Invest Like the Best with Patrick O'Shaughnessy
00:29:58 · Gavin Baker, Patrick O'Shaughnessy
That's happening to like a cutting edge of public cloud Companies, and then you have this whole wave of AI natives, they're leading it to this so hard, and they're not hiring humans, they're just putting it mostly into tokens, they're not slowing down. And then you have companies on the east coast of America who have like barely adopted AI, companies broadly speaking, you know, not in the coast, who maybe aren't as cutting, and then Europe, who's just trying to figure out how to regulate AI, you [00:30:30] S0: know, [00:30:31] S2: before [00:30:32] S0: using it. So just
00:30:33 · Gavin Baker
[00:30:33] S2: like there's kind of these differential waves of adoption all happening at the same time, but the thought I can't get out of my mind is like, I think I said it maybe last time, but just y'all access it or not, like five hundred thousand people in the world, two hundred fifty thousand maybe are using agentic AI, and we're in an acute compute shortage. There's seven or eight billion people on the planet. What happens when we go from five hundred thousand to one percent to a hundred million, you know, to five hundred million? It is interesting, you know, a lot of people, I do think it's like helpful to post on X to see the pushback and a lot of people are saying, "We accept your argument that hyperscalers are a dirty, get us compute reprices, their operating cash flows gonna accelerate, and maybe we can fund this, but like, where's that operating cash flow gonna come from? Where is the customer?" And kind of definitionally, it has to either come from faster economic growth through productivity, kind of Satya's comments, like "Either we're gonna start growing ten percent or we're not." Or labor substitution. And for sure, I think in a lot of these AI natives, you're seeing labor substitution, but not because they're firing people, they're just not hiring nearly as many humans. The gross profit dollars per FTE in A16Z, ICANN, a bunch of companies that have done this work, they're vertical, particularly relative to past generations of startups. And then it is interesting, are you doing any surveys of your companies and their token spend relative to labor spend?
00:32:05 · Patrick O'Shaughnessy, Gavin Baker
[00:32:05] S0: Oh yeah, I mean, it's tokens as a percent of total comp spend or something like that. And what, what are the ranges you've seen? I mean, like in the really pilled companies, like it gets really high, twenty percent, twenty-five percent. [00:32:17] S2: Our friend Nile Patel at his, at his company, he's an ASI backseat, but he's at thirty percent. [00:32:23] S0: That's probably the [00:32:24] S2: highest one I've heard. I've actually heard a fifty, and there's twenty-five trillion dollars in knowledge work Let's take your twenty percent number, that's five trillion, and that either comes out of labor substitution or faster economic growth, and we really, really, really want as humans to come from faster economic growth. [00:32:45] S0: One interesting thing I heard this morning from one of the great leading technology CEOs that's founded several companies, if you look at the founder-led and controlled companies and adjust for some of the like COVID-era over-hiring, nobody's really laying people off. These are the people that would probably be most quick to adopt AI to become more efficient or whatever, like they're not really doing jack-assed like huge-scale layoffs, which probably tells you something about where they think there will be lots of opportunity to still have people plus--
00:33:12 · Gavin Baker
[00:33:12] S2: A hundred percent. Well, the bull case, you've- I've seen charts from Cognition, Rayop, and Stripe that the companies that are spending the most on AI are growing meaningfully faster. Yeah, I love that Cognition index. Yeah, the Cognition index is wild. All the skeptics will point out rightfully, it's not really controlling for industry, but then if like you dig down into it, I think one of them gave an example of, I forget if it was a plumber or an HVAC contractor, but like everybody who's a blue collar worker is doing great 'cause of AI. By the way, something that I think we should touch on These LTAs. So everything's in a shortage. If there's weakness, it's just 'cause we can't energize the gigawatts fast enough. The gigawatts are gonna get energized like regulatory policies moving in a good way, the turbine manufacturers, the diesel genset manufacturers, you know, you're ripping turbines off old airplanes and, you know, reconditioning them and then repurposing them. There's crazy things happening. Capitalism's very, very good at this. But I do think one of the most important questions in the market, and like a transition in the market that I got wrong, is we are shifting, particularly for memory more than anything else, from crushing numbers in the short term to they are trading short term upside for these, what they call supply chain agreements, long term agreements, LTAs. There's many flavors, but customer pre-pays, there's a floor and a ceiling. And this comes back to the point about labor, because, you know, a lot of people after firing too many people during COVID were really reluctant to lay people off. They talked about labor hoarding, if you remember a few years ago. You remember this? Yes. Let's just think about the game theory of breaking an LTA. So there's four companies that matter at scale. There's Amazon with their Trademms, there's Google with their TPUs, there's AMD, and then there's Nvidia, who's like much bigger than everybody else combined. Let's just say it's two thousand and twenty-seven, and it's very important to realize memory is, the more memory you put with Flop for a given unit of compute, the more tokens you get out.
00:35:22 · Gavin Baker
It's the single most important thing you could do to increase token output per unit of compute, and then that obviously definitionally actually lowers costs, which is why the demand hasn't responded at all negatively. There's been no elasticity just because it's the access that is dominating all others. And this is at some level like a giant Game of Thrones or Ippar's between these companies. Okay, it's two thousand and twenty-seven or twenty-eight. You're vaguely tempted to break one of these LTAs and try and get a lower price. But to a large degree, market shares, I think for the next several years, are going to be determined by supply chain allocations and kind of what you have pre-purchased. So if you break the LTA, this is assuming we're not in a severe oversupply situation, the game theory even holds in a severe oversupply situation, if you break your LTA, and then in the next Two or three years, for any reason, leverage shifts back to the Bibury guys, you're out of business. It's over. Let's just say Google breaks an LTA, there's an oversupply, I'm making this up at twenty-eight, twenty-nine, they break their LTAs. Well, if they're breaking their LTAs, it probably means, you know, your oversupply, prices are coming down, and then, you know, capacity naturally contracts. Well, what do you think's gonna happen to Google's allocations? And then, you know, this is a cyclical industry, and oversupply is followed by undersupply. What do you think they think is gonna happen to their allocations next time? So I just think given that this is the axis around which kind of everything is revolving, you might blow up your entire business and your franchise by breaking an LTA, and that was never the case before. Apple, who cares? They don't have a competitor, they're overwhelmingly the largest purchaser. This is, you know, going back three, four, five years, they know they can do whatever they want with no consequences, 'cause their volume is so big that even if they like super screw Heineken, Micron will of course- Take them. This is just different, you know? You have at least four players, didn't you have all the startups, your investor and Etched. If you break an LTA, they just say, "Okay, fine, great, you broke the price agreement, we're gonna break the volume agreement, and screw you, we're gonna give the volume to your competitor.
00:37:43 · Gavin Baker, Patrick O'Shaughnessy
You just lost share, you know? Nvidia's dominance, the current environment to which it favors Nvidia, it is a little hard for me to understand why it's trading at such a low- Low multiple. In other words, if you need to be able to finance the chips, and you do, nothing's more financelable than an Nvidia GPU, nothing. If you need to get land and power, well, they're doing a very good job of playing that chess game in matchmaking, and then they've rolled out this really clever new business model, which I would describe as kind of like a credit wrapper with a revenue share if GPU prices are backstop it, yeah, yeah. Yeah. And this could lead to them having a really Really giant cloud business effectively through royalties really quickly, and it is another way of kind of alleviating this cash flow mismatch, like, hey, we're making all the cash This isn't really vendor financing, 'cause they're not loading them the money. Somebody else is loading the GPU buyer the money. They're still making equity investments, but it's not like you're just putting money into someone, then some of that money was used to buy your chips, even though Nvidia said that they write into all their equity investments that the money can't be used to buy Nvidia chips, but obviously money is fungible. Funny thing, makes no [00:39:02] S0: sense. [00:39:03] S2: Yeah, but, you know, I think at some level it probably makes everybody feel better. [00:39:06] S0: What would you do if you were the mem- like if you were the CEO