Semil Shah: Venture Capital Trends in the Age of AI

0:05Hey, everyone, and welcome to Generative Now. I am Michael Mignano. I am a partner at Lightspeed And for today's episode, I talked to Samil Shah, founder and partner at Haystack VC, a legendary seed fund that has invested in companies like Figma, HashiCorp, DoorDash, Instacart, and now lots of AI companies as well. Samil and I go way back. We're good friends. So this was a bit more of a casual conversation. So take a listen to this episode with Samil Shah. Hey, Samil. Sir. We finally made this happen. I'm excited. You and I have been friends now for a while, but I've been following you on Twitter for much longer than that.

0:46One of the things I always liked about your tweets were, one, I found them fascinating, interesting. I learned a lot from them as I was starting my company and then becoming a VC. The other reason I liked your tweets were I could also relate to the non-tech ones. I could relate to a lot of your tweets around parenting or food or music. I saw one recently that gave me a chuckle um which was this one about the kids baking championship oh and and and maybe just to refresh your memory yeah yeah no i remember watching this i was like actually pretty surprised so just for the the listeners uh samil tweeted the ending of an episode of kids baking championship is pretty ice cold these poor kids i can't believe they go survivor style no medals for all in this show and it's totally true i just saw it too like three weeks ago and blew my mind.

1:37For some strange reason, all my, my kids, they get fixated on the food network. We were watching a couple of weeks ago, the kids baking championship and they treated the end like they would like kill off like an adult chef in a show. Yes. And I was like, and again, I'm, I'm not the type of person, you know, me to be like, Hey, everybody gets a medal. I'm not that either. But this poor girl was like, I mean, I just, I was stumped. I was stumped. Me too. Me too. I had the same experience. Anyone with kids who's listening knows like, there's so much junk kids programming. It's just so much junk. And so recently my wife and I were like, we need something with a little more substance, a little more educational, vocational, whatever.

2:21And we stumbled on this show and the kids love it. Don't get me wrong. But when I saw that end, I had the same reaction. I started wondering like, should I let them watch this? This is brutal. It felt like Game of Thrones for kids and like cupcakes, you know, like it's just totally nuts. When I saw that little girl, like she like it was like the few seconds before she started to cry. She was like shaking. Yeah. You know, I was like, oh, God. Yeah. Poor kids. Besides the ending, it is it is pretty entertainment, entertaining. And these kids are talented. Oh, yeah. I'm guessing they're just learning from TikTok or something.

2:57I don't know. Yeah. It's a YouTube video generation, right? Like every year they're going to get every vintage is going to get smarter and smarter and they can just, you know, especially for cooking. Right. I mean, I used to I don't know if you know this, but I used to work as a professional cook. Where did you cook? The main one was in San Francisco, but that was like a long, long time ago. But, you know, I threw out all my cookbooks because YouTube just crushes cookbooks. So if I had had growing up YouTube, you know, I'd be cooking a lot earlier. Back to the Twitter thing, like you've been doing VC for a while now.

3:3411 years. Yeah. 11 years. I kind of consider you like a bit of a guru, like a luminary, you know, you've got all this wisdom. How much of what percentage of your strategy is Twitter? Like, like, in what ways do you use Twitter as part of your, your VC strategy? Well, I have to break apart multiple premises of your question because they're not true. I don't have a VC strategy. Okay. This is great. And I don't use Twitter for any conscious reason. But it's got to have value. I mean, when I was a founder, that's how I knew of you. That's what, you know, Samil, oh, he's this amazing, thoughtful guy that I see from afar on Twitter.

4:19I would love to take money from him. It does have value. One of my favorite shows of all time, which of course my wife hates, is Pawn Stars on History Channel. Terrible show. Don't watch it. But one of Rick's famous lines is that if something's collectible or valuable today, typically when it started or was created, the intent behind it wasn't for it to be valuable or collectible. And so I kind of view Twitter that way because I started using it right when it came out. And I just thought, oh, it's like this interactive social network where you can put out content and interact with content and interact with links.

5:02And honestly, I had nothing going on in life and got into some Twitter fights and just started there. So, you know, so when people look at my Twitter once before Elon changed the whole interface, which is bonkers, you know, they'd be like, wow, you have a lot of tweets. you know and i'm like yeah i've been using it since 2008 or whatever you know um and i yeah so i just started using it as a way to like escape basically maybe this is a good a good way to to transition into some some ai stuff oh non sequitur there you go using your your twitter your tweets uh your posts sorry uh for some inspiration my ex posts yes your ex posts you and I have the good fortune of working and collaborating together on some things.

5:53And so, you know, we're both looking at AI rounds, Series A, Seed. And you put out this tweet recently, competitive AI Series A rounds seem to start around 50 million in terms of round size bifurcation in Series A market of these rounds versus the traditional$10 million A round. What's going on here is the first question. And you, somebody who's been doing this for 11 years, you've seen these cycles, you've seen these moments of like extreme hype and mania. Where do things go from here? I don't think anybody really knows. Like maybe like Nat Friedman and Daniel Gross and Sam Alvin know. But like I don't think most people know.

6:36Yeah. And especially VCs don't know much. Right. So put those two things together. I don't really know where we go from here. I'm not sure if this cycle and wave, meaning business cycle attached to the technology wave, will actually play out like other historical examples. okay so i don't i don't want to be uh too cavalier about that but i you know i still think there's a world in which these things become insanely profitable insanely valuable to other targets uh insanely capital efficient so i'm not saying that those things can't happen but i think right now because of the excitement the uncertainty the constant changing plate tectonic shifts that happen in that world.

7:29And also, if you have capital and you're chasing alpha, it is the only alpha game in town. One way to create an analog for this is like, okay, you have Kevin Systrom and Mikey doing Instagram, let's say 14, 15 years ago, and they're looking at every iOS upgrade and what's happening in the sensors and the sensor fusion happening in the iPhone and creating all the little tricks that they did. You know, I think a lot of people would probably believe that if Instagram stayed private, it'd probably be like 50 to a hundred billion dollar company today. Right. I've heard that. Yeah. I mean, I've heard people say that.

8:11I mean, I feel like that's a fair, fair speculation, right? If Slack's worth 25, Instagram at least worth 50. Yeah. I mean, tough to say what they would have been without, you know, the distribution and the support from meta, et cetera, et cetera. But yeah, it was growing so fast. It was growing so fast. It was ripping. And so at the time when we all got the notification that Facebook was buying Instagram for like whatever the number was, 1.2 billion or something, I think people were shocked. But I think the small few that understood what it could have become were like, that's way too small. and it's possible that that same thing is happening today right right like it's way too small we just don't know yet um and it's also lining up with a number of other things that you and i talk about offline a lot which is you know if this game wasn't happening now with so many big bc funds where would the money be going right yep and so it's it's creating a nice um sort of symbiotic relationship between capital exploration and hopefully value creation.

9:18Yeah. Talk about that. Unpack the symbiotic relationship. Well, I mean, you would know better than me, right? Like, I feel like I should be asking you in the sense of like, when these companies right now, instead of just paying for the talent, the talent is more expensive. So you're maybe your top flight engineer for a non-ai company four years ago may have been x now it's 2x yep maybe it's 3x i don't even know then it's like you have all the uh software and cloud related costs that go into the company of what they're building in addition to whatever real estate and human capital costs and then you have like the infrastructure chips part which is you know very expensive and sort or rate limited right now.

10:04And you have the FOMO from capital of not, you know, they cannot afford to miss parts of this wave. So it creates this perfect storm of activity that, you know, when you break it apart, it logically makes sense. Speaking of the Kevin Systrom, Mike Krieger, Instagram example, are we starting to see potential examples of those for AI happening now? First of all, acquisitions taking place, period. Second of all, acquisitions taking place that we may look back on and be like, oh, those were cheap. Yeah, yeah. No, this is a good topic to explore, Mike. I think this is where past history can inform the current day and future.

10:48But there are major caveats that complicate this sort of analysis. So I would say that it's a sort of canonical activity for public market companies when their stocks are riding really high in terms of multiples and PE ratios to use their stock to be acquisitive. So Mark Benioff, I think, is probably ace number one in terms of this strategy, right? If you look at his acquisitions over the last five years when his stock was exploding, I mean, he really bought some really nice assets. I think that you're starting to see that happen a little bit in small cap, meaning like sub$500 million acquisitions in AI.

11:37And I think a lot of those are probably more talent-based than they are necessarily just revenue-based. Some of them are product-based. I think the issue is that how much this area is ripping and the sort of deterrent strategy of the FTC and DOJ under the current administration, I think it's just a bonafide fact that a lot of companies are very skittish to raise any flags to those groups um and you know we're not really sure a year from now whether that regime will be the same regime either yes they almost have to maybe thread the needle a little bit do you want to do you want to jump in now while your stock is riding high or do you want to wait to see how the administration plays out yeah um and how the climate changes the other game theory here would be like the doj and the ftc are doing so many broad-based investigations that maybe their plate is full and you can do one now.

12:40Right. Or you could at least do like a small-ish, like you said, like a 500-ish. Maybe somewhat related to this topic, another one of your tweets was talking about incumbent advantages right now with AI around how incumbents should not be underestimated. They've got the distribution advantage. They've got the packaging advantage, engineering power. I see a line between that tweet and what you were talking about a little while ago about how some of these acquisitions maybe are a little more talent-based, not necessarily strategic acquisitions. I wonder, do you feel like that will continue to be the case because incumbents have this advantage?

13:25Or do you think there will be strategic sort of breakouts on the horizon? No, I think it'll ebb and flow over time. So that tweet was from like a year ago. And I still think that's true today. Yeah, incumbents are moving, right? Like they're doing stuff. Yeah, and I think a lot of us understand the distribution advantage. They have talent, right? Like the random 30-year-old at an incumbent tech company 10, 15 years ago is not the same as that random 30-year-old today. So just generationally, they're more adept now and sort of trending younger. I think it's a little bit complicated in the sense that I always, even though I believe what I said in that tweet, which is the incumbents have the initial advantage and a lion's share of the market cap returns that are going to be generated from this technology will be captured back to those original shareholders in those companies.

14:19That doesn't mean that there aren't opportunities for startups. Yeah. So both of those things I think could be true. I think the opportunities that could be more narrow and you'll always have that sort of David and Goliath, like somebody always, you know, you picked, you know, smartly Pika as a category to invest in with those folks. And, you know, that's proving out every month to be a more interesting and more interesting category. What's going to happen? You know, who knows? Um, and so I think that there's going to be one, a number of new, like AI first companies that have a way of attacking a problem or market that the incumbent just would never have had the time and attention to do or the discovery, the patience for discovery to, to unearth.

15:04I think you'll have like optimizations happening that can create massive gross margins in business lines where a lot of these incumbents may have, you know, 10 extra people for everyone that they need in a certain part of their org. So there's probably a lot of fat to cut, you know, and so we'll probably go on this like fat cutting journey for a decade. And the entrepreneurs who are part of cutting the fat or the VCs and in funding those things will reap the rewards of that. Correct me if I'm wrong on this, but you strike me as a person that's based on our conversations and podcast interviews I've heard you give.

15:43You seem to be a bit of a student of history when it comes to investing. you've learned from really smart people. No? Am I wrong about that? I think I use history as like a crutch to help me build a view for today. Okay. It's just a step in the analysis, but it doesn't mean that it always copies itself or rhymes. You know that classic line, right? History doesn't repeat, it rhymes. Although I think there may be less rhyming in AI. So my question is, if we're doing this podcast 10 years from now, we were to look back on right now, 2024, who do you think is doing interesting stuff in terms of AI investing?

16:27Who's doing the really unique stuff that we'll think was really smart? And what are they doing? On the investor side? Yeah. I mean, I don't think any of this will be earth shattering. But I think Nat Friedman and Daniel Gross, I mean, by far and away. Maybe one other person I'll mention really were sitting ahead of this curve. I remember meeting, I don't know if Daniel would remember, but I remember meeting Daniel, I think when he moved here. And he was already known to be way ahead of the curve, had his company that was focused on AI, was acquired by Apple, did all that stuff. I think he's had a standing offer from Sequoia before he even became of age to drink alcohol.

17:13So I would cite those two as being at the white hot core center of this universe and I think smartly broadening out and making a lot of interesting bets and grants and strategies. What I think is interesting too is they didn't try to announce a firm name or a strategy or a website. it was like it's the nat and dan fund it's like a podcast yeah that's like i that's a good that's a good analogy yeah so i think there was something really organic uh maybe unintentional or not you know you should have them on here i could be your side your sidekick for that one oh yeah yeah we could do that yeah we could have you sit in that'd be awesome yeah and then uh elod of course i mean i remember we we had a private event where he spoke a number of years ago and he was just saying And people were asking him, how did you find whatever foundation model that he was an early investor in?

18:10And he was like, well, I read the Transformer papers a while ago, and I thought they were interesting. And I started to track all the authors of the Transformer papers. This is like before 2019, 2018. Wow. And I was like, damn. You know, like every investor who was in that room afterwards was like, this guy. so i think it yelod gil nat and dan and then there are other people too but like they're just in their own orbit you mentioned grants i'm assuming you're referring to ai grant um yeah have you guys at haystack ever thought about doing anything like that like a accelerator incubator yc-ish type thing has that ever been on your radar this part could turn into a clip for you a reel let's let's mark the time stamp.

18:56I believe that there are so many venture funds and ventures gotten so big and so competitive that people are looking for all sorts of edges to use their capital to do something different. I think 99 % of that activity is in the pursuit of trying to do something different and literally throwing stuff at the wall. We don't do any of that stuff. Sometimes it works though, right? Well, but maybe when it works, it's not spaghetti, right? We're smaller. So I think we're taking more people-based approach. It's like, what we invest in is a function of what our network brings us and the people we can actually meet.

19:43Now, I think for Nat and Dan, I don't want to speak about their strategy too much because I don't know. But from afar, it seems like they were able to use capital as a weapon in a focused way to just help people start. It's the same thing at YC, where you just sort of say, you know, hey, here's a little bit to start, and it's the cost of doing business. Yeah. And so that really makes sense to me, right? Those kind of things really make sense to me. In fact, I think a lot of venture firms, just speaking generally, don't use their capital as a weapon. the best firms do capital as a weapon explain what you what you mean by that exactly just for listeners who don't understand what makes venture unique is an asset class where your brand matters and there are a small number of winners that end up paying for all the ones that don't work so it's completely asymmetric uh if you're lucky enough to have an outcome uh completely asymmetric power law-driven outcomes.

20:43It's a crazy world. So when you're starting to invest, there's absolutely no way to know. So I think of people who like Nat has been angel investing and sort of been around as a startup founder and successful executive. Daniel has certainly been around YC and started Pioneer Fund. I think that they understand that if you get to people early, and you think they're talented and they just need some starter capital, and especially in a field like AI, that giving them money, which if you have billions of dollars is actually not that much money, and becoming friends with them and just being someone that they remember early is a way to use capital as a weapon so that later on you get phone calls that matter.

21:41I think picking something off right at the same time, like when Matt Kohler started 15 years ago and kind of changed how a lot of VC firms were approaching hiring and targeting, he was known as a sharpshooter. He found Instagram at the Series A and Bill found Uber at the Series A. They were looking at data, but they had an intuitive sense of where it's going. I think what Nat and Dan were saying is like, we don't know if it's going to be transformers or solid state models, like whatever, you know, whatever the next thing is. And so let's fund talented people. It's not going to break our bank account, but then we're going to be friends.

22:25They're going to be in our orbit. They're going to send us their friends. They're going to call us when they need strategic advice. It's the same playbook at YC. How I would tie this into a bow is that actually seeding the ecosystem with small amounts of dollars, it creates noise. You have to manage it. You actually have to help them. But that's a way of using capital as a weapon on the early side. Now, the other end of it, you have, let's say, a fund like Founders Fund or Pick Your Big Fund. when they put$100,$200 million in a company early, that's their use of capital as a weapon and saying, we're going to make this bet.

23:06I'm sure you were at Upfront and Brian Sigerman just said, our AI investment strategy is just give it all to OpenAI and they made that investment and call it a day. They're using capital as a weapon. That's really helpful and insightful. You mentioned you guys rely a lot on your network. I think I just heard you say. entirely entirely one of the things i've heard you talk a lot about is the decision making process investment decisions i've heard you talk about how in a lot of ways that's what that's what lps are buying in a sense right they're they're buying through the decision making process how does haystack make decisions and has that changed in any way due to ai have you had to change the way you make decisions in this market in this climate how fast things are moving how big things are getting, et cetera.

23:56My philosophy here is that, um, that the, the product, like, like when you built anchor, the product was the ability to consume and create a podcast. Yep. The product of a VC firm is an investment decision. Yeah. That's it. I believe that to be true. I would probably argue to the death with anyone who disagreed with that. so let's just assume that's true then all the inputs to what you make a decision around is the art and the the craft and so i do think those are reflective of your brand the network you have access to frankly the creators who want to invite you along to their journey, right? That's what it is.

24:48Like, you're not building PICA, right? You're not building Tome. You've been selected by those founders to be a part of whatever journey they're going on. That's the game. So when I think about the investment decision, it's like, okay, we take money from a university, a hospital system, a charitable foundation. They're entrusting us that we're going to be good citizens. We're going to meet all sorts of people. We're going to keep tabs on the ones we like. And that when the tomes and picas call us, we're going to take the call. And that when we're making the decision, we're actually not running around with an accelerator or an event or all this other bullshit.

25:32We actually have a clear mind about making that, you know, what does Jeff Bezos call, like a one-way door decision? Yeah. All these decisions are irreversible, just one-way decisions. So I believe that very deeply. Now, what has changed over time? I'll give a two-part answer. So in terms of AI, what has changed is because in some of the dynamics we talk about where the round sizes are bigger than typically we play in, we always want to break rules and have exceptions to those rules. so some of the rounds that we've participated in are just straight to series a or or larger but we we give ourselves a few shots on goal in every fund that sort of break the pattern and so we've done that you know for ai in the past we did that for defense and hardware and you know now those things are interesting like people ask me today like how are you guys in sale drone.

26:28And I'm like, oh, I just met the guy in 2016. No one wanted to do that deal. And so I think of it as like, we made an exception and it sort of worked out. And so you get some exceptions in these funds. Now, the main adjustment, when I started, I was just a guy with a fund going on a random walk. And I would get very founder focused and got conviction in the person and then just would ride that person all the way through whatever journey they're going to. I think as we've grown modestly and everything has gotten more competitive, I will say the hardest thing for me now is to be attracted to an individual person or protagonist, founder, but then not really like the direction or space that they're going into.

27:17You're saying that happens more? Oh, it happens all the time. And I just say, I really like this person and they're great. Like I just met this kid who just graduated from Stanford. He's doing this thing, perfect founder market fit based on a personal experience. And I just really hate the market. I think that part of it's maturing. Part of it is having slightly bigger funds. Part of it is learning from the scar tissue of prior mistakes. But you would have done that. You would have done that deal five, six years ago. Maybe like eight or nine years ago. Yeah. Mm-hmm. Back to the LPs thing. the size of these rounds of the ai rounds yeah the amount of capital is this good for venture well good for who in venture well that's part of the question well let's go through is it good for lps yeah yes so my view on lps is uh lps will always bitch about the market okay always that's fine um by the way they fuel and fund everything that everybody does right right so they're allowed to, they're allowed to complain.

28:24There's nothing they should be complaining about though, because they'll be the beneficiaries of these waves. These endowments, foundations, charitable groups, they have their money in venture for seeking this alpha and finding people like us to help them catch these waves and participate in these waves. And no one's making them re-sign up for funds. No one's making them sign up for bigger funds. So they have the ultimate discretion. So I think of it as like, if I were an LP, I would be really excited to be a part of this wave about having a small part of my cash going into this place that I can't go manage.

29:03Right. And like, yeah, there's going to be 30 entrepreneurs in every fund of 40 companies that just literally fall on their face. It's okay. Right. What about the venture funds? Well, the venture funds there, the issue that is the sort of principal agent problem between the fee base that you get contractually versus the long-term stewardship and trying to generate the returns, which I think is a big unknown because before the stock market correction, which I think started right before the appetizer of the Ukraine war was the beginning of the stock market correction. And then things went into this sort of massive correction.

29:50I think before that, everything was up and to the right and people just thought, you know, nothing could stop it. I think the same thing is true is that people, once the Ukraine war started to take root and it became what it was and other conflicts broke out and things got tighter and inflation, yada, yada, yada, whatever you want to talk about, people started to then swing on the other side, like it's just going to be this way now forever. Right. And I also think nobody really knows. Nobody really knows. And so, you know, you make the Pika bet. When was that last summer? Right. Yeah, it was it was it was late 2023.

30:26Yeah. So most people say, like, if you enter a C or a. And it does become a good outcome. You'll only start to be able to, like, taste parts of the outcome around year seven, eight, nine or 10. Right. So So if we're talking 2023 and 2030, we've gone through two presidential elections. Different world. Yeah. Like Texas may be on fire. Like who knows? Yeah. I just think that a lot of these things are really, really hard to know. And maybe this is part where like venture folks in the culture get caught up where you want to be seen as a thought leader and like prognosticate and make these stripping conviction level bets.

31:07But we don't know what's going to happen next week. I mean, think about this. A week from today, 51 weeks ago, it was the SVB thing. Yeah. No one saw that. What about the startups? So we did LPs, we did funds. What about startups? I mean, it's their world. It's an amazing opportunity. All these venture funds want to give them money. literally there's nothing stopping good talented entrepreneurs from doing their thing other than not being maniacal about finding product market fit that's their only job and uh so i mean it's their world i mean it's it's an amazing spot for them there are traps though right there's traps in any business no one yeah all of this stuff is not forced right like Right.