important thing is just the opportunity set that it, that it un-unlocks. So there, there was a paper, a very... There's always, whenever you have a bull market and very, very exciting tech, there's always somebody saying it's a bubble or it doesn't work or, you know, it's, it's all over-hyped. And I think there was some MIT paper that came out, um, th-this is not to fault the MIT, this is, uh, somebody who published the paper. It's like, "Oh, you know, mo-most enterprise deployments really, really aren't working, um, in terms of AI." Um, we're seeing the exact opposite, and I'll, I'll show two things. So there's a company called Ramp, um, and they are kind of credit card expense management products. And you see this giant tick up in January of 2025, which is, you know, when did enterprises... And these are much more, like who uses Ramp? This is not necessarily a startup, but it's a more forward-thinking company. It's not necessarily GE. It's a company with, you know, thousands of employees, maybe in the Bay Area or New York, that wants to be more tech forward, and they've just realized like, "Wow, this stuff..." Jen, to your point, like GPT-3.5, pretty good. 4.0 was like, wow, that's pretty amazing. I could write a, I could write a new episode of "Seinfeld" with it. Like, amazing things that I could do almost to, to kind of wow my friends, like a magic trick. But now the magic trick has actually gone into the enterprise and is saving people time and money. And, uh, you know, one of the themes that you'll potentially get out of this presentation from me is that I have this, this, uh, prevailing view of human behavior, which is everybody wants two things. They wanna be richer and lazier. So they wanna do less work and get more economic value. And this is really what GenAI unlocks, and it's really starting to happen right now. And this has been a little bit of a flat curve, but it has been inflecting a lot, and you see this in the expense data. You see it in the growth of all of the companies, both at the infrastructure layer and at the app layer. And, you know, again, whether they're overvalued or undervalued is almost not the point. It's hard to time the market on these things. The amount of value that they are generating, um, is just tremendous, and we're gonna get into this in a second. Um,
- 5:03 – 8:43
Emerging AI Trends and Investment Strategies
- ARAlex Rampell
so there, there's a... If anybody knows Maslow's hierarchy of needs, like, you know, this is like this philosophical term of what is it that humans need. At the base of the pyramid, you know, people would joke is Wi-Fi. So it's like, okay, I need all these things that have been true for hundreds of years, and at the very, very top of that pyramid is this self-actualization concept. But what I really, really need, if you talk to any teenager, it's like, you know, "Where's my Wi-Fi? Where's my Wi-Fi?" And what's starting to happen now, next, is, uh, it's actually AI. Um, so obviously you can't have AI without the Wi-Fi, but, um, something like 15% of adults on planet Earth now use ChatGPT every single week. Um, and why are they using it? It's just part of their daily routine. You know, whether it's settling a bet with their friends over like, you know, how does this work or that work, or I want directions to this thing, or I'm really puzzled.My wife just used it to complain to the school because, uh, our kid missed the bus, and the bus driver said he can't open the door because it's against the law to open the door. This is a true story. So my wife, you know, had ChatGPT scan all the laws in California, um, and the US, um, you know, federal system writ large, even though our government is closed down. Nope, that was completely made up. Sent a very, very polite note. Um, I'm sure that the school is going to start adopting ChatGPT too to start responding to people like, like my wife, saying, you know, apologizing on behalf of the bus driver. But they did s- they did send an apology. "Sorry, we made that up. Next time we can open the door for your child if he is on time when the, the bus has already closed the door." It's like a countably infinite number of use cases for these things, and the growth of minutes per user in the US, I mean, this is just astronomical. And as these things work better, and as they unlock more use cases, it's kind of obvious that the, uh, the, the growth in minutes will go up. This is happening at a breakneck speed. So the, uh, the, the key paper, which was co-written by this, this very, very smart guy, uh, Noam Shazeer in 2017, "Attention Is All You L- Need." It introduced the transformer model. Um, I remember, we have a partner here, Frank Chen, who's been here for a very, very long time, and he demoed ChatGPT or GPT-2. Um, and it like, it didn't really work that well. It reminded me of this thing called ELIZA, which was like a famous, uh, Markov chain-based thing. It's like it was, it was basically a therapist that came out. It was an AI-based therapist in the 1960s or 1970s. It's still around, you could try it. And basically you say like, you know, "Doctor, I'm not feeling well." And then it just kind of says, "And why is it, Jen, that you aren't feeling well?" It just basically takes the words that you say, turns it into a question. It feels kinda sentient until you ask it like, "Hey, I wanna complain to the school about the bus driving." And then it says, "And why do you wanna complain to the school about the bus driving?" It doesn't actually give you an answer or anything that you need. So, um, you know, OpenAI, it's, it's hard to imagine that this just happened a couple years ago. But, um, from 2023 until now, like we really have entered the golden age of apps. And I, I base that purely numerically. I mean, like the number of... I'm used to companies that will grow from, I don't know, like we used to co- talk about like double double triple or triple triple double or all these different ways of measuring revenue growth. Because normally, if you're selling a software product, and let's just say that you're selling a software product to an enterprise and it's, you know, $100,000 a year, you might sell a couple one year, a couple the next year, a couple the next year. But very, very rarely have we ever seen a software company go from zero to $100 million in revenue in a year or two, and we are seeing this right now. And that, that, that's why... And this is not like, oh, we're seeing it because people have too much money and they're buying these things. These are companies that are buying these things because it unlocks so much value for them. Um, they wanna be lazier, they wanna be richer, and this is unlocking that. So I'm gonna talk about three broader themes that we're seeing in AI applications, or really more broadly, these are the types of companies that we're investing in. And partially this is, uh, wh- when we ask ourselves what is defensible, um, what is it that the labs aren't going to do? Because this is a
- 8:43 – 14:40
Traditional Software Going AI Native
- ARAlex Rampell
very, very good question. It's not like OpenAI just wants to be this backend layer for everything. They have a leading consumer app. Like they just launched arguably a competitor to TikTok. Um, so, uh, Microsoft is getting into the space in a meaningful way. And if, if you look at the history of software, I mean, this firm was started by Marc Andreessen. He started a company called Netscape. Netscape became roadkill, um, due to this company called Microsoft that went into an antitrust case because of making Netscape roadkill and whatnot. But, um, how do you build an enduring company? And what are the, what are the areas that potentially have the most enduring growth? And there are three that I'm gonna lay out. So the first is, um, you know, basically traditional software is going AI native. And this is no different than like if you could've built a time machi- if you built a time machine right now, go back 15, 20 years and say, "I'm just going to invest in every single cloud native company that pops up," you would have an incredible portfolio. You'd have Shopify, you'd have Viva, um, you'd have NetSuite. NetSuite's a little bit older. You'd have, you know, Salesforce when it went f- first went public, because it turned out that the incumbents couldn't really respond to that because they were selling on-premise software or shrink wrap software, um, for a lot of money up front, and they didn't really know how to go for like less money every single month as a subscription. So, you know, category one is trad software that's going AI native. Category two is arguably the biggest, which is basically it's not competing with the software market at all. This is, um, if any of you saw my talk that I gave in May, um, software is starting to eat labor. You're basically selling software that does the job of what people would do before. This is arguably a much, much bigger market. The, the, the laws of business still apply. You have to build real moats. You can't just build something that's a little widget that somebody underprices your widget by a dollar tomorrow, and we're gonna talk about that in a second. And then lastly, um, I call this the walled garden, but basically really, really interesting proprietary data models where the value of this business, because you're able to deliver the finished product thanks to AI, becomes much more valuable. And, uh, I'll talk about number one. So existing categories are going AI native. So this is a little... We actually have a post coming out about this in a couple days. Um, but I'm sure everybody here has heard of bingo or played bingo. I'm from Florida. There's lots of bingo in Florida. Um, lots of different names on this list. And, um, one of the key lessons that I had as an investor is, um, you know, and Mercury is kind of a great example of the tortoise that beat and is, you know, still beating the hare.Mercury built a neobank for startups. So they said, "We're gonna be the better source for you when you start your company to go deposit your money with us. We're gonna, you know, help you pay your bills, um, track your expenses, be a basic accounting system." Mercury never stole an existing customer from Silicon Valley Bank until the weekend that Silicon Valley Bank failed. And it is what I would call the canonical greenfield opportunity versus brownfield opportunity. So brownfield is you're selling to an existing market. So let's just take an example here. Um, email marketing, you use Mailchimp, I wanna go sell you a competitor to Mailchimp because h- it has AI. That's gonna be really hard. Or you use NetSuite and I'm gonna say like, "Hey, ditch your NetSuite, I'm gonna give you AI NetSuite." That's gonna be really hard. If you're a net new company, and this is what I mean by greenfield, you have no existing product, you're not using anything, you're a brand new company, or sometimes you've hit an inflection point. So the inflection point, I'll, I'll pick on NetSuite here for a second. Um, the inflection point is I have 50 employees, now I have three entities and two currencies. I've been using QuickBooks my entire life. Uh, QuickBooks can't handle, for whatever reason, they cannot handle multi-entity, multi-currency support very well. KPMG says, "Hey, you gotta go move to a better ERP system that supports that." And now I have an opportunity to pick the better product in the market. And NetSuite is a product in the market, or I can try this thing called Rillet, uh, which is one of our companies, which is basically like NetSuite, but it closes the books for you. It has 50 AI features built in. That is a greenfield example. Now, these things don't grow like weeds because you have to wait for the new company creation. Um, you're going entirely for greenfield and not for brownfield. But every single one of these spots on this bingo board, the incumbents are all adopting AI, and they're gonna make their businesses much, much better with AI. Like Bill.com is gonna be a stronger business, or SAP is gonna be a stronger business, or Adobe's gonna be a stronger business because of AI. They're just going to be able to charge for new things. Workday will start charging, and I mentioned this in my presentation that I gave a couple months ago, Workday will say, "Hey, do, do you want us to do reference checks on every new employee that you enter into our system? That's $500 per reference check." Why can't somebody do it for $499? Because you're stuck with Workday. And there's a saying that I use a lot, which is the best companies have hostages, not customers, and I'll talk about a couple examples here. Um, so RPA, there's an existing company called UiPath, public company. Um, customer support, there's an existing company called Zendesk. It's now a private company. Uh, ERP, SAP, NetSuite. Or in some cases, like Zendesk charges per seat per month. That is almost an extinct business model for support software because, well, wait a minute, I don't wanna pay per seat per month when 99% of all queries can be answered by the support software. I wanna pay per outcome. So we've been aggressively betting on the bingo board. Let's evaluate every company that we see in this space, so if it's payroll, if it's support, if it's ERP. Um, and the important thing is that these are systems of record. So this is the, the best companies take hostages, not customers. Uh, like we don't want to invest in hostage companies. We don't want to invest in companies that have negative 100 NPS. We want to invest in companies that still have a very, very strong moat, and that's what I mean when I use that expression. Um, so all of the companies that we're looking at here, what is a system of record? It just means like it runs the entire business. Everything on that bingo board, like how do you get rid of, of, of NetSuite? It's basically impossible. You can enter in with an AI wedge or, um, you know, m- more often than not, a lot of these bingo categories are we're just building the new system of record. Um, the existing incumbent is doing that as well, but it still is a no-brainer whenever you're brand new in the market or at this inflection point of do I use this old one or do I need this, this new one? So, uh, next here.
- 14:40 – 17:04
Software Eating Labor
- ARAlex Rampell
So the second theme here, uh, which I, I am personally most excited about, is where new categories are emerging where labor is, is software. And there is no bingo board for this at all, and the reason why is because there weren't software companies that did this before. And like the predominant theme is that you have a lot of things where you would hire a person, you can't hire that person, or that person that you were going to hire doesn't speak 21 different foreign languages and won't work 24 hours a day, but software can do 90% of what that human would do. Now you will pay for software, not necessarily at the same like rate that you would pay for labor, but this is not something that you would hire a software product for. Or sorry, th- th- this is not something you would ever have a software product for before. So I'll, I'll talk about a couple examples here. Um, and obviously, you know, I mention this, uh, I, I can mention this ad nauseam, but the labor market is astronomically bigger than the software market. So next. Um, so th- th- this, again, th- this is kind of the, the governing principle here. You go look at a job, front desk receptionist, Plaza Lane Optometry. Plaza Lane Optometry has like, they have a, a bingo board as well in terms of software that they spend, uh, money on. They probably spend money on Microsoft Office. They probably spend money on Squarespace or Wix. That's on the order of $500 a year. If you can deliver them a software product that does, you know, call it five out of the eight things on this job posting, they will hire that software product. What do they pay for that software product? This is the part of the market that is almost unknown, um, because they're probably, they're almost definitely not going to pay the $47,000 a year that they're advertising for this job or whatever the, the, the, the rate is that they're paying for the job. Um, they're probably not gonna pay $500 for software. Um, but the, the, the promoter, the, the creator, developer of this software product, an application software company, might say, "You know, we're gonna charge you $20,000 a year." They need to be careful about how they do this. We often wanna see them turn into a system of record so that if they are doing, you know, five of these eight job responsibilities, somebody doesn't pop up and say, "We're gonna charge $19,999 a year." We wanna make sure that this is a very, very sticky end solution for Plaza Lane Optometry. You're gonna see, I believe, a lot of market cap creation on the bingo board of existing software products that have a new better alternative that are going after greenfield. But here you can go after brownfield, you can go after existing companies. You could probably charge a lot more. There's a path to much, much more explosive revenue growth.
- DHDavid Haber
But just to, maybe to take a step back, you've probably
- 17:04 – 21:33
Case Study: Eve
- DHDavid Haber
heard a ton about what's happening in legal AI. You know, just given how document intensive the industry is, there's tons of applications for LLMs in the space.Most of what you've probably heard are around companies like Harvey, you know, serving the defense and the corporate side. Maybe less familiar to you might be the plaintiff side, which is really about representing the individuals in areas like employment law or personal injury. And, you know, we, we spent a bunch of time looking at, you know, the different com- companies on the plaintiff side, in, in part because one of the unique characteristics about that side of the market is that these attorneys operate on a contingency basis, meaning they only get paid if they win. And so they're incredibly aligned with their clients. They don't, they don't bill by the hour, you know. They, they take a percentage of the, of the actual case outcome. And so as a result, you know, for every hundred leads that a plaintiff attorney gets, they often take one case, because anytime you take a case, it's an investment in your time and your labor. So just incredible alignment with AI's impact on their core business model, right? Uh, to c- to contrast that, if you're a corporate attorney, you know, and your, you know, uh, you know, junior, uh, attorney is 50 times more productive, you've just eroded some of the revenue that you can actually charge to your end client. Again, in this case, if you can make your attorneys, you know, 5X more productive, you can potentially increase, you know, your revenue by 5X or more. And so the Eve guys had a, a particular, particularly interesting, um, kind of point of view from a product perspective. They really wanted to own the end-to-end workflow, from intake all the way to outcomes. And so, uh, you know, to Alex's point earlier around voice, you know, they recently launched a voice agent which is actually collecting evidence, you know, from their prospective clients, and it's sifting through, you know, mountains of, you know, medical records or employment documents and helping these attorneys, you know, figure out which cases to take because it is generating sort of this data set of, you know, case characteristics s-such that it can say, "Hey, this case is potentially worth 50K. You know, this case is worth $5 million. You should probably spend time, you know, on this case over here." And then it'll just help step through all the different phases of pre-litigation and litigation for these attorneys. So it'll draft a medical chronology, it'll draft the kinda core artifact of these cases, which is known as a demand letter, um, it'll file complaints. Um, and ultimately I think what's so interesting about this business, and it speaks to I think why moats matter, you know, one is these attorneys are living in this product all day long. Like, one of the core, you know, pieces of feedback that we heard when we were diligencing the business was that literally 100% of the cases were flowing through the product. But interestingly, as Eve begins to generate data on outcomes, that data isn't public, right? That's not something that the large, you know, labs can train models against, and that data is actually informing better intake, right? So that they can then go back and say at intake, "Hey, given the characteristics that we've seen in all the cases that we've prosecuted across all the, you know, the Eve platform, you know, these have these three variables that make this case potentially worth a lot more money." Or, to Alex's point, it can, you know, reduce the cost of taking on a case. You know, before an attorney was only taking a case that, you know, at minimum could potentially make them 50K, and suddenly they can afford to take cases at 5K, you know, the market expands, right? And, and there's a, a big sort of supply and demand imbalance, you know, today on, on the plaintiff side that, that Eve is unlocking. And as a result, you know, just the market pull for this product has been candidly, like, stronger than we even anticipated. You know, you know, my hope is that it has a lot of the characteristics that we'll be, you know, continuously investing in, where AI is just incredibly aligned with the business, both, you know, driving revenue and, uh, you know, saving these folks money.
- ARAlex Rampell
Well, thanks, David. [clears throat] Yeah, and the reason why I wanted, I wanted to talk about that is I, I think it's, it's really cool as Eve, but it's a metaphor for the types of businesses that we find compelling and, and why, you know, zero to 30 certainly or two to 30 is not normal, but it actually is normal if you're able to move very, very quickly and just deliver, again, this, this promise of I'm gonna make you lazier and, and richer. Um, so let's go to the next slide.
- JKJen Kha
Actually, before we go to, to Salient, Alex, why don't we just take some of these questions here because they're relevant in the context of-
- ARAlex Rampell
Sure
- JKJen Kha
... Eve as an example, and then also, um, before we switch to Salient, uh, exemplify why, why we find these to be particularly compelling. So there's a good question here from Brian: A lot of consumption-based AI apps have found it hard to become mission-critical. They're easy to switch on or off as a part of the broader suite. How do you evaluate that in diligence? Maybe David, if you wanna use, uh, Eve as an example or other- others that we have in the portfolio. How do you evaluate that
- 21:33 – 24:45
Building Defensible Moats
- JKJen Kha
in diligence, and what patterns have you seen around in which apps actually graduate to being essential?
- DHDavid Haber
Yeah. I mean, one, one of the distinctions that I often draw is this notion of, um, differentiation versus defensibility. And I think AI is an incredible tool often for differentiation, right? So the idea that the voice agent can speak to folks in 50 languages and gather that evidence, you know, highly differentiated versus the human, right? Obviously delivering value, but that capability alone, in my opinion, is not a source of their defensibility, right? The source of defensibility for Eve is in owning the end-to-end workflow, right? It is actually in building a product that is contextual to, you know, all the work that that attorney has to do. And then I think, you know, not unique to Eve, but one of the kind of, uh, X factors is that the data that that business is generating, which Alex will get into a bit in this sort of walled garden mo- it has a bit of these characteristics of this sort of walled garden, um, is not public, and it sort of creates a source of compounding competitive advantage, you know, for the product itself, right? So the more cases that Eve can prosecute for all their different clients, you know, the smarter that the product becomes, and it actually, you know, kind of reinforces that loop. It becomes sort of, you know, you're showing, you're showing up to a, a knife fight with a gun, right? And so soon it's gonna become an essential tool for any plaintiff attorney to operate with. Um, and that just becomes very difficult to displace, right? So it's not so much the AI-ness, right, in the voice or, or the ability to summarize documents. It's actually in becoming kind of the system record, this end-to-end workflow.
- JKJen Kha
For sure. Um, and in fact, actually, there's multiple threads to pull on it, but maybe I'll ans- uh, ask this question first, uh, relatedly around, um, talking about the potential upside of market size of these companies aroundUm, labor versus vertical software bucket, and how do companies in this category build defensible moats, um, and particularly earn attractive margins as AI proliferates and, and costs continue to scale down?
- ARAlex Rampell
Yeah. Well, why don't we come back to that one at the end? Because I think hopefully what you'll get from... It's not like we're just investing in companies that do labor and then the end. Um, their moats matter, in, in fact, more than ever because the one thing that's happened in software is once upon a time, there was a company called WordPerfect. And WordPerfect kind of like kept growing for a very, very long time. Or once upon a time, there was a company called VisiCalc, and then whoever had the most distribution said, "I should do that," copies it, and obviously, you know, WordPerfect is toast, VisiCalc is toast. Lotus 1-2-3, which was the one that beat VisiCalc, that became toast. But it would normally take five years for the, the bread to become toast, and there is a very, very high level of prolific speed. I mean, now, um, you know, Anish, David, and I, and Jen can go build a software product. We can vibe code, if you've heard that term. We can go build software very, very quickly. What makes... It actually increases the peril for anybody who's built a software product that has an enormous margin pool. You know, your margin is my opportunity. Well, I can vibe co- I can vibe code against your opportunity. It has to be very, very sticky. It has to have some unique competitive advantage, and data is often one of those. So if I work with every plaintiff law firm or... You know, actually, why- why don't we go to the next slide here, and I'll just talk about Salient a little bit.
- 24:45 – 31:53
Case Study: Salient
- ARAlex Rampell
Sorry. Uh, so, so Sa- Salient is, is in the Eve mold. Um, and I know we also had a question about like, you know, what is the societal impact of everybody losing their job. Like, uh, I don't think that's actually going to happen very quickly. Um, you know, 90% of Americans were farmers in 1789, and obviously the, the, the tractor made some of them unemployed and made them do other things. But most of what we're seeing, candidly, is not about eliminating work. I mean, I, I do think that the three and a half million people that drive trucks, at some point in time, like we have a better solution than the tu- the truck driving human. You have, you know, AI doing that. But most of these things, they're really... It, it's like you have cost here, you have value here. You would never hire a human where they are producing less value than their cost. It just does not make sense. But if you can now hire AI, um, effectively, you can hire AI where the amount of value that the... Like the cost has just gone down, the value has stayed the same, you're gonna hire a lot of AI. You're not going to get rid of a lot of humans. And if anything, um, we never know. This is so hard to predict, but what will humans do? I mean, like, there was no job of like product manager 75 years ago, uh, at a software company or designer. Like, all of these jobs that exist today, they wouldn't have made any sense to somebody in 1800. So it's hard to, it's hard to kind of pontificate on that, but a lot of the things that we're seeing, they're not displacing people per se. I mean, I know it sounds pithy to say software is eating labor, but really software is augmenting labor or it's like all of these people that I can't hire, whether there's a job shortage or a skills shortage or whatever, I can now deploy people that will answer a phone. Like I, I would just never hire somebody to go answer the phone for me at 2:00 a.m. I would hire somebody at 4:00 p.m., but not at 2:00 a.m. It's just the value to cost equation is inverted. Um, and kind of a great example of this is like the, the Salient. Yes, they are going to people that collect, um, uh... It's, it's called auto loan servicing. So you go to an auto lender, they have to go make sure that they're collecting on their bills, or if the person's in a car accident and the insurance carrier is at, you know, supposed to pay you, how do I make sure that that insurance carrier is paying me on time and writing the check to the right person? In this case, because I have the, the lease, like they need to write it to me and not the actual, you know, not, not the person, uh, in, in, in their actual name. How do I do all of that kind of stuff? I would hire lots of people. I would train lots of people. A lot of these people hate their jobs because it turns out, um, people yell at them all day and say, "I'm not paying you back for this car," or the insurance carrier keeps you on hold for four hours and that hold music is just terrible and you're gonna wanna kill yourself if you have to listen to that 12 hours a day. Like, all of these reasons why humans don't want to do this, or you can't hire humans for this. The key thing with Salient is not that they're saving you money. Um, the key thing with Salient is that they collect 50% more. Like, th- this is the key thing because, um, Ari, the CEO, he kept pitching like, "I'm gonna save you money. I'm gonna save you money. I'm gonna save you money." Like, people like saving money. But if you go to somebody and say, "I will collect 50% more revenue for you every single month, and I will make sure that you don't go to jail," because none of these people that you hire that aren't very well trained, that have to listen to this horrible hold music for four hours a day, they don't say something that they're not supposed to say. I can make sure that AI doesn't do any of these things. Like, that's why that company is growing so explosively. It really is... It's, it's much more about the value generation. I mean, yes, the cost is much lower, and this is one of the questions around like how do they figure out how to, how to charge for the product? They went to their first, um, client, had a $50 million a year call center with, I think, a 40% to 70% annualized churn rate per employee. So it's just... And not because they're firing people. It's just like nobody wants this job. Um, so they now say, "I will do it for you with software. Um, I will give you a system of record. I will make sure that we're scraping every single new federal and state statute," because what you say in Missouri is very, very different than what you have to say in California. It's very different than what you say in Iowa. We're gonna do all of these things. No human can keep that in their head at the same time. It's like, "All right. I'm talking to David. Shoot. What do I say? He's, uh, from Santa... You know, he's somewhere in California. Oh, wait, but actually he's traveling to like Kansas. Ah, I don't know what to say." Like, Salient knows exactly what to say and it knows how to say it in 21 languages, and that's why the, the collections rate is 50% higher. So like this whole category of like, we are going to make you more money, um, and, and it's gonna cost you less. Like it's just, it's a very, very hard thing to move away from. The key question for us, which I think is a very good question, is how do we make sure that we're backing the right one, and how do we make sure that Salient is not... I mean, this was my number one question when, when Ari came in, it was like, "Well, how are... Imagine that there's a company called Taliant and a company called Zaliant. Why is it that Salient is going to beat Taliant and Zaliant?" And, and Ari actually had, Ari the CEO, had a very, very good answer to this, not to like, you know, he looked up on ChatGPT, how do I answer this difficult question from a VC? But again, moats matter. Um, we know exactly what script to say. Um, this is an example of kind of a, a data moat. It's like, because we've done millions of phone calls, we know exactly what to say. Um, we have lower latency on every single like statute that comes out from... Like we, we... They actually have like a very, very good product that ingests every single law, like as it is even proposed as a statute in all 50 states. Sometimes it's at the county level. Like, they're doing all of these things that make it so much harder to compete so that they will not lose a deal. You know, moats matter more than ever because you're able to create software so much more readily.
- JKJen Kha
Actually, maybe this is a good dovetail to, to this section, which is does this then mean software becomes way, way, way more specific in certain categories and it doesn't need to win a bunch of different categories and to become a huge business? And, and I think that might actually be a good dovetail to this theme that, that you wanna cover here.
- ARAlex Rampell
Yeah, I mean, th- this is the thing that we don't know. I mean, like we obviously have many examples of vertical software companies that have become very big. So ServiceTitan is a vertical software company. Um, Mindbody is a vertical software company. Toast, that's a very large vertical software company. Toast is designed for restaurateurs to run their business, to integrate with DoorDash, to pay their waitstaff, to do line... Like everything around operating a business. It's a vertical operating system. It's very, very hard to displace one of those. People would've doubted how big that could become, and actually peop- a lot of people did. Like it was very hard for Toast to raise their B round because people would say, "Well, I look at the, the restaurant space and like, you know, half these restaurants go out of business every year. I look at how much software they buy. Well, they don't buy any software, so therefore this is a bad company. I'm not going to invest in it." And, and, you know, fast forward 10 years. Um, but the reason why that happened was it turned out the business was much bigger, in this case because they added financial services. And the financial services we're gonna, we're gonna do lending to restaurants, we're gonna do payment processing for restaurants, and we make it very, very sticky because it's an entire software platform and there's no way for First Data or Global Payments or any of these companies that traditionally do software to go append, uh, sorry, that, that traditionally do payment processing to append some kind of software solution. So that's why Toast, you know, people got Toast wrong. It's a very valuable company and a public company today. Um, I think the same thing applies for I'm adding in labor. Like it's not just I do labor and then somebody does labor for a penny cheaper. I have... I, I need to build some kind of system of record for you, some kind of vertical operating system for you so that you can't just go switch out for the cheaper player. And maybe this
- 31:53 – 40:23
The Walled Garden
- ARAlex Rampell
is a good way to kinda go into theme three here, um, which I'm, I'm very excited about, and I, I call this the walled garden. Um, and this is really important today because if you look at... Like take, take a metaphor here where this amazing company called OpenAI shows up and they're like, "Hey, we're a vegetable farm and we're, we're farming tokens. Um, and we're gonna sell tokens and we're gonna charge for tokens to all these people out there that are building applications." So it plays out exactly as I talked about, like OpenAI is an infrastructure company. We invest in all these application companies. But then OpenAI is like, "You know what? We should put some restaurants on our farm because a lot of people come to our farm. Let's just have restaurants here." And then all these restaurateurs are like, "Wait a minute. Like you're selling me vegetables, now you're competing with me. Like that, that, that's not good." Um, the reason why I bring this up as an example is because it actually is happening, and it's a blueprint for how to potentially deal with a world where, um, the, the, the source of the raw material is actually what is rare. So l- let's go to the next slide and I'll show you, like I'll, I'll make this a little bit clearer. But as I mentioned, this is kind of like the world's second oldest profession. There are lots of cases where I, I, I kinda construct some physical property, I build a wall around it, and I charge you for access to my property. You can do this in the data world as well. And, you know, I'll pick a, an example on this little, this, this little bingo board here of FlightAware. Um, I'm not sure how many people have heard of FlightAware. How do they get their data? And their, their data, by the way, what is their data? There's nothing proprietary about it. It's all public. Um, you can buy an antenna on Amazon to receive, it's called ADS-B transponder data. So every single airplane after that Malaysian plane went missing, um, has a little transpo- transponder on it that shows its height, its speed, all, all of these different attributes on it, beams it down to planet Earth. Um, antennas can pick this up and figure out, you know, this tail number is at this place. I can buy one. It's free. FlightAware, I think they have something like 100 antennas around the world. They pick up all this information, and they can char- That, that's a piece of data, like I can ask ChatGPT that. They don't know that. Um, only FlightAware knows that, or PitchBook does this for funding rounds. Like who know, who knew what the, you know, Series B price of a company in 1992 was? Like PitchBook somehow has that. Or LexisNexis knows this. CoStar knows this for, uh, real estate data. Bloomberg knows this for all sorts of exotic financial stuff. Like it's... I- in many cases, it's all free. Ancestry.com built their entire data moat by buying genealogical records from the Mormon Church. All of this stuff is not available on ChatGPT. It's not available on Anthropic. Of course, they can license it. But the reason why I mention this is what do you do with FlightAware data, or what do you do with Bloomberg data, or what do you... Like I'll tell you what I do with PitchBook data. I hire an analyst and I say, "Analyst, go write me a memo about this company called Eve and compare it to every other company in the legal space that had ever done something before." And PitchBook just sells us a subscription for here's every single Series B of legal tech companies since 1992. Okay, that's valuable. They can charge $20 or $200 or whatever they charge per month for that. What would be more valuable is saying because they're the only ones that actually have that piece of information, they should probably charge $2,000 for that, which might mean, I mean, maybe this makes you nervous, we might need one less analyst because now we have a finished product. Because w- what we don't want is we don't just want a subscription to PitchBook data. We actually want to do something with it. We wanna somehow take that vegetable, if you follow my metaphor, and turn it into a finished meal. Um, you know, one of my favorite examples here is Domain Tools. Domain Tools does... They have one thing which is very interesting. They run a WHOIS query which says who owns a particular domain name. This company has been around for a very, very long time. If I wanna figure out who owned a domain in 1998, there's one place to go, and that's Domain Tools. So like this model has been around for a very, very long time before AI. Very, very large companies exist in this space. When you add AI, it makes it tremendously more valuable. So I'll give you three examples that hopefully kinda hammers this point home. So there's a company called OpenEvidence, which if you use it, apparently two-thirds of doctors in America use this thing pretty much every week.Um, OpenEvidence is exactly like ChatGPT. The interface looks exactly like ChatGPT, except you know who has exclusive license to the New England Journal of Medicine and every other medical journal out there? OpenEvidence. Um, so if I, I tore my Achilles, if I wanna read about what I should do, all of the evidence-based care out there, I can go to ChatGPT. It's, it's moderately useful. There's no reason not to do that. OpenEvidence is so much better because they're the only ones that actually have... They've built... In this case, they found all the da- they found all the unique vegetables out there. They convinced the vegetable seller not to sell it to any other restaurant, and they have a restaurant that delivers the whole thing. Where there's a 26-year-old company called VLex, incredible company that just got bought. Um, the I, I... The, the CEO was telling me the, the origin story of this company. He's from Spain. He bought up every single legal record in Spain. Um, and why would you wanna buy up legal records? Because, I don't know, Wilson Sonsini wants to know, you know, Spanish case law and case injuries, and Horwitz goes invest in a company and figure, you know, needs to figure something out. So VLex would, uh, aggregate and digitize this information, sell it to law firms and other people that need legal information. Pretty high gross margin, but, you know, very, very low scale and predominantly European in, in Spain. Um, then they were like, "You know what? We should add AI to this." And, um, apparently it quintupled their revenue. Now why would it quintuple their revenue? I might love Harvey. I pay for Harvey, amazing product, but if I want to have a finished memo for my client at 7:00 a.m., I can't get a paralegal to go do this, and I know that it needs to incorporate some element of Spanish legal data, like VLex is my only solution. And instead of charging $2 a month or $2 an article or $200 a month or whatever they can charge for the raw material, and what Ask Leo does is it's a procurement product. So if I'm a company, um, and every company, every employee at every company kinda hates their procurement department because on the one hand, the procurement department is supposed to save the company money by making sure that some rogue employee doesn't buy t- you know, expensive widgets at an, an overpriced, uh, price from a unapproved vendor. But on the other hand, they, they introduce all sorts of complexity into the process. So imagine that I've got a contract from Deloitte to give me AI and, and, and, you know, somehow revitalize my company. Um, who has 50 other contracts from Deloitte where I can understand what I push back on? Like that, that is actually very, very useful proprietary information. I wish I could go ask ChatGPT for this, but they don't have the world's treasure trove. Like what, what is the information they will never get? They are never going to get 50 old Deloitte contracts. Like where would you find them? I guess you could do a FOIA request or something, but you're not going to find them, and Ask Leo has these. So it just makes the product so much better. And go, go back one slide here. [lips smack] Um, it's hard to say where we're gonna find these things, but the, the, the most compelling of the ones that we found are it's like all the information is free, just like ADS-B flight transponder data, that's free. But you find something that just like it wasn't worth that much before because like what do you do with flight data? What do you do with who is record data on the internet? Um, I actually talked to an entrepreneur recently, he was like, "Oh yeah, you know what? I like to figure out historical subscriber data on, of YouTubers." He's like, "YouTube doesn't publish like how many subscribers MrBeast had on August 4th, you know, 2017." Like where would you find that? There's some company that collates that, collects that, and that's just, they're just selling the data. It's not available anywhere else. And, you know, these are some, uh... We just published a post. I would encourage people to read it on like, you know, the walled garden, or we called it Fruits of the Walled Garden. All of these things, like creative arch- archives, logistics, like you go to like some county recorder's office and you can see who owns what property record. But you have to go to the county recorder's office to, to find that. It's all free, but you can digitize that, make that available, and then add AI to that. And this sounds like, "Oh, just AI, add AI, it's much more valuable." The reason why is because you're saying, "I have something that nobody else has." There's a reason why people are buying this before, because they're trying to create something that, that is of higher value at the end, and you can now do this. So, you know, go to every museum. Or actually, I just talked to an entrepreneur, um, who found every old manual. This is a great example. Found every old manual for like blenders made in the 1980s, 1990s. Like just a... You can buy this stuff for pretty much nothing on eBay. Where would you find a manual for an old blender in 1999? I have no idea, but apparently eBay is where you find it. But it just shows like these, these walled gardens that you can build with data, um, you coulda built this before. You could build a 10 or 100 times more valuable company today.
- JKJen Kha
So Alex, can you...
- 40:23 – 49:39
Incumbents vs. Startups
- JKJen Kha
Can I pause you here, um, in part because, you know, the last era of investing, you gave a great framework, and the world a great framework, for thinking about the battle between startups and incumbents and, you know, if startups could figure out distribution before incumbents can figure out innovation, that was, you know, their, their success. When like how, how... Take us through the dynamic of when you're thinking about which companies to invest into, where it's very clear that they can disrupt, you know, the incumbents in the category, and where, you know, what are the examples where it probably doesn't make a lot of sense for someone to build a company like, and that has a, a proprietary walled garden that is gonna be very difficult to unseat?
- ARAlex Rampell
Yeah. I mean, I think there are two ways of thinking about this. Number one is in the case of the used blenders on eBay or the manuals, like there just wasn't a company before. Um, charging for access to the subscription of like, "I'm gonna sell you, you know, per data article that I've digitized," or, "I'm gonna charge you $20 a month." Like, you know, probably not that interesting. But now if you have this finished product that you can charge $1,000 for versus like the raw material that you charge a dollar for, maybe now the business is tenable. So, so one category is you just find a new data source and there's a reason why, like, you know, in, in venture capital school we learn to always ask why now. Like if this is such a great idea, why didn't this exist 10 years ago? Great answer for Uber when it came out, there was no iPhone and no GPS transponder in every device. Um, once you have that, now you can have Uber. Um, the why now for some of these more esoteric things is it's, it's kind of like a little bit of a why now, like why isn't this a $20 million business like VLex after struggling for 26 years? Why is it now a $100 million business? It's because you can deliver the finished product. Um, and of course like there are... I, I would argue like a lot of the old things that were out there, like Ancestry.com is a valuable company. They digitized LDS data, and a lot of people wanna figure out where they came from, and there's an NBC show that says, you know, "What are your roots?" And people like watching that and all these kinds of things. You know, it's a valuable company.That would be one where it's like I would be hard-pressed to say how do you make that dramatically better with AI? Maybe it's like I wanna say, "Hey, please, uh, I'm about to die. I wanna figure out which one of my heirs to leave all of my money to. Please email them and set up dates with me so I can figure that out." And like that's the value add that you do with this proprietary data. Um, this is why I'm an investor, not an entrepreneur anymore. I'm out of good ideas. Um, but that would be something where, you know, there is an existing data store. Um, maybe I license that, like OpenEvidence. They didn't create new medical journal entries. They were just like, "Hey, let's go distribute to doctors. We know that doctors are really interested in this stuff. We know that all of the information is in these old medical journals, and the back catalog is very, uh, very, very useful." Like it turned out, like I think, um, of all the, the things that Michael Jackson did, uh, right and wrong, um, probably the, the most right from an economics perspective was buying the back catalog of The Beatles. Um, or like he, he bought a big chunk of that, that ended up being worth a lot because until the copyright runs out, like Beatles catalog, a lot of people like listening to The Beatles, that's going to become more valuable. So you can buy existing stuff that is already out there that already has a business, and that's like OpenEvidence. Or you can try to create something net new, which is kind of more of the Ask Leo. So I, I don't know if that perfectly answers your question, but my view on, on everything that's happening in AI right now is it's one of these weird situations where it's very different than cloud, where most on-prem software providers were like, "Cloud is stupid." Most potential customers were like, "Cloud is stupid. It's not safe. I don't trust it. I wanna host things." Like you'd have your entire IT staff is like, "I don't trust that stuff." So the, the existing incumbents did not build cloud providers. Like PeopleSoft did not say, "Let's go build PeopleSoft Cloud." They have it now, um, but, uh, that's where, that's where Workday came from. They were like, "We're going to build this." It took a while for the business to ca- for the, for the, for everything to catch up. I'm very, very bullish on incumbents. Um, I, I, I hope I can say that because I don't think that... I think NetSuite is going to figure out 15 different ways to monetize with AI. I think that QuickBook, Intuit has this goldmine on their hands where they're, they're just gonna start charging per collections that they make to all of their existing hostages that use QuickBooks. Um, but that still does not mean that you don't have these greenfield opportunities, you don't have these new data opport... Like, there's so many new opportunities that have popped up largely because of this value cost thing. It's like you have so many, like it, it's this infinite number of things where it's like I find something where everybody would want this at $5, but it is currently only sold for $10, therefore nobody wants it, therefore it's not a business. Wait a minute, AI allows me to sell it for $5. So it, it's, it's really one of these rare situations where it's good for both. Whereas I think mobile, like most people thought BlackBerry was great, iPhone was stupid. That's why the incumbents didn't, you know, that's why, you know... Why didn't booking.com build Airbnb? Why, why didn't, uh, I don't know, a taxicab company build Uber? It's just most people thought this was stupid. Everybody thinks that this is a good idea. Because of course intelligent, like, you know, AGI in everybody's pocket is a very good idea. No- nobody can argue against that. It's more of, um, the, the existing incumbents... Th- this is why I'm just, I'm, I'm bearish on the brownfield opportunity on the bingo board. I'm very, very bearish on... I'm sorry, I'm very bullish on the brownfield opportunity for the, for like walled gardens and for, um, kind of software that does the job of labor.
- JKJen Kha
For sure. By the way, I thought you were gonna say the smartest thing Michael Jackson did was let his family use his likeness for the Michael Jackson Live show, which I, a- according to Ben, has now generated more revenue, uh, from that show than his entire existence, uh, as a performer. But anyway.
- ARAlex Rampell
But I give him more credit for like... I, I think apparently what happened was somebody was like, "You know what? You know where the money is?" It's like that, it's, it's like that movie The Graduate. It's like plastics, right? Somebody was like, took Michael Jackson aside, "You know where the money is? Back catalogs."
- JKJen Kha
Exactly.
- ARAlex Rampell
And it's a good point. I have a lot of money. I'm gonna, I'm gonna go buy The Beatles back catalog, and then I'll make money from it because this, you know, CDs are gonna come out and streaming's gonna come out, and there are so many different ways of monetizing this, so.
- JKJen Kha
Smart move. Smart move by the man. Uh-
- ARAlex Rampell
Let's, let's, uh-
- JKJen Kha
Well, well actually let, let's cover some of the, the... There was a question about the walled garden, uh, metaphor that Daniel had here. So the implication is that the new restaurant is direct to consumer. Why wouldn't the company sell to the end user rather than a business that is ultimately the intermediary?
- ARAlex Rampell
Th- this is a great question. So th- this is like, Veelex is a good example of this, right? Like Veelex could have sold their data to Harvey. Um, instead they realized this exact point. It's like they should just be in this business of selling directly to... They, they, they shouldn't be selling to, to Wilson Sonsini anymore, or if they are, they should dramatically change the pricing of their products. Or they, they should change their pricing strategy. And instead of saying, "We're gonna charge, you know, this like tiny subscription fee and allow so much of the value creation to occur elsewhere," we're going... Like OpenAI on their, you know, OpenAI charges very, very little per million tokens. We're just gonna consume that and then enrich everything that we have that is proprietary to us, and then go sell that directly. So, um, you know, it, it's a good question, but I think the point from an investment lens is we, uh, a lot of entrepreneurs are now looking for... Sometimes it's like existing companies where it's like they don't know what's going on, they can just buy that data. Those existing companies, if they're run by an entrepreneurial CEO, like they realize, "Wow, I can make my business 10 times better and we're gonna go invest in those." Um, and then lastly, I'm just gonna buy some antenna from Amazon and like listen to Malaysian Airlines flights or whatever, and then aggregate this information that's completely free, but it's not free past tense, right? Like the number of subscribers that MrBeast had five years ago, like the number of subscribers today, you just go to YouTube, you see exactly what that is. If I wanted to see what that was 10 years ago, that's what is actually proprietary. So sometimes the proprietariness, if you will, everything is free. Anybody can go collect this stuff that's free. The value only accrues over time. Um, and there are a lot of examples of this. Like, you know, I can go to the Mormon Church and get my genealogical information, um-And they'll probably give it to me, and I don't have to go pay for an ancestry.com account. But it's, it's kinda useful and easier to just do it with ancestry.com than to go fly to Utah. So, so sometimes just the, the ease of going to somebody who's already digitized, um, and put this, this information in an easier to digest form, that's one of the reasons why, like, people go to LexisNexis. That's one of the reasons why people go to a lot of these providers, because sometimes they're the only game in town, sometimes they're the best game in town. Um, but increasingly today, they're the ones that can actually give me a finished product, and actually it saves the end customer money as well, because I don't really want to buy LexisNexis data. I just wanna know if I should accept or reject this transaction. Um, and there's a lot of enrichment that I do of the data. There's a lot of workflow. There are a lot of analysts. Like if I'm a financial services company, I hire fraud analysts to go tell me what's going on. And the raw vegetable, uh, that I, I need to figure this out is this LexisNexis information. But LexisNexis, like this is, this would be kind of bullishness for an incumbent, probably can do a lot of things if they're the only ones that have that information.
- JKJen Kha
Great. Um, Alex, I feel like you paid Joe to, to ask this question, but I'm gonna take it here, and then, uh, we'll switch gears to, to, um, Anish, uh, your, your two sections here. Uh,
- 49:39 – 53:32
AI Roll-ups
- JKJen Kha
what is your view on white collar services AI roll-ups, i.e., fully verticalized software plus services companies that are popping up?
- ARAlex Rampell
Yeah. So, um, I wrote an article about this two years ago. I called it Barbarians at the Gate, but where the, the barbarians is spelled with an AI, uh, in homage to the, uh, RJR Nabisco deal in the 1980s and a, a book that was written about that. I mean, I think it's very interesting, is what we're great at is, like, here are two people that are gonna change the world. They don't know how they're gonna do it. We're buying an out of the money call option. Um, there are a lot of private equity firms out there that are like, "We're good at firing everybody," and like, you know, moving people to the Philippines and doing this and doing that, and all of these kinds of things. Like, this is a big thing that private equity's looking at. At the same time, we do have a couple bets in this space, and, um, it's, it's, you know, very, very smart entrepreneur. But there's never a question of, um, can I get more clients as an accountant because I can't hire more CPAs to do tax returns? It's like the hardest part is to get the clients. So you have to go to the chamber of commerce meetings. Like, it's just very, very hard to buy one accounting firm, and then by virtue of like all sorts of cost synergies, you can now onboard 10,000 more clients. Like, that's just... Like, the way that you would have to play that game is you buy one accounting firm, you like integrate it for nine months, then you go buy another accounting firm, then you buy another accounting firm. And yes, is there value at the end? Absolutely. But you probably have to buy 200 accounting firms, and then you're left with a pretty interesting business. And there's probably a big competitor called, you know, Mid-Market PE, who's done this for 500, you know, years. Not years, but has done this 500 times, and they're gonna do a better job of that playbook. On the other hand, there is a strategy that we think is very interesting, which is instead of having a sales team, you buy one. So, you know, take the example of debt collection. I could buy a publicly traded debt collector that has lots of people, that doesn't do a very good job, that doesn't follow lots of laws, um, and I wanna get started somehow. I, I, I built this great tool that I believe in. I wanna dog food it. I don't have any customers right now. I know, I'll buy a company that has declining revenue, but five blue chip clients. I'll buy this company for three times EBITDA, and now I'll transform it with AI, and now I don't have to buy a second one. I don't have to buy a third one. I don't have to buy a fourth one. I can just say, "I have better collections rates. Um, I have five blue chip customers that love me, and I'm cheaper." So do you want to be lazier and richer? You're like, "Yes, I already have the customers to back this up, and I can now onboard 1,000 customers into the existing acquisition that I made." That's actually quite interesting. So the question is which one are you doing? And I think the we're going to go roll up, you know, 100 dental clinics or we're gonna, and we're gonna make it better, or we're gonna roll up, you know, dermatology. I have a friend that rolls up dermatology clinics. It's like, I just don't think we're good at that game. Um, and the problem is that dermatology clinics are like, just because I bought one in San Carlos, it doesn't help me, like, do anything in Florida. I gotta go buy more there. Uh, same with accountants, uh, versus, you know, debt collection. That's very, very national. You could buy one and then, you know, that is your entry point. And it's kind of an opportunity cost of do I hire salespeople, um, to go sell? Um, or if the best companies have hostages, not customers, do I buy some company that is stagnant and even shrinking because they don't know how to respond to AI? Because by the way, all of these companies, like every debt collection company, like they'd be crazy not to look into doing AI on their own, so it is this battle between startup and incumbent. But there, there is an interesting opportunity, and we've done one in the, um, in the MSP space, um, managed service provider for IT. Um, because a lot of IT now is not p- "Hey, come into my law firm office with 50 people and fix my printers." It's like, "Onboard me into Microsoft Office." And like all of that stuff can be done remotely. It's a very, very digital experience. It's a $100 billion market. Like that's a little bit more interesting because I can actually ingest more clients that way as opposed to I have to buy hundreds of these things. So hopefully that, that makes sense.
- JKJen Kha
Awesome. All right. Should we switch gears to-
- ARAlex Rampell
Yeah. So,
- 53:32 – 56:03
Consumer AI Applications
- ARAlex Rampell
so, so I wanted to turn it over to Anish because all of these things that we're talking about, they also apply to consumer. Um, so, um, so maybe with that, why don't we talk why and how this applies to consumer?
- AAAnish Acharya
Great. Actually, if we're gonna do that, why don't we skip ahead a slide, and then we'll come back to this? SoGreat. So this is the application of all the categories that Alex outlined to consumer AI. It's, it's the exact same pattern. So the first and very important one is traditional categories are going AI-native. This is happening. So if you look at Photoshop, it's a fantastic business. But what do you do if you're a young designer coming up in their career? You wanna use the AI-native Photoshop. The AI-native Photoshop is Krea, that's over 18 months. So it's a fabulous product, and it has all the AI primitives built in, and it's the one that's being chosen by people that are adopting a first design tool and are early in their career. So this sort of transformation of existing categories is definitely happening. You know, the second is category creation. ElevenLabs is a fabulous example of this. This sort of market for voice and audio models really didn't exist five years ago. There was no... I mean, perhaps people doing voice actors and voice dictation as a niche market. It just wasn't interesting. Eleven's done something much more ambitious. They're a model, um, a model provider, and they have both consumer and enterprise SKUs. And because they vertically integrate, they're able to really go after this opportunity, create the category in a very short period of time. Finally, proprietary data. Um, Alex talked about proprietary data. It's actually near and dear to my heart because I, I worked at a, a large-scale consumer company that was based on proprietary data, which is Credit Karma, for many years. So I- I've seen this playbook, and it works extraordinarily well. The area that we've actually seen it applied in one of our investments is a company called Slingshot. Slingshot is an AI therapist. How do they collect their proprietary data? Well, they actually go to existing therapists, and they provide an AI scribe, a note-taker, and the note-taker takes notes while those therapists counsel their patients. It then uses the generated notes to train a foundation model, and the foundation model trains a consumer product called Ash, which is then, um, sold directly to consumers. Of course, OpenAI and ChatGPT are formidable, but they simply don't have the data that Slingshot has, and as a result, Slingshot's able to provide a differentiated and high-priced product, and it's working well. So each of the sort of observations Alex made is absolutely playing out in consumer AI, and we're very consistent in our, um, approach to the three. Do you wanna go back one?
- 56:03 – 57:06
Model Aggregation Strategy
- AAAnish Acharya
I think this is an important slide as well, and an important concept, um, because a very fair question is, well, why aren't either labs or, um, sort of big tech, um, big tech who have real model efforts like Google going to win it all? Well, the reason is that in many categories, being an aggregator of models is actually preferable to consuming just a single model. And the metaphor that we're all familiar with here, of course, is airlines. It's much more useful to search for a flight from SF to New York on Kayak, because I can look across the inventory of every airline versus just going to Delta or United and looking at their inventory alone. The same thing is true in categories like vibe coding or creative tools, where you really want access to all of the models. And the reason for that is the models each have their respective specializations, so they're not exact substitutes. You wanna work with them all. You want a single pane of glass, and the labs and big tech companies can sort of definitionally only use their own first-party models. So this is why we see the aggregators winning, and it's an important trend and, and sort of investing principle for consumer AI.
- ARAlex Rampell
The key thing, I
- 57:06 – 1:06:46
Investment Process & Team
- ARAlex Rampell
mean, everybody's heard this, this, uh, framework before, but our job is to find, pick, and win deals. And then once we win deals, to help these companies actually achieve their objectives and, and most importantly, don't screw them up by, by giving them bad advice and, and telling them what to do. The CEO knows what to do, and, and we're there to, um, advise and consent. Um, but the way that we do this is we try to be the leader and the expert on, on every market. We're putting out more benchmarks. Like, there's actually a really cool benchmark that we're, we're coming out with. It's like an AI productive, uh, AI productivity benchmark. So for all these different categories, actually, this is pretty cool. So everybody on the team, and the way that I would kinda phrase this is we have a process interrupt job. So our interrupt is there's a very, very incredible deal, like incredible, incredible, incredible, like, let's go meet with them, drop everything. This is unfortunately, uh, from my wife and children's perspective, like a weekly occurrence right now, where it's like, "Ah, gotta cancel this. I have to have dinner with this entrepreneur who, who has discovered the, the fountain not of youth, but of, you know, perpetual motion," um, or so they think. Um, so go meet with them. That's the interrupt part. The process part is like, um, you know, I'll give you a good example. Uh, somebody's going to out-Salesforce Salesforce, not for the hostages that they have, but is going to build the greenfield version of Salesforce, because how is that possible? Everybody hates using Salesforce. There's a new company that's going to do this better, that's going to be AI-native. Um, how do we make sure that we are adept at finding, picking, and winning and supporting that investment? Well, we believe in adverse selection versus positive selection. So a very inexpensive deal that has been hanging around the hoop for six months, that's probably bad. We don't wanna meet with them. We want to meet with the best company. If it's the best company, every other venture firm also wants to meet with the best company, obviously. Um, they're gonna send out their big guns to go try to win that deal, and it's very hard to win these great deals. So the best way of starting with this is to write this article, and we made a video about this as well, which has had, like, it's hundreds of thousands of views. It's pretty incredible. "Death of a Salesforce: Why AI Will Transform Sales." Joe Schmidt and Mark Andrusko on our team wrote that. Everybody wants to talk to them, but ultimately, knowing what you're talking about really, really matters. Or, you know, death, taxes, and AI. We've done-- We've covered the gamut on everything around taxes. Um, what about companionship? What about, like, we, we do something that we just came up with, like, what are the top 50 enterprise applications, the top 50 consumer applications? You know, we often get a, uh, somewhat a pejorative joke, although I think it is, it's a compliment. We're a, we're a media firm that monetizes with venture capital, but there's a method to this madness, and the method is it's helping us find deals, it's helping us pick deals, and it's helping us win deals. So next.Um, and this is the team that does that. So everybody, you know, again, we've, we've got process interrupt, um, but you know, we have a very, very prolific process, uh, calendar where we're publishing things, we're, we're becoming experts in certain categories and trying to find entrepreneurs that are positive selection, that are building the best things here, and we always see them. And like a good example of this is Relit, where if you talk to, to Nick Kopp, who's the CEO of Relit, um, you know, Sima and Mark Andreusco just knew more about this category. Um, you know, we, we were in a very, very competitive Series B process. Um, yeah, I mean, so if you look at this, uh, this chart, um, so we have a bunch of people... Like, what are the two things that a lot of companies need? They're like, "Okay, we need help on the accounting side," because it's like, yeah, everybody wants to buy our product. I shouldn't say the accounting side, but just how do I scale a business and make sure that, you know, very important, revenue is more than expenses, and also how do I go build out a sales team? And on the other side, you have people, as I mentioned, kind of the content generators, so like Mark and Olivia and Joe and Kimberly and Gabe. You know, Kimberly, I'll, I'll call her out here, like, um, there's a company called Decagon. She introduced the two co-founders. Um, Joe has written some great content and has a lot of great people coming to him. We wanna make sure that, uh, if somebody leaves or somebody gets hit by a bus or, you know, whatever happens, we wanna make sure that the entrepreneur experience is very good. If you think about the origin of the firm, the firm originally was the only people that we will have write checks are people that have run a company or started a company, and actually I, I joined as part of that, that mandate beside, you know, for better or for worse, run a company and started the company. But then we realized that some of the best people to find deals, like Olivia is just nonpareil in terms of her ability to find great deals and be an expert, as I mentioned, in voice AI. So it would be insane not to have her, who's like the, the, the front of the spear finding a lot of these great deals, to be, um, working with a lot of these entrepreneurs.
- JKJen Kha
Great. Uh, the follow-on to that question is, is there a process-- in case folks wanna check it out. Um, what's the process for investment decision-making and, and, um, is the right assumption is that each partner is given a budget to invest rather than needing investment approval or how, how has that changed, if at all?
- ARAlex Rampell
Yeah, so we, we try to be highly, highly conviction-oriented. Um, and I feel like m-my job and David's job and Anish's job is to make sure that the right process is followed, because what, what the mistake, the automatic mistake in venture capital is, "I'm old. I don't use social apps. Why would anybody wanna send disappearing messages? That's stupid. Let's pass on that deal." And meanwhile, you have like the really, really smart, not to be ageist, like 24-year-old who actually uses this tool every day, who knows the entrepreneur and says, "This is the greatest thing that I've ever seen." Um, and then the old person, you know, the, I'm the old person here, you know, vetoes that deal, versus the right process is, yes, we do have somewhat of a budget, um, and our investment committee is effectively like making sure that we believe very strongly that the process was followed, that you've met every competitor, that the work is top-notch. And we will often defer, um, to the individual who, you know, is in the arena. Um, and our job is to just make sure process and, you know, kind of turn that second key. So it's kind of a, it's a, it's a two-key process and, you know, again, m-much more conviction-oriented. I, I know that that doesn't perfectly answer the que- but we don't have a committee where we, everybody votes and then you have to have this many votes, and then it's all this political horse trading. It's, all right, for especially for seeds, where a lot of the younger people, we have them focused on doing seeds, where it's a little bit trickier. But for the, for the smaller checks, which we are predominantly focused on, let's just defer to the, uh, the, the person with high conviction, but make sure that our entire process is done end-to-end, and that this is the expert. It came from the content. You know what you're talking about, and so on and so forth.
- JKJen Kha
Right. Um, may just generally talk about team, um, evolution and changes, how you're thinking about the augmentation of kind of check writers on the team, how you are evaluating the path to promotion for folks, whether or not, you know, in light of some of the recent promotions and also evolution of check writers, if you will hire any incremental people as well.
- ARAlex Rampell
Yeah, I mean, I think the main thing that we often debate about, just very candidly, is what we want the most is probably more leverage, um, as opposed to capacity. So we have the capacity to do lots and lots of deals, but if it's the best deal in the world, we need to assume that our counterparty is Roloff at Sequoia or is, you know, a top partner at Accel or Reid Hoffman at Greylock. Like, all of these people are active. But if it's a great deal, the entrepreneur wants to talk to as many people as possible and will often be starstruck by the person that started a multi-billion dollar company, as, as they should. That makes a lot of sense. So, um, I would say the, the one, the one area that we might look to add to is, you know, somebody who probably has built a, you know, quasi-generational company that is still very, very hungry as an investor. This is not like you go pl- this is not a retirement job. This is an anti-retirement job. This will drive somebody crazy to the point where they wanna retire, because you have to work 20 hours a day sometimes, and the working 20 hours a day is something that my, my kids make fun of. It's like, you just have coffee with people. How is that working? It's like you have to have a lot of coffee. You have to have a very high tolerance for coffee, and then you have to switch to alcohol at like 5:00 p.m. It's a lot of work to do this stuff. But, you know, joking aside, you really need to be able to meet with everybody, and when it is a great... Like, this, how do we, how do we know? Like, this is the errors of commission versus omission. We need to make sure there are fi- this actually happened with the ERP space. If we get one of those wrong, not only do we lose our money because we were wrong, but we lose like infinite money because we didn't, we didn't actually invest in the right one. So we have to make sure that we are on top of all of these people and that our team is made up of experts that all of these entrepreneurs wanna meet with. So, um, I don't know if that, that answers your, your question, Jen, but, um, the, I think the only thing that I would potentially add is, um, you know, when it's time to go win a super power deal, like we all show up together. Um, and by the way, like, you know, I, I jokingly call Mark the Air Force because like if we need a big strike, like we, what do we do? We, we call in the F-35s. Like Mark's got a few of those. We'll have dinner at Mark's house. Ben will sh- like we all show upBeyond just this team, um, but having a few other people that can kinda, you know, lead the charge on winning deals, um, and have board gravitas is helpful. Uh, of course, that is how we use Brian. That is how we use Andy. Like, I'm, I'm doing that too largely. We wanna get as much ownership as possible and, you know, we, we might need more people at a senior level not to find the deals, not to pick the deals. Of course, you know, we don't wanna just say like, "Hey, you're just a monkey that helps us win deals." But that, that is a very, very helpful thing to go do, and that's a capacity perspective.
- JKJen Kha
By the way, I know it frustrates folks probably on this call to no end because we can't cleanly attribute a certain deal to a certain GP at all, all fronts. But hopefully, that also represents how much we think about this, uh, sport as, as a team sport, and, uh, one in which we bring the entire, you know, kind of force of the firm, uh, to, to bear as a part of that. Um, and also, just in case people, uh, did not pick up, Mark does not actually have an F-35, but he's the, uh, F-35 that comes in to, to win deals as a, as a part of that. Okay. We, uh, have two kind of last questions. Maybe we can bundle them together, and it, this was in reference to, um,
- 1:06:46 – 1:09:29
Q&A: Customer Retention & Enterprise Sales
- JKJen Kha
any observations on customer retention to date on AI-native companies, and then just the scale of s- spending required for enterprise sales, uh, for these type of companies. Maybe David or, or Anish, you wanna take this one?
- AAAnish Acharya
I can talk a little bit about the customer retention point. I mean, I-- we, so far we haven't seen a bunch of sort of price shopping and switching, and I think it's important that the companies that are selling in, the startups that are selling into these companies build a rich software ecosystem around the primitive. This is what David was talking about with voice. Like, it's, it's necessary but not sufficient to provide a voice capability. You've gotta build a lot of things around that voice capability. So I think one is the companies that are building rich ecosystems have, do a better job of retaining their customers. I think the other thing is that AI is moving so quickly, many of these customers are looking to these startups as their sort of AI solutions provider, and they're looking to them for a much more holistic set of things. And because new primitives are being released every day, the startups are kind of helping drive them into the future and, um, and helping them sort of capture a lot of the top-line gains from the new technology. So I'd say so far, certainly on the enterprise side, retention has not been an issue. And then happy to speak to consumer as well, where we've also seen strong retention signs.
- DHDavid Haber
Honestly, I don't think we're seeing a tremendous difference from an enterprise sales perspective. I mean, if anything, we're seeing more inbound than ever. I mean, Eve hasn't had to have an outbound motion, which is kind of insane, uh, given, you know, the scale w- with which they're operating. Um, so there is a lot of sort of market pull for a bunch of these categories, but at the limit, I think that they will all need, you know, you know, significant kind of enter- enterprise sales. And I, I think if anything, what we're seeing, especially when companies are selling to larger corporates, is, is more of a forward deployed motion on the engineering side. I think many large companies are looking to startups to better understand where and how to apply AI within their organizations. Um, and so if anything, we're seeing people invest more kind of on the forward deployed engineering side than, than necessarily on the sales side.
- ARAlex Rampell
I mean, it, it's a very cultural thing, which is, um, before you hire somebody, this is kinda happening in a lot of startups, it's not happening at GE, can you use AI for this job? Um, in fact, you know, B- Ben is the CEO of Andreessen Horowitz. Like, he's asking that before we hire people here. Um, and I think that mindset, actually, if you do it correctly, like if you're Eve and you're like, "Oh, I'm just gonna hire people that play golf with lawyers, and that's my entire sales process, and I'll never use AI for anything, and I'm just gonna use NetSuite, and I'm just gonna use QuickBooks." Like that, that's not how these companies are actually orchestrated. Like they, they really, they understand the transformative power both on a cost side and a revenue side, and they're, they're transforming themselves internally.
- JKJen Kha
All right. With that note, thank you all for joining, and talk to you all soon. Thank you.
- DHDavid Haber
Thank you.
Episode duration: 1:09:44
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