Mike Volpi on Why AI Breaks Traditional Venture Capital | Ep. 52

1. 0:00 – 0:39

   Intro

   1. MVMike Volpi0:00

      The kind of classical marketing efforts that have been done for brand building, particularly in venture, s-sound off-key-

   2. JAJack Altman0:08

      Mm.

   3. MVMike Volpi0:08

      -to your average twenty-two-year-old entrepreneur. I think what does resonate is inside knowledge, tips, connections, network, all those things which are kind of indirect but organic ways of building brand. Yes, brand is important, but I think you wanna build it organically. [upbeat music]

   4. JAJack Altman0:24

      All right. I am really excited to be here today with Mike Volpi, who is probably one of the most successful venture capitalists of the last couple decades, and now building your own new firm, and I'm really looking forward to learning from you, so thanks for doing this with me.

   5. MVMike Volpi0:35

      Are you kidding? It's a pleasure, and I've already fooled you. [laughs]

   6. JAJack Altman0:38

      [laughs] Well, that's one.

2. 0:39 – 4:02

   Building a venture firm for AI

   1. JAJack Altman0:39

      One of the things I wanna start with talking to you about, which I thought would be kind of interesting just 'cause, you know, I also, um, gave, gave my shot at it, um, is just, like, building a new venture firm. You obviously have had this incredible run at, you know, a great firm at Index for a long time, and now you're building your own firm, which you've been doing for the last, I don't know, year?

   2. MVMike Volpi0:57

      Year and a half.

   3. JAJack Altman0:57

      Year and a half. Obviously, you've been really thoughtful about how you wanna do it and, you know, what the trade-offs you wanna make are and what the firm design's gonna be and what's the strategy. So I guess I wanted to start, when you were thinking about creating a new firm, what did you sort of start by thinking about? What were, like, the key considerations as you got going?

   4. MVMike Volpi1:14

      The first is somewhat obvious but very important, which is it's very hard to disrupt a market, to break into a market, unless there's something macro that's happening that's an enormous change. Obviously, AI is that. So, uh, the first thing is to take a firm that's new and deadly focus it on whatever gigantic wave is hitting the industry right now. 'Cause if you tend to do the, you know, spread the peanut butter thing, it's just never gonna work. So first, A, identify that there is a massive trend. Two, absolutely focus on it. The third thing I would say is gather people who are not only fluent but just have grown up and live whatever this new trend is. I do think that there is a big generational shift right now between sort of classic entrepreneurship, classic venture, and this new generation of AI venture, and some people are more predisposed to it than others. The last thing I would say is you have to be very careful about your past success. This is, I would say, very true for individuals, for yourself, and it's also very true for firms. And the more success a firm has had, the more, to use an AI term, reinforcement learning there is of how things were done, and if the world shifts to a place where things are done a little bit differently-

   5. JAJack Altman2:34

      Yep.

   6. MVMike Volpi2:34

      -that reinforcement could be applied very incorrectly.

   7. JAJack Altman2:37

      I actually think this, like, past success reinforcement loop thing explains why a lot of, for example, like, execs from pre-AI SaaS are, like... That-- It's really difficult to adapt-

   8. MVMike Volpi2:46

      Yeah.

   9. JAJack Altman2:46

      -because you learned a whole set of things that don't make sense anymore.

   10. MVMike Volpi2:49

       Yeah. The whole concept of software is changing. Basically, most venture capital firms are focused on making money on software companies, and that foundation is based on the idea that software is complicated, expensive, and takes a long time to build. And it makes... It costs very little to make lots of it, but it costs a lot to make the first edition of it. And so then you're in this world of, "I have a high fixed cost thing which I need to sell to as many people as possible." Every business model starts looking like that. Then you move into an AI era, which takes the cost of making software way down. You're completely shifting the core assumptions on how a business is built, and that then extends into everything from go-to-market, engineering, fundraising, h-which customers you target first. How do you target your customers? Should it be a product-centric company or a service-centric? All these assumptions kinda blow up. So if you've had sort of a, a f- a firm as an investor that's been structured to invest in a certain type of company with a certain type of people and that base assumption changes, the cost of making software is now super low, you blow up everything. And so if you get stuck with the old way of doing it, you're probably gonna invest in

3. 4:02 – 5:52

   Designing Hanabi

   1. MVMike Volpi4:02

      the wrong companies.

   2. JAJack Altman4:02

      You obviously invested in a certain way over the last, you know, years at Index, and you had a certain, I don't know, ownership model, stage you like to do, all the rest of it. When you came in with Hanabi and you're like, "I've got a blank cl- blank canvas now, and I need to not train on what I did wrong. I wanna learn from the good stuff. I wanna not, like, you know, bring the bad stuff," what did you think about from a firm design perspective when it comes to, like, let's say, the types of deals you were gonna do, the stage, like, the ownership, the size checks, the dispersion of all that stuff?

   3. MVMike Volpi4:29

      Well, let's start with the people. Um, first of all, I thought, you know, AI is a, uh, relatively complex and deeply technical field, and therefore, the people that I have at the firm should be native speakers of that new dialect. The number of people that were focused on AI and machine learning pre-two thousand and eighteen, nineteen is incredibly tiny. So essentially, the volume of people that are, I'll call it, a-a native human beings have a professional depth of five to six years max.

   4. JAJack Altman5:06

      How big of an, of an advantage is it if you got into AI in twenty eighteen versus twenty twenty-four, let's say?

   5. MVMike Volpi5:12

      Uh, reasonably substantial, but not massive, I would say.

   6. JAJack Altman5:15

      Like, you can catch up?

   7. MVMike Volpi5:16

      You can catch up.

   8. JAJack Altman5:17

      Yeah.

   9. MVMike Volpi5:17

      You can catch up, but, you know, you gotta have a foundation, like how does it work? Why does it work? What are the flaws? How quickly does it evolve? Do you understand compute? Can you talk semiconductors? What's a GPU versus CPU? Why? Memory, high bandwidth, like, all this stuff. Like, unless you sort of are genuinely fluent in tech, these are not conversations that you're gonna easily have with your counterpart, the entrepreneur. So you gotta look for people that are pretty damn techy and are pretty damn young.

   10. JAJack Altman5:42

       Mm-hmm.

   11. MVMike Volpi5:42

       You know, when you build from scratch, the complexity is finding such people in this industry that wanna be VCs. It's not the easiest thing in the world.

   12. JAJack Altman5:49

       Yep.

   13. MVMike Volpi5:50

       But A, you, you look

4. 5:52 – 9:38

   Why stage matters less

   1. MVMike Volpi5:52

      for that. The second kind of idea that's very important is in venture capital, we've talked a lot about stage centricity. We are an early stage firm. We are a mid stage firm. We do growth. We do pre-public.

   2. JAJack Altman6:04

      Yeah.

   3. MVMike Volpi6:04

      We're crossover. Everything is defined by stage. I don't think that idea applies in this point in time because I could invest in a company At 10 billion in valuation, and three years later, it could be worth 380 billion. In essence, what you have is a suite of companies that we would now consider growth stage-

   4. JAJack Altman6:22

      Yeah

   5. MVMike Volpi6:23

      ... but that represent venture-like return characteristics.

   6. JAJack Altman6:27

      It's also probably the flip side of that is, you know, there was probably a point in time when investing in something that was worth 10 billion, the downside risk was also probably very different than it is today.

   7. MVMike Volpi6:36

      Yeah. But honestly, like you can't sit around VC and worry about downside risk. I mean, if you're gonna lose your money, you're gonna lose your money.

   8. JAJack Altman6:41

      No, I'm just thinking about, you know, there were growth investors who at one point in time-

   9. MVMike Volpi6:43

      Oh, yeah

   10. JAJack Altman6:43

       ... could, you know, they could... I'm gonna get my three Xs when it works, and I'm gonna get my money back when it doesn't, and now it seems like there's still venture outcomes from much later stages-

   11. MVMike Volpi6:53

       Absolutely

   12. JAJack Altman6:53

       ... in the business.

   13. MVMike Volpi6:53

       I mean, when I, when I got started in this industry, growth investors would be like, "Oh, I'd like a three X lick pref, and I might triple my money and whatever." And now I think you can genuinely go into a company at, you know, you would g-get into Anthropic at 60 billion, and you're gonna get like 10X plus return on it. So I think you have to be ignore stage, observe the size of the opportunity, the magnitude of it, and so forth, and in some cases, you're finding two people in a garage and you're helping them build the business, and in some cases, you're piling in Anthropic at 380 billion.

   14. JAJack Altman7:25

       Mm-hmm.

   15. MVMike Volpi7:26

       And they, they have... Literally all of those have 10X plus possible outcomes, so I think you, you just don't pay attention to that.

   16. JAJack Altman7:35

       I wanna stick with that topic for a second. I think it is an idea that is maybe still not the mainstream idea, but definitely more people are s- operating in this way where, you know, you can, you can sort of choose what boundaries you create. The stage one has gone away in favor of other things. Do you think that you're able to do that as a result of experience, or do you think a early career investor is also equipped to both traffic and pre-seed first money investments and also make assessments at the growth stages?

   17. MVMike Volpi8:00

       Let me phrase it this way. On the assessment side, so being able to, uh, effectively value very different stage companies can be done by the same person. It's not that hard. Like, you know, looking at a spreadsheet is not rocket science for the average engineer. What is trickier, one of the things that I still think in this era and in prior eras is important, is the proximity or, or affinity you have with the founders. If you're investing in two kids coming out of OpenAI right now, and they're 22 years old, and you're a young new investor, you can definitely do that. It's not likely that you'll be able to establish that relationship with Dario. So I think the advantage I have is that I can play that, you know, relationship game with some pretty senior folks because of my experience, but also appreciate that I need to build that relationship with a 25-year-old. Now, some of the younger people on my team don't quite have the ability to go up to Dario or Sam and establish a relationship with them, which is understandable. My job is to start to open up that pathway for them so they can. But I do think the assessment of the fact that, you know, Cerebras is an interesting investment at the pr- at the price that it was done, or that, you know, uh, uh, OpenAI might still be interes- th-that any-anybody can do is just look at the math and see what it looks like and expect some level of multiples. It's not that hard to make the decision. I do think it's hard to get in at a growth stage if you don't quite have the reputation.

   18. JAJack Altman9:27

       When you thought about, you know, building this, not just as, you know, creating great funds, but also, you know, sort of building a firm, what are the other things that you've thought about? Like have you thought about... You know, and we've talked a little bit about team, the stage and focus and

5. 9:38 – 13:58

   Building a venture brand

   1. JAJack Altman9:38

      things like that. Have you thought about things like brand, infrastructure, you know, sizing of the funds over time? Like what, what are some of the other attributes when you think about building like a new real venture capital firm?

   2. MVMike Volpi9:49

      I still believe brand is super important. Brand is probably even more important when your purchaser, the i.e. the entrepreneur, is not incredibly well-informed. It's like, you know, what is brand? Brand is basically a way of summarizing the value proposition that a product has to the prospective buyer, because the prospective buyer is an expert. You know, you buy a Mercedes-Benz. Why? I don't know anything about the engine or the reliability or whatever.

   3. JAJack Altman10:20

      You just know it's good.

   4. MVMike Volpi10:21

      But you just know it's good.

   5. JAJack Altman10:22

      Yeah.

   6. MVMike Volpi10:22

      Right? That's what brand is. And if you think about entrepreneurs being younger and having less network in the world of capital, brand is very important. So I do think you have to be super conscious of brand. However, the creation of that brand has to be done very differently, which is to say, in the old world of brand, you know, you, you could use marketing good stuff. Like, you know, you put out super professional content and banners, and you sponsor this conference and so forth. I think in this modern era, there's an enormous amount of transparency, and so brand gets conveyed in a much more organic way, person by person, reference by reference. So it's less about, did I sponsor this conference or is my banner over here?

   7. JAJack Altman11:12

      Yep.

   8. MVMike Volpi11:13

      And it's much more about what impression do you convey to a person that you interact with, which spreads, and then people get to know you.

   9. JAJack Altman11:21

      Yes.

   10. MVMike Volpi11:21

       Right? So I think the kinda classical marketing efforts that have been done for brand building, particularly in venture, s-sound off-key-

   11. JAJack Altman11:31

       Mm

   12. MVMike Volpi11:31

       ... to your average 22-year-old entrepreneur. They're just... It's doesn't resonate.

   13. JAJack Altman11:35

       Yeah.

   14. MVMike Volpi11:36

       I, I think what does resonate is k- inside knowledge, tips, connections, network, all those things which are kind of indirect but organic ways of building brand. So yes, brand is important, but I think you wanna build organically.

   15. JAJack Altman11:50

       Billboards aren't the right thing. I heard somebody did like a survey of college students and what VC firms, and interesting on this point, Thrive was ranked really highly, and they don't do a lot of, you know-

   16. MVMike Volpi12:01

       Exactly

   17. JAJack Altman12:01

       ... they're not, it's not loud, there's not tons of blog posts, there's not all the other stuff, and-

   18. MVMike Volpi12:04

       Yeah, I think, look-

   19. JAJack Altman12:05

       ... but the brand

   20. MVMike Volpi12:05

       ... Jo-Josh and his team over there are probably the prototypical built a brand on the down low versus the You know?

   21. JAJack Altman12:13

       Totally. There's also when you feel like you're in on a secret. You know, when you've, when you know about it and if you know, you know brand, that's worth a lot more to people.

   22. MVMike Volpi12:21

       100%.

   23. JAJack Altman12:21

       But how does that get cultivated, I guess, is one of the que- you know, like, um-

   24. MVMike Volpi12:24

       Well, it's, you know, over time, succe- you know, Hermes doesn't exactly do big brand ads.

   25. JAJack Altman12:28

       Yeah.

   26. MVMike Volpi12:28

       You just know it.

   27. JAJack Altman12:29

       I also think, um, I'm sure you've probably felt this just over the course of your career, but probably over the long term, making good investments is probably the number one thing and, you know, being able to sit with the founder and say, "I've invested in these companies," and then-

   28. MVMike Volpi12:40

       I think that helps. I, I... look, I, I think, at least from my own experience, what I find is, like, having made some good investments, i.e., I know what I'm doing, is a good one, but also just, uh, people saying, "Look, so and so was very, very helpful in these particular moments in my company's evolution. When this happened, they were helpful in this way. When this happened, they were helpful..." You know, you're on the board of somebody-

   29. JAJack Altman13:01

       Yeah

   30. MVMike Volpi13:01

       ... and they say, "Who's your best board member?" And if, if you're that person-
6. 13:58 – 17:06

   The role of board seats

   1. JAJack Altman13:58

      How do you think about leading in board seats than in contrast to participating and, you know, maybe having, like, a slightly less engaged relationship? Do you do both?

   2. MVMike Volpi14:07

      Hanabi is a small fund, uh, and you know, we op- we manage $175 million. So leading a Series A in this day and age, which probably ranges between 15 on the low end to 25, 30, not broadly generalizing, very hard to do with my size fund. So for now, we generally lead seeds, co-lead a few Series A's, deploy some capital against big companies that we think are gonna be even more successful. I do think that at some point in the future, maybe with a little more capital, we'll try to lead some things. But I also think that the idea of classic lead may not be as relevant in the future, meaning, you know, again, this is classic VC role. I wanna own 15% of the company or 20% of the company at Series A. Okay, that's, that's nice. First, it's probably incongruent with what the entrepreneur wants. But then again, would you own 20% of some schmo company or 1% of Anthropic? So I think there, too, you sort of need to relinquish this need to, like, lead, not lead, whatever, and deploy capital into good companies. If you can deploy it as a, you know, 4% owner or an 8% owner, just deploy the capital. And then these companies create such disproportionate value over time, just pour more money in, more money, more money, more money. Even at higher valuations, just put more of it in because they're great companies.

   3. JAJack Altman15:33

      Yeah.

   4. MVMike Volpi15:34

      And so I think that's one of the kind of historical VC rules that we have to let go a little bit of, like, I must own this much in the beginning. Own a reasonable amount.

   5. JAJack Altman15:42

      Then buy more over time.

   6. MVMike Volpi15:42

      And then buy more over time. Now, what does that mean in terms of board membership, not board membership? It's a badge of honor for a VC to say, "I'm on the board of that company." In my case, you know, I've done this for a while. That's not... I don't need that badge of honor anymore. But I will commit to spending a lot of time. And so basically, almost every investment that I've made as part of Hanabi, I will do weekly, biweekly, or at least monthly check-ins with founders, go on a walk with them, spend an hour with them. Uh, in some cases, for the younger companies, it's literally, like, weekly. A, I find that a lot higher bandwidth in board meetings. Like, I, I, I've done enough board meetings to last a few lifetimes at this point, and I don't find them as productive for knowledge extraction.

   7. JAJack Altman16:25

      Mm.

   8. MVMike Volpi16:25

      And I think it helps the entrepreneur more with what matters to them in the moment.

   9. JAJack Altman16:29

      A lot of it is, like, managing their execs and things like that a lot of the times.

   10. MVMike Volpi16:31

       Yeah. There's, there's so much stuff.

   11. JAJack Altman16:33

       There's all sorts of stuff that's not-

   12. MVMike Volpi16:33

       Everybody's got, like, you know-

   13. JAJack Altman16:35

       Yes

   14. MVMike Volpi16:35

       ... when you're a founder, like, okay, this week I got this issue. Next week I got a different issue. Next week I got a-

   15. JAJack Altman16:39

       Yeah

   16. MVMike Volpi16:40

       ... so yeah, once a quarter you prepare a deck, and you sit around and read the deck, and, you know, all, all the three guys that are observers wanna say something useless.

   17. JAJack Altman16:48

       I agree.

   18. MVMike Volpi16:48

       Like, you know, companies-

   19. JAJack Altman16:48

       Once they're big, they're useless, I think.

   20. MVMike Volpi16:49

       Yeah.

   21. JAJack Altman16:50

       A small board meeting is a good forcing function to get everybody together, but once they're big, I-

   22. MVMike Volpi16:53

       I completely agree

   23. JAJack Altman16:54

       ... it becomes a different thing.

   24. MVMike Volpi16:55

       I have done some board seats. I don't make it in any way mandatory, but I do make it mandatory to invest the regular time one-on-one-

   25. JAJack Altman17:03

       Yeah

   26. MVMike Volpi17:03

       ... or one-on-two, depending on how many founders they

7. 17:06 – 20:44

   Attributes of enduring firms

   1. MVMike Volpi17:06

      have.

   2. JAJack Altman17:06

      When you think about going from, you know, a good early fund, couple funds, what do you think will allow for a new firm to break through into the sort of like multi-decade, this is now a truly established firm? You know, like, do you think that'll be a function of the brand asce- ascending to a certain place? Is it a function of getting to a certain size? Like, what do you think is the thing that leads to, all right, this is now one of, you know, the institutional firms?

   3. MVMike Volpi17:32

      When you take this job of a venture capitalist and really distill it down to its, its barest bones, uh, attributes, I think there's four things that matter. You need to find opportunities, so discovery sourcing is important. You need to have good judgment to decide whether something is good or not. You need to convince the entrepreneur to take your money, so you gotta be a salesman. And then lastly, you've gotta help them develop their business so there'll be a reference so that the other things work. Those four things matter. I think a lot of the other decorations that VC has become, where you have, like, 600 people at a firm to do spreadsheets... And by the way, nobody's gonna do any spreadsheets anymore. [chuckles]

   4. JAJack Altman18:14

      That's true, too. [chuckles] That's over.

   5. MVMike Volpi18:15

      I think you can have actually very compact organizations Of people that do those things very well. Doing those things very well take actually a fairly diverse skill set. So once you start trying to overspecialize, like, you know, this VC is a good sourcer, but they have bad judgment.

   6. JAJack Altman18:34

      Should never do that.

   7. MVMike Volpi18:35

      This one's a great salesperson-

   8. JAJack Altman18:36

      Yeah

   9. MVMike Volpi18:36

      ... but they can't source. You know, this one's a great operating partner, but they-

   10. JAJack Altman18:39

       Now you're trying to stitch together like five people to do one deal.

   11. MVMike Volpi18:41

       No. So I would say the firms of the future are probably leaner and more concentrated to groups of people that are well-rounded at that suite of four skill sets.

   12. JAJack Altman18:52

       On that point, the way you described it, you know, was the loop of the strong reference from being a great board member loops back. You can't then transfer it to somebody else doing the next deal. Like, it almost has to be one person.

   13. MVMike Volpi19:02

       No, I agree. Venture capital has gone from this sort of, uh, boutique business to the scale business of, like, I administer $20 billion.

   14. JAJack Altman19:12

       And-

   15. MVMike Volpi19:12

       So if you wanna call that venture-

   16. JAJack Altman19:13

       Administer is a funny way to say it. [chuckles]

   17. MVMike Volpi19:15

       If you wanna call that venture, okay, then you have all sorts. But in terms of actually happen- helping companies grow and develop in, in, in true startup mode, then I think it's smaller firms with, um, that set of skills demonstrated by as many people in the firm as possible.

   18. JAJack Altman19:33

       I suppose also there's gonna have to be something around the sort of like the generational transition ability of the firm has gotta be like the thing that makes it last beyond the founders and-

   19. MVMike Volpi19:42

       Yeah, but I mean, you know, that's the trickiest thing at every single venture firm.

   20. JAJack Altman19:46

       Yeah.

   21. MVMike Volpi19:46

       This fact doesn't change, which is the, the loop in VC is very long, right? So you're a brilliant investor at Benchmark. You're making investments today. Benchmark will raise a fund, the next fund you do, not because of the work you did, but the, your predecessors. So is the credit due to them or is the credit due to you?

   22. JAJack Altman20:04

       Them.

   23. MVMike Volpi20:05

       And this is, well, I don't know, because you're gonna generate value for the capital that you're raising now. So I think when legacy investors get greedy on the economics in a firm, things go poorly.

   24. JAJack Altman20:17

       Yeah.

   25. MVMike Volpi20:18

       That, that is the quintessential failure mode of every venture firm, which is legacy partners who no longer do useful investments-

   26. JAJack Altman20:25

       Yeah

   27. MVMike Volpi20:25

       ... take the disproportionate portion-

   28. JAJack Altman20:28

       It, yeah

   29. MVMike Volpi20:28

       ... of the promote.

   30. JAJack Altman20:28

       It seems to me it's almost like it was clearly the last generation's work that earned the next fund, but you have to give it all away anyway if you want the thing to-
8. 20:44 – 23:14

   The future of AI labs

   1. JAJack Altman20:44

      kind of thing.

   2. MVMike Volpi20:44

      Yeah.

   3. JAJack Altman20:45

      I wanna talk about AI now. Obviously, you know, I know you're, you're fully AI pilled. The whole firm's around AI. So I wanna talk about, you know, a few of the ideas here. What I wanna start with is just sort of level setting on your overall, I guess, assessment of the state of play of AI. And maybe let's start with kind of like what you think is happening at the labs, at the sort of like core intelligence and, you know, I wanna talk about sort of where you think the, you know, advantages and edges are, what you think around sort of like compute and capital and scale of these things. Like, what's your read of sort of like, you know, the state of AI at the sort of central lab level first?

   4. MVMike Volpi21:19

      The first thing I would say is my mental model of AI is a stack of things that start at the bottom with, uh, foundries and then semiconductors and then core models and the infrastructure that's associated with building those. And then there's sort of, uh, you know, middleware and application layer software that sit all stacked on top of each other. I think you were referring to the big labs themselves-

   5. JAJack Altman21:43

      Right

   6. MVMike Volpi21:43

      ... which sort of sit right in the middle of that pie.

   7. JAJack Altman21:46

      Mm-hmm.

   8. MVMike Volpi21:46

      My perspective right now is that the winners are the winners, and we already know. Um, I think, uh, you know, clearly OpenAI, Anthropic, Google, uh, I would throw Meta in the mix right now, and if Elon can get his act together at X.

   9. JAJack Altman22:01

      Yeah. Yeah. Those are the five.

   10. MVMike Volpi22:02

       Those are the five.

   11. JAJack Altman22:03

       Yeah.

   12. MVMike Volpi22:03

       Why those five? And that's because if you think about what are the vectors, what are the forces that make one model company better than the other one? Right now, compute and access- availability of, of compute and chips dominates. Compute is very highly correlated with capital, and you are talking about a group of companies that spend fifty to a hundred billion conservatively a year on compute. Now, you show up and you're a new company X, and you're like, "Hey, you know, I raised two billion." And it's like-

   13. JAJack Altman22:36

       Yeah

   14. MVMike Volpi22:37

       ... nicely done. You're about an order of magnitude, if not more, at a disadvantage than your competitor. So I don't see a scenario. Until model architectures change, and they may change, it's the bitter lesson to me right now, even if you came up with a far better model, and you could argue that the way OpenAI and Anthropic do their things are le- are a little more clunky, they can just throw compute at it and blow you away. I don't see that landscape changing. They are the dominant force in LLMs. Now, there are other kinds of models-

   15. JAJack Altman23:09

       Yeah

   16. MVMike Volpi23:09

       ... that could be kind of interesting, but-

   17. JAJack Altman23:11

       Yeah

   18. MVMike Volpi23:11

       ... at least in that world, game over.

   19. JAJack Altman23:12

       Okay, so two follow-ups

9. 23:14 – 32:49

   Open-source and neolabs

   1. JAJack Altman23:14

      on that. The first is, um, what do you think about then open source? And so, like, obviously in the wake behind the frontier, you have open source, you know, let's call it six, whatever, nine months behind. Obviously smaller models, cheaper, you know, served by, you know, inference companies. And there's obviously a lot of utility there. Is that going to be an important part in your view of the next few years? Do you think that that's gonna sort of be at the edges no matter what?

   2. MVMike Volpi23:39

      Open source is a, is a relevant phenomenon, but not a business in AI. If you look at the overwhelming amount of prompting that's happening, it's against the most advanced models, and that's the most monetizable, right? So advanced models being queried over and over again is where the dollars are, and that will sustain. Open source can exist, in my view, in the context of, you know, somewhat far behind and somewhat reliant On various forms of distillations and techniques that the big guys have already done. So what that tends to do is if you think about the monetization curve, it, it, it commoditizes the tail end of the curve, but not the front end of the curve, and the big dollars are still in the front end of the curve. So I think there, there will be. The asterisk there is that as-- if you're creating an open-source model that's very close to the front end, you're by definition using a lot of compute, and you need to have capital, you need to have money to get that compute. And you're seeing even the most staunch open-sourcey firms not be so open-source anymore. The latest Qwen model is closed. Muse Spark is closed. That's not a coincidence. They're spending a lot of money training those models. They're not just gonna, like, open them up.

   3. JAJack Altman25:00

      Do you think the frontier labs will stop allowing third party to use their frontier quite as much because of the compute crunch stuff?

   4. MVMike Volpi25:07

      It is likely that that will be the case.

   5. JAJack Altman25:09

      Let's say that that happens, then what, what are the impacts of that? If, you know, the, if the big labs start to say, "Hey, you can sort of, you know, you can access our old models, but the new stuff is only first party."

   6. MVMike Volpi25:19

      Well, I mean, what it'll do is it'll cause the open-source stuff to be even further behind. And by the way, the- temporally, you can have blips. So, like, you know, Jensen can get the idea that he really wants an open-source model, so he can go to Reflection or whatever and give them ten billion dollars. One generations, they can catch up, and then-

   7. JAJack Altman25:34

      Right

   8. MVMike Volpi25:34

      ... they, they'll fall behind again.

   9. JAJack Altman25:34

      But it's a one-time thing.

   10. MVMike Volpi25:35

       It's a one-time thing, yeah. You c-- I don't think it's continuous. I do think that you'll, you'll have-- I mean, open source will be relevant. It's relevant in one more context, which is, at least in today's world, and I don't know if this will sustain, but in today's world, if you post-train a lesser model enough, it will perform a small number of tasks just as well as the big models can, right? Essentially, open source can exist as the underlying layer of companies that are post-training them for specific personalized or business or corporate use. That exists, and there may be a business model somewhere out there if these post-training kinds of companies are quite successful, that they can provide financing for open source to be closer in to the big models. But open source out of the kindness of your heart-

   11. JAJack Altman26:24

       Mm-hmm

   12. MVMike Volpi26:24

       ... which was the Qwen, the, the DeepSeek, Kimi, Llama.

   13. JAJack Altman26:27

       Doesn't make sense.

   14. MVMike Volpi26:28

       No. I mean, who's gonna go spend fifty billion dollars to give it away? I mean, it just doesn't make sense.

   15. JAJack Altman26:33

       It made sense for a minute, or what do you think was the argument for it at the time?

   16. MVMike Volpi26:36

       I don't think people forecasted how much money it would take to train these bigger models.

   17. JAJack Altman26:40

       Yeah.

   18. MVMike Volpi26:41

       I don't think people expected it. I think, you know, decisions like why was Llama free, my guess is the folks at, at Meta looked at all these people and said, "We can't exactly monetize this, but we'll try to commoditize their market by putting out something that's free." And I think that that's passed.

   19. JAJack Altman26:57

       Yep.

   20. MVMike Volpi26:58

       That's passed, clearly.

   21. JAJack Altman26:59

       Yeah. I mean, it seems like once we saw that it was tapping into labor budgets for real instead of, like, software spend, at that point, it's not really about price. It's about value.

   22. MVMike Volpi27:07

       Yeah, exactly.

   23. JAJack Altman27:08

       That's the open-source side. And then what about the neolab side? 'Cause that's, like, obviously the other potential vector here, and I would argue that's probably, like, one of, if not the hottest venture segments right now that is getting backed at, you know, huge dollar amounts, huge prices. Like, what's your read on why that's happening?

   24. MVMike Volpi27:24

       Yeah. Well, we largely have not invested in neolabs because of my thesis that the big labs are gonna win. It is difficult to imagine that there will be an algorithmic improvement, uh, that will allow a new lab to be competitive with the capital that the big labs are throwing at it. Not to mention the fact that the big labs, they're not sitting there clueless, like thinking like, "Oh, yeah, there's no other algorithms here." They're, they're doing their own research of what the next generation will be. I don't see a scenario where there's a more clever architecture to a model that outperforms dramatically the big guys. Now, there are a couple of areas that I find somewhat interesting, and they-- those usually sit in pockets where there is a set of proprietary data that the model can be trained on-

   25. JAJack Altman28:11

       Hmm

   26. MVMike Volpi28:11

       ... that is not available to the big labs. So if you think about, uh, uh, the core of the training that happens for the large models, it's the Internet. The Internet, and the Internet is largely available to everybody. If there's pockets of the Internet that are not available, you can pay for it and open it up and get that stuff. Any model that sort of bases its training on Internet-available data is likely to not be as competitive with the big labs. However, there are pockets where you need, you need or have proprietary data. Uh, we're investors in Periodic Labs. Uh, why is that interesting to us? They create their own data through their own labs, and they do training and reinforcement based off of that. We are interested in robotics. Why? Well, robotics data is not broadly available on the Internet. However, you can either teleop it or have remote workers, uh, uh, create data, but you have to basically generate the data that your model trains on. So long as that data universe is reasonably private and not available to everybody else, then the people who have the right data strategy can actually stand out. So there are pockets where I think different kinds of models can be used for different kinds of orthogonal directions than the classic core models. But the neolab that comes along and says, "You know what? I'm really good at RL."

   27. JAJack Altman29:30

       Right.

   28. MVMike Volpi29:31

       "And, you know, because we do RL better, we're gonna beat the other guys." And I'm like, "You know-

   29. JAJack Altman29:35

       Day late and RL too

   30. MVMike Volpi29:36

       ... OpenAI got the memo on RL. They didn't miss that memo." [chuckles]
10. 32:49 – 36:51

    The compute race

    1. JAJack Altman32:49

       What's your read on the overall compute situation? So like one framing of this is that basically like the demand for AI is just going absolutely vertical much faster than can, compute can get online. What do you think is, like, the likely ways this plays out? You know, if like the labs, you know, Anthropic adds ten billion of ARR, you know, a few more mon-- It's just like, how, how do you think this ends up shaping, you know, maybe down through the stack? You know, we were talking about the labs, but like what, what will the ripple effects be, and like, how do you think about this dynamic if demand really is surging at this rate?

    2. MVMike Volpi33:18

       It used to be that the demand for GPU compute was largely on training. Now, with this explosion in inference, you have the twin effect of bigger models being trained and tons and tons of inference running on the same systems. So that means that the load or the demand for compute is kind of skyrocketing, and it's likely that it will continue for some time. The supply side of that is basically TSMC wafer starts.

    3. JAJack Altman33:48

       Yeah.

    4. MVMike Volpi33:48

       There's only so many of those. So anybody that bought compute historically probably got it cheaper than anybody that will buy it in the future. And I think one of the very smart things that OpenAI did is they bought a lot, a lot, a lot of compute ahead of time. As a result, I think, Google aside, 'cause we can talk about TPUs in a second, but Google aside, they probably have the lowest cost of compute of any player in the market right now.

    5. JAJack Altman34:14

       Yeah, there's the price of it, and then there's also just the availability of it.

    6. MVMike Volpi34:17

       The availability of it.

    7. JAJack Altman34:17

       It's just like, you, you know, money doesn't get you more wafers kind of thing. You just gotta wait.

    8. MVMike Volpi34:20

       Yeah, exactly. On the other hand, the value, particularly on the inference side, that the value that people are seeing from the, the inferencing of these models is very high. Like, you know, you sit there and you do a spreadsheet, and you ask Claude to do the spreadsheet for you, and you go, "Wait a minute, I'll pay triple the amount of money that I'm paying for." So in some sense, we're getting into the fact that you'll be able to sell that, the output of that compute at a much higher price point in the future, given how productive and useful it is. Today, we live in a world where NVIDIA is the gatekeeper to all compute. Again, TPUs aside, 'cause that's a whole interesting side conversation of what Google decides to do with TPUs. I don't see that sustaining, and I do see more specialization in the kind of compute.

    9. JAJack Altman35:03

       You don't think NVIDIA's dominance will sustain?

    10. MVMike Volpi35:05

        No.

    11. JAJack Altman35:05

        What do you think will happen?

    12. MVMike Volpi35:07

        I think you're gonna have compute that is oriented towards specialized tasks that are not necessarily dependent on NVIDIA. So, for example, I'm a big fan of Cerebras.

    13. JAJack Altman35:18

        Totally.

    14. MVMike Volpi35:18

        Um, why do I like that one? It's not a particularly good training chip, although Andrew will argue with me that that's not true, that's not true. But, you know, let's leave that as where it is. In inference, it's a godsend. It's super fast, and it's made certain compromises that make it very, very good for that. I think that's one. I think we're gonna see more of that style of architecture that's very good for inference, for example. I think you're gonna see more of these. There's even Further evolutions of, you know, back in the old days, we used to call them ASICs, but if you look at Etched or Talys, these are companies that are fundamentally baking in some parts of the neural network weights into the chip itself, which will make it even faster than Cerebras, even less flexible than Cerebras. So I think that you're seeing this evolution towards mission-specific silicon rather than general purpose silicon, and that will happen and will take the load off of, uh, be- everything being Nvidia. But I do think that we're gonna do a lot of work in that bottom layer of the infrastructure to limit ours- liberate ourselves as an industry from a stranglehold of chips.

    15. JAJack Altman36:21

        Yeah. Feel like, um, the US probably can't invest enough, fast enough in this.

    16. MVMike Volpi36:25

        Already some, a bunch of the GPUs are being built in Arizona. Like, I think, uh, s-some of the Cerebras chips are ma- are made in Arizona. I know Intel is trying to come online with their fabs to do, uh, independent silicon. I don't know that that's still worked yet. But I do think we're gonna see a, a huge amount of capacity, and then obviously there's the geopolitical issue of Taiwan and, you know, I-

    17. JAJack Altman36:46

        Yeah

    18. MVMike Volpi36:46

        ... can't imagine that that same situation will be true in five, six years.

    19. JAJack Altman36:50

        That would be great.

    20. MVMike Volpi36:50

        Yeah.

11. 36:51 – 45:49

    The future of software

    1. JAJack Altman36:51

       What about, you know, flipping to the other side, you know, we've been at the bottom of the stack, like the application layer. Obviously, over the last few years, there have been a bunch of amazing application companies built. Do you feel like there's durability there, and if so, what do you think the source of it is? Or, you know, what are the places that you think are risky? Not talking about pre-AI SaaS. I'm talking about like an AI native, you know, seeming application. I guess let's start there.

    2. MVMike Volpi37:12

       In a given business, there are two things that are fundamentally proprietary. One is we talked about data. Every business has a bunch of data, and it's their most relevant data. And the second one is business workflows, so how you do and conduct business. I think companies that can capture the data and the workflows that exist inside of a business or in a, in a given industry vertical that the big labs are unconcerned about or don't have access to those things can survive as application companies.

    3. JAJack Altman37:46

       Mm-hmm.

    4. MVMike Volpi37:47

       If your basic concept though is, you know, I take a document, I send it over to, to, uh, to OpenAI API or, or, or Anthropic API, it comes back and I show it to you this way-

    5. JAJack Altman38:00

       It's not enough

    6. MVMike Volpi38:00

       ... that's not enough. What will also happen is over time, the, the OpenAI's, Anthropic's, and Google's of the world will l-look at the most interesting TAMs and saying, "Wait a minute, I'm gonna do that."

    7. JAJack Altman38:13

       Yes.

    8. MVMike Volpi38:13

       So, you know, there's Anthropic for legal-

    9. JAJack Altman38:15

       Yeah

    10. MVMike Volpi38:15

        ... or Anthropic for finance or whatever.

    11. JAJack Altman38:17

        Yeah.

    12. MVMike Volpi38:18

        This is not their core business, so they're gonna have varying degrees of success.

    13. JAJack Altman38:21

        But it'll do eighty percent of the job.

    14. MVMike Volpi38:22

        But it'll do the damage. Business verticals, like if you're in construction, there's a bunch of workflows in construction that it's not likely that OpenAI or, or Anthropic or Google will care about.

    15. JAJack Altman38:33

        Also, I personally, I don't know, may-maybe this is something I need to let go of, but it would be surprising to me if people no longer wanted UIs, but we'll see. If everything just became chatting.

    16. MVMike Volpi38:43

        Uh, no, I, I'm, I'm in that camp. You know, it, it was interesting when you were talking to Brett, he was talking about like systems of record and how systems of record are important. I actually think one of the reasons why s-Salesforce sustains is because every salesperson knows how to use Salesforce.

    17. JAJack Altman38:56

        Yeah.

    18. MVMike Volpi38:56

        So actually, the human interaction [chuckles] with the system is the single highest-

    19. JAJack Altman39:00

        It's the best

    20. MVMike Volpi39:01

        ... moat-

    21. JAJack Altman39:01

        Yes

    22. MVMike Volpi39:02

        ... that, that, that anybody has from, from breaking in. That might change over when agents do the work-

    23. JAJack Altman39:08

        It may

    24. MVMike Volpi39:08

        ... for us as humans. But as AI pilled as I am, I think that takes a while.

    25. JAJack Altman39:12

        Yeah.

    26. MVMike Volpi39:13

        And so that, that retains some l- the UI does retain some level of sustainability for some period of time.

    27. JAJack Altman39:18

        What do you think about AI like service as a software, fully do the work type of things where, you know, instead of selling you, you know, accounting software to an accounting firm, we're just gonna sell you completed accounting work kinda thing. Like do you think that's where stuff ends up? Are you more excited about that, or are you more excited about the, you know, software looking companies?

    28. MVMike Volpi39:37

        Well, I answer the question two ways. One, I think it's a high bar today, for AI systems today to actually offer accounting as a service. You still... You, you, you may not need the entry level, lower level white collar work, but you still, in today's world, need a lot of contextual and other forms of knowledge that accountants have about their clients, about the systems, about how all things work. So I think we're still in an era where purely delivering a, a, uh, uh, sort of service from AI with no humans involved, I think we're a little early for that.

    29. JAJack Altman40:13

        Particularly 'cause in some of these you need the verification of a human stamping. It is actually part of the value.

    30. MVMike Volpi40:17

        Yeah. You know, I think customers obviously will want some human to have supervision over it, and then humans, we have some very interesting sporadic contextual knowledge about things that's actually surprisingly helpful. To the point earlier about VCs and what makes us different than introducing you to customers and, and employees, there's just like random little bits of knowledge here and there that we collect over time-
12. 45:49 – 47:50

    Investing in defense

    1. JAJack Altman45:49

       And then how about outside of AI? Is there anything that you're investing in that's not AI?

    2. MVMike Volpi45:54

       Right now it's, like, ninety percent plus AI, but I would say defense tech is an interesting area. In defense tech too, there's a lot of AI mixed into it.

    3. JAJack Altman46:03

       Yeah, sure.

    4. MVMike Volpi46:04

       Um, but I do think that we're seeing geopolitical shifts, uh, that, uh, are reasonably permanent for some time. Uh, take for example, um, the dynamic between the US and Europe and defense spending. I don't see European defense spending being reduced. It's probably gonna be dramatically increased, and so there's opportunities there. It's the right tailwinds. I do think that with companies like Anduril and to a degree Palantir being successful at breaking into the market of selling into the US defense infrastructure will be an inspirations for both sides, for, for the-

    5. JAJack Altman46:44

       I was gonna say, it does both things. It, it both, it unlocks capital and talent, but then it also sort of warms up the DoD to believing that, you know, these companies can work with them and take their understanding seriously and all that.

    6. MVMike Volpi46:55

       Absolutely. And I don't think that's going back. You know, the sl- sort of like the, you know, Pandora's box has been opened on that front. So I do think that that's an interesting sector. You know, it's interesting 'cause there's always these philosophies like, oh, do you, do you invest in weapons and not invest in weapons? And when I was at Index, uh, we didn't do defense investing at the time, and I remember looking at Anduril and thinking, "This is gonna be a winner." And I had a conversation with Trey Stevens, and I was like, "Hey, I don't think we can do this because we don't do weapons." And he was like, "I don't think you get the mix here. Weapons are a system that, uh, deters violence because the more weapons one side has, the other side have it, the less likely as they are to go to war." Now, this president has disproven that, but leaving that [chuckles] aside, I think the logic was pretty strong. And, uh, so now I'm more of the belief that, uh, I, I think the right kind of defense investing is the right thing to do.

    7. JAJack Altman47:49

       Yeah, I

13. 47:50 – 50:35

    From operator to investor

    1. JAJack Altman47:50

       think so too. Before you joined Index, you were, like, an, a founder, you were an operator. Do you feel like that mattered looking back? Like, was it valuable to you to have done that? Do you think... Would you have been an even greater investor had you just been an investor the whole time, or do you think that if you sort of, like, think back and reflect on those chapters, that it, like, the net effect was that it made you a better investor than just more experience would have?

    2. MVMike Volpi48:13

       First of all, I really enjoyed being an operator It was super fun to be at a fast growth company, to see things explode and grow. You know, I joined Cisco, we were a few hundred people. I left, we were fifty-five thousand.

    3. JAJack Altman48:25

       Oh my God.

    4. MVMike Volpi48:25

       You know, you know, like-

    5. JAJack Altman48:26

       In how long?

    6. MVMike Volpi48:28

       I was there for thirteen years.

    7. JAJack Altman48:29

       Wow, that's crazy.

    8. MVMike Volpi48:29

       But it, it, it grew to that size in about ten.

    9. JAJack Altman48:32

       Wow.

    10. MVMike Volpi48:33

        And by the way, you feel somewhat like you participated in something that's reasonably momentous. Like-

    11. JAJack Altman48:37

        Yeah

    12. MVMike Volpi48:38

        ... [chuckles] you know, I, I got there when nobody had the internet, and because of the products that we made, everybody got the internet.

    13. JAJack Altman48:44

        Wow.

    14. MVMike Volpi48:44

        I mean, that's-

    15. JAJack Altman48:44

        I mean, that's only a, you know... You could count the companies on one hand that have had that headcount growth.

    16. MVMike Volpi48:48

        Yeah. Yeah, yeah.

    17. JAJack Altman48:49

        Yeah.

    18. MVMike Volpi48:49

        Not just the headcount growth, but the-

    19. JAJack Altman48:50

        No, of course. Everything that's, that's implied with that

    20. MVMike Volpi48:52

        ... the, the, the societal impact-

    21. JAJack Altman48:53

        Yeah, of course

    22. MVMike Volpi48:53

        ... of what was created.

    23. JAJack Altman48:54

        Yeah.

    24. MVMike Volpi48:55

        Just because of the pure enjoyment of having been there, I'm happy I did it. How does that, how is that relevant in the context? I, I do th- of, of the rest of my life, I do think that the old Steve Jobs things applies, which is you gotta connect the dots looking back. Now that I understand VC better, and by the way, I still get... I still learn every day, but I understand it a little bit better. I didn't actually realize how important having that card of b- having been an operator was. Because there's a lot of VCs, everyone's smart, everyone's got a degree from a good school, everyone's got a big fund. You gotta differentiate yourself, right? Like when an entrepreneur is selecting a VC, I am the product. What makes this product different than any other product in the market? And in my case, having had that experience of growth, recruiting, customers, relationships, all that was enormously useful for me. I'm not of the camp that you have to have been an operator-

    25. JAJack Altman49:53

        Oh, yeah

    26. MVMike Volpi49:53

        ... because, you know, you look at Peter Fenton, the biggest thing he's operated was a lemonade stand. But [laughs] he is-

    27. JAJack Altman49:59

        Well, shout out Peter. Yeah, this is for you.

    28. MVMike Volpi50:01

        But, but he is a, he is one of the greatest VCs of all time.

    29. JAJack Altman50:04

        He is.

    30. MVMike Volpi50:04

        And so y- we all, as a venture capitalist-
14. 50:35 – 56:21

    Thriving founders today

    1. JAJack Altman50:35

       it.

    2. MVMike Volpi50:35

       Yeah, absolutely.

    3. JAJack Altman50:36

       When you think about what types of founders are thriving today, has it changed versus before this AI thing? Is it, are there different mindsets, different types of educational backgrounds, different work experience, different age? Like have there been updates that are material to you that change what kind of founders you're interested in?

    4. MVMike Volpi50:53

       I think the biggest difference is the level of maturity that some of the younger founders have relative to even fifteen years ago. There is so much content available, so much peer community available, that you take the average twenty-year-old, twenty-one-year-old, and they're showing up with so much knowledge-

    5. JAJack Altman51:13

       I know

    6. MVMike Volpi51:13

       ... compared to a generation ago.

    7. JAJack Altman51:15

       I know. I was twenty-one fifteen years ago, and when I meet a twenty-one-year-old today who's like a founder of... I'm just like, "Oh my God." Like I wasn't there when I was twenty-seven.

    8. MVMike Volpi51:23

       Dude, I was twenty-one in the Stone Ages, so. [laughs]

    9. JAJack Altman51:25

       Yeah. There you go. [laughs] Two, two, two fifties ago. But I'm just like, it's crazy what people know now, and I think it's going... I think it's accelerating.

    10. MVMike Volpi51:32

        Yeah.

    11. JAJack Altman51:32

        'Cause I think, you know, now a twelve-year-old today is gonna be using AI tools. By the time they're twenty, they're gonna be eight years into this.

    12. MVMike Volpi51:38

        And it's not just like book knowledge or AI knowledge. There's also a lot of just commercial knowledge.

    13. JAJack Altman51:42

        Yeah. What do you think that's about?

    14. MVMike Volpi51:44

        Uh-

    15. JAJack Altman51:44

        Is that from the online content? Where is that from?

    16. MVMike Volpi51:47

        Yeah. I mean, it's all of the above. You know, we're absorbing content from all sorts of sources. It's peer groups, it's online, it's stories that we tell, podcasts that we listen to.

    17. JAJack Altman51:57

        Here we are.

    18. MVMike Volpi51:58

        Especially yours.

    19. JAJack Altman51:58

        That's right.

    20. MVMike Volpi51:59

        But I think people accumulate knowledge from all these sources at a very young age and-

    21. JAJack Altman52:03

        It's incredible

    22. MVMike Volpi52:04

        ... it's extraordinary.

    23. JAJack Altman52:04

        Okay.

    24. MVMike Volpi52:04

        I mean, it's absolutely extraordinary.

    25. JAJack Altman52:05

        Can I ask you an offensive question?

    26. MVMike Volpi52:06

        Yeah.

    27. JAJack Altman52:07

        So you got all these young founders. You're not old, but you're not, you're not a young VC exactly.

    28. MVMike Volpi52:11

        Yeah.

    29. JAJack Altman52:12

        Um, and so, and you're doing it very successfully. What is the mindset? Like what do you have to do to be not a twenty-five-year-old VC?

    30. MVMike Volpi52:19

        First of all, thank you for calling me old.

Episode duration: 56:21