Invest Like the Best with Patrick O'Shaughnessy
· David George
[00:00:00] S1: I feel like I'm probably reasonably consensus on the excitement on the consumer side, I can put it into context around this upside around price that you get on the P x Q, especially if time spent continues to go up, which I think it will as the models get better and they have memory and things like that. I think on the enterprise side, one of the lessons I learned from SaaS and cloud, which by the way, the advancements of SaaS and cloud are tiny compared to the advancements of what AI is going to do, is I think maybe a little bit more expansively on what the companies can become on the enterprise side, but maybe I'm slightly more skeptical about what their ultimate business models will be. So, one of the really fun topics that people debate with high degrees of confidence that I have very low confidence in is what is the ultimate business models of these companies, and people put up these super compelling slides that are like, hey, the whole software industry is only $400 billion, but look at how big white collar labor is, and we're going to go get a ton of that. And to me that's a little bit hand-wavy, so there's a couple of areas where the business model has progressed in a compelling way to go tackle that directly. So, customer support is one, but because there's a very discreet task with very simple completion analysis that you can do, it's simple to price it on that. You can shift the business model from a seed-based thing for Zendesk or something to a new business model where if you successfully complete the task, you can charge on that. Maybe the next furthest developed area is coding, but it's not completion of a task, it's consumption-driven, and especially in the developer world, that whole world is used to paying things on consumption, it's how it has all shifted over the last 10 years, everything else I think is pretty TBD. It's going to be very hard. And I think when you see major technological shifts, it's very tempting to say, oh my gosh, there is so much economic value that all these companies are going to capture top down. The reality of doing it is much harder. And I always say to people, 90% of the technological surplus is going to go to the end users.
· David George, Patrick O'Shaughnessy
Just start with that as the assumption, whether it's consumer, whether it's enterprise, a funny analogy that I heard from somebody else is how is the steam engine ultimately priced? It wasn't priced based on replacing 50 laborers, competitive forces drove it to a certain price where there was an appropriate return on capital, but the vast majority of those productivity gains went to the end users of those machines, not the maker of the machines. So, I think something similar will probably happen in the enterprise, even with that, you can create the biggest businesses in the world. So, an analogy would be Apple, what would you pay for your iPhone? [00:00:00] S0: A lot more than I do. [00:00:00] S1: The sky's the limit. 90% consumer surplus is probably low, if the iPhone costs $1000 or something like that. So, I'd say the same for Google, I'd say the same for Facebook, it's going to happen in consumer, consumers are going to be the ones who realize the surplus. The same is going to happen in business, but I think the next generation of business companies can still be much bigger than the previous generation of companies given the capability gains.
· Patrick O'Shaughnessy, David George
[00:00:00] S0: When I last ran into you a couple years ago in person in San Francisco, we were talking about Waymo, and you were in the mode of intensely studying that company and thinking about it, which makes me very interested in this class of companies where you heard about Waymo, and self-driving as a service for a really, really long time with nothing happening, and then all of a sudden, the last time I was in San Francisco a couple weeks ago, it's just every other car, and the explosive nature of Waymo, as an example, is really cool to watch. There's all these other technologies, you might call them American dynamism and Andreessen Horowitz, whether that's robotics or small modular reactors, really exciting big technology ideas, which you understand the potential. Like if we had an in-home robot, that'd be awesome, but it's really hard to figure out how long it will take, maybe similar to how long Waymo took or something. How do you think about investing in those kinds of companies, where it's incredibly exciting, clearly if we had it and it worked, it would be really valuable, but it's really hard to know how long it's going to take to work? [00:00:00] S1: Often these are the ones that are the biggest market opportunity. Robotics is the biggest market opportunity, we are all obsessed with LLMs and diffusion models. [00:00:00] S0: Yeah, if you know it was going to work in five years, you'd put all your money in.
· Patrick O'Shaughnessy, David George
[00:00:00] S0: Yeah, if you know it was going to work in five years, you'd put all your money in. [00:00:00] S1: You'd put all your money into it. I happen to think it will take a little bit longer, part of that is informed by my experience with Waymo. I'd contrast maybe what Waymo does and increasingly Tesla and some others with what a robot needs to do, and it's very different. A car needs to basically stay in a lane, avoid anomalies, collisions, go a certain speed limit, find places to park... [00:00:00] S0: It's not simple- [00:00:00] S1: When I describe it that way, it's much more complicated than that, but simply put, that's what it has to do. I contrast that with what a robot has to do. What does a robot have to do in your home? [00:00:00] S0: A lot more degrees of freedom. [00:00:00] S1: Endless degrees of freedom. Make a cup of coffee, go do my laundry, but it took Waymo 10 years, and if you go back to the DARPA challenge, the whole industry, decades to get this point, two decades to get to this point roughly. So, my expectation is technology is advanced, obviously the generative AI techniques can be applied to robotics to help it go much faster, but I think it's going to take a long time. [00:00:00] S0: So, how do you invest in that?
· Patrick O'Shaughnessy, David George
[00:00:00] S0: So, how do you invest in that? [00:00:00] S1: We have an early stage team that is studying all the robotics companies, we meet them all, we're learning a ton, we're waiting for them to find the team that they can do an early stage traditional seed or series A investment in, and then at the growth stage, ideally they find that and we can invest in it, or one of these companies that we're not investors in really starts to work. And we've debated what does it mean to work? I think we'll know it when we see it, there will be things that start happening and customers pulling their products that we will have not seen before. [00:00:00] S0: What's the lesson from Waymo there on what it means to start to work? What do you think in the history of Waymo was the point at which you would've said, okay, now something happened and that makes this more investable?
· Patrick O'Shaughnessy, David George
[00:00:00] S0: What's the lesson from Waymo there on what it means to start to work? What do you think in the history of Waymo was the point at which you would've said, okay, now something happened and that makes this more investable? [00:00:00] S1: So, the interesting thing about Waymo for us... I'll tell you the history of our Waymo investment. We originally invested in 2020, they came to us to raise outside capital for the first time. So, it's just purely funded by Google over time, and they thought it would be helpful for employees for hiring all that stuff, outside counsel, all that, diversify the cap table to bring on some outside investors. So, some folks invested in it, we're the only VC firm that invested in it, we invested out of our first growth fund, and it was really fun because... And this was seeing the future. Taking the ride in 2019, it was doing some pretty amazing stuff. In retrospect, it could do unprotected lifts, it could avoid construction sites, and the thing it didn't know how to do actually was park. We got to a parking lot, and it stalled and we had to override and go drive up to the front, but you could see signs that it was going to be pretty interesting. But it wasn't on the road, we knew they were going to be conservative about rolling it out. So, Marc and Ben came to me and they said, "Hey, we got to do this Waymo investment," and I said, "No, I don't like this at all, this is crazy. It's going to take 10 years, the valuation that we come in at, it's going to be really high," and they said, "You know what?" [00:00:00] S0: Don't care.