The Exchanges

Q So I've definitely started to see this narrative catch on, which must feel very validating for you. Although at this point you have won two bets against me, so you're on a roll. Uh, have you started to see others catch on to this? What's going on in the broader techverse, Twitter sphere, all the good stuff?

A Yeah, so a good close friend of both of ours, Delian, um, you know, recently on a, on a podcast, you know, had mentioned that, you know, SAS funding is down to a five-year low. Um, and then, you know, a layer deeper than that, he's also saying, you know, that VCs are finally waking up to the fact that zero marginal costs in the short term means zero margin in the long term. Um, and then, you know, transitioning over to something a little bit more along the lines of the dropping costs of software, and we're, we're seeing that happen, um, is that, you know, Christian Keel, Pronounce Kyle, um, is saying that the SaaS era is over. Um, and his reasoning is that it's really ridiculously easy to build and to copy companies or really easy to copy and build applications that are already built. Um, so what that really means is that your only moat as a business at that point is just distribution. Um, and distribution really at the end of the day is sales and marketing. And so, you know, starting to see sales and marketing budgets for, um, Test companies like go up pretty significantly. So there's not really a moat around the technology anymore. It's really around like the marketing and the distribution. Um, and then, you know, a big narrative shift that we've also seen with, uh, just like the more broad kind of general market, um, especially with David Friedberg and the all in pod is that…

AI assessment note: “a good close friend of both of ours, Delian, um, you know, recently on a”

Q I think it was Tesla versus Snowflake. We could, we can get into that later, but, um, in terms of this overall narrative, is SAS dying? Do you think AI is going to save software companies? What happens to all of those out there? Do they adopt this new component into their product suite or rebuild, or maybe this has happened before and we're being like a little bit dramatic.

A Yeah. So I, I've actually seen this story play out once before. Um, and so where I actually have like a fairly good insight here, um, is that my, my first company I started was a, was, was a predictive analytics company. Um, and so what I'm actually seeing with this current flavor of AI is almost identical to what happened almost 10 years ago now, a little more than 10 years ago, uh, with predictive analytics. And so this was the big rage back then. Uh, might've been before your time, Molly, but Um, you know, there was a, a huge run of acquisitions that Salesforce and Workday were going on. Um, and so, you know, Prediction.io was a, was a machine learning, um, as a service business that was open source. Uh, they were then bought by Salesforce and tucked in there. Um, and then Salesforce went out and bought a sales and marketing related, uh, predictive analytics business called Relate IQ, which is now their Salesforce IQ product. Um, and then Workday, obviously, you know, sitting on all of that HR data that they have, uh, was able to, you know, acquire a handful of predictive analytics companies, and funny enough today, actually, um, in, in how the comparison between predictive analytics 10 years ago with, uh, the, the current flavor of AI that we're seeing, Ramp just acquired a procurement business that was focused just on AI as, like, their moat to their business. Um, and so w…

AI assessment note: “I've actually seen this story play out once before.”

Q Great. Yeah. Well, hard tech has seriously taken LA by the reins. Everyone seems to be loving it. Um, however, there is a narrative violation here. In the previous, like most recent LP letter of yours, you did mention the shutdown of a popular emerging manager. What's going on there? Is this going to continue? Is this an emerging trend? Should we be concerned?

A Yeah. So you're talking about Countdown Capital, um, and Jay Malik, who's a good friend of mine. Um, and so I, he really outlines two, two main reasons for, for, you know, winding down the fund. Um, the first one was that pricing for aerospace and defense companies and industrials, um, was getting too expensive. Um, and then the second part was that it was just getting harder and harder to compete with multi-stage funds that were now coming into the space. Um, so I definitely agree with Jay on the pricing, uh, discussion. We've seen a lot of, um, supply of capital for very little, you know, high quality demand, um, in, in businesses and, in companies that are getting spun up. And so there are a, a, a decent amount of companies that are getting funded today, um, that I would say would fall more on the science project side, uh, less on the actual, you know, near term commercial viability side. Um, and so that, you know, that really kind of, Puts into question, you know, who's investing and how are they kind of taking what we had as a little cottage industry for the last, you know, three or four years, and now it's becoming a really main theme for a lot of different, a lot of different funds, um, and a lot of different, just like investors coming into the space. Um, and then kind of dovetailing on, on, you know, more investors coming into the space. Um, when it comes to big multi-…

AI assessment note: “So you're talking about Countdown Capital, um, and Jay Malik, who's a good friend”

Q And then in terms of, um, vertically integrated monopolies, we'd love to get into that a bit deeper. Um, for those who might not have context on it, could you share more about what vertically integrated monopolies mean and More about the effects of declining software development costs and the opportunities being created because of that?

A Yeah, absolutely. Um, so we're, I'm kind of talking about, uh, you know, the, the complex vertically integrated monopolies, um, you know, there's really like two layers of this. So the first layer are the companies that are actually, you know, leveraging, uh, the declining cost of software. So, you know, across the top, we've got startups, Like Hadrian, Varda, Swarm, Albedo, Armada. Um, and what they're really using are three main pillars that I've, I've seen, you know, become, become either hyper cost effective or things that are just super easy to build. So modern software stacks, like it's so cheap and easy to build, um, enterprise software applications. So, you know, pushing that further and making it easier for companies to vertically integrate, you know, just even just like internal systems. Um, the second piece of that are APIs. So APIs are extremely abundant now. We see them everywhere with companies like Stripe and Plaid and Twilio. Um, these are kind of like those foundational building blocks that historically you've had to build internally, but now, you know, there's massive API companies that have been created. Um, and then finally artificial intelligence, which is, you know, we'll dive into this a little bit later, but, um, where I see this really playing in is, is taking You know, what a company might do, like a Hadrian, for example, in their, uh, customer workflo…

AI assessment note: “the first layer are the companies that are actually, you know, leveraging, uh, the declining cost”

Q Okay, so in a previous LP letter of yours, you compared Snowflake to Tesla. Um, in the world of vertically integrated monopolies, what would you compare there?

A Yeah. So I, I actually would draw the comparison, which I think is a better apples to apples, uh, for just like how important this like vertical integration theme is, um, is if you compare Tesla to Ford. Um, so what we see here is, you know, Ford is almost like double the revenue of Tesla, but if you look down at their expenses and you look even further down than their net income margin, um, that just, just absolutely highlights like how critical and how much leverage if you actually Build all your own tools internally, um, software or hardware based. And so, you know, we can look back at, um, a prior, uh, Tesla, um, uh, shareholder meeting that they had, and they actually showed you all of the products that they've built internally as what they call their Tesla operating system. So it's everything from customer experience to employee experience, uh, service and support, fulfillment and charging. So you've got all these different categories that Tesla's actually taking on internally. Um, and so, you know, if you look at that apples to apples comparison, you know, we can just see, you know, how actually important this, this actually is and where this actually starts to show up, um, and how the business is run and how it does financially. Um, so I think it's more critical than it's ever been to actually, you know, use vertical integration, use that dropping cost in software, um, …

AI assessment note: “I actually would draw the comparison... is if you compare Tesla to Ford.”

Q For one, I'm a big fan of all three of those people. Um, I'm not saying that David Freeberg is my favorite on All In, but he might be. Um, I guess in terms of those, those are all kind of centered towards startups, so what about public equities? Anything on that side?

A Yeah. So, I mean, Snowflake is like a, a fantastic example of this. Um, so, you know, we've anecdotally like, you know, looked at these three comments. Um, but if you look at a company like a Snowflake, you know, they're spending a ton of money on sales and marketing more so than they actually are spending in research and development. Um, so I think, you know, what that kind of shows you is that that's really like the final mode. Um, and on average, uh, you know, A company assuming no net new customers, assuming no expansion, um, they basically churn through 30% of their customer base a year. So in the span of two to three years, I think what we're really going to start to see is this narrative really catch up with publicly traded companies, uh, that already have these like massive user bases. Um, so I think it'll be interesting to see what happens over the next two to three years with publicly traded, uh, SaaS companies.

AI assessment note: “Snowflake is like a, a fantastic example of this.”