Nvidia: The GPU Company (1993-2006)

Ben Gilbert 0:00 Hello, Acquired listeners. We, uh, we are coming at you with a little bit of an announcement, uh, some late-breaking news. We recorded this episode, what, David, a week ago?

David Rosenthal 0:11 Yeah, a little over a week ago. We got some time travel going on here. I feel like I'm Jensen in, like, a deep fake Nvidia keynote. [laughing]

Ben Gilbert 0:19 [laughing] We sit here, uh, Saturday, March 26th, getting ready to release this episode in about twenty-four hours, but we wanna tell you, we've got something that you don't wanna miss. Save the date of May 4th, Star Wars Day, for something in Seattle, Washington, and we hope to be able to see you in person. We'll be able to share more soon, but for now, save the date.

David Rosenthal 0:44 Consider this our save-the-date card that we're sending to each and every one of you.

Ben Gilbert 0:49 [upbeat music] Yep, all right, now on to Nvidia.

Speaker 0:51 Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight, another story on the way. Who got the truth?

Ben Gilbert 1:08 Welcome to season ten, episode five of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs, and our venture fund, PSL Ventures.

David Rosenthal 1:23 And I'm David Rosenthal, and I am an angel investor based in San Francisco.

Ben Gilbert 1:29 And we are your hosts. It is the eighth largest company in the world by market cap.

David Rosenthal 1:35 Dang!

Ben Gilbert 1:35 When Nvidia began in 1993, it made computer graphics chips in a brutally competitive and low-margin market. There were ninety undifferentiated competitors, all doing basically the same thing at the same time, and yet today, they have an eighty-three percent market share of standalone GPUs, that's graphics processing units, for those of you starting with us from square one, that are supplied for desktop and laptop computers.

David Rosenthal 2:03 Ben, you're telling, like, the whole story here. [chuckles]

Ben Gilbert 2:05 [chuckles] Sorry, sorry, I'll just-- I'll tease a few things here. So not only that, but of course, followers of Nvidia know that they recently pioneered a completely new market, the hardware and software development tools to power machine learning, neural networks, deep learning, all of this in the cloud and the data center, which obviously is proving to define this whole decade of computing. And as David and I began our research, we realized this really could be a book, and like a thriller of a book, since the co-founder and CEO, Jen-Hsun Huang, really has bet the company, like, the whole company, three separate times, nearly going bankrupt each time. But obviously, as we reflect back here today, that certainly did not happen.

David Rosenthal 2:48 All right, so here's everything you need to know- [laughing]

Ben Gilbert 2:50 [chuckles]

David Rosenthal 2:50 ... about Jen-Hsun. The CliffsNotes before we talk for, like, six hours about him. The dude used to drive a Toyota Supra, [chuckles] like a Fast and Furious style-

Ben Gilbert 3:00 Yes

David Rosenthal 3:00 ... like, [chuckles] like a death machine, and he almost died. He got in, like, a huge accident.

Ben Gilbert 3:05 Just one more way he is like Elon Musk.

David Rosenthal 3:08 Oh, man. Crazy.

Ben Gilbert 3:09 Well, because we have way too much here for one episode, we'll save the stories on machine learning for next time. Today, we are gonna tell the wild story of Nvidia's founding to its rise in prominence, powering the computer graphics and gaming revolution. This really is a story of, like, true invention and innovation. It reminds you that engineering breakthroughs really do push our world forward. And in saying that, to s-- kind of set some context, this is a story that takes place from about 1993 to kind of the mid to late 2000s. And as hyped as Nvidia has been, you know, over the last five years, obviously, with the stock run-up and everyone's sort of excitement around the company, I think Jen-Hsun is still an underrated CEO, even rated-

David Rosenthal 3:54 Hundred percent

Ben Gilbert 3:55 ... where the Nvidia bulls have put him. I think Jen-Hsun is one of those people where, like, if you know about him, you know what we're talking about, and you have unbelievable reverence, but I think not enough people really know.

David Rosenthal 4:08 Just one more Jen-Hsun quote before we get into the episode. This is the best: "My will to survive exceeds almost everybody else's will to kill me." [laughing] Ah, amazing.

Ben Gilbert 4:22 Well, listeners, before we begin our parallel processing and graphics rendering journey, we wanna introduce you to our presenting sponsor, Vanta, the leader in automated security and compliance. As you know from previous episodes, we are huge fans of Vanta and their approach to SOC 2, HIPAA, GDPR, all the compliance stuff. We have the CEO and co-founder, Christina Cacioppo, back with us today to help analyze her own company. Christina, I know long before Vanta, you were at Union Square Ventures from 2010 to 2012. You were really starting to be at the forefront and see how software was going to make it so companies could get way more leverage on people, and money, and all the resources they have at their disposal to accomplish so much more, so much faster. Was that an inspiration to what ultimately became Vanta?

Speaker 5:13 So definitely, especially in retrospect. Like, I think when I was at USV, I didn't know the word SaaS, and that's a reflection on me, not on USV at all. But what we called it or how I thought about it, was like developer tools, right? And this was 2010, 2011. This was like, uh, is it too niche? How many of these people are there? All their customers are start-ups. Clearly, that's not sustainable. You know, how do you sell new-age tools to old companies? We sort of, being on the inside of USV, like, saw the traction of, like, an early Twilio or Mongo, right? And so you sort of just be like: Oh, no, people haven't caught up yet. Like, this is very much a real thing. And I think I just, yeah, saw that a little bit earlier than, I mean, the market broadly. And so coming into Vanta, just deeply believed, like, a go-to-market focused on start-ups-... can work, right? There are pros and cons of any, but you get, like, fast iteration cycles, and, like, that works. You don't have to worry about selling to, I don't know, IBM, you know, when you're a five-person startup.

Ben Gilbert 6:13 Right. And with tools like Vanta and last season's sponsor, Pilot, I mean, you have this ability to get so much more of your internal focus exclusively on the thing that makes your company great.

Speaker 6:27 Right. You don't have to become an expert in compliance or in, you know, financial accounting or, or whatever it is. Think of Vanta very much in the mold of, like, a, a Jeff Bezos. Like, you should focus on what makes your beer taste better, not on the electricity you need to, to produce the beer. And I think, you know, the Vanta version of that is you should focus on your product, what makes it special, not on how it becomes compliant.

Ben Gilbert 6:51 Our thank you to Vanta, the leader in automated security and compliance software. If you are looking to join Vanta's over 2,000 customers to get compliance certified in weeks instead of months, click the link in the show notes or go to vanta.com/acquired for a 10% discount. Listeners, after you finish this episode, and you're thinking to yourself, "Gosh, I wish I could talk about this with people," we have good news for you. You can do that with 11,000 other smart members of the Acquired community at acquired.fm/slack. If you're dying for more after this, and you're like, "Ah, I can't wait for part two, I need some more stuff in the meantime," search Acquired LP Show in the podcast player of your choice. Here's a new thing. If you haven't rated or reviewed this podcast yet... I think the last time we, we mentioned this was, like, years ago. Spotify, in their mobile app, just added the ability to rate. So if you listen in Spotify-

David Rosenthal 7:43 Oh, nice

Ben Gilbert 7:43 ... you should totally leave us a little, uh, rating in there. If you're on Apple Podcasts, leave us a review. We really, really, really appreciate it when you help share your experience as a listener with others. All right, listeners, this is not financial advice. We may hold positions in things we discuss on this show. This is for entertainment and informational purposes only. And David, take us in.

David Rosenthal 8:06 So [exhales] we start in February of 1963. What was going on in Silicon Valley in 1963? Let's see, Fairchild had already started, I think, and Silicon Valley was, like, underway, but it was early days. But we start not in Silicon Valley, but in-

Ben Gilbert 8:26 Taiwan?

David Rosenthal 8:27 Yes, the southern part of the island of Taiwan, with the birth of Jen-Hsun Huang, later Americanized to Jensen, Jensen Huang. So his dad was an engineer for the air conditioning company, Carrier.

Ben Gilbert 8:48 Oh, yeah.

David Rosenthal 8:49 Yeah, you see those, like, big, like, industrial air conditioning units on buildings and stuff. And when Jensen is four, his dad goes on a company training to America, to New York City, and he was like: "Wow, you know, this is amazing. I want my kids to grow up here and to have all the opportunities that are available." So he comes home, Jensen's four. Jensen has an older brother, who's a couple years older. You know, like, nobody speaks English, so his mom gets an English dictionary and picks 10 words every day, grills the two kids, like, quizzes them, and teaches them English out of the dictionary. [chuckles]

Ben Gilbert 9:28 Huh.

David Rosenthal 9:28 Now, if you listen to Jensen, where's that accent come from? Because it's not what you would think. The family ends up moving to Thailand a few years later, and then when they're living in Thailand and Jensen is nine, they finally decide that this is the right time to send the kids to America. Now, the, the parents can't move to America yet. They don't, they don't have enough money. But they found a boarding school in America that is cheap enough that they can afford. It is called Oneida Baptist Institute, and it is in Eastern Kentucky, the sticks of Kentucky. Jensen would later say that he and his brother were the first foreigners to attend this school, and they're pretty sure they were the first Chinese people ever in the town [chuckles] of Oneida.

Ben Gilbert 10:11 Whoa!

David Rosenthal 10:11 Well, it turns out that the reason that this school, OBI, Oneida Baptist Institute, was so cheap, was it's actually not a prep school, it's a reform school. [laughing] So this is a school for, like, troubled kids. It's a reform school. So Jensen's roommate, when he shows up as a nine-year-old, is a 17-year-old kid who had just gotten out of prison and was recovering from seven stab wounds that he got in a knife fight.

Ben Gilbert 10:40 Classic American journey right here.

David Rosenthal 10:43 And amazingly, this is so Jensen, like, they become great friends, even though this kid is eight years older than him, like, twice his age, basically, from a way different background. Jensen helps him with math, and he gets Jensen into weightlifting. [chuckles] So you see Jensen today, and you're like-

Ben Gilbert 11:00 Ah

David Rosenthal 11:00 ... "That dude is jacked!"

Ben Gilbert 11:01 He is jacked.

David Rosenthal 11:02 He's been weightlifting since he was nine years old. [chuckles] He says about his time at Oneida, "You know, now I don't get scared very often. I don't worry about going places I haven't gone before. I can tolerate a lot of discomfort." [laughing] Boy, does that play out-

Ben Gilbert 11:16 Wow

David Rosenthal 11:17 ... in his life, as we will see. So it's pretty awesome, actually, now, he and his wife, Lori, have given a few million dollars to the school, and it's, like, a amazing institution now. You can see Jensen gave the commencement address in 2020. We're gonna link to this in the sources. It's pretty awesome. So after a couple years at OBI, his parents are finally able to save up enough money to afford to come to the US themselves. So they move first to Tacoma, Washington, the great state of Washington,

David Rosenthal 11:48 and then they move a little farther south down to the suburbs of Portland, Oregon. Jensen and his brother go home. They live with them. They go to public school there. [chuckles] You know, Jensen continues his, uh, his American upbringing. He gets really into table tennis. He-... places third in the junior nationals in, uh, table tennis, and he gets his picture in Sports Illustrated growing up.

Ben Gilbert 12:10 Oh, no way!

David Rosenthal 12:11 Pretty amazing. But his parents continue their sort of like academic discipline, and Jen-Hsun's super smart, obviously. He ends up skipping two grades and then going to college. He goes to in-state college. He goes to Oregon State University, just down the road a little bit.

Ben Gilbert 12:26 And he got there when he was, like, 16, right?

David Rosenthal 12:28 He got there when he was 16 'cause he had skipped a couple grades. And he loves math, so he decides he's gonna major in electrical engineering at OSU, and he totally falls in love, in more ways than one. The first way that he falls in love is, uh, he just thinks, like, electrical engineering is the coolest thing in the world, becomes one of the top students in the school. He talks about how, like, he gets mad at the professors because they don't use, like, enough precision when talking about, like, exact numbers. [chuckles]

Ben Gilbert 13:00 Which he later comes to say that he respects the opposite position. I think some of the Nvidia employees call it CEO math when, uh, he sort of rounds all the numbers, and he's like, "I, I-- reflecting back, I do understand what the professors were trying to show, is, like, the details only matter if you understand the big picture first."

David Rosenthal 13:17 That's so Jen-Hsun. Like, he understands, like, "Yeah, my employees get mad at me when I, you know, round the numbers and use CEO math, and, like, I get it.

Ben Gilbert 13:24 [chuckles]

David Rosenthal 13:24 Like, I appreciate precision, too, but, you know, like, the big picture is what matters here." The second way he falls in love is with his lab partner [chuckles] in, uh, electrical engineering fundamentals, his lab partner, Lori, who goes on to become his wife. Such a cool story. So he graduates in 1984. She graduates in 1985. They move down to Silicon Valley, and Jen-Hsun joins AMD as a sort of equivalent of, like, a chip design PM.

Ben Gilbert 13:56 Hmm.

David Rosenthal 13:57 It's very, like, engineering-heavy, but he's kinda like a PM. He's sorta like helping as a junior manager of a, of a process for developing a chip. He's working on a then blazing-fast one megahertz CPU chip.

Ben Gilbert 14:10 Yeah, he talks about this, and he says, uh... You know, he's talking about how slow one megahertz is, and he refers to it and says, "You could even see it coming." That's about how fast it was. [chuckles]

David Rosenthal 14:18 [chuckles] You could see it coming from a long way away-

Ben Gilbert 14:21 [chuckles]

David Rosenthal 14:21 ... and still coming and still coming. Amazing, and, of course, now he makes literally the fastest chips in the entire world. So he starts at AMD. He starts at night, working on a master's degree in electrical engineering at Stanford. It ultimately takes him eight years to finish this master's. He works all the time that he's at AMD and then at LSI Logic, where he goes to, we're gonna talk about in a sec. He ultimately does graduate right before they start Nvidia. This is, like, a super cool bit of trivia. Did you go back and watch the Don Valentine, uh, View from the Top-

Ben Gilbert 14:56 No, I didn't

David Rosenthal 14:56 ... lecture at GSP? Oh, I watch that, like, once a year every year-

Ben Gilbert 14:59 [chuckles]

David Rosenthal 14:59 ... every time there's an excuse.

Ben Gilbert 15:01 Is that the one where he holds up, uh, Alfred's resume?

David Rosenthal 15:03 It's... Yeah, where he holds up Alfred Lin's resume. So also, Easter egg in that talk, that was the day that the Jen-Hsun and Lori Huang Engineering Center at Stanford-

Ben Gilbert 15:14 Ooh

David Rosenthal 15:15 ... was dedicated. And as Don says, "Jensen did a building." [laughing] Pretty awesome.

Ben Gilbert 15:21 I did watch... He gives a talk where he wa- he walks in and gives a talk at, uh, Stanford. I think it's the first time that Jen-Hsun has given a talk since the building opened, and he says, uh, "I've donated. We have this nice building now, so I, I have no more money."

David Rosenthal 15:34 Yep, "I'm penniless," I think he says.

Ben Gilbert 15:36 [chuckles] "I'm penniless." [chuckles]

David Rosenthal 15:36 [chuckles] Right. Right, Jen-Hsun. Ah, so great.

Ben Gilbert 15:40 Just to set context for people, if you look at his Nvidia shares, he's worth about $20 billion right now.

David Rosenthal 15:45 I think he owns, what, like, three and a half percent of Nvidia?

Ben Gilbert 15:47 Something like that.

David Rosenthal 15:48 Something like that. Yeah, he's not penniless. [chuckles] Okay, so he works at AMD for a couple years, and while he's working there, probably from working on this chip that you can-- so fast, you can really see it coming, he realizes that designing chips is really freaking hard. Intel can do it. AMD can do it. But, you know, there's not many companies. It's all, like, full stack at this time. You know, TSMC doesn't start till 1987.

Ben Gilbert 16:13 Not only are you manufacturing in-house, but for the most part, the, like, process of designing a chip is a manual one, and so these companies sort of each have their own institutionalized, internal way of working that you design and lay out the elements of a chip.

David Rosenthal 16:29 And Jen-Hsun talks about, like, when he was in school, the reason he wanted to go to AMD was he thought this was so cool, that, like, you could do it all, and then once he's actually at AMD, he's like-- he realizes, like, that's actually not cool. Like, it would be cooler if you could be really good at, like, a certain part of the stack and have tools and platforms and other companies to allow you to [chuckles] allow anybody to make chips.

Ben Gilbert 16:51 Yeah, if there were, like, design tools to help you make chips.

David Rosenthal 16:56 So after a couple years, his office mate at AMD leaves and goes to join a startup called LSI Logic, which had just gone public, and we've talked about it on the show, made Don Valentine and Sequoia the then-largest venture return in an IPO in history, maybe the largest venture return ever in history when they went public, of $153 million on day one.

Ben Gilbert 17:27 Boy, has venture changed as an asset class.

David Rosenthal 17:30 But that... I'm trying to think. That fund, that probably would've been, I don't know, Sequoia Fund II or III, maybe. I mean, I bet the fund was, like, I don't know, ten, 15 million. Like, so that, it probably roughly 10X'd the fund in, in one day.

Ben Gilbert 17:46 Right.

David Rosenthal 17:46 Pretty awesome. So what was LSI? It was one of the first, and was sort of the premier ASICs company, A-S-I-C, application-specific integrated circuit companies. And so what they did, and what that meant, was they basically made custom-designed chips for other companies. That's what Jen-Hsun's kind of thinking about, and the custom-designed chips that they would make, these ASICs-... would be like for a very, very specific function that would be integrated into other systems. So like defense companies, Lockheed Martin and the like. Um, but lots of other companies now, too, are coming to LSI Logic and the other ASIC companies and saying, "Hey, we wanna create these systems of chips. You help us design the chips to go into these systems, and, yeah, we'll use processors from, you know, Intel, too," but, like, it really helps democratize making end product systems.

Ben Gilbert 18:41 Right. And the idea with ASICs is really if you're not saying, "Hey, th- there's gonna be a general purpose computer that this needs to power, that can, you know, be super flexible, and people might have all kinds of applications that run on it, but, you know, more inefficient in order to get that flexibility chip," "Hey, I know the exact thing that this chip will do, and it will only ever do this, and so we can actually literally hard code that right on the chip." I mean, the, the actual design of the physical chip can be for this one specific thing, so it's super efficient at this one low-level thing.

David Rosenthal 19:17 Yep, and the legacy of ASICs today, still around, still used by the ASICs, but the legacy is FPGAs, field programmable array chips, that are, um, you know, some might say is sort of a bear case for Nvidia these days, but we will, we will get to that far, far, far down the road. Sun Microsystems was one of their biggest customers, and that was how Sun got started and made the chips for their workstations. And in fact, Jen-Hsun, when he shows up at LSI, Sun is, like, just starting and coming to LSI, and so he gets put on the project, and he basically embeds with Sun, like, in the early days of Sun Microsystems, to help them build out the chips for what would ultimately become the SPARCstation 1, Sun's first big workstation product. Over the next few years, he pretty much exclusively works with Sun while he's at LSI Logic. He works directly with Andy Bechtolsheim, who-- you know, the founder of Sun, and with Vinod Khosla.

Ben Gilbert 20:17 Yeah.

David Rosenthal 20:17 He becomes super well-known and develops quite a reputation there as somebody who can really, like, take these visions for chips and these customer requirements from Sun and turn it into, you know, reality and production. So one day, right around Thanksgiving 1992, Jen-Hsun has finally, after eight years, finished his master's degree at Stanford, and, uh, Stanford is quite, quite glad that he finished before this happens. Two of Jen-Hsun's buddies, who he's become close with at Sun, Chris Malachowsky and Curtis Priem, who in Jen-Hsun's own words, he describes them as really, really fantastic engineers, and when Jen-Hsun says that, he means it. They come to Jen-Hsun, and they're like: "We're not, like, super happy at Sun, the two of us. We have an idea that we wanna talk to you about." And Jen-Hsun's like: "Well, sure! Let's go meet at my favorite spot, Denny's." [chuckles]

Ben Gilbert 21:13 Really?

David Rosenthal 21:14 Yeah, like, the man loves Denny's. He worked at Denny's-

Ben Gilbert 21:17 [laughing]

David Rosenthal 21:17 ... in high school. Like, he's always going to Denny's. He, uh, he orders, uh, the Super Bird, I think, is, like, his go-to dish.

Ben Gilbert 21:22 Nice.

David Rosenthal 21:23 He's so folksy. I love him. So they go, all have dinner at Denny's, and Chris and Curtis pitch him on their idea, which their idea is, it's pretty good. It's pretty good. Tell me, as a venture capitalist, if you would fund this idea back then in late 1992. So they see 3D graphics are really becoming a thing, and, you know, remember, this is the era of Sun, LSI Logic, all this stuff. It's also the era of Silicon Graphics, right down the street, right there in Silicon Valley, SGI, so many great things that come out of there. You know, Jim Clark, Netscape, like, all this great stuff.

Ben Gilbert 21:59 Jurassic Park.

David Rosenthal 22:00 Jurassic Park-

Ben Gilbert 22:01 [laughing]

David Rosenthal 22:01 ... is about to come out. It comes out in 1993. So there's this huge demand for 3D graphics. The way 3D graphics are done, you need SGI workstations. You need, like, super custom, you know, very high-end, very expensive stuff. Only something with the budget of, like, either the military or, like, a Jurassic Park can afford to do this, but people love it. Like, the consumers love 3D graphics.

Ben Gilbert 22:26 Not to mention, where are we in the evolution of video game consoles at this point?

David Rosenthal 22:31 Well, we're still in the Super Nintendo days, so we're not at 3D console graphics yet. That's coming very shortly. But what is happening is the PC wave is, like, really cresting right now. Like-

Ben Gilbert 22:45 We're, like, a year and a half from Windows 95 coming out.

David Rosenthal 22:49 Mm-hmm, and I remember doing this. I bet you do, too. What are kids in 1992, 1993 doing on their PCs? They're playing Wolfenstein 3D-

Ben Gilbert 23:00 Oh, yeah

David Rosenthal 23:01 ... and Doom. Doom comes out in 1993. These are taking the world by storm, and they're made by id, id Software in Texas, and John Carmack and John Romero. But Carmack is, like, doing incredible feats of engineering to get 3D graphics to run on consumer PCs. It took somebody of Carmack's caliber to make this happen, and the market loved it. So the idea that Chris and Curtis has, they're like, "We're really great chip engineers. Jen-Hsun, you're a really great, you know, chip PM, essentially. Let's make a graphics card. Let's make a chip that can accelerate the graphics of a normal PC to enable 3D graphics like SGI is doing with professional workstations, to enable them for consumer hardware PCs. We know that people love games. This will help the entire industry, you know, take off."

Ben Gilbert 23:56 And you're not even saying-

David Rosenthal 23:57 Sounds pretty good, right?

Ben Gilbert 23:58 -that they're gonna try and make it so you can develop games on a PC. You're saying, like, just so you can play games on a, on a PC, right?

David Rosenthal 24:08 Well, both. I mean, mostly that you can play games on the PC, but then you're also gonna have to create, you know, all the APIs and SDKs and developer ecosystem for developers to access this new hardware on PCs, but they'll just develop on PCs. Uh, it's really about getting the, like, the hardware into consumers' hands, that they can actually play this stuff.

Ben Gilbert 24:30 Hmm.

David Rosenthal 24:32 ... All right, so what do you think? Is this, like, a good pitch?

Ben Gilbert 24:34 I mean, so what you're basically asking me to believe, nineteen ninety-two me, is that video games on PCs are gonna be a thing, that there's gonna be a big economic wave around, that lots of consumers are going to want to do this. They're gonna wanna do it on PCs instead of on Super Nintendo and dedicated systems. Maybe.

David Rosenthal 24:57 Well, I have this proof point of, of id Software and, and Wolfenstein and Doom right there, of, like, millions of people doing this.

Ben Gilbert 25:04 But still maybe, because it's not clear that, like, video games are gonna be a giant market. It could be, like, a kid market, you know? And it could be the case that, like, do you really need to totally change the development environment, or can, like, there be, like, five or six different Dooms out there? There's five or six Carmacks, who are all independently geniuses and can figure out how to do all the graphics on their own. Yeah, maybe, but there's a leap of faith.

David Rosenthal 25:29 Yeah, definitely a leap of faith. So, yeah, okay, not totally obvious, but still, like, I think this was pretty fundable, I think, at this moment in time. And the other thing that was going on was, in Silicon Valley, all these peripheral companies, like people building chips and cards that plug into consumers' PCs, this was full swing. There are companies making sound cards. There are companies making networking cards. There are companies making serial port cards, like, God knows what.

Ben Gilbert 25:59 Okay, so there's already, like, sort of an accelerated computing wave here, where people are saying, like, there's some reason to do something specialized off the CPU that needs its own integrated circuit, that vendors are making custom, and there's a market to make custom stuff as a vendor for PCs that takes a workload off the CPU.

David Rosenthal 26:18 Yeah, and so the pitch is, we're gonna make a custom graphics card. Take a graphics workload off the CPU, specifically for gaming.

Ben Gilbert 26:24 Great.

David Rosenthal 26:25 Okay. So yeah, it was pretty much a brain-dead yes. But as you alluded to at the top of the show, the problem when something is a brain-dead yes for a venture capitalist is that it's a brain-dead yes [chuckles] for lots of venture capitalists, and lots and lots and lots of companies get funded to do this. But back to Denny's that night, Nvidia is the first. They are the first dedicated graphics card company. They all decide, the three of them, that they're gonna go in on this. Jensen goes to the CEO of LSI Logic, walks into his office, and tells him that he's gonna resign. He's gonna go start this company with two engineers from Sun, and, uh, this is what the business plan is gonna be. Now, do you know who the CEO of LSI Logic was?

Ben Gilbert 27:22 No.

David Rosenthal 27:23 It was a man named Wilf Corrigan, who was previously the CEO of Fairchild Semiconductor.

Ben Gilbert 27:31 No way!

David Rosenthal 27:33 Damn right.

Ben Gilbert 27:34 So is that how Don-- 'cause Don Valentine obviously was the biggest investor in... Well, Sequoia was in LSI Logic, and he, did he know him from Fairchild?

David Rosenthal 27:43 Yeah, they were colleagues back in the day.

Ben Gilbert 27:44 Ah, okay. [chuckles]

David Rosenthal 27:46 And then the biggest exit in, uh, in Sequoia's history to that point in time. So Wilf says, "So let me get this straight." And he says to Jensen, "You're gonna go build these graphics cards?" And kind of just like you were saying there, Ben, "Who's gonna use these, and, and what for?" It's like: Well, you know, they're gonna be in PCs. They're for gaming. They're for a bunch of kids. And Wilf hones in on the critical question. He's like: Well, who makes PC games? Is there a developer ecosystem for this? So that's kind of like, "Uh, we think if we build it, like, they'll come." So Wilf says, [chuckles] uh... Remember, he was at Fairchild. He sounds like he knows when to make silicon for specific applications. And, uh, [chuckles] Wilf says, "Hmm, all right, you'll be back. I'm gonna hold your desk. [laughing] But in the meantime, before you go, I'm gonna call up Don. I'm gonna do-- You've done good work for me. I'm gonna call up Don." He calls up Don, and he's like: Don, I got a kid. He's gonna come see you. [chuckles] Standby.

Ben Gilbert 28:43 Which this is a lesson for all founders and, uh, you know, aspiring founders out there. Getting a reference from the CEO of a portfolio company is a really good way to come in with a venture capitalist already leaning toward investing, especially if you're referred by the top-performing company of all time in their portfolio.

David Rosenthal 29:03 Yes.

Ben Gilbert 29:04 It's kind of hard for Jensen to mess up this pitch with the recommendation that he's coming in with.

David Rosenthal 29:10 It's literally impossible- [laughing]

Ben Gilbert 29:12 ... [laughing]

David Rosenthal 29:12 -because he goes to see Don. You know Don. You know, Don sits down, and he's like... "So?" [laughing] And Jensen completely botches the pitch. He gets, like, really nervous.

Ben Gilbert 29:24 At this point, I think he had, like, a partially written business plan, that he had, like, bought a book on, like, how to start a business and was, like, three chapters into the book but decided not to finish and started writing the plan and didn't finish the plan. So he comes into this meeting and just kind of, like, barfs all over Don.

David Rosenthal 29:41 Yes, exactly. So [chuckles] Jensen's walking out the door. He's like, you know, totally dejected, and Don stops him and says, "Well, that wasn't very good. [laughing] But, uh, Wilf says to give you money. So against my best judgment, based on what you just told me, I'm gonna give you money. But if you lose my money, I'll kill you." [laughing]

Ben Gilbert 30:09 [laughing]

David Rosenthal 30:09 Classic. Classic Don line, so good. So the deal happens. Uh, Sutter Hill comes in, too, 'cause, you know, again, like, this is all dramatized. At the end of the day, like, this is a hot deal.

Ben Gilbert 30:22 This is, uh, two episodes in a row for us with, uh, S- Sutter Hill.

David Rosenthal 30:27 I know. Oh, geez, they're so good. But it was a hot deal. They wanted in. This fits central casting of at this point in time.

Ben Gilbert 30:34 They invested, like, a million each, is that right, for a total of two?

David Rosenthal 30:37 ... So, $2 million total round. I don't know who invested what. I assume a million each, but $2 million total round at a $6 million post-money valuation. Remember, everybody, this is the eighth most valuable company in the world right now, [laughing] started at a $6 million post-money valuation. So they're getting things ironed out, and there's just one problem, they don't have a name for the company yet. Jensen and Chris and Curtis, they've just been, you know, working on this, working on the business plan, but they don't have a name. They need to incorporate the company, and, uh, they were saving the files that they were working on for the chip design, for the first graphics chip, as .nv, nv being short for next version. And so they're like, "Oh, we kinda like that. You know, we're always working on the next version here." They start looking around in the dictionary for words that have nv in them, it's probably a very short list, and they find the Latin word invidia, I-N-V-I-D-I-A, which means envy. And they're like, "Great, we'll be the envy of the industry. Nvidia, we'll drop the I at the beginning, so we start with envy. This is awesome."

Ben Gilbert 31:49 Of course, they pick green, so later on, they can have that marketing campaign of green with envy.

David Rosenthal 31:54 Careful what you wish for here, though, because, again, as we've been saying, literally eighty-nine other companies [chuckles] get funded within a couple months to go do the same thing.

Ben Gilbert 32:04 It's a very clever name. Also, the notion of, like, vid being in there, that it's sort of video, and that- that's another thing that they wanna do. Like, it's the classic Rich Barton empty vessel name. You know, there's enough things that it could mean, and we're gonna fill it with, with meaning. Because they're doing a thing here that, like, while eighty-nine other people are also sort of simultaneously doing, it is kind of a new frontier that they need to invent and then own, like, thought leadership in that area, and they do need to kind of, like, quickly build a brand, not only with consumers, but with PC manufacturers. Jensen, the way he sort of describes it is that their vision, although he doesn't like the word vision, 'cause he thinks it's exclusionary to people, so he said, "Our perspective is that they want to enable graphics to be a new medium to tell stories." And here's sort of, like, the way that he articulates at the time why video games today are a hundred and eighty billion dollar a year industry, bigger than Hollywood, bigger than music. It's the biggest entertainment medium. But at the time, he sort of has this thesis that, like, you really can't, through computer graphics, tell stories today, but if you could, it's really interesting because it's not pre-recorded, so it can be sort of new and different every single time you enjoy it. It's also the only medium of entertainment that can be networked, and so therefore, it's the only one that can really be, like, social and interactive. And so our reason for being is to create 3D graphics as a form of artistic storytelling for the future, and everything will be in service of that. And I think that's not really what they are today, necessarily. It's a piece of what they are today, but that kept them going for the first twenty years of their existence.

David Rosenthal 33:55 Well, and baked into that is, again, you know, Wilf kind of, like, hit on it, and you did, too, to your credit. You're a very good venture capitalist. You hit on really the key problem with this first iteration of Nvidia, which is they have to go evangelize to developers to... Like, yeah, there's Id and there's Carmack out there, but, like, not a whole lot of other PC game developers out there. There are not a whole lot of other 3D PC game developers at this time. There are 2D PC game developers, but they gotta convince a whole lot of people to go, you know, learn how to do 3D game development for PCs, and that's so, like, "Oh, we're gonna enable storytelling, all them." So to do that, they have to go write their own, you know, APIs and SDK and development framework to develop for this new graphics chip that they come out, and they have to make a whole bunch of, like, technical design decisions that they want the industry to standardize on.

Ben Gilbert 34:50 Right. [chuckles] This is a case study of what happens when you get more clever than the rest of the industry.

David Rosenthal 34:57 Exactly. So at first, things start off really well. Remember, they're super hot, they're the first company, they're funded by Sequoia and Sutter Hill. Like, they land a big deal with Sega to power their arcade consoles and their next-generation home console to be the 3D graphics engine, and would ultimately become the Sega Saturn. And as we know from our Sony episode [laughing] -

Ben Gilbert 35:24 Not quite the Sega Genesis.

David Rosenthal 35:25 Not quite the Sega Genesis. Well, so the problem is, so Nvidia and Sega, they're working together, they make a bunch of these design decisions, the biggest of which is they decide that the way they're gonna create... You know, people probably know you create 3D graphics, you use polygons. That's why people are always talking about polygons in this industry. They have to decide on a sort of primitive for the polygon. They're like: "Oh, well, we'll use quadrilaterals- [laughing] ... four vertex," you know? [laughing] And anybody who knows anything about video game development now is like, "That's not how it's done."

Ben Gilbert 35:54 Like, I'm pretty sure people talk about triangles.

David Rosenthal 35:57 Yeah, and I'm pretty sure if you look at Nvidia's amazing headquarters building today, it's, you know, made out of triangles in a homage to game developers, not quadrilaterals. So this becomes a pretty big problem. You know, things go along for a while. It's, like, fine for about a year. Nvidia's leading. They got this big Sega deal.

Ben Gilbert 36:16 There's not a reason to need standards yet, right? The industry isn't complex enough yet to necessitate a whole bunch of collaboration and set of tools that everyone standardizes on using. You're like, "Okay, well, we're just gonna put this chip in our game console, ship the game console. We're the only people that, you know, make an SDK," we being Sega, "so everyone will have to kind of standardize on this thing anyway, so great." But obviously, the ecosystem gets much more complex much more quickly, and it sure would be nice to have some kind of compatibility.

David Rosenthal 36:46 ... Well, here's what happens. So [chuckles] you know, Curtis and, uh, Chris and Jensen, they weren't the only people in Silicon Valley that saw that kids wanna play games on PCs with Doom. Microsoft [chuckles] is like: "Oh, that's interesting. [chuckles] We like selling PCs, and, uh, gosh, there are all these graphics cards companies out there now that are doing this, and, you know, what do we do as Microsoft? We really wanna encourage this in the ecosystem. Well, we create standards."

Ben Gilbert 37:18 We would love it if Windows developers could be able to easily develop for all these new machines shipping with all these advanced graphics capabilities. Let's make that as easy as possible for those developers.

David Rosenthal 37:28 Yeah. You know, developers wanna do 3D graphics directly into Windows without any of this, you know, crufty middleware from some no-name company, Nvidia, out there. Why don't we just bake these APIs right into Windows directly for 3D graphics? We'll call it Direct 3D. [chuckles] And, of course, anybody who knows about the history of this, that becomes DirectX.

Ben Gilbert 37:51 And DirectX made some pretty different design decisions than Nvidia had made. Is that right?

David Rosenthal 37:55 Yeah. So they used triangles-

Ben Gilbert 37:57 [chuckles]

David Rosenthal 37:57 - 'cause triangles make sense. So now Nvidia's really up a creek. Like, all of their com-- you know, the eighty-nine other competitors out there that started later, most of them are like: "Sure, I'm gonna jump on board of this Microsoft ecosystem, like, I would be dumb not to." It's standardized on this completely different paradigm than Nvidia, and then Sega... You know, they've got Sega. They've got this one sort of customer, and then in nineteen ninety-six, Sega's like: "Yeah, we're not so sure about this quadrilaterals thing either."

Ben Gilbert 38:31 And just so that, like, this doesn't feel arbitrary, why we're talking about this, and we're gonna stay at a super high level on 3D graphics here, rather than really going into the weeds. But a triangle is the fewest vertices in a shape that you can have while still creating a two-dimensional shape, and so it serves as a basic building block, where assuming you can draw enough triangles and make the triangles small enough, you can form any other shape, any other curved surface. It's sort of the most fundamental building block that you could use to create something that is perceived as 3D.

David Rosenthal 39:04 Yep. So Nvidia, at this point, they're halfway down the road of developing the next chip that they think Sega's gonna adopt for what ultimately would become the Dreamcast, Nvidia was calling the NV2, when Sega comes back and says: "We're switching horses. We're not gonna do this." So, like, they're screwed for so many reasons, everything we've discussed. There's also, in the interim, you know, year and a half since Nvidia started, the price of memory dropped because thank you, Moore's Law. [chuckles] So Nvidia's chips were designed to be, like, super, super tight on memory, and the memory cost about two hundred dollars in component, you know, parts to go into their chips. Their competitors have more memory that's costing them, like, fifty dollars.

Ben Gilbert 39:52 And that was just in that one iteration. So it's interesting to note that Nvidia, by being first and not projecting out the exponential change that would come from Moore's Law, was actually at a disadvantage. 'Cause, A, they didn't get a chance to watch and see where the standards were adopted, and so they sort of, like, picked their own lane and went off in their own direction, which ended up not being what everyone else picked, which put them at a disadvantage. But second of all, everyone else's cost structure was way lower, or at least everyone else could see that the cost structure was getting way lower. And so Nvidia sort of designed for a constraint that was no longer true by the time everyone else came out with their stuff. At this point, Jensen and his co-founders kind of had to look at each other and say: "Okay, do we scrap everything we did, and if so, how do we not make this mistake again? How do we make sure that in future generations, we sort of premeditate the exponential curve of Moore's Law and prices coming down, and design for things that are, you know, two, three, four generations beyond what we actually have available to hardware right now?"

David Rosenthal 40:58 So when all this goes down, the company has about nine months of runway left, and, like, like, literally anybody else, like, you pull the plug. Like, it's over. Like, everything in the deck is stacked against you. Like, you're effed. [chuckles] And, uh, I can't imagine sitting there dreaming up a way out of this, but Jensen, God, he's such a G. He's like: "No, [chuckles] we're not going out like this." You know, when you hear Jensen talk today about, like, Nvidia's culture, and he says that intellectual honesty is, like, the cornerstone of Nvidia's culture. Like, this is what he's freaking talking about. Like, he sits down with Curtis and Chris, and remember, they're... Like, they're engineers, and they've recruited Nvidia, a hundred-plus engineers into the company at this point, and sold them on this technological vision of we're gonna define the industry. We set the standards. Like, we're not gonna use some, you know, off-the-shelf stuff, and, like, it's all toast. And so Jensen's like: "Guys, like, this is a pipe dream. We need to throw it all out if we're gonna survive. The only thing we can do is standardize on, on the same Microsoft, you know, Direct 3D as everyone else, same architecture, and our only shot is just to, like, compete on performance and try and become, like, the best chip out there in this now sea of commodity chips." [chuckles] And, uh, his co-founders, like, don't wanna do this. This is not an exciting vision for a Silicon Valley engineer.

Ben Gilbert 42:30 When your CEO comes to you and says that, what they're basically saying is, "Look, if my job was strategy and your job is execution, the strategy failed, and so we just now need to, like, literally out-engineer all of our competitors. We need to be smarter at engineering decisions, so we can be more performant at a lower price point, using less energy than our competitors." Because Microsoft, being Microsoft, had all the developer attention, and because Microsoft set a standard, Nvidia realized, look, we have no ability to uniquely get our own developers, at least at that point in the company's history, and so we must just, on our left, look and see all the developers are coming from Microsoft using this API. On our right is all the same consumers, and we have to compete just head-to-head on raw engineering ability with everyone else.

David Rosenthal 43:20 Well, you're saying engineering ability, but remember, like, this is essentially a commodity at this point. So-... really, it's not just engineering ability, it's how fast can you ship? [chuckles]

Ben Gilbert 43:30 Mm.

David Rosenthal 43:30 Like, how fast can you design the next generation of chip, and can you ship it before everybody else? 'Cause everybody knows what's gonna be in that ship.

Ben Gilbert 43:39 And why is it- what fundamentally about, was it about graphics cards that made it a commodity?

David Rosenthal 43:46 Well, at this point, like all the other peripherals, and we're gonna get into this in a sec, there was nothing that special about it. They all did the same thing, which was take polygon-level 3D graphics processing out of the CPU and onto this other chip on the motherboard. Just like sound cards were doing the same thing for sound, just like networking cards were doing the same thing for networking, and it was just like, what's the price-performance ratio of doing that? The interfaces and the programming language, that's all standardized by Microsoft. You're just commodity hardware. [chuckles]

Ben Gilbert 44:21 And so what GPUs actually do, or did, at least in this point in time, is say, "Okay, the system is gonna feed me in," basically point clouds, like, vertexes that make polygons that represent, like, a 3D world, "and my job as the GPU is to, as fast as I can, in the highest resolution that I can," or I suppose a standard predetermined resolution-

David Rosenthal 44:43 As fast as I can, that'll drive the resolution.

Ben Gilbert 44:46 Output a 2D thing that goes on the screen. So I turn 3D stuff into 2D stuff, and I have to do that better than other things that I'm competing against, where basically all of us are... When you say commodity, you mean limited by Moore's Law and doing right up to the edge of what integrated circuit manufacturing techniques enable us to do.

David Rosenthal 45:04 Yep. So everybody knows what this means, is that, like, they gotta ship faster than their competitors, and they also gotta ship faster than their competitors 'cause they're about to go bankrupt. [chuckles] So they draw up this plan that's like, they're trying to thread, like, the tightest needle possible here. They have to lay off 70% of the company, which they do. They go down to about 35 people, and everybody who's staying knows we now have to design from scratch and ship a new chip before our runway runs out, which is nine months. You can't do that on a normal-

Ben Gilbert 45:37 [chuckles]

David Rosenthal 45:37 ... chip design cycle.

Ben Gilbert 45:38 Takes, like, two years, right?

David Rosenthal 45:40 Yeah, the way that, you know, in the- with these fabless chip companies, the way they would design chips is, they would work on the design, they would send them over to the fabless company, the fabless company would produce some prototypes, they'd send them back, they'd test them, they go back and forth a few times.

Ben Gilbert 45:54 You mean the foundry would produce them, like the TSMC, or the Samsung, or the GlobalFoundries, or-

David Rosenthal 46:00 Now, importantly, Nvidia is not using TSMC at this point, 'cause they can't. [scoffs] They can't. TSMC only works with the best, and Nvidia is not the best.

Ben Gilbert 46:08 Huh.

David Rosenthal 46:08 So they're using, like, second-rate foundries, and that process takes a, a long time, and then at the end of it, when you're sure you've got the, the design right, then you do what's called a tape-out of the chip.

Ben Gilbert 46:19 I love this term, by the way.

David Rosenthal 46:20 It harkens back to literally, like, when you used to tape, you know, masks [chuckles] to, like, do the photolithography on the chip back in the day.

Ben Gilbert 46:28 So cool.

David Rosenthal 46:29 But it just means finalizing the design.

Ben Gilbert 46:31 But you actually do run it on some prototypes first. Like, the, the foundry sends back some, you know, "Hey, thanks for the designs. Here's the chip. You know, run your tests on it, make sure everything does what you think it does," and, um, you know, that process takes two years to get a, a full sort of iteration on.

David Rosenthal 46:47 Yep. So they're like, "We ca- we can't do this." So, like, Jensen's, "Here," like, "here's what we're gonna do. I've heard about there's this new technology, some new machines out there, that enable emulation of chips, and in our case, we're gonna use it to emulate the graphics chip that we're, we're designing, all in software." And it, you know, it works.

Ben Gilbert 47:08 They're startups, but they exist.

David Rosenthal 47:11 The problem is, when you emulate it in software, you know, it's like, it's really slow. [chuckles] So, you know, when you play a game, and you're, you're looking at your computer monitor or whatever, it's refreshing 30 to 60 times a second. If you're a professional gamer, you probably have it going at, like, 120 times a second, you know, frames per second. This emulator runs at one frame every 30 seconds. [laughing] So they're gonna have to debug this thing in software to save this time, going at one frame every 30 seconds.

Ben Gilbert 47:39 It's just insane.

David Rosenthal 47:40 That's brutal.

Ben Gilbert 47:41 They're basically making this trade-off of, "Okay, if we wanna ship something in nine months, we don't have time to actually have it execute on the hardware, so we are going to make the trade-off of our testing being mind-numbing, like, running whatever our graphics tests are, where we're looking for, like, this certain specified output. We need to plant someone in front of a screen to watch the new frame render once every 30 seconds and look against some tests to verify that the output is correct, and if it is, and this person does that mind-numbing work and sits there just observing and observing and observing, then we will go right to manufacturing without ever producing a physical prototype and ship that."

David Rosenthal 48:21 And that is exactly what they do. [laughing]

Ben Gilbert 48:24 [laughing]

David Rosenthal 48:24 They have to spend a million dollars just to get the emulator, you know, hardware and software to, to do this.

Ben Gilbert 48:30 Which I think they had generated some revenue, but it was still, like, a third of the cash that they had in the entire bank account.

David Rosenthal 48:37 So they go down to six months until they're cash out [chuckles] in the company. They get it done in a few months, and then they call up their foundry. I don't know if they're using, um, United or, or one of the- one of the other foundries in Taiwan, not TSMC. They're like, "All right, we taped this thing out. Send it to production." [laughing]

Ben Gilbert 48:55 [chuckles]

David Rosenthal 48:55 And the foundry's like, "Uh, are you guys sure about that?" They're like, "Yep, we're sure. Make, you know, 100,000 units."

Ben Gilbert 49:02 If I'm remembering right, I think Nvidia basically was the only customer of that emulation software. Like, that was a startup that really wasn't fully proven yet, but Nvidia was like, "Look, we literally have no options."

David Rosenthal 49:16 Yeah, they were the only customer, and then that, that company went out of business after. [laughing]

Ben Gilbert 49:19 [chuckles] It's wild.

David Rosenthal 49:21 Well, and so the chip they designed... So now the advantage, like, this is lunacy, what they're doing. Obviously, they have to do it, 'cause their back is against the wall.... the advantage of this, though, is they are now designing this chip with, you know, the same set of assumptions about what, you know, technology is available as all their competitors, but their competitors are working on those designs. They're not gonna be able to get them out for, like, eighteen to twenty-four months. Nvidia's gonna get this same, you know, generation of design out in six months. [laughing] So this chip is called the RIVA 128. That's what they call it. It is a freaking beast, and it is, like, a beast in every sense of the word.

Ben Gilbert 50:06 It's big. [chuckles]

David Rosenthal 50:08 It's big. It's extremely powerful, relative to anything else on the market.

Ben Gilbert 50:12 Like, more powerful than any customers are telling them they want.

David Rosenthal 50:15 Yeah, way more powerful. Way, way, way, way, way more powerful. But, [chuckles] you know, it comes with some downside. With great power comes, you know- [both laughing] great responsibility. Because they built this thing in such a manner, it, like, barely works. Like, there's a lot of stuff wrong with it. I forget the exact number of this, but, like, essentially, Direct3D at the time had something like, let's call it, like, twenty-four, twenty-five different ways, like, different sort of techniques.

Ben Gilbert 50:40 These are the, like, blend modes?

David Rosenthal 50:42 Yeah, I think that's what it was, blend modes, and the RIVA only works with about two-thirds of 'em. Like, one-third of it just, like, freaking crashes. Like, it just doesn't work. [chuckles]

Ben Gilbert 50:49 I thought even worse than that, but, uh, basically, like, I, I think Nvidia had to launch a campaign going around to, like, all the different developers and being like: "Come on, what do you really need more than these eight for? Come on, what are you really gonna do where you need to use that fancy stuff? Do us a favor. For this generation of the chip, these eight work great. You're gonna love 'em. They're so good, and just use those." [chuckles]

David Rosenthal 51:13 Okay, so this is so, so, so great because people do it, and so what they learn from this, like, they learn about the market. You know, the first iteration of Nvidia, "We're gonna build all this technology, we're gonna drive the market," they didn't know anything about the market. They were just making all these assumptions about what people wanted. But now they're actually going out, and Jensen's going to these developers, trying to convince them to do this, and they all do it. Why do they do it? Because the only thing that matters is performance. Consumers are gonna buy hardware and games based on the quality of the graphics. [chuckles] This is, like, being discovered for the first time, and so, like, people are willing to make a lot of compromises in, you know, service of performance. Nvidia is, like, the first one that figured this, this out because they have to go around and do this, and developers all get on board.

Ben Gilbert 52:04 And to be clear, it's because the consumer's making the buying decision, right, on what graphics card they buy?

David Rosenthal 52:11 It's, it's a completely interrelated system, where the consumer is making all of the decisions. That's where the demand is. The consumer is deciding what hardware to buy. That's what Nvidia's business is.

Ben Gilbert 52:23 Whether they're buying it as a fully, like, built computer from the OEM or whether they're buying the card to put in later themselves, they're making a decision on what graphics card goes in the computer.

David Rosenthal 52:34 Exactly, and the game developers are making decisions on what graphics cards to support-

Ben Gilbert 52:43 Right

David Rosenthal 52:43 ... and how to build their games with, like, the assumption of, "What's my target market of consumers?" Like, "Who do I think will this game run on? Do you need to have at least an X-level performance rig in order to run my game or run my game in its fullest form?"

Ben Gilbert 53:01 So the developers are premeditating what graphics cards are going to be out in the market when their games launch, and they're saying-

David Rosenthal 53:09 Yes

Ben Gilbert 53:09 ... "It's gonna be the most performant one at the right price point, so whatever the mass market is, we kinda have to target that, and if you're telling us, and we're gonna test it, and it turns out that yours is the best performance per price or performance per watt, or whatever, it's the most efficient card, then people are going to buy that one, and so we must target it."

David Rosenthal 53:27 That card, and they're gonna buy my game. I mean, I remember, like, this is a few years later. This is a, you know, a trope that happened. There was a game called Crysis, C-R-Y-S-I-S. Remember this?

Ben Gilbert 53:37 Oh, yeah. What's the relationship between Crysis and Far Cry?

David Rosenthal 53:41 Uh, it was... Oh, no, Far Cry was the first game. Yeah, the CryENGINE, and then Crysis also, but it was super convoluted. Basically, my perception of this thing was when this came out, when Far Cry came out, this was, like, mid-2000s, the graphics were unbelievable. Unbelievable, and if you had a rig powerful enough to run it, like, just unbelievable. The game itself was total crap. [chuckles] Like, I don't think I ever played more than ten minutes of it.

Ben Gilbert 54:05 I'm pretty sure if your computer didn't support it, there was all these videos that people would record of, like, building a tower of, like, a thousand gasoline barrels and then shooting it, and because it was too complex for their graphics card to handle, their computer would just freeze. That was the failure mode of Far Cry with non-performant chips.

David Rosenthal 54:25 This is how the hardcore gaming industry evolves. Like, Far Cry sold so much software and so much hardware just because people wanted to experience that, u- to attempt to experience that level of graphics, and so that's what the developers are starting to figure out, and they're like, "All right, well, if you can ship this thing, we'll use only those, you know, eight blend modes or whatever, [chuckles] like, whatever it takes, 'cause we want... You know, graphical performance is the most important thing." So it works. They sell one million units of the RIVA 128 within four months.

Ben Gilbert 55:01 Wow!

David Rosenthal 55:02 I should've looked what the MSRP was of it, but that is a lot of revenue. [chuckles]

Ben Gilbert 55:07 Yeah, no kidding. What year was this?

David Rosenthal 55:09 This was 1997.

Ben Gilbert 55:12 Okay, so we're- it's an interesting era, like, the internet is a thing. We still have a few more years till the dot-com bubble crashes. PlayStation 1 is out, but PS2 is not out yet, I think.

David Rosenthal 55:25 Yep, PlayStation 1, and with that, the gaming market kind of bifurcated into, like, sort of the, you know, the console market, which was standardized, and you knew it was all gonna work, and then the, the hardcore PC gaming market, which just had so much revenue potential, even though it was smaller in terms of numbers, 'cause people are willing to spend so much money on this stuff.... So at the end of this, Nvidia has now figured out these dynamics of the PC gaming market, and they now have a process within the company to design and ship each next generation of their hardware in a six-month timeline, [chuckles] while the rest of the industry is on an eighteen to twenty-four-month timeline.

Ben Gilbert 56:07 Necessity is the mother of invention.

David Rosenthal 56:09 To say this is huge is, like, understatement of the century huge. [chuckles] And it's huge for this market, but nobody even saw this at the time. Like, Jensen didn't see this. Nobody saw this. They're now shipping re- relatively, you know, doubling, essentially, the performance in each generation with their hardware, and they're shipping it every six months. [chuckles] And you think about Moore's Law, right? Like, Moore's Law was that the number of transistors on a chip equating to the compute power available at a given price point to the market would double every eighteen to twenty-four months. Nvidia is now on a cycle, starting in nineteen ninety-seven, nineteen ninety-eight, where they are doubling the performance that they are delivering at a given price point to the market every six months.

Ben Gilbert 56:57 It's fascinating, and they're also competing on a different vector than the CPU manufacturers because... And it's kind of amazing we've made it an hour into the episode and haven't talked about this yet, but the magic of GPUs is that they're very, very parallel. Like, CPUs, for anyone who's taken a low-level computing class, you sort of know that, like, every time the clock ticks, an instruction can sort of run, and things move through the sort of long chain of operations that can happen within the CPU, and it's advancing things serially through the processor.

David Rosenthal 57:31 It's serial processing.

Ben Gilbert 57:33 It can read from a register, or it can add two things together, but, like, it's all happening serially.

David Rosenthal 57:39 It's like the, uh, the I Love Lucy, um, you know, famous one, where, like, the chocolates are coming down the factory pipeline, and you had the CPU has to, like, wrap each individual chocolate, one and then the next one. [chuckles]

Ben Gilbert 57:50 [chuckles] Yes, exactly. And with graphics processing, like, the magic of it is that it's super parallelizable. Like, there's all these things that need to get outputted to the screen that do not depend on each other, and so you can do them independently. And so the vector that they're competing on is really like, "Oh, we can..." And it would be years before they would really get to this, but add more and more cores or find more ways to execute more instructions simultaneously to parallelize these tasks. And I think, at the time, people thought, really, the only big use case for parallelization is graphics. Uh, let's put a pin in that for now, but it's worth knowing the thing that they're doing is figuring out how to process more things in parallel faster.

David Rosenthal 58:37 Yes. So graphics cards, like Nvidia is making at this point in time, are really good at, in parallel, lighting the pixels on a screen, you know, thirty, sixty, a hundred and twenty times a second, with the images that are being fed to them from, like, the game or the graphics program, which is living all in the CPU land. So, like, you're a game developer. You develop in, you know, Microsoft Direct 3D, becomes DirectX, or, uh, OpenGL is the open-source, you know, competitor to this. You know, all that logic is really happening in the CPU realm, and what that means is, like, if you think back to games from this time [chuckles] you know, think console games, PlayStation 1, even PlayStation 2, N64, when you look at the graphics in those games or PC games from the time, too-

Ben Gilbert 59:33 They're all kind of the same.

David Rosenthal 59:34 They're all the same, right? All the lighting, like, the lighting, it's all, like, pre-done. So, like, when you're a game developer, you set the scene. You'd never see, like, a character running around carrying a torch, and that torch light, like, impacting the rest of the environment. It's all set in advance. Like, no intelligence is happening in the GPU level with the screen. It's just lighting up the pixels.

Ben Gilbert 59:58 Basically, in order to make it easy for developers, the software development kit is written at such a high level that you don't really get enough control to make your game stylistically different. You just get to lay out the items on screen.

David Rosenthal 1:00:14 It's all the same. It's all flat. Maybe you can program that, like, hard code that, like, oh, time of day might change, and, like, that might change the way things look, but you're hard coding, like, what they look like. No computation is happening, right? If you're playing a game today, even the [chuckles] most basic, you know, mobile game or whatever, you're seeing dynamic lighting and shading, [chuckles] which we'll get into in a sec, all over the place. So this is still, like, in the... You know, GPUs are, like, a really, really important sort of commodity, but, uh, they're a commodity. There's not a lot of smarts happening here.

Ben Gilbert 1:00:47 Yep.

David Rosenthal 1:00:47 No programming. But Nvidia's figured this out. They can now ship on a six-month time cycle. They're starting to, like, really take huge market share. Now, [chuckles] a lot of people start paying attention to them in a good way. TSMC, that wouldn't even return Jensen's calls back in the day, there's this amazing, amazing story. Did you watch the TSMC 30th anniversary-

Ben Gilbert 1:01:11 I did

David Rosenthal 1:01:11 ... celebration? This is so good. It's, like, three hours on YouTube.

Ben Gilbert 1:01:14 This is worth a brief aside. This is how much pull Morris Chang from TSMC has. He gets the CEOs on stage of Nvidia-

David Rosenthal 1:01:24 Arm.

Ben Gilbert 1:01:24 Arm, ASML, Qualcomm, and Broadcom?

David Rosenthal 1:01:29 Yep. I don't think Lisa from AMD was there.

Ben Gilbert 1:01:33 No. It's basically everyone but AMD of the sort of pillars of the TSMC ecosystem. I mean, Morris is playing interviewer. Like, it's very entertaining to watch him.

David Rosenthal 1:01:42 It's like a celebration of Morris and of, of TSMC. It's amazing. It's amazing.

Ben Gilbert 1:01:47 Yes.

David Rosenthal 1:01:48 So in the section with Jensen, [chuckles] uh, they tell the story of how Nvidia-... at this point, it's gotta be TSMC's biggest customer. I mean, they've been, like, tied at the hip forever of how this all came to be. After the RIVA 128 hits, and it's become a big success, Jen-Hsun writes a letter to Morris, like, a physical letter, addresses it to Morris Chang in Taiwan.

Ben Gilbert 1:02:14 Because he can't get in touch through any of the, like, salespeople. [chuckles]

David Rosenthal 1:02:18 Exactly, exactly. They've all just been ignoring him, as well they should, 'cause they were a, you know, left-for-dead startup in a sea of startups. The letter gets to Morris, he opens it, he reads it in Taiwan. He does the most Morris Chang thing possible, he calls up Jen-Hsun on the phone, right there. [laughing] And the phone rings, as they tell the story, in the Nvidia office. This is in the middle of their trying, like, mad scramble as a startup to ship these RIVA 128s that are coming in. They're testing them all by hand in the office, 'cause n- none of this stuff was-- It's fresh off the line. It's not been tested. It's chaos. Jen-Hsun picked up the phone and is like: "Yeah, who's this?" And Morris is like: "Hello, this is Morris Chang at TSMC. I got your letter." [laughing] And Morris says that there's, like, a silence on the other end for a couple seconds, and then he hears Jen-Hsun yelling, "Everybody shut up! [laughing] Morris Chang is on the phone." [laughing] Ah, amazing.

Ben Gilbert 1:03:16 And that's how TSMC became the manufacturer of Nvidia chips.

David Rosenthal 1:03:20 Yep, the next year, the two companies sign a huge multi-year deal for TSMC to become the primary foundry for Nvidia, and still are today. Jen-Hsun and Morris are super close. It's a landmark, landmark deal for both companies. So with now an actually really good foundry as their partner, and this super unique chip development process, Nvidia just keeps accelerating. So in 1999, they rebrand their products. You know, they'd used the NV1 first, and then this RIVA 128. They actually run a little contest of what they should name the products, and the winning name is Geometry Force. "The force is with you," which they shorten to GeForce, which anybody who knows, who, you know, buys graphics cards, the Nvidia GeForce, still the brand name they use for their gaming cards today, and is probably the most-- one of the most respected, you know, brands in the gaming ecosystem. And it's because this card that they ship, the first GeForce, uh, in 1999, it's the GeForce 256, it's so powerful, it has 5X better graphics performance than, like, anything else on the market.

Ben Gilbert 1:04:40 And they call this, like, the first GPU, right? Don't they say, like, "We're inventing the GPU"?

David Rosenthal 1:04:45 They call it a GPU. Before this, the term GPU didn't exist. It was... These were graphics cards, graphics chips.

Ben Gilbert 1:04:53 I think Sony had, like, sort of used it about the PlayStation, but no one's marketing this idea.

David Rosenthal 1:05:01 So they market this as the graphical processing unit. Now, on the one hand, that's, like, sort of like marketing bravado. On the other hand, that is, like, a very loaded statement to make. And why so? What does Jen-Hsun and Nvidia mean by this? So Intel, [chuckles] you know, you think chips, you think Intel, right? You think silicon, you think Intel. Intel's whole strategy at this point in time was basically, they're almost like a biotech company today, like one of the big pharma companies. And, uh-- Or, or put another way, it was another version of the Microsoft embrace, extend, extinguish [chuckles] thing. They would see, there are all these peripherals, sound cards, networking cards, all the C graphics cards, all the stuff we've talked about. They would let all these flowers bloom, and be like: "Oh, yeah, yeah, yeah, just plug into the PCI slots on our motherboards. No big deal, we're an open ecosystem. We want everybody to flourish." And then they would see which of these, you know, peripherals got consumer traction, and then they would just turn them into, you know, a component in the motherboard.

Ben Gilbert 1:06:09 And thus began the wave of being able to buy a PC with, uh, an Intel motherboard and integrated graphics.

David Rosenthal 1:06:17 Well, and before that, you know, integrated sound, integrated networking. Like, remember, um-- oh, it was so fun doing this research. Remember the company Creative and the Sound Blaster cards?

Ben Gilbert 1:06:27 Oh, yeah.

David Rosenthal 1:06:28 I remember-

Ben Gilbert 1:06:28 Yeah, yeah

David Rosenthal 1:06:28 ... buying tons of that stuff. Like, and then at a certain point, [chuckles] you stopped buying Sound Blaster cards, right?

Ben Gilbert 1:06:33 You're like: "Oh, the motherboard does 90% of what I need it to do, and why would I spend extra money on a separate thing?"

David Rosenthal 1:06:39 Exactly. And so Intel, they'd just sit back and watch all this happening. They'd integrate it, game over for the startups.

Ben Gilbert 1:06:47 And there was, like, reasons for specialized stuff. Like, I remember buying a special network card because the integrated networking capability of the motherboard on my, I don't know what it was, a Mac 8500 or something, wasn't as fast as, like, if you bought a dedicated PCI card that could be a faster networking card. And graphics cards would sort of become that same thing, where the integrated graphics, for most people, was good enough, unless you were a gamer, in which case you'd go buy your own graphics card, or you'd buy it directly from the OEM when they were making the computer and shipping it to you.

David Rosenthal 1:07:21 But wait a generation or two. Even if you have the most demanding performance for home networking, you're not buying a separate [chuckles] networking card. Like, get out of here.

Ben Gilbert 1:07:29 These things are, like, dead-end businesses.

David Rosenthal 1:07:31 And there's no reason why graphics cards wouldn't be the same. So Jen-Hsun and Intel coming out and being like, "We're a graphical processing unit, we're a GPU," it's a big middle finger to Intel and this whole CPU-dominant world.

Ben Gilbert 1:07:49 And it really wasn't true yet. It wasn't a processing unit in the same way that a CPU is a processing unit, where it was-- people could write software for it in a way that created a meaningfully different experience for people using the software.

David Rosenthal 1:08:03 Yep, but-... This is where, you know, Jen-Hsun is just such a master strategist, and Nvidia is so great. Like, this whole kind of orchestration of a bunch of things all hit over the next couple of years. So first, Nvidia goes public. You know, they've now shipped the RIVA 128 was a huge hit. This new GeForce 256, flying off the shelves. They go public in beginning of nineteen ninety-nine at a six hundred million dollar market cap, so a hundred X return from the six million dollar [chuckles] post-money valuation on the Sequoia and Sutter Hill round. That gets them, you know, some more capital, and then behind the scenes, they're working, they're in talks with Microsoft. Microsoft's got a secret project that they're working on at this time, the Xbox.

Ben Gilbert 1:08:51 Mm-hmm.

David Rosenthal 1:08:52 Which, we talked about a lot on the Sony episode and so many times on the show. And Microsoft comes to Nvidia, and like, "We want you to be a key supplier of the graphics [chuckles] the GPU for the Xbox," and they do a huge, huge deal, five hundred million dollar a year deal for Nvidia to supply the graphics for the Xbox with a two hundred million dollar advance.

Ben Gilbert 1:09:20 Hmm.

David Rosenthal 1:09:21 And the chip that they use is a modified version of this incredible new chip [chuckles] that Nvidia is working on. I sound like Steve Jobs. David Jen-Hsun sounds-

Ben Gilbert 1:09:32 [laughing]

David Rosenthal 1:09:32 ... like Steve Jobs talking about this. The GeForce 3, which introduces for the first time, programmable shaders and lighting on the GPU. Everything we just talked about, though, like the GPU, massively parallel, can light all these pixels, but it's essentially just taking instructions that are pre, you know, hard-coded, baked in on what the lighting's gonna look like. Now, you can program [chuckles] for these GPUs, and you can make dynamic lighting in games and 3D graphics that is calculated.

Ben Gilbert 1:10:09 This is game-changing. The way to think about it is those "GPUs," in quotes, were fixed function graphics accelerators. So they would be able to map textures onto a set of polygons, but you couldn't do the thing that you're talking about, David, custom lighting, a lot of that sort of stuff, to, to actually program at the GPU level what is happening. And so this is like, of course, it's cool because it's a wave of new consumer experiences that can happen because every game developer can kind of stylistically put their own stamp on games, but it's a totally different metaphor for the computer architecture, where suddenly you can program a GPU, and I guess that's why they're calling it a GPU, and this is different than a graphics card.

David Rosenthal 1:10:54 And Nvidia develops in conjunction with this. They call it Cg, literally, like, they extend the C programming language with graphics, libraries, and capabilities to directly program graphics and lighting and shaders for the GPU. So this makes, you know, that sorta like marketing, you know, "Oh, this GeForce 256, it's a GPU." Now, it's real. Like, [chuckles] this is a graphical processing unit that is intelligent, that is... Every bit as, you know, maybe not every bit as important as the CPU yet, but, like, this is, like, the stake in the ground of, like, this is no sound card. [chuckles] This is not gonna get commoditized.

Ben Gilbert 1:11:36 Do you know if this was the GeForce FX or if the GeForce FX was a similar version of this that was available to PC?

David Rosenthal 1:11:43 That's a good question. It was the GeForce 3 was the, the PC version of this. [chuckles]

Ben Gilbert 1:11:48 Okay. This move to programmable shaders was a bet the company move, and it was Jen-Hsun's answer to, how do we get out of this commodity business and do something unique and different? And I'm pretty sure they were, like, months away from cash out again by pulling this move because of how aggressively they had to staff this, like, very new type of product they were inventing.

David Rosenthal 1:12:16 Yeah. I mean, this is the, you know, back to that original sort of quixotic vision for the company of we're gonna create an industry, we're gonna create the APIs, the SDK, to interface with it. We're gonna do all this. Like, now they're doing it, [chuckles] and they're doing it with Microsoft this time instead of, like, against Microsoft, so, like, [chuckles] A-plus move there.

Ben Gilbert 1:12:36 Yeah.

David Rosenthal 1:12:37 But, yeah, like, the amount of capital investment that went into this was enormous. So at this point, Intel's like, [laughing] "We might have a problem here."

Ben Gilbert 1:12:49 Right. It's gonna be more difficult than we thought to just take whatever these people are doing and integrate it directly into our, our motherboards.

David Rosenthal 1:12:55 Yep, and, uh, irony of ironies, Jen-Hsun presses this even further. He does a big partnership with AMD.

Ben Gilbert 1:13:02 It's worth knowing here when you're saying AMD, 'cause people probably know AMD and Nvidia are big competitors today in the GPU world.

David Rosenthal 1:13:08 Not yet. [chuckles]

Ben Gilbert 1:13:09 Right. AMD primarily made CPUs at this point. They made processors and competed with Intel. They hadn't yet bought ATI, which is where the Radeon business comes from. That's all the graphics stuff that they do today.

David Rosenthal 1:13:20 Yeah, ATI, at this point, was the number two competitor to Nvidia. Actually, an amazing story, too. It was a Canadian company, uh, started in the '80s and pivoted into graphics cards. Like, very different, you know... I feel like there's a lesson in here, right? We could talk about this in playbook, but, like, when all the VCs funded these ninety, you know, Silicon Valley startups to go make graphics cards, 3D graphics cards, the only two surviving ones were Nvidia, [chuckles] which went through this hellish journey, and then these Canadian guys that were, like, totally out of the ecosystem and, like, did it sort of more in a boot- more bootstrapped way and evolved into the space.

Ben Gilbert 1:13:59 Jen-Hsun has a great quote about this, uh, and he's giving this lecture at, at Stanford years later, and he says: "When technology moves this fast, if you're not reinventing yourself, you're just slowly dying." You're slowly dying, unfortunately, at the rate of Moore's Law.... which is the fastest of any rate that we know.

David Rosenthal 1:14:17 Yep.

Ben Gilbert 1:14:18 It's so clarifying of how he thinks about why Nvidia needed to do these, like, three complete transformations of the company, bet it all, risk it all, 'cause if you're not, you're one of those eighty-nine companies.

David Rosenthal 1:14:31 Exactly. So Intel's like, "Holy crap, [chuckles] we might have a problem on our..." Not, not a pro- like, this is not a problem for Intel.

Ben Gilbert 1:14:39 It just is, uh, a thing they're gonna have to deal with, instead of it being part of their extinguished strategy.

David Rosenthal 1:14:45 Right. Intel is used to, at this point, just, you know, like Microsoft at this point, "Oh, sure, you know, you wanna go make WordPerfect? Uh, we'll, we'll let you do that. We'll see these great applications, and then we'll go make our own." That's what Intel's doing, and now this is the first example of, like, Intel's gonna have some trouble [chuckles] doing this on their own. So they actually, at first, come out with their own dedicated Intel graphics, you know, GPUs, graphics cards, competing as separate cards-

Ben Gilbert 1:15:15 Whoa!

David Rosenthal 1:15:16 - harder than Intel had ever done. I may, I may be speaking out of turn here, but, like, as far as I know, I don't... This is not a common strategy for Intel. It's usually integrated-

Ben Gilbert 1:15:23 Yeah

David Rosenthal 1:15:23 ... into the motherboard and the CPU. They come out with their own external cards right around this time, like 1999, to directly compete, and, like, they suck. Like, these are, like, some of the worst reviewed [chuckles] graphics cards in history.

Ben Gilbert 1:15:36 Talk about not your core competency.

David Rosenthal 1:15:38 Not your core competency.

Ben Gilbert 1:15:40 And it really illustrates how different Nvidia's approach was to what graphics cards had been before, and building programmable shaders and creating CG, which was a little bit of an early strategy and something they would later do with CUDA. Uh, but really understanding that, like, "Oh, we can differentiate our hardware not only with interesting hardware features, but by building software on top, that it only works with our hardware, but makes it really great for developers to develop for our thing."

David Rosenthal 1:16:09 So Intel does make a big push, and this actually, you know, ends up becoming a great strategy for them into integrated graphics. So they do try and integrate this, but it's never good enough for the high end. It's only good enough for if you don't care about graphical applications, for laptops and the like, and, and that's great. [chuckles] You know, that ends up... You know, that's a big market for them for a long time, uh, and especially leading into, you know, mobile. Although, [chuckles] Intel and mobile is a story for another day.

Ben Gilbert 1:16:35 Yeah.

David Rosenthal 1:16:35 But for the hardcore market, and that, that's, that's making it sound too small. For the market of anybody who cares about graphical performance and quality, which is not just gaming at this point, you know, it's 3D modeling, it's architecture, it's lots and lots of graphical, high-performance graphical computing applications, you're always gonna want... It's this dynamic, and it sets up just like Moore's Law. Whatever the current maximum is, it's not enough. It's never enough. You always want more. As good as graphics are today, it'll never be good enough. Ten years from now, game graphics will make today's graphics look silly, and we'll all be in the metaverse or the omniverse, if Nvidia has their way, but it still won't be good enough. Like, it's Moore's Law. You always want as much performance as possible.

Ben Gilbert 1:17:24 Yep. All right, David, it's time for you to tell us about one of our favorite companies.

David Rosenthal 1:17:29 Indeed, it is. It is time for the next iteration of our Insurance 101, brought to you by our amazing friends at Vouch. Today, we are talking about directors and officers insurance.

Ben Gilbert 1:17:42 Oof.

David Rosenthal 1:17:42 Last time, we talked about ENO. Today, we're talking about DNO. Okay, so this is one that Ben and I can speak to [chuckles] very personally.

Ben Gilbert 1:17:52 I have been insured under DNO many times.

David Rosenthal 1:17:55 Me too.

Ben Gilbert 1:17:56 And usually, the process sucks. [chuckles]

David Rosenthal 1:17:58 The non-Vouch process does suck. So if you've ever been on the board of a company, you know what we're talking about here. If you don't know what we're talking about, literally, I can't stress this enough, like, you absolutely, absolutely need to have this [chuckles] in your company.

Ben Gilbert 1:18:11 In fact, if you get venture funded, most ventured firms will tell you, "We cannot wire unless you promise to get DNO insurance within 60 days," or something in the term sheet.

David Rosenthal 1:18:20 Yep, a condition of closing the round from any credible venture firm is always gonna be, "You must have this in place." So if you, [chuckles] if you are running a company, you are an officer of a company, a board director of a company, and you do not have this in place, like, literally, just stop right now, pause this-

Ben Gilbert 1:18:35 Click the link in the show notes

David Rosenthal 1:18:36 ... You will hear.

Ben Gilbert 1:18:37 Yeah. [chuckles]

David Rosenthal 1:18:37 Go to vouch.us/acquired. Click the link in the show notes. Like, get it right... Like, I'm serious, like, right now. You do not wanna not have this. So what is DNO? Why do you need it so badly? This is insurance that protects the directors and officers of the company personally from liability arising from any lawsuits against the company. So, like, if the company gets sued, in many cases, you see this all the time, the plaintiffs will name the company as the defendant, but also the CEO, the individual members of the board, maybe officers of the company. This insurance protects you from the personal liability arising from that. Like, it's bad enough if your company gets sued, but the worst-case scenario is the company goes bankrupt. If you are named as a defendant, all of your personal assets are on the line, [chuckles] so you absolutely need this. Now, you may be thinking, "Isn't this the whole point of a company or an LLC or whatever your structure is, to protect you, you know, limit your liability personally-

Ben Gilbert 1:19:36 Mm-hmm

David Rosenthal 1:19:37 ... from the company?" Yes, but there are plenty of cases where the veil of the corporation can be pierced, and you can be personally liable. Like, say, you're a VC board member of a company, and somehow, but you're not even trying to do anything nefarious, you get some information from a pitch deck of a competitor to that company. You accidentally, you're not thinking about it, whatever, you disclose some of that information to the company you're on the board of. The competitor finds out, they can sue you personally for that-

Ben Gilbert 1:20:09 Hmm

David Rosenthal 1:20:10 ... and the company, and you are on the hook. [chuckles] So, you know, step one, get this insurance in place.... no matter what, to protect yourself. Um, but part of the reason we love Vouch so much here at Acquired is not only do they make it way, way, way easier than in the past to get this in place, it's specifically designed for startups and tech companies. So Vouch's D&O insurance covers a couple other really relevant items that most traditional legacy players do not. One is cap table disputes. [chuckles] This is super important.

Ben Gilbert 1:20:46 Mm.

David Rosenthal 1:20:46 So, like, say, there's a falling out with co-founders or amongst the company and the venture capitalists, and who has what shares, who vested, you know, et cetera. Like, you've got personal lawsuits flying about all over the place, Vouch will protect against that. And then the second is intellectual property protection, which is super common, you know, patent infringements, trademarks, copyright. If you get named personally as a defendant, Vouch will protect against that. So whether you're bootstrap, seed stage, growth, public, if you're public, my God, I hope you already [chuckles] have this in place or you are grossly negligent.

Ben Gilbert 1:21:22 Do you know what public company that we have covered on Acquired at length does not have D&O insurance, philosophically?

David Rosenthal 1:21:29 Ooh, I believe that is Berkshire Hathaway.

Ben Gilbert 1:21:31 Yes. Warren's perspective is, uh, we all should have a whole lot of skin in this game. That is not the vast majority of people's perspective.

David Rosenthal 1:21:38 And that is not one that I personally think is worth taking, but, like, I get where he's going with it. So unless you're Warren Buffett, [laughing] but even if you are, for God's sakes, Warren, protect your family.

Ben Gilbert 1:21:48 Warren, go to vouch.us/acquired and, uh, and get yourself some D&O insurance. [chuckles] My God.

David Rosenthal 1:21:53 It takes ten minutes, you know. [laughing] Ah, so great. Vouch is the best. vouch.us/acquired. Everybody, if you use that link, you will get five percent off your coverages. They're the best. We love them. Thank you, Vouch.

Ben Gilbert 1:22:09 Thanks, Vouch. Okay, David, so Xbox comes out, Nvidia has a card in there that is the, uh, the GPU of the Xbox that has programmable shaders. So, you know, rather than, um, you know, literally just spitting out triangles to put on screen, they actually are running these little programs in, in, in shaders. It's super cool. Uh, what happens after that?

David Rosenthal 1:22:33 Basically, the company goes like supernova, [chuckles] in a good way, in a good way at this point in time. So the fiscal year that ends January 31st, 1999, this is, like, right before they go public or right as they go public, they did $158 million in revenue. The next year, the fiscal year ended January 31st, 2000, so but like the calendar year 1999, they do $375 million in revenue, [chuckles] so more than double that year.

Ben Gilbert 1:23:03 Wow!

David Rosenthal 1:23:04 The next year, they do $735 million in revenue. The year after that, which is basically the calendar year 2001, the year the Xbox comes out, they do just about $1.4 billion in revenue.

Ben Gilbert 1:23:19 Which makes them the fastest semiconductor ever to reach a billion in revenue and gets them added to the S&P 500.

David Rosenthal 1:23:26 Indeed. This is the company's essentially ninth year of existence. They're already doing over a billion dollars a year in revenue.

Ben Gilbert 1:23:33 Throughout the company's history, they basically have these, like, six-to-ten-year epochs, and during those, they have, like, a meteoric rise when they do something contrarian that's off the rest of the industry, and then it starts to taper, and they need to figure out how to reinvent themself again. And so we sort of saw it the first time before the competitors come in, and then the competitors come in, and then we see it again with them figuring out, we're gonna do, um, the emulated version of letting our engineers design the chips and lay out the chips, so we can be faster than everyone, and then everyone sort of catches up, and they have to do it again with programmable shaders, launching those to the industry, and then they have these few amazing years. After that, there is kind of a plateau again, and you can see it in their revenue. They did, obviously, close to $2 billion as we move through 2001. They stayed reasonably flat for a few years after that. I think they eventually did $2.8 billion in 2005, but it was kind of barely profitable. Like, they never lost money, but net income for each of those years was only a couple hundred million or less. So it's not like they're this, like, super free cash flow positive company. They're not adding to their cash pile in a meaningful way. You can start to see competitors figure out programmable shaders, too.

David Rosenthal 1:24:49 Yep, ATI, of course, and then in 2005, I think it is, AMD-

Ben Gilbert 1:24:56 That's where they start shopping around. '06 is when the transaction actually happens.

David Rosenthal 1:24:59 They buy ATI, and of course, now AMD is the main competitor to Nvidia. So we're gonna tell those stories on the next episode, but basically, like, a little sort of teaser, what's going on here, they kinda take their eye off the ball in the gaming market. Now, maybe that's too harsh. I don't know what Jensen would say about that, but right around this time, there's something that ultimately becomes pretty amazing that happens, which is they've achieved the dream at Nvidia. They've created a programmable GPU. It is truly a GPU. It rivals the CPU. This is the model. They have driven forth this new industry of computer graphics, enabled a whole generation of storytellers to program their GPUs and tell stories. A whole new class of, uh, users and developers starts to tinker around with these GPUs, and, uh, Jensen likes to tell a little story that's probably apocryphal, but, you know, [chuckles] we'll repeat it here as a little teaser for next time. Right around, you know, sort of the early 2000s, a, uh, quantum chemistry researcher at Stanford calls up Jensen, and he's like...... I need to thank you [chuckles] because, you know, I do this, this work in my lab on these supercomputers that we have at Stanford, and I write these models for the molecules that I'm researching, and it takes a couple weeks to, you know, finish the computation on these models. Well, my son, who's a gamer, he told me that I might wanna try going over to Fry's, the local electronic store, [laughing] and, uh, buying a bunch of your GeForce cards, so I did, and that I should try porting my models into CG, into your, you know, graphics computer language, and, and just see what happens. Well, I did it, and my computation finished in a couple hours. [chuckles] So I, uh, I waited a couple weeks for the supercomputer here at Stanford to finish, and I checked the results, and they were identical.

Ben Gilbert 1:27:18 Boom!

David Rosenthal 1:27:19 Boom. And he's like, "So I just wanna thank you, Jensen, for making my life's work achievable in my lifetime." [chuckles] This for sure is something that Jensen made up. [laughing] Maybe he did, maybe he didn't.

Ben Gilbert 1:27:30 It's probably cobbled together from a few different people's experiences.

David Rosenthal 1:27:33 Probably. It's, it's a composite, but every word of it is true in spirit.

Ben Gilbert 1:27:38 Yes, there is a, a whole industry called scientific computing, or a whole segment that Nvidia would be able to address in the future, but they need a whole lot of tools to be built for them to be able to really use GPUs for all those purposes, and more, with machine learning and everything else. But right now, yes, you are buying off-the-shelf GeForces here in this mid-2000s era and trying your best to sort of hack them together to do your super parallel processing task that is not specifically building a cool video game. What's interesting is the industry perception around this time was that Nvidia had started to sort of focus on this high-performance computing segment, and that they were starting to take their eye off the ball in gaming. So people were starting to think, like, "Oh, maybe ATI is actually more interesting as a gaming-specific graphics card maker at this point." And there's a little-known fact that is... So you mentioned this AMD-ATI deal, and, like, we all think the AMD Radeon at this point. You don't think about the ATI Radeon, which was the- it was the- they-- I think they retired the ATI brand in 2009. But AMD's first choice was actually Nvidia.

David Rosenthal 1:28:51 Ah.

Ben Gilbert 1:28:52 So AMD tried to buy Nvidia to make that their graphics line, and it was possible because it's not like the stock was blowing up at this point in time. It had had this sort of few years of reasonable stagnation before we get into late 2006, 2007, and certainly, people didn't see the machine learning market. People didn't really see the scientific computing market, and it was like: Hey, maybe this company needs some guidance from a smart company like us, AMD. And so they make the offer, and there's the cover story on Forbes. We'll put it in the show notes, but there's this article that comes out called Shoot to Kill, and Jensen, in this merger acquisition talk with AMD, insisted that he be the CEO of the combined company, and that is the thing that blew up the deal, and instead, uh, AMD went and bought ATI, and the rest is history.

David Rosenthal 1:29:48 Oh, man, that is such a good what would have happened otherwise. [laughing] Well, should we use that to transition into analysis for this one?

Ben Gilbert 1:29:56 Yeah, let's do it. So I thought it'd be fun to do narratives. Like, let's take it from this point in time. The AMD-ATI deal has just happened. We're sort of looking forward. It's 2006. You know, what's the bear and bull case for the company? And I thought an interesting data point to sort of ground this discussion would be that if we look at the gross margins today for Nvidia, which we will talk in our whole next episode about everything that they do that's so insanely differentiated, they sell their GPUs at a sixty-six percent gross margin, hardware business with a sixty-six percent gross margin. Back in 2004, that gross margin was only twenty-nine percent, that they were able-

David Rosenthal 1:30:39 Mm

Ben Gilbert 1:30:39 ... to command as a premium on their cards, and so you can kinda see, like, all of their economic potential was being competed away, and they weren't doing anything to differentiate in a way to get any sort of pricing power. And so you think, you make that twenty-nine percent, then you need to use that to pay all your overhead and fixed costs, and your engineers, and develop the next product, and pour it into R&D. And sure, they had a few great years of doubling in revenue after going public, but it's not looking great right now in 2006.

David Rosenthal 1:31:13 Yes, and there's also another reason why their gross margins are so low in those years following 2001. So they made this deal with Microsoft, right, [chuckles] to, um, power the Xbox, and it was absolutely the right strategic decision to power the Xbox, to get Microsoft's support in creating CG for programmable shaders, you know, protect themselves from Intel. But if you're gonna deal with Microsoft, [chuckles] they're gonna extract their pound of flesh. So you'll note there are three game consoles in the history of game consoles that Nvidia has powered: the original Xbox-

Ben Gilbert 1:32:03 Mm-hmm

David Rosenthal 1:32:04 ... the PlayStation 3-

Ben Gilbert 1:32:06 Oof

David Rosenthal 1:32:06 ... which we'll talk about next time, oof, and the Nintendo Switch.

Ben Gilbert 1:32:10 Hmm.

David Rosenthal 1:32:11 They have not done any others.

Ben Gilbert 1:32:13 Really?

David Rosenthal 1:32:14 And people are always, like, asking Jensen about this and whatnot, and, you know, he's, he's diplomatic about this, but... 'cause it's a crappy gross margin business, right? [chuckles]

Ben Gilbert 1:32:25 [chuckles]

David Rosenthal 1:32:25 Like, yeah, there's a five-hundred-million-dollar-a-year revenue deal with Microsoft. You know, five hundred million dollars a year when their whole company revenue is a billion-... Well, that's, that's five hundred million a year of very low gross margin revenue.

Ben Gilbert 1:32:37 Yeah, I think the way that he talks about this sort of opportunity, in the talk that I watched him give, he didn't name names, but he says, "People always ask me, you know, they come to me and say, 'Jensen, why aren't you making this great game console GPU? Like, what a waste! Why wouldn't you do that?'" And he always talks about it like there's a lot of things we could spend our resources doing, and if I don't think that we can do anything really unique and special and really change the world, then we have better things to spend our resources on. And that is kind of Jensen speak for like: "No, there's crap margins in that. I'm not doing that." But he is right that, like, given a finite amount of resources, y- you have to allocate your capital and your resources in the most optimal, both short-term cash flowing way, but also long-term strategic way. You know, it seems like from their sort of analysis, especially recently with game consoles, sure, we might be able to make some low margin revenue on it, but it's not strategic for us long term to do that.

David Rosenthal 1:33:30 It's probably, at this point in time, a little too much of an exaggeration to say that they're out of the fire and into the frying pan, having solved their Intel existential strategic challenge and ending up now [chuckles] sort of at odds with Microsoft. That's too much, but there's a lot of truth to that. So, you know, if you're looking at this stock in those years, especially as revenue starts to flatten, and a big part of that is coming out, you know, towards the end of the Xbox generation of consoles leading into the Xbox 360, which of course, Nvidia does not power, that's a lot of gaming revenue, top-line revenue going away. Meanwhile, they're spending tons of resources investing in this new high-powered computing segment for these researchers. You're a little bit like, "Okay, Jensen, [chuckles] do you really know what you're doing here?"

Ben Gilbert 1:34:21 And in 2006, Intel launches or announces this project Larrabee, where they're gonna be, like, a full-fledged GPU maker. I mean, this is like a totally, a second foray of, of Intel's really into this. So you're like, okay, you've had to, like, be this commodity where you're living on Intel's motherboard. Customers are only choosing to buy your product when the integrated card isn't good enough for them. The person that makes the integrated card has now announced they're gonna be, like, a real, honest-to-goodness GPU maker. So, like, are you betting the farm on scientific computing?

David Rosenthal 1:34:54 How big is that market?

Ben Gilbert 1:34:55 So the answer is yes, and that is also the bull case. And it turns out scientific computing would be so much more than scientific computing, and it would be, uh, you know, the acceleration of all the other things in our computing world that has been very advantageous to become parallelizable. But I will, uh, leave it there, so I don't have too many spoilers. But that is one hundred percent the bull case and one hundred percent what happened.

David Rosenthal 1:35:20 Yeah, it's interesting. We're working on an episode, episode two, with Hamilton Helmer and his colleague Chen Yi at Strategy Capital, about power.

Ben Gilbert 1:35:28 Specifically with platforms, how to apply power to platform businesses.

David Rosenthal 1:35:33 It probably won't be out yet when this episode comes out, but it'll be coming out shortly thereafter. They make the point, and it's a very, very valid one, that, like, when you climb the mountain as a founder in a company of finding product-market fit, it's very different than climbing the mountain of then having to go develop power. [chuckles] It's a whole, you know, second journey that you have to go on.

Ben Gilbert 1:35:57 It's a whole second invention, and at, at this point, uh, Nvidia had definitely found product-market fit but had not yet found their source of power.

David Rosenthal 1:36:07 So, you know, if you're looking at this company at this moment in time, especially as revenue's flattening, coming off the Xbox contract, [chuckles] costs, OpEx is going way up, investing in this sort of speculative new area, I can totally see looking at this and being like: Wow, this is yet another Silicon Valley startup that had immense product-market fit, top-line revenue soared, but now we're kinda coming to the end of that, and there's not a lot of power, you know, as defined by sustainable, you know, economic profit, you know, operating cash flow coming out of this thing.

Ben Gilbert 1:36:47 So then, as we talk about power here, what power do they have? And for listeners who are newer, this is really the what is it that enables the business to have persistent deferential returns or sort of, in a sustainable way, be more profitable than their closest competitor. They really didn't have power. I mean, I'm trying to think which of the seven powers can we make the best case that they did have? It's not switching costs. Switching costs are crazy easy.

David Rosenthal 1:37:16 So switching costs is interesting, right? Like, I think they were trying really hard to develop it. They did a really good job. I mean, they made CG in collaboration with Microsoft, and CG works on Nvidia products. But it's not like CUDA today, to, to flash forward to next time.

Ben Gilbert 1:37:37 Yeah, so it was like they had the inkling of how they could get power, but it was not yet implemented.

David Rosenthal 1:37:42 And Microsoft didn't have a lot of interest in helping Nvidia create huge switching costs there. [chuckles]

Ben Gilbert 1:37:49 Right, 'cause Microsoft wants to play Switzerland. Like, hey, anyone that is an application developer for Windows should be able to use whatever hardware is on any PC in a really great way, and so we wanna commoditize all of our suppliers.

David Rosenthal 1:38:02 So maybe some-- an attempt at switching costs that was not fully realized. I think they probably thought and did for a while have process power in this six-month shipping cycle that none of their competitors could match for a while.

Ben Gilbert 1:38:16 Yep.

David Rosenthal 1:38:16 But certainly, the delta of Nvidia's shipping cycles versus competitors compressed over time.

Ben Gilbert 1:38:23 Okay, playbook. I have one big one that we have not discussed. We sprinkle in lots of, like, playbook themes, but there's one to me that I wanna call out and draw a through line to something that's happening with Nvidia today. And-... That is simulation. So there's a thing that we're gonna talk about a lot on the next episode, which is totally changing the world as we know it, which is things that we used to have to do physically, we now do in simulation. An obvious example of this is Boeing doesn't take every part and throw it into a wind tunnel. Well, maybe Boeing does, but the zillion new space startups certainly don't do that. They simulate the atmospheric effects on stuff, and it happens way faster, and it lowers your iteration time. And another one is drug discovery. Like, you look at how fast we came up with coronavirus vaccines. Simulation, it's an absolute miracle, and everything in our world is being compressed ten times, a hundred times faster because we're able to simulate it rather than needing to do it in the real world. The interesting thing is, a lot of that is actually powered by a lot of the machine learning advances that Nvidia is doing in today's world with cool things that you can do on GPUs. But the reason I'm talking about it in this episode is, that DNA comes from the fact that in order to survive when they had nine months left, the way that they saved themselves was with simulation. So it became very clear to the company, very early on, the benefits of being able to simulate something rather than having to do it in the real world.

David Rosenthal 1:39:58 Similarly, a playbook theme I wanted to highlight that we have not talked about explicitly yet is just the power of, like, democratizing tools for developers. You know, and Jen-Hsun really saw this back in his AMD days before going to LSI Logic, but the ability for Nvidia to use an emulator, [chuckles] a software emulator, to design their chips, and then, of course, the massive, massive strides that the EDA industry has made since then. And then Nvidia itself, you know, enabling, you know, we haven't really talked about it as much, but, like, Jen-Hsun and Chris and Curtis's original vision did come true. Like, they created a new artistic platform for artists to tell their stories, and without this industry and all the hardware, software, tools that went into creating it, like, uh, there's no way that, you know... Anybody-- You would have to be a John Carmack to tell a story in this medium, and there are very, very few John Carmacks out there in terms of being gifted enough developers and surrounded by storytellers, too, and being a great storyteller himself, to, like, be an artist, you know, to be a [chuckles] Nvidia talks about this now in their marketing materials, to be Da Vinci and Einstein, [chuckles] you know, together in one person.

Ben Gilbert 1:41:22 Yeah, it reminds me of the people that do, like, the crazy, cool art in Microsoft Excel by, like, painting each of the cells a different color. You had to be that type of person to be a game developer in Carmack's era because it was esoteric as hell to be able to actually figure out how to make this hardware do what you want.

David Rosenthal 1:41:41 Another big one I wanna highlight, you know, I just keep thinking back, going to the, thinking back to the original time when Nvidia was funded. And I wonder what, like, if they're really honest with themselves, like, what Sequoia and Don Valentine would think about that?

Ben Gilbert 1:41:57 Hmm.

David Rosenthal 1:41:58 They made the wrong venture bet. Like, in a, in a market like that, we see it all the time. Like, look at Web3 right now. If there's a team coming out of, like, Solana and FTX, or, like, let's make up an imaginary example, making some new vision for a class of applications in Web3. Like, they're gonna get term sheets from everybody, and then there's gonna be a million copycats the next day.

Ben Gilbert 1:42:22 It is the beauty of proliferation and then consolidation. I mean, Buffett has... I- I think it's in a two thousand Fortune article that he wrote, it's weird that I know that, but I think that's right, in an op-ed about how there were, whatever it was, seventy car companies before we narrowed it all the way down to four, GM and Chrysler. And the airlines were sort of the same way. There's this proliferation, there's mass, there's-- no one can really differentiate, no one can build any power, and so you only have a few survivors left. And in general, they compete on pretty low margins when there's only a few left, and their defensibility comes from their scale. You know, I think open question if that's sort of how the graphics market necessarily matured, but you're absolutely right to, like, sort of, uh, self-reflect on the time when Sequoia and Sutter Hill invested, to say, "Would you make that type of bet again?" You backed one of the two winning horses out of ninety. Should you do that and just say, "Well, we're betting on amazing founders," or should you-

David Rosenthal 1:43:22 [chuckles] Well, I think that's... So this is the nuance. I think what is so cool, and part of, you know, the fun of the art and the science of sort of what we do, the company they backed was wrong, and yet it became, I don't know how long Sequoia has held. I mean, I think a lot of the GPs at Sequoia, and certainly Mark Stevens, who was one of my professors at GSB, who was on the board for Sequoia, is still on the board, have held their shares personally for, like, to this day. Like, that's one of the best venture investment returns of all time, full stop, period. [chuckles]

Ben Gilbert 1:43:55 Anything going from a six million dollar valuation to the eighth largest company in the world definitionally has to be one of the best of all time.

David Rosenthal 1:44:02 Right. And so, like, they were wrong intellectually, and yet they were right, right? And, like, why were they right? Like, they were right because, frankly, of Jen-Hsun.

Ben Gilbert 1:44:13 It was a reasonable enough market. The question is, w- are you better off doing what they did and investing at the proliferation phase on someone you believe is going to figure it out and have a good shot at being one of the winners, or should you wait until consolidation and just pay that much higher price in order to back one of the ones that are already running away with the market?

David Rosenthal 1:44:35 Well, and back then, in the day, there, there was no option, right? [chuckles] There was no, uh-

Ben Gilbert 1:44:39 There were no stages of venture capital. There was you raise your venture capital, and then hopefully, you're profitable enough to go public.

David Rosenthal 1:44:45 ... They did raise some more money in between that initial two million and going public. I think they raised twenty million in total, but, like, there wasn't a lot of window, and I think it was Sequoia and Sutter Hill that put that capital in for the rest of that twenty million. But it's really interesting to think about these cases. Take Sequoia and Sutter Hill, too, you know, and specifically, like, they've gotten it right so many times, but it's not a straight line. So, like, what's the lesson from that?

Ben Gilbert 1:45:11 Yeah, and the magic was that Jen-Hsun really figured it out early, that they were in a business that was totally at the mercy of Moore's Law. And so, like, in having that initial realization as early as they did with the proliferation of competitors and everyone doing, you know, the triangles and DirectX and all that, that taught them the lesson early enough that, oh, we are in a business where we must be reinventing. There is no way to stay ahead other than ruthless self-examination and completely upending and rebetting the business.

David Rosenthal 1:45:47 Yep. Ship faster and, and reinvent. Yep.

Ben Gilbert 1:45:50 Yeah. So that, I mean, that, that to me is why they, why they survived.

David Rosenthal 1:45:56 If you think about the class of companies [chuckles] that are, like, the greatest venture returns of all time, some of them are like Nvidia, where, like, you look at the team, you look at the business plan, [chuckles] the thesis-

Ben Gilbert 1:46:11 Mm-hmm

David Rosenthal 1:46:11 ... originally, and like, yeah, it wasn't a straight line, but it worked out. But then some of them are, I think it was Sequoia even used to talk about this on their website, the misfits, the ones that look like unfundable. [chuckles] Like the Solana, the early Solana team, starting in the crypto winter, building a new blockchain.

Ben Gilbert 1:46:31 Steve Jobs smelling bad, you know, that sort of-

David Rosenthal 1:46:33 Right.

Ben Gilbert 1:46:34 Yeah.

David Rosenthal 1:46:35 So it's like... And I think, you know, plenty of venture firms, but I, I have to hand it to Sequoia over history, too. Like, they've done a really good job of doing both of these. They do the Steve Jobs, and they do the, [chuckles] the Jensens.

Ben Gilbert 1:46:48 Okay, well, before we move to grading, I'm gonna plant a seed with you, David. Do you know, it's a fun trivia question: the company, it was a startup, that in two thousand and six Nvidia invested in?

David Rosenthal 1:47:02 Oh, I do. I do.

Ben Gilbert 1:47:04 All right.

David Rosenthal 1:47:04 This is a really good one.

Ben Gilbert 1:47:05 Hold on and answer.

David Rosenthal 1:47:06 We'll, we'll hold it.

Ben Gilbert 1:47:07 Okay. Listeners, before we finish up here and jump to that answer and grading, I wanna thank our good friends at the SoftBank Latin America Fund. SoftBank, as you know, created this fund with a simple thesis: Latin America is totally overflowing with innovative founders and amazing opportunities, but historically has been short on the ingredient of capital. And SoftBank, unbelievably, has invested eight billion dollars in over seventy companies. They have one huge takeaway, which is not, like, super obvious at first, but in retrospect, makes tons of sense, that LatAm is not so much about disruption as it is inclusion, because the majority of the population is underserved in, like, every category, from banking to e-com to transportation. Most businesses as well are just underserved by modern software, and there's just so much to build for so many people in Latin America. An amazing example of this is their portfolio company, Banco Inter, and you should recognize this name because, uh, last season, we actually talked with the CEO, João Menin, but it's a unbelievable story of, like, legitimate digital transformation. If this is your first time hearing about Banco Inter, they're accelerating the shift to online financial solutions and expanding access to banking, uh, and investing services in a region, obviously, where over half the people over the age of fifteen still don't have a bank account. And they're lowering the historically expensive cost of doing banking, really by, like, becoming a digital-first bank, even though they're a multi-generational physical bank.

David Rosenthal 1:48:44 Really, all of SoftBank Latin America, I, I was catching up with Shu and Paulo, who, who run it, uh, just this week, and, uh, it's such a great example of, like, what we were just talking about. This is such a bright spot of, you know, in venture capital period and in SoftBank, of, like, the Latin America, [chuckles] you know, investing ecosystem when these guys started several years ago. Nobody was there. You know, it was the misfits. Like, it was crazy to go think to invest in this.

Ben Gilbert 1:49:12 And they've attracted so many more dollars from everyone else, too, by sort of, like, lighting the fire in this region. They really are the OG LatAm investors and are such a power there. So to learn more, you can click the link in the show notes or go to latinamericafund.com. And if you're, uh, interested in joining a company there or starting a company or perhaps co-investing in the region, definitely reach out to Shu, Paulo, and that team.

David Rosenthal 1:49:37 They're the best.

Ben Gilbert 1:49:38 All right, David, so what is the company that they invested in?

David Rosenthal 1:49:42 Ben, you are talking about Keyhole.

Ben Gilbert 1:49:44 Yes, I thought you would know. So I love this little foreshadow before we get to grading because I think it's so interesting that Jen-Hsun basically saw the potential of Keyhole. And without sharing what Keyhole became, I think astute listeners will know.

David Rosenthal 1:49:58 We've talked about it on Acquired.

Ben Gilbert 1:49:59 We have. We've done an episode.

David Rosenthal 1:50:00 Did a whole episode on it.

Ben Gilbert 1:50:02 Basically, this company that can't raise any money from anyone else comes and pitches Jen-Hsun, and he's like: "Oh, my God, I see this. This is the future. This is simulation." Like, "You are creating a model of the Earth in software, and people can just navigate around the Earth?" And so now that I've given it away-

David Rosenthal 1:50:20 A graphical model of the Earth.

Ben Gilbert 1:50:22 Yes, Google acquired it. It became Google Earth, and, and Nvidia was one of the, the early investors, and that really goes to speak to, like, where Jen-Hsun and the leadership team at Nvidia sort of saw their business going from this point forward, where it was all about simulation. It was all about using massively parallel computing to build brand-new experiences, to enable research, to enable-... I don't think there was any machine learning going on. I think it was all sort of like the graphical use of the chip, but this sort of like gets into the Omniverse stuff that they're doing now, and one of the main reasons that I think they invested was because he wanted it just to stay alive so they could keep demoing it to customers- [laughing]

David Rosenthal 1:51:04 [laughing] That's so great.

Ben Gilbert 1:51:04 - 'cause it showed off Nvidia technology so well. But I just love that little tidbit.

David Rosenthal 1:51:09 Yeah, we did our episode, God, it was years ago now, the Google Maps episode. That was such a good one.

Ben Gilbert 1:51:14 Yeah, Where 2, Keyhole, and...

David Rosenthal 1:51:18 Uh, there were three companies that Google all bought and mashed up, in the parlance of the day, to, uh, ultimately become Google Maps.

Ben Gilbert 1:51:27 ZipDash.

David Rosenthal 1:51:28 ZipDash, yes, and they were all, like, twenty, thirty million dollar acquisitions. Amazing. That's what's so cool about this, and I think maybe this is the, like, where Jensen and the Nvidia story bridge from, like, the, oh, it was the, you know, obvious investment market to bet on, team to bet on, to go all-star engineers to go build this graphics card. Nobody really could have seen that graphics were gonna become a lot more than games. [chuckles] Like, you maybe could have seen it, like, you know, there was SGI and Hollywood and Jurassic Park, and there were some military applications for computer graphics, but very few- even Jensen and Nvidia, they were like, "Video games are the thing."

Ben Gilbert 1:52:15 Fortunately, that became the biggest entertainment medium, and so even if that was your only market-

David Rosenthal 1:52:19 Keyhole and Google Earth and Google Maps, such a great example of, like, computer graphics became so much more important than, like, relevant beyond just video games, and that's all a computer, you know, dynamically generated, programmable computer graphics that are making all of that, all of that happen. All right, so how are we gonna grade this?

Ben Gilbert 1:52:40 Yeah, so I'm thinking, given the opport- the market opportunity that existed between 1993 and 2006 for computer graphics, how did Nvidia do at exploiting that market opportunity? And, like, share price is a reasonable way to think about it. I think it's a second-order metric on, like, how were they at creating value and capturing value? And I'd say, like, their value creation was amazing. Their value capture-

David Rosenthal 1:53:12 Yeah

Ben Gilbert 1:53:13 ... They did better than anyone else, as far as I could figure out. The question I was sort of trying to figure out is that there were ninety other competitors doing the same-ish thing, two-ish survived. Was there anyone else in the value chain that was able to, like, do a much better job capturing? Like, would you rather have been Microsoft than Nvidia?

David Rosenthal 1:53:35 This leads into the really interesting question to think about for Nvidia in this period. Microsoft did basically nothing. Now, okay, that's, like, like, that's not fair to Microsoft.

Ben Gilbert 1:53:46 Sure, there was a large team that did DirectX.

David Rosenthal 1:53:48 Huge team, you know, and the Xbox project was amazing, and, like, I don't mean that in any way to throw shade at anybody at Microsoft. But, like, they were in this position where they could just sit there, they could watch the market develop for computer graphics, and they could be pretty... You know, by making good, very good strategic decisions, they could capture a ton of the value with other companies taking the risks of developing the market, figuring out all this stuff, and then, you know, Microsoft can come along and be like, "Great, Nvidia, we're gonna help save you from Intel. [chuckles] And in return, you're gonna, you know, give us a really sweetheart deal on these chips, and you're gonna put us in business with Xbox. And by the way, y- the other side of your gaming and computer graphics business on PCs, we're gonna become your primary partner for that, too. And all of the development languages that you're gonna create and CG and all that, yeah, we're, we're tightly coupled with that, and it's all gonna work only on Windows." [chuckles]

Ben Gilbert 1:54:55 I think your assessment of Microsoft did basically nothing except make really good strategic decisions is, like, reasonable enough for DirectX, but totally is not fair for Xbox.

David Rosenthal 1:55:07 No, it's not fair for Xbox at all. [laughing]

Ben Gilbert 1:55:08 [laughing]

David Rosenthal 1:55:08 It's not, it's not.

Ben Gilbert 1:55:09 But it is an interesting way of fra- like, to put it another way, and let's exclude Xbox for a moment, you're basically just recognizing that Microsoft had an unbelievable position in the market and did an amazing capital allocation job exploiting it, and basically saying, "Hey, you know what? You know what we don't need to do? All that crap that, like, Nvidia and ATI and all those guys are doing. You know how we can still retain our market position, uh, and continue printing money the way that we do? This thing." And they did that, and they didn't get into the commodity business, and they were brilliant.

David Rosenthal 1:55:42 We don't need to be in this brutally competitive industry where, like, if we don't ship six months ahead of our competitors, every cycle, we're toast. [chuckles]

Ben Gilbert 1:55:52 Yeah.

David Rosenthal 1:55:52 So I think, you know, in this kinda like grading question... [exhales] Oh, man, the longer we do this show, the more I realize this is, like, a mega theme of Acquired, that, like, Microsoft in the '90s, early 2000s, was such a power, and the antitrust, you know, the DOJ case really, really crippled it, probably for good for the ecosystem.

Ben Gilbert 1:56:16 Then the 3D chess version is, and this kinda foreshadows the next episode, because Nvidia had to learn these hard lessons and had to develop, like, was forced to develop these really crazy competencies, like eventually developing CUDA, that would power this whole machine learning and scientific computing revolution, was it bad for Microsoft to not have to grow that DNA, in the same way that it was bad for Microsoft to not have to grow the mobile DNA, and Apple beat them at that game?

David Rosenthal 1:56:42 Yeah, that's a great point.

Ben Gilbert 1:56:44 I don't know enough yet about how the machine learning market is gonna develop or has developed in order to sorta make a call yet on that point. But if you're s- just standing there in 2006, reflecting back, Nvidia fought for their life and won.

David Rosenthal 1:57:02 ... multiple times.

Ben Gilbert 1:57:03 And Microsoft just leveraged the crap out of their amazing position. [chuckles]

David Rosenthal 1:57:08 Yes.

Ben Gilbert 1:57:08 And probably achieved about the same outcome.

David Rosenthal 1:57:12 Yeah. Both of these two fighting-for-their-life, company-defining moments from Nvidia's first 10 to 15 years, the overcoming the 90 competitors, and then the building and making the case that they're not gonna get commoditized by Intel, that the GPU is gonna be a standalone, important thing. [chuckles] Microsoft profited hugely from both of those.

Ben Gilbert 1:57:37 Yep. It's so true. I will say, Nvidia doing what they did has been net unbelievably positive for the world. Like, I watched the Nvidia GTC conference, the 2021, 'cause the 2022 is about to happen, and just, like, the review of all the stuff they're involved in is so inarguably good for humanity. We need way less energy to do way more interesting stuff that's good for humans because Nvidia exists, and without doing this first 13 years, they would not have laid the groundwork to be able to do all of that in the future. So that's, like, one sort of contorted lens to look at it through.

David Rosenthal 1:58:14 I think I give Nvidia, for this period of time, an A because they're basically the only company that survived. ATI did, of su- for sure, of course, but in a very different fashion. And they created this whole industry, almost inarguably, created and shepherded this whole industry. But it's not an A+ because Microsoft. [chuckles] Well, shoot, there was the DOJ case. [laughs] Until the DOJ case.

Ben Gilbert 1:58:46 Yeah, it's true. All right, I like that. Hard to argue with it. Carve-outs?

David Rosenthal 1:58:51 Carve-outs. I have a fun and very appropriate one for this episode. Elden Ring. Have you heard about this, Ben?

Ben Gilbert 1:58:58 No.

David Rosenthal 1:58:59 You're not a gamer, so you- you need to, we need to, like, get you into gaming after, you know, doing all these episodes now.

Ben Gilbert 1:59:05 Yeah.

David Rosenthal 1:59:05 It's so fun. It's just, like... It's great. [chuckles] So Elden Ring, for people who don't know, is the latest FromSoftware game, and it's on all the platforms: console, PC, et cetera. Lots of people are saying this is probably gonna be... It's up there with the conversation for greatest game of all time [chuckles] ever made. These are the guys, it's a Japanese developer, they made the Dark Souls games, if you've heard of them.

Ben Gilbert 1:59:29 Mm-hmm.

David Rosenthal 1:59:29 They're, like, just these legendarily, like, incredibly hard games, but, like, the s- the world-building is unbelievable, and Elden Ring is the first one to come out on modern platforms, and just, like, everything about it, the graphics, the scale, the breadth of the world, the story. George R.R. Martin helped develop the backstory to this, like-

Ben Gilbert 1:59:53 Oh, wow!

David Rosenthal 1:59:54 If you needed another example of how video games have become, like, the biggest, most ambitious storytelling medium out there, like, this is it. I've only just started playing the game 'cause I've been researching [chuckles] Nvidia the whole time.

Ben Gilbert 2:00:08 Yeah.

David Rosenthal 2:00:09 But even just in a few hours playing it, like, it's, it's incredible. You're not gonna get an experience like this in anything else.

Ben Gilbert 2:00:15 Cool. I have an appropriate one that I didn't realize was gonna be appropriate until you shared it earlier, which is, I have been getting back into a lifting, like, a weightlifting program that I haven't done for, like, 10 years.

David Rosenthal 2:00:29 Inspired by Jensen?

Ben Gilbert 2:00:30 Uh, called Starting Strength by, uh, Mark Rippetoe. Yeah, apparently inspired by Jensen, and I didn't even realize it. But it's like I reactivated a gym membership, and I went back to the gym. You know, started kinda from square one in terms of, like, doing all the basic barbell lifts. It's just been really f- like, it's a new hobby. It's something I did, like, 10 years ago, and then totally let atrophy. And the way that I love to work out, and at least historically have the last five to eight years, has been, like, endurance sports, so, you know, training for a marathon or doing week-long bike trips and stuff like that. And, uh, it's just very fun to get back into the, like, every other day, try and, you know, lift as heavy as you possibly can for a few reps, rest for a long time, you know, make sure you get all your sleep. It's a very different mentality, and so it's been fun doing that again.

David Rosenthal 2:01:19 I love it. It's like, uh... [chuckles] I feel like we're both becoming, like, better versions of our high school selves, you know? [laughing]

Ben Gilbert 2:01:25 [laughing]

David Rosenthal 2:01:25 I'm, like, a, like, a full-on, like, gamer again, and you're getting back into weightlifting.

Ben Gilbert 2:01:29 High school me would have been like, "What? Why would I work out? That doesn't sound fun." [laughing]

David Rosenthal 2:01:33 [laughing] Okay, college you, college you.

Ben Gilbert 2:01:36 Fair. All right, listeners, that's all we've got. We are very excited to, at some point, come back and talk to you about 2007 through 2022 with Nvidia and the absolutely unfathomable things that they have done. Imagine if you started a business in the early '90s doing a thing that seemed like a small market at the time, but you, you did the thing, and then it turns out that that gave you line of sight to something that the same technology was uniquely able to do that was, like, 10 times bigger than the original thing, and no one else was even close to you 'cause you had, like, 18 years of, like, building stuff and learning about these technologies to be the best company in the world to take advantage of that next thing, which obviously is machine learning. It is just, like, an oh-my-God story, and then you layer on top of that the fact that gaming actually was, like, 10 to 100 times bigger than anybody ever thought it would be. It's, like, a literally unbelievable story, except that it happened, so you have to believe it.

David Rosenthal 2:02:37 Ah, so great. This, this is the kind of stuff that, like, we do Acquired for. [laughing]

Ben Gilbert 2:02:41 [laughing]

David Rosenthal 2:02:41 I've just, like, been so jazzed about this.

Ben Gilbert 2:02:44 Yeah. I got a lot of research to do on, uh, parallel processing and, like, why this was so perfect for all the machine learning and cryptography use cases, but that's why we get some time between episodes to go and do more research and to watch GTC, uh, the, uh, GPU Technology Conference, their annual developer conference, 2022. So thank you so much for listening to us. Uh, leave us a review on Apple Podcasts, if you listen there, or with the new Spotify ratings feature on their mobile app. Share it with a friend if you liked it. We welcome lots of feedback, and fortunately, in having a part two, we're gonna be able to take your feedback and actually work it into the next part of the story. So acquired.fm/slack. Come hang out with us, talk about this, check out the LP Show, and, uh, we've got a job board. If you are looking for the next stage of your career, we have curated all of the positions at acquired.fm/jobs. And with that, thank you to Vanta, Vouch, and the SoftBank Latin America Fund, and we will see you next time.

David Rosenthal 2:03:46 We will see you next time indeed.

Speaker 2:03:48 Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Uh. [upbeat music]