a16zWhy Investors Are Rethinking Everything for the AI Era
EVERY SPOKEN WORD
50 min read · 10,447 words- 0:00 – 0:44
Intro
- AVAram Verdiyan
We've looked at the data of 3,000 venture capital firms in the US. Only 20 have achieved consistent 3X net returns over the last two decades.
- DGDavid George
Right now, clearly the power law is more extreme than it has been in the last 10 to 20 years of technology investing. For the first time, you can take capital and throw it at a company, and it compounds their advantage.
- AVAram Verdiyan
AI is attacking every facet of the GDP, transportation, labor, services, capital, coordination. There hasn't been a technology paradigm that hits on 30 trillion in GDP at the same time.
- DGDavid George
Elon has talked publicly about Grok Bot. On Sam's side, he's talked about Astra and some of the long-running capabilities that are gonna come out soon.
- JKJen Kha
What do you think is gonna be the next $100 trillion market cap company?
- DGDavid George
It is possible that-
- 0:44 – 1:34
Why Power Law Is No Longer Just a Venture Thing
- JKJen Kha
Welcome back to the a16z podcast. Something fundamental has changed in how value gets created. Power law used to be just a feature of a cottage industry in venture capital, and now it's systemic throughout, and particularly the three frontier model companies, SpaceX, OpenAI, Anthropic, represent somewhere between $3.5 to $5 trillion of potential enterprise value. And shockingly, before SpaceX went public, a lot of our LPs and also the broader institutional allocator community didn't have a lot of exposure to it. And so we'll talk about today why, uh, potentially f- portfolio construction and asset allocation may have changed, um, why power law is not just only in the venture capital industry, and then particularly where and how value actually compounds today. David George, Aram Verdiyan, thank you for joining me.
- DGDavid George
Great to be here. Thanks for hanging out.
- AVAram Verdiyan
Thank you for
- 1:34 – 3:43
Every Venture-Backed IPO Combined: Where Does It Go From Here?
- AVAram Verdiyan
having us here.
- JKJen Kha
Awesome. Awesome, awesome. Okay, so DG, so if you add up every venture-backed IPO for the last six years, all of them together, where does it go from here?
- DGDavid George
Right now, clearly the power law is more extreme than it has been in the last, you know, 10 to 20 years of technology investing, probably going back to, you know, the emergence of the network effect driven consumer companies. Um, there are many reasons why that's the case. Increasing returns to scale have always been a dynamic in our business. Obviously, it's well covered how a network effect business can have increasing returns to scale, but so can software businesses, right? And they, and they can take different forms, but, you know, brand reputation in the market, the accumulation of resources all provide competitive advantages. That all still is the case. But right now, especially with the labs, for the first time, you know, in my career, you can take capital and throw it at a company, and it compounds their advantage. And this is a, a thing, like how do you screw up a, a startup? Um, well, you know, throw too much money at it and have them hire 1,000 people, and then, you know, you create all these coordination issues and overhead issues and, and dueling priorities and, and it sort of gets messed up 'cause you can't hire enough people to do enough things fast enough. Um, now that's not the case. You can throw dollars at compute, and compute can make products and the businesses better. And so to me, it's not terribly surprising that the power law is more extreme. Right now, economies of scale are a very real thing, uh, in the AI market, and I think it'll continue to be the case.
- JKJen Kha
So Aram, so first of all, uh, you're not just one of our longtime LPs at Accolade, uh, but incidentally, it's been exactly 10 years since you were actually an employee of a16z. And so for your 10-year anniversary since you were last here, I've brought this gem back.
- AVAram Verdiyan
Oh my goodness.
- JKJen Kha
[laughing]
- AVAram Verdiyan
Oh my gosh. This is amazing.
- JKJen Kha
[laughing]
- AVAram Verdiyan
How do you still have this? This is amazing.
- JKJen Kha
So we dug in the catacombs, uh, and we made this extra large version, uh, just for, for posterity here. [laughing]
- AVAram Verdiyan
I can't believe that.
- JKJen Kha
We got this from the, from the catacombs. But incidentally, during the last 10 years, a lot has changed in the world. And, and if you remember, at that point in time, people were bellyaching about fund sizes being too large back then.
- AVAram Verdiyan
And you had one at a billion,
- 3:43 – 8:27
Rethinking Portfolio Construction from a Blank Sheet
- AVAram Verdiyan
I remember.
- JKJen Kha
Yeah. The, the first one at a billion. First venture fund.
- AVAram Verdiyan
Venture fund three? Yeah.
- JKJen Kha
Exactly.
- AVAram Verdiyan
Yeah, yeah.
- JKJen Kha
Exactly. And so, you know, a lot has happened since then. How do you think about your venture portfolio juxtaposed against your private equity one? And then just also generally asset allocation, we were talking about this on the way in. If you were to start from a blank sheet of paper again, knowing what you know now, how would you have constructed differently?
- AVAram Verdiyan
Yeah. Let's take venture today. We've reached 100 billion in revenue in AI. It took SaaS 15 years to get to the same point. AI did that in four years. And we're not even close to anywhere in terms of the penetration of demand. The reason DG is saying you can throw capital at it, the func- that's a function of unlimited demand for inference. And we are at a point where AI is attacking every facet of the GDP, transportation, labor, services, capital, coordination. There hasn't been a technology paradigm that hits on 30 trillion in GDP at the same time. And so you have the fastest growing technology. It's hitting on all parts of the GDP. So as an allocator, it's hard not to make the case. You should-- It's not a satellite position. You should be core or super core in some shape or form.
- JKJen Kha
Mm-hmm.
- DGDavid George
I, I'm very biased, but if you just think about the, the shape of the markets and how they've changed since I started my career, um, you know, in private equity and growth equity, you know, that was, I guess, 18 years ago, this was a cottage industry.
- AVAram Verdiyan
Yeah.
- DGDavid George
And now it's not. And I talk about this all the time, but our asset class is $5 to $6 trillion of value, and the dynamics around companies staying private longer, they're not gonna reverse. You know?
- AVAram Verdiyan
Yeah. I mean, you had that insight in 2019 when you left GA. It's venture-like outcomes in late stage, which is now happening.
- JKJen Kha
Mm-hmm.
- AVAram Verdiyan
Like, so it's no longer just early stage and you IPO when you have 100 million in revenues.
- DGDavid George
Yeah. The top decile outcomes, I think, used to be 10 billion, and now they're, like, 40 billion.
- JKJen Kha
Yeah.
- DGDavid George
Or so.
- JKJen Kha
And soon to be probably 100 billion by the time Anthropic and then OpenAI came, come out. Yeah.
- DGDavid George
Yeah, yeah, yeah. And, and look, this makes sense, right? Like, the last cycle created 25 trillion of market cap, new market cap, and a bunch of that went to the incumbents.
- JKJen Kha
Yeah.
- DGDavid George
But a lot of it went to, to startups and the new startups, and-
- AVAram Verdiyan
Yeah
- DGDavid George
... you know, each one of these subsequent waves gets bigger than the prior one.
- JKJen Kha
Yeah.
- DGDavid George
And so, you know, our expectation is, you know, the, take the 25 trillion and, like, it's going to be a larger number.
- JKJen Kha
Yep.
- AVAram Verdiyan
Yeah. And I'm constantly confused about the TAM of AI. Would love your thoughts on this. Um, like, take healthcare. Healthcare spends, like, 60 to 100 billion on healthcare IT per year. But AI is hitting on actual labor And the value of tasks that are being performed in healthcare, that's claims, billing, administration. That's a trillion-dollar industry. So the TAM of AI can be 10X plus bigger than traditional SaaS or healthcare IT. And what is that value? Well, what's the economic value of a task that's being performed? Like, that's the TAM you're looking at, and then there's some capture rate that the AI company will take. But we have no idea what-- how big the TAM can get. To your point, it's... You look at every wave, the incumbents are 10X smaller, uh, over time. So it's hard to estimate it, but I can tell this for myself, I've been chronically wrong about how big these outcomes can get.
- DGDavid George
Yeah, same here. Yeah, labor-- I mean, look, if you just look at, like, how much of, you know, dollars are spent in the US economy on labor versus software, it's like something like forty times more. Now, that doesn't mean, importantly, that, um, labor is gonna go away. Like, I think labor's just gonna get reinvented.
- AVAram Verdiyan
Right.
- DGDavid George
And so we'll, we'll end up with, um, you know, sort of re-imagination of the tasks that humans do. Um, but I think that's actually the, the, the whole point of AI is, like, you're going after this different thing. And so to equate it to software and say, "Oh, it's the next evolution of software," is far too limiting.
- 8:27 – 10:40
Why This Era of AI Is Categorically Winner-Take-All
- AVAram Verdiyan
Yeah.
- JKJen Kha
Extract it out, 'cause why, why do people think it's gonna be a winner-take-all? And, and, you know, we can hypothesize, but, you know, in the last era of technology, it was probably winner-take-all in a lot of categories. But this feels categorically different because we're re-underwriting a lot of the fundamentals. So maybe extract it out.
- DGDavid George
Yeah. Look, winner-take-all is an interesting way to describe it, 'cause, like, if you just look at the market cap growth of all the leading technology companies, like, there are many, many, many that were successful. Like, there-- it wasn't winner-take-all, right? Now, there's an important distinction. Like, we very much are believers in the power law within a given category. So, like, the winners will capture the vast majority of the market share, um, and market cap, and second place is, like, playing for scraps, you know?
- JKJen Kha
Yeah.
- DGDavid George
Um, uh, but I think there will be a massive expansion of the amount of categories that we have, right? And so, you know, if you go back twenty years, like, CRM was not really a category. I mean, it was small. It was, like, Siebel Systems and, and things like that. Um, but, you know, now it's a massive category. And so I think the same thing will happen. We've seen it in every technology market that we invest in. Again, our approach is, um, you know, in our business, we can tolerate loss, right?
- JKJen Kha
Mm-hmm.
- DGDavid George
And, like, if we're not losing money in a given fund on a given amount of investments, we're not taking enough risk, right?
- JKJen Kha
Yeah.
- DGDavid George
And so, you know, if you look at our best-performing venture funds over time, I think the loss rate is sixty percent-
- JKJen Kha
Yeah.
- DGDavid George
-or so.
- JKJen Kha
On early stage, yeah.
- DGDavid George
On early stage. Um, now, at the growth stage, like, the loss rate will be lower, but it's probably gonna be in the ten to twenty percent range, and that's appropriate, because with that, you will get investments that we make that, you know, 10X or more in returns. And so, um, you know, if we're doing a good job, we're backing the leading company in every category that is a credible category, and if the category works out well, then we do a great job. And if the category doesn't work out well, that's okay. That's kind of, like, the risk that we live with.
- JKJen Kha
Yeah. Yep, yep. And, and embedded in that is also kind of timing, 'cause I, I know, Aram, you and I lament on this, in that I think a lot of folks oftentimes think that things are overheated in that moment in time.
- AVAram Verdiyan
Yeah.
- JKJen Kha
And then you look back in retrospect, and it turns out everything was actually quite cheap. But then there's these aberrations in the market where it's probably actually true.
- 10:40 – 20:32
Why Consistency Matters More Than Ever in Venture
- JKJen Kha
And so I know you advise a lot of your LPs on, on the cons- importance of consistency in venture capital, probably even more than any other asset class, 'cause you just never know when these technologies can come out. Maybe walk through that, 'cause there's a lot of institutional allocators out there who actually don't have access to a lot of the frontier, certainly, models. Now they're trying to play catch-up-
- AVAram Verdiyan
Yeah.
- JKJen Kha
-and s- in some instances, probably maybe introducing some adverse behavior that-
- AVAram Verdiyan
Yeah.
- JKJen Kha
-is a little bit too reflective of things being a little bit too frothy. So maybe unpack that for us.
- AVAram Verdiyan
Yeah, I mean, the extremeness of the power law that DG talked about. If you, as an allocator, have not had access to the top five to ten companies over the last five to ten years, you're significantly behind in terms of returns. And let's take a step back. Like, w-we've looked at the data of three thousand venture capital firms in the US. Only twenty have achieved consistent 3X net returns over the last two decades.
- JKJen Kha
Sorry, say that one more-- twenty percent have achieved-
- AVAram Verdiyan
Twenty, no. Twenty com-
- DGDavid George
Twenty.
- JKJen Kha
[laughs]
- AVAram Verdiyan
Less than one percent.
- JKJen Kha
Wow.
- AVAram Verdiyan
Consistent 3X net returns.
- DGDavid George
That's incredible.
- AVAram Verdiyan
And it's actually-- you don't have... You don't need seven, eight funds in those twenty years.
- JKJen Kha
Mm-hmm.
- AVAram Verdiyan
Our-- It was do you have three to four 3X net TVPI funds over a twenty-year period?
- JKJen Kha
Mm-hmm.
- AVAram Verdiyan
We found only twenty-
- JKJen Kha
Wow.
- AVAram Verdiyan
-firms that have done that.
- DGDavid George
Wow.
- AVAram Verdiyan
Consistency in venture is really, really hard.
- JKJen Kha
Yeah.
- AVAram Verdiyan
But what's interesting is the consistent ones consistently had access to the category-defining companies every vintage.
- JKJen Kha
Yeah.
- AVAram Verdiyan
Um, now, there are exceptions. And by the way, just having the logo is not sufficient enough. If you're early stage and you have a large fund, you need to own enough of it.
- DGDavid George
Yeah.
- AVAram Verdiyan
If you're late stage, DG, I'm curious if you agree, sizing is really critical.
- DGDavid George
Yeah.
- 20:32 – 25:49
How Venture Has Structurally Changed Since the 2000s
- JKJen Kha
Aram, well, how do you think about from the LPC how venture is fundamentally perhaps a structurally different job than maybe when you started your career also as well, and, you know, how do you think about also asset allocation within venture? 'Cause there's actually subclauses within venture as you think about portfolio construction as well.
- AVAram Verdiyan
Yeah, I mean, there's f- I mean, in a very simplistic way, there's, in our mind, there's four ways to do venture: pre-seed, seed-
- JKJen Kha
Mm-hmm
- AVAram Verdiyan
... so think sub 150 funds. There's thou-thousand, close to 2,000 today-
- JKJen Kha
Mm-hmm
- AVAram Verdiyan
... in the US alone. Messy middle, we talked about the, the-
- JKJen Kha
Yeah
- AVAram Verdiyan
... and then there's a lot of firms there, by the way, thousands of, not thousands, hundreds of firms, and then the big firms.
- JKJen Kha
Yeah.
- AVAram Verdiyan
And then dedicated late stage. So there's four ways to play it. Um, we have done the larger firms-
- JKJen Kha
Mm-hmm
- AVAram Verdiyan
... for decades now. We've done the seed firms. We've selectively done a few in the messy middle.
- JKJen Kha
Mm-hmm.
- AVAram Verdiyan
And we haven't done dedicated late stage-
- JKJen Kha
Yeah
- AVAram Verdiyan
... uh, for the reasons we talked about. Um, how is it changing? AI is actually making our jobs harder than ever before.
- JKJen Kha
Hmm.
- AVAram Verdiyan
Um, it's making it harder because rounds are larger-
- JKJen Kha
Mm-hmm
- AVAram Verdiyan
... in general. They're faster. The traction that's happening in the industry is confusing, and here's why it's confusing. You can have a company-- I'm actually really curious to hear this from you because we hear this a lot. Company comes out of pick your accelerator. I went from zero to five million ARR in a month.
- DGDavid George
Yeah.
- AVAram Verdiyan
There's no renewal cycle yet on that company.
- DGDavid George
Yeah.
- AVAram Verdiyan
And they're raising off of that traction at huge multiples.
- DGDavid George
Yeah.
- AVAram Verdiyan
And a lot of times they're selling to each other in a cohort, potentially, and it's not even ARR, but they're multiplying by 12. So but for every co- for nine companies like that, there's one really special one that's doing a couple of million in ARR, actual ARR, that has a huge valuation that will go on to be the next Cursor.
- DGDavid George
Yeah.
- AVAram Verdiyan
So it is really, really tough actually today to parse out, like, what's real traction, what's not. Valuations are really high. This is why the big firms do well. I actually think they can wait, or they have enough relative certainty in the next round to then lead that round. But even then, there isn't a lot of certainty. When you guys did Cursor, I don't think there was a lot of certainty. And how many, h- for how many months were people saying Cursor is dead? Like-
- JKJen Kha
Oh, even the morning of the acquisition announcement, people were still saying that Cursor's dead. And we're like, th-they just announced that they were gonna be acquired by SpaceX for 60 [laughs]
- AVAram Verdiyan
Tell me if I'm wrong. $3 million in ARR, $400 million round, or somewhere maybe around there.
- 25:49 – 33:39
Are We Catching a Falling Knife? LP Sentiment Today
- JKJen Kha
So a lot of it is, is worries around, um, you know, are we catching a falling knife here? Just like the timing of the market where we are, like are things overheated, et cetera. And so we talked a lot about this at the, the outset, you know, around valuations and what the potential of the market is, but I do get a lot of sentiment from the LPs that their job is also about to fundamentally change as well. And, and you mentioned earlier one aspect of it around AI making it more challenging to evaluate opportunities and funds. But the other aspect of it as well is the, the LP historically has not been incentivized to actually embrace change in some respects, right? You know, this is very much a job where, um, the end goal is actually somewhat diametrically opposed with the risk tolerance of the GP. And, and this is just the, the mechanics of the industry, but I oftentimes say, you know, a GP can get fired for missing out, you know, the next, you know, Facebook, the next Uber, right? Like, that is the error of omission-
- AVAram Verdiyan
LPs will not-
- JKJen Kha
... and like that is fireable. But LPs on the flip side only get fired if you invest into a mentor. So in some respects-
- AVAram Verdiyan
Oh, that's interesting
- JKJen Kha
... like the incentive outcomes are actually completely opposite of the GP.
- AVAram Verdiyan
You don't get fired for investing in IBM if you're an LP.
- JKJen Kha
Exactly, yeah. And in fact, like you don't potentially even get fired for not investing at all.
- AVAram Verdiyan
Yeah.
- JKJen Kha
And so even s-
- AVAram Verdiyan
If you miss, if you miss the frontier models, back to your first question, as an LP, but you kind of were along the benchmark-
- JKJen Kha
Right
- AVAram Verdiyan
... maybe slightly below the benchmark, you're keeping your job.
- JKJen Kha
Right. Right. And so-
- DGDavid George
Yeah, it's fascinating
- JKJen Kha
... and, and also for most folks, and I'll leave fund to funds out of the-
- DGDavid George
Yeah
- JKJen Kha
... the equation 'cause it's a different, different piece but, but you know, for a lot of folks, the upside actually is not that interesting for them. So the pitch of like, "Hey, you're gonna miss out on the next potential of generational returns"
- AVAram Verdiyan
It's incentive misalignment.
- JKJen Kha
It's, it's actually quite, um, direct. So, so where do we go from there in terms of the LP kind of role and see if like it... I think we also have an important role and function. We oftentimes talk about in the context of our job as the leader of the venture capital industry is we have to help folks understand where the future is going, and part of that is understanding how to infiltrate not just within their venture capital allocation, but across their entire portfolio. And that I think is way more interesting than just saying, "Hey, like you might miss out on this next generation of returns," or the optimization of like the next frontier model or, you know, one or two power law companies, et cetera.
- AVAram Verdiyan
Access selection sizing is what LPs do.
- JKJen Kha
Yeah.
- AVAram Verdiyan
So access, you could argue you have the data to figure out who has done well historically.
- JKJen Kha
Mm-hmm.
- AVAram Verdiyan
Out of those 20 firms, out of 3,000, like you are not gonna see consistency, right? Maybe half of them are consistent.
- JKJen Kha
Mm-hmm.
- AVAram Verdiyan
But the LP's job is also to find the next gen firms as well as continue accessing that. So one is you access, two is selection, three is portfolio construction sizing, and it's critical from an LP standpoint.
- JKJen Kha
Yeah.
- AVAram Verdiyan
Because if you have an asset class where 20 firms out of 3,000 do well, you should concentrate in those 15, 20 firms pretty consistently. So when I see a portfolio with 50, 60, 70 venture capital firms, just it's very hard for me to imagine that the overall portfolio can generate better than the average.
- JKJen Kha
Hmm.
- AVAram Verdiyan
And again, going back to the average in venture, that's just not what one should do.
- 33:39 – 39:30
The Legacy SaaS Problem: What to Do with the Old Book
- JKJen Kha
Yeah. May- maybe on that thread though, DG, 'cause we, we also sometimes get the pushback as well, like for folks who have been in venture and allocated to venture, they might also have a similar problem where they do have the legacy SaaS businesses-
- AVAram Verdiyan
Yes. Yes
- JKJen Kha
... also as well. Like, what's the balance between how you think about the historical stuff?
- AVAram Verdiyan
Let me ask you that question. So I'm gonna piggyback off of Jen's question to you. You got a pick a 2016 through 2021 pre-ChatGPT vintage software company that was fine but doesn't have that AI native features anymore, it's not accelerating. It's growing, like, 30%. On the venture books it's at, like, 10, 20 times revenue. It's not, can't go public anymore. Like, no one cares to take that public.
- DGDavid George
Yeah.
- AVAram Verdiyan
Silver Lake has no interest in that company anymore. They would have a year ago. They don't.
- DGDavid George
Yeah.
- AVAram Verdiyan
What happens to that company?
- DGDavid George
Um, you know, look, it's like-
- AVAram Verdiyan
We have a lot of exposure to those companies too, so like-
- DGDavid George
Yeah. Yeah, look, I, I would say it's like-
- AVAram Verdiyan
... what are your thoughts looking through this?
- DGDavid George
... it's, it's very TBD, right? Like, I, you know, I was with, um, one of our CEO founders this weekend and, you know, he was like, you know, "Give me the straight scoop. Like, what do you actually think is happening?" And, um, you know, "Not... Don't give me a..." He, he actually said to me, "Don't give me a podcast answer."
- JKJen Kha
[laughs]
- DGDavid George
Um, which is ironic. Um-
- AVAram Verdiyan
[laughs]
- DGDavid George
... and, you know, I think both things can be true, that AI is, like, the biggest generational change that we've ever seen, and it's gonna transform industries. And also there will be some enduring value of software companies that are able to adapt, right? Um, part of the thing that we're monitoring, which makes us extremely bullish about AI, is just actual diffusion into the real economy, right? So coding, I think if, if you were to paint the, the bullish scenario for regular software and for slower pace of change, y- you would say, um, you know, coding hit, but that's kind of a head fake, right? Like coding, coding is perfectly documented, right? So it has, like, perfect data. Uh, it's verifiable and it's simulatable, right? And so, um, like most tasks in business do not share those three attributes. And so, you know, maybe the diffusion into other knowledge work beyond, you know, coding will take a lot longer. That would be the case to make for the software companies. Um, and then some of them will evolve and, and have AI, you know, solutions, and they'll change their business models. Um, and I think that's a must. Um, but that would be the case for why maybe, you know, it's a little bit overblown. I think if you look at the way that a lot of the public SaaS companies have reacted over the last few months-
- AVAram Verdiyan
Yeah
- DGDavid George
... like that's... I think there's a little bit of a, a growing realization in that. Um, all that makes me super, super, super bullish on AI though, right? So, like, if you look at our portfolio, um, you know, we have some of those companies, but about 95% of our NAV is not in those companies, right? Like-
- AVAram Verdiyan
Right
- DGDavid George
... they're, it's, it's in the, it's in the companies that are, you know, growing very fast, accelerating, et cetera. Um, you know, the average, I think it was the median ... company in the US is spending $12 per employee on AI per month. The top 1% of the data set that we've seen is spending $7,000-
- JKJen Kha
Wow
- DGDavid George
... per employee on AI per month. So, um, not only have we had, like, limited diffusion beyond coding-
- JKJen Kha
Right
- DGDavid George
... but if you just look at diffusion of, you know, the shape of who is consuming tokens and actually getting real value out of AI today, we're super early, right? Like banks, you know, the most cutting-edge banks are probably doing 1% of headcount cost on, on AI tools. Um, and so the reason this makes me very bullish is these are the fastest-growing companies we've ever seen, like of all time. Again, they're adding more revenue per month-
- JKJen Kha
Yeah
- DGDavid George
... than the, than the mega cap tech companies. Um, and yet it's probably on the back of adoption of, like, 10 million users, maybe 20, maybe 30 max. And, you know, there's one and a half billion knowledge workers in the US, and I think it's gonna transform the way we do a lot of work.
- JKJen Kha
Yeah, CalPERS famously, uh, lost out on billions of gains by not investing in the bracket. They're making up for lost time now. They- they've, uh, converted their portfolio from 91% to 58, and venture and growth from nine to 43. There's probably some balance-
- DGDavid George
Yeah
- JKJen Kha
... in between those things, uh, but, you know, they're, they're leaning hard into. Um, but there's gonna be a lot of value still that's gonna be accreted in some of these historical companies. And, you know, I was sort of joking around about Bendix, but that was probably a great outcome for Airtable, you know, outside of the fact-
- 39:30 – 47:17
Why "AI Private Equity" Isn't a Panacea
- JKJen Kha
By the way, even the, um, AI version of private equity is not completely insulated. We oftentimes talk about, like, you know, just because you put Sears on a website didn't make it Amazon, right?
- AVAram Verdiyan
Mm-hmm.
- JKJen Kha
You have to have the benefit of building Amazon from the studs logistically to make it Amazon. It's not just the website. And in a lot of instances with the private equity-backed companies that are now just infusing AI, we've seen it actually in some of our companies as well, where the peer competitor is like, "Oh, the first thing I'll do is, of course, hire AI customer service agents," 'cause that's, like, an easy low-hanging fruit. Like, turns out, if you don't actually build in the workflow, you start to churn customers very quickly if they're used to talking to a human. And for every dollar, uh, every drop in NPS is, like, a direct correlation with drop in revenue, and then you start to spiral, especially if you have debt laid in on top of it. So oftentimes, uh, sometimes we hear from folks going, "Well, I'll just do the AI, you know, kind of version of private equity." It's not a pan-panacea for, for generating returns, especially when it's just so categorically different from a technological perspective-
- AVAram Verdiyan
Mm-hmm
- JKJen Kha
... to actually infuse that throughout the company as well.
- AVAram Verdiyan
Yeah, you can't just throw an operating partner at the company and say, "Let's put AI on it." It just doesn't work.
- JKJen Kha
Yeah.
- AVAram Verdiyan
You need to completely re... And if you have-- By the way, if you do have a founder mentality at the management team, like, it is possible.
- DGDavid George
Mm-hmm.
- JKJen Kha
Yeah.
- AVAram Verdiyan
But the board has to be aligned.
- JKJen Kha
Yeah.
- AVAram Verdiyan
The pr- all the investors have to be aligned, and you do have to make some really hard decisions the way Intercom did.
- DGDavid George
Mm-hmm.
- JKJen Kha
Yeah. Yep.
- DGDavid George
Yeah. So obviously th-this is a group that is very pro, you know, venture and growth as a category. Um, let's talk about the legitimate opposition to it and w-what is the case, you know, for why maybe the, you know, the risk that you're taking or whatever it may be with venture and growth, you know, doesn't justify it.
- AVAram Verdiyan
Uh, I mean, the pushback we get a lot is timeline to liquidity. So it takes... The average unicorn is private for 10-plus years typically, and then you got all these follow-on rounds that are happening pretty quickly, one after the other. You see maybe the same logo in five, six different firms.
- JKJen Kha
Mm-hmm.
- AVAram Verdiyan
And the question is how do you get out of it?
- DGDavid George
Mm-hmm.
- AVAram Verdiyan
Um, and so-
- JKJen Kha
And an IPO isn't actually a distribution-
- AVAram Verdiyan
Right. It takes-
- JKJen Kha
... milestone at this point
- AVAram Verdiyan
... it could take 12, 24-plus months before you actually get liquidity-
- DGDavid George
Yeah
- AVAram Verdiyan
... out of an IPO. Like, especially if you own 10, 15% at IPO, like, it's gonna take a long time if you're in the generational company. So we get that pushback a lot in terms of timeline to liquidity.
- DGDavid George
Mm-hmm. And then, um, what is the, what is the sort of counter to that pushback?
- AVAram Verdiyan
Well, counter to that pushback is going back to 3,000 firms, 20 do well consistently. If you're in the top 1% of those firms and you have a category winner, you wanna make sure that compounds actually.
- DGDavid George
Yeah.
- 47:17 – 48:04
The Real Bottleneck: Data Centers, Chips & the Machine Age
- JKJen Kha
Mm-hmm.
- AVAram Verdiyan
So that is a real bottleneck, and that means reimagining the data center. You talked about the density being 10X plus. Well, you can't just repurpose an old data center-
- DGDavid George
Yeah
- AVAram Verdiyan
... for the, for a new AI facility. So this is where the new fund you have can create not 10, 50, but 100 billion-plus opportunities as well that can really solve the bottleneck. And I think that is a real concern because demand is not the concern. Um, a lot of... I've heard LPs say, "This is like the dot-com," or, "This is COVID." It's not, 'cause the traction is real, and it's not ephemeral revenue like COVID.
- DGDavid George
Mm-hmm.
- AVAram Verdiyan
The bottleneck could be supply, but if you have the right inputs, like the fund that's... you're now backing those companies, the next generation chip companies, memory, et cetera, that's a huge opportunity.
- JKJen Kha
It's time for machine age. Let's bring the machines.
- DGDavid George
I love it.
- JKJen Kha
All right. Let's close on that. Thank you both so much. It was super fun.
- AVAram Verdiyan
Thank you for having us.
- JKJen Kha
Thank you. Awesome.
- DGDavid George
See ya.
Episode duration: 48:18
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