Invest Like the Best with Patrick O'Shaughnessy
00:31:00 · Alex Sacerdote
[00:31:00] S2: Yeah. And so the s curve is our map for looking in the future. Now a lot of people were worried about tech because they thought there was so much disruption you could never trust a company to be a long lived asset. What we found over the years is some of the competitive advantages within the digital world are more powerful, if not equally or more powerful than in the offline world. You've got the network effect that was so powerful for LinkedIn, Facebook, Alibaba, you name it. Then you can become an industry standard. Oracle and Bloomberg are the industry standard. Oracle charge a lot and there's free versions. There's open source Oracle, but they had all the database administrators. They had all the software that was tuned to work with them. They basically had a choke hold on the relational database market forever. You can get to scale very quickly because these s curves grow and all of a sudden Anthropic is doing 30,000,000,000 in sales, or Amazon had so much scale and they got it quickly. So they got a Walmart size scale advantage in five years versus forty years for Walmart. So you can have network effects scale. You can become industry standard. You can be a platform that people build on top of. You can have critical intellectual property, which was what Qualcomm had. You couldn't make a phone without paying them. Or ASML has critical intellectual property. You can't make a chip without their lithography. You can also have brand and brands very important because Google, Amazon, they got to grow. They never had to advertise. Elon's never had to advertise for anything and cost to acquire versus lifetime. It's the whole business model. Almost all the companies I mentioned have all of these rolled into one. Sometimes we can notice these things before the rest of the world. One of our high points was we pitched Amazon for AWS at twenty thirteen at the Robinhood investors conference. And we said the bulls have no idea what they're sitting on. Amazon's won the war before it even started. And at that time we said there's Coke and there's no Pepsi. Did turn out there was Pepsi, but it was big enough to last. And we could see they had a seven year lead. So first mover is important. Then they became a whole ecosystem and a platform. Then they got scale. So they were 10 times the size of everybody else.
00:33:26 · Alex Sacerdote, Patrick O'Shaughnessy
Nobody could invest in the R and D to catch them. But you're right that if you don't have a competitive advantage, you can be in the best s curve of all time. [00:33:36] S0: And still lose out. [00:33:37] S2: But if your name was Rim, Pong, Nokia, HEC, LG, Motorola, I can go on forever. Zero zero zero negative negative negative negative. And that's what we saw at the foundational model layer where there's like 50 companies trying to do that and they all have fallen away and two or three have emerged at the top. There's a lot of reasons to think they will continue to hold their position. [00:34:02] S0: Google's a little trickier because they have this other huge massive complex business attached to the Gemini business. But if you take Anthropic and OpenAI as pure plays, and you dig through those, and you reason through their competitive advantages, why aren't they susceptible to erosion of those things?
00:34:19 · Alex Sacerdote
[00:34:19] S2: Of all the s curves we've done, AI is by far the most complex and the fastest changing. We have to keep in mind that there are risks. The rewards are the highest because we're talking about a market in the trillions, maybe clouds 800,000,000,000. This might be we now think three to five, but there's higher risk, higher reward. But let's just say with Anthropic now, it looks like they have critical intellectual property. Generally, they've been able to maintain their high market share in code. Number two is they've built a strong brand for enterprise to where go talk to any CIO and the first thing they'll say is Claude. Three, they're gonna have escape velocity and scale. And what was scary for OpenAI and Anthropic fighting these big companies like Google was they had these huge cash cows. And to both of the management teams credited OpenA and Anthropic, were able to work in these super capital intensive industries and find ways to raise capital. And certainly with Anthropic, with their 10 x sales growth and their fundraising ability, it looks like they've reached escape velocity. So now they have scale. And the other thing that Anthropic and OpenAI could have is Anthropic, now that they're leading in code, they set that code back onto their model, and it's this concept of the recursive improvement. And if you look at the pace of their innovation, it's accelerating. Maybe they can have this lift off stage. OpenAI, they were focused on so many different other sectors. They're starting to do better in enterprise and their coding tools good, and they're starting to see accelerating growth on that side. And then look, the consumer franchise, it looks like enterprise right now is much better because you and I, we're willing to pay a lot because it's replacing human beings. Now consumer, maybe you can get advertising, but maybe they would pay for a claw bot type assistant if you can make that perfectly well for them. But they have gazillion eyeballs there. Things do shift. We have this charts that we almost do for all of our pitches. On the internet, the leader grows bigger, faster and wins. Most of the time the leader gets it. Shopify becomes the leader, just keeps on going. Amazon the leader keeps on going. SaaS company, x y z, you get the lead, it compounds on itself. And another thing is you need to be big.
00:36:48 · Alex Sacerdote, Patrick O'Shaughnessy
Another is scale, you need the compute, and you gotta pay for the compute. So there's only so many people that can do that. Those are some of the moats that we think are now showing up in this business. Now there are some exceptions to that rule, usually with the paradigm shift AOL, and then dial up went to broadband and they didn't make the change. Netscape came out early and it wasn't as strong of a business model. And if you talk to anyone in the Valley or any startups, they'll tell you that they're building on top of these three and the world's a huge place and the economy is a huge place that they'll be able to differentiate within those. [00:37:30] S0: I'm so curious then what you think all of this means for software. When I look through your portfolio, I don't see a ton of big software companies, enterprise software companies. I don't know if you once had them and sold them. But it's hard to have the experience of building really useful, cool little tools, even if they're still toys, and not have the thought of, wow, if I spend enough time on this, even if I'm not technical, maybe I could build a ERP equivalent replacement or something for my company. There doesn't seem to be a fundamental reason why that's not possible and then those companies could be in lots of trouble. Seems like everyone has a strong view on this one way or the other. I'm curious how you've approached those sorts of companies given that you don't seem to own a ton of them.
00:38:12 · Alex Sacerdote
[00:38:12] S2: Five years ago, we might have had 40 or 50% of our portfolio in software. And early on in our April 2023 webinar, we said definitely invest in chips first. But at the application layer, initially we thought these companies are huge. They have huge sales forces. They can take these AI APIs and build products and they have the data. This is gonna be amazing for software. Pretty quickly, we realized their AI products were not very good, they weren't moving the needle, nobody could charge for them. We basically sold almost all of our software. Entering this year we were net short, It really helped us in the first quarter. There's so many layers to this. I mean, the old way of software is like using pen and paper or it's like a horse and buggy. The new way of software is like a jet engine or frankly, the transporter from Star Trek. It's so revolutionary changing that it feels like it has to be disruptive. If it's not disruptive now or right away, the software companies have another problem which is their list on the to do list or priority list of any CIO has fallen a lot. So even if AI is not going to be disruptive, they're spending it on anthropic tokens because there's faster ROI there. Second, if they're spending all that money over there, it pushes on the budget, so that hurts them. Third, a lot of software companies were able to raise price every year, and now they're probably nervous about doing that. Then fourth, we'll see what happens with jobs because there's smart people on both sides of that but we are seeing some companies really gut their jobs.
00:40:10 · Patrick O'Shaughnessy
[00:40:10] S0: Free hiring or whatever Free hiring and