Sarah Guo - Funding the Frontier - [Invest Like the Best, EP.489]

27:35And we are a very small firm or ecosystem oriented. And so I've learned so much from just getting to know investors who think differently than I do, including different asset classes. Well, I never spent that much time with public markets people before. And it was very educational how they think about the world. I spend time with other investors of all skills and asset classes. I spend time with companies. Right now, with a pharma company who is thinking about how AI is going to transform their business. This is very interesting to me because I've learned a lot about what they believe about the future.

28:09I've done a lot, but I'm like leaving room in my calendar for learning, feeding curiosity. And then there are pieces that are other parts of bridges to DC, external communication. Where have you learned about raising money? I stand with the belief that I advise entrepreneurs with, which is you should understand people's objections to what you are doing and their questions, but you should not tell them what they want to hear. When I started the fundraise for Fund One, I knew a lot of LPs over a long period of time already. So it was not very complicated. But I had one of my friends who is a private equity investor who stated, you have to have like a very differentiated story for LPs.

28:51Every part of the funnel should be the specific thing you're going to do. And I'm like, let's be honest, I don't know yet, but I need to like raise the money so I can go experiment and figure it out. So I never made slides and told a specific story about all the things that we attempt to do now. I think you don't know until you make contact with reality and think about it and you're in the market. There were definitely LPs who did not like that. I gave people a two-pager on my background and investing history and claimed that I was good at identifying extraordinary people, being useful to that set of people and being genuine supporters.

29:29If you combine that with investment judgment and ability to recruit, you got a starting point. Mostly some things I imagine about firm culture, and then we'll go execute like hell and figure it out. I can see how this is tough from an LP perspective. And I deeply value the people who bet on us early because they go write a memo for their investment committee and they're like, she's going to execute like hell. We'll find out. Sometimes the cleanliness of the story is what people are looking for. I can't advise other managers on this because people have different outcomes. If you tell people what you are going to do, life is much simpler and what you actually believe life is much simpler.

30:08And for me as an investor, when somebody can convince me that the world works differently than I thought, I'm like immediately incredibly excited. Maybe I can convince people that this is just how it actually works. I've met a lot more investment managers for the last four years. I knew a lot of BCs, but people who are doing creative things. I really like entrepreneurial investment managers, as you, I think, do. And as you might imagine, where I'm like, I don't want to build the firms that they've built, but the creativity with which Philippe and Thomas go to or that Josh at Thrive approach their business and the encouragement they have for others to approach their business.

30:44Well, you can do new things and you should go express your opinions in the form of your investment management firm. I think it's amazing. What was imprinted on you watching your parents who are both entrepreneurs? I think this is very helpful to me because there was no moment of my childhood or being a teenager where I felt like they were not there for me, even though they worked all the time. On stop, yeah. Both of them. We try to resolve these things. I was a pretty independent kid. That helps me. I don't know where I was in the distribution, but I feel like I was pretty independent. It helps me to think your family can make you feel like you are the center of their world.

31:23But they're whole people with other interests and they want to spend time doing other things too. Even just recognize my own importance from the perspective of like remembering what it's like to be 10 years old. I liked my mom. I love my mom and dad. And it was so cool. Our family values are very similar to theirs. There's integrity, thinking for yourself, independence of thought, and then there's like focus on family, team spirit and family. The independence of thought is probably the least generic one of those. I think a lot of people like want to be good and kind and work hard and whatever else.

31:57For both my parents, it was a moral issue. You cannot ever worry about what other people think. I'm like far to that side of the spectrum, but I do think about it sometimes. You do sometimes worry what other people think? Yeah. What do you want them to think? That you worry that they don't? I worry about raising people's competitive hackles in the ecosystem. Why? Because I'm a friendly person. I want to be friends with everybody. I don't mind competition, but the sometimes pure zero-sum competition stance of traditional Series A firms, Series A, Series B firms that says, I'm going to own 18 to 25 % of this company and take the board and you're going to own none of it.

32:41It's not conducive to like a lot of collaboration. There are issues with that from an incentives perspective, but the public markets orientation, people are loved to tell you about their best ideas, pile in after them. This is an extraordinary situation. I would love to talk about why gaming and entertainment is going to be totally different and people are super under indexed on it. There's part of that orientation that just appeals to me as a very positive some person. I'm always interested in sources of inspiration. I'm curious in two ways, overall in your life, who has inspired you the most?

33:12And also right now in this very moment, who is inspiring you the most and why? I saw my parents build a company. I was like, this is so cool. It's us against the man. The man is very big companies. The man is trying to kill us. We can still do it just because the technology is better. The product is better and the customer will want it. My love and ethos goes to entrepreneurs. You can make something out of nothing because you see a better future and you can do it really fast. These things appeal to me in terms of what I want to try. There's so much courage in that and optimism. There is something poisonous that bothers me today where I think especially like the post-Gen Z entrepreneurial crowd think it's like all marketing and brand is real.

33:57Building a network is totally real. No one denies that. But when folks are very cynical about how the world works, how entrepreneurship works, that it's just nepotism and Twitter is useful, I think that's nonsense. If you focus on value and treating people well and you work with extraordinary people and the vision is worthwhile. That works more times than you'd think. There's so much criticism about playing the game, be it marketing or fundraising, and I hate that. Codd is like this. I find him very inspiring. And Tuhan is like this. I find him very inspiring, where he's just like, if we just do the right thing by the customer, we will win.

34:37Feels a lot more complicated than that. I think he's right. That seems to be working. One of the huge debates right now is what to do about the fact that there are open source models, not American made, which are competitive at the frontier of performance of AI models and seem to clearly have been at least to some degree based on the work of American models. What to do about this, what it means for the future of AI. Companies love open source because they can build their own thing and base 10 and others that serve a lot of inference work with a lot of these models. How are you thinking about what's right, what should happen, what will happen, the implications for business?

35:19This is a big, hard, important, interesting question. It's a big question. My point of view on what is healthy for businesses, America, the ecosystem, individuals, and then there's what's already actually happened. The reality is we have, over the last three years, increasingly competitive open source models from all fronts. largely China, but definitely also the U.S. and Europe. Most recently, Thinkie, Poolside, People Waiting for Reflection, NVIDIA models, Mistral. We will have very powerful and already do have very powerful open source models from Western countries. The cat is out of the bag and these are in use everywhere.

35:59Even if you have no economic point to view on the labs and you just say, how is the diffusion of capability going to happen in the economy? There are a huge number of instances where it is too expensive, too sensitive, or too slow to use the model from the frontier providers today. And I think that's going to increase as we learn how to do more things with AI because it's actually quite expensive. It's objectively true that if the capabilities are more democratized, you will see them used in more ways. I want to see that happen. I do think that it would be irresponsible not to understand the safety profile of models as they progress, because you just draw the line.

36:48We have companies that use frontier model capability for defensive cybersecurity and for biology work. If it works for those use cases, it obviously also should work in similar ways for the offensive use cases or the bioweapons, biosecurity use cases. We just need to look at that reality and think about what are the other ways in which you control this, but attempting to stop technological progress and openness around it. If you did restrict use of open source models in the United States, You'd basically just restrict law-abiding American businesses and slow them down or move profits to different pockets, prevent certain uses of them.

37:38Because the actual attackers or people who have adversarial uses of these things are not affected by your restrictions. You're restricting your own people. My view would be there should be testing and understanding of these models at the frontier. People are very worried about backdoor-like behaviors in Chinese models. The thing to do would actually be like have a very rigorous set of safety testing on that. Like, let's go find out as much as we can instead of talking about how there might be this issue in a speculative way where there's not been nearly enough actual research on it. The future where there is broad access to intelligence too cheap to meter, as Sam put it, that is coming.

38:24It will be supported by open source. Businesses want it to control their own destiny for economics, for capacity. If given those models and the increasing democratization of the skills to post-train these models, build harnesses, use tasks, the economy is so big. Every individual has these use cases that are not going to be imagined by a researcher in a frontier lab. You can't imagine the diversity of reality. Even if you trusted the models to go figure out what to do, they have to get there. The best way for that to happen is a ecosystem of businesses, as we've always had in the economy, cheap infrastructure.

39:04Do you ever worry that an alternate version of U.S. history is that there was energy too cheap to meter because we built 1 ,000 AP-1000s or something, much like China is doing now in nuclear? And just a set of circumstances happened such that we just didn't get that. Do you ever worry about that as it relates to intelligence? It does seem inevitable that we're going to have abundant, accessible, low cost, valuable intelligence. Can you imagine a world where we don't? Yes, absolutely. And I also think I can imagine very easily a world where we don't have that in a competitive way because it is essential to economic competitiveness and national security.

39:41There is not a version of the world where we rebuild our industrial base without automation in the United States. if we don't import people and our people are expensive and we lack some of the skills, but want to produce a lot more goods and have a more resilient supply chain. This doesn't add up. Who's going to produce this stuff? People in the United States do not want to work and should not want to work for$13 an hour doing a very inhuman job. I don't think it is inevitable that we are competitive. And I think we need to make that decision actively. The version of it that I think is very possible is that people are rationally afraid of the impact of AI on jobs or dislike the capture of rent by a small number of technology firms, rejecting the idea of being in the permanent underclass and then connecting that to a anti-capitalist orientation.

40:36transportation, that contingent of thought can slow down build of energy and infrastructure and industrial capacity. One of the most important inputs is compute. If we don't have it, we're naturally not competitive or we're at least not independent. I think we're going to start talking much more about compute independence. That's a big problem. So on this point of compute independence, what does that mean? What are the missing pieces of compute independence? Like the The most obvious one might be more fab capacity, more leading edge fab capacity here in the U.S. or something like this. There's all sorts of stuff upstream.

41:11There's particular kinds of glass, very important, that's controlled by basically one company that TSMC has like a monopoly on the supply of. There's all these component parts. But if you think about compute independence, like if so much boils down to compute, what's to be done about it? Are you trying to invest in companies that are solving that problem? What is the problem? Say a bit more about what it'll take. Well, if you just work backwards from a data center full of GPUs, cooling, powering, training, and inference so we can support the use cases, all of those inputs, it actually looks a great deal like energy independence or something like that.

41:47all those inputs, there is a global supply chain. I've got my TSMC mug with me. There are parts of that supply chain that are like a very thin sieve in a place that is not necessarily stable or accessible to the U.S. and allies. A different version of the world that will take a bunch of investment and national security and energy policy is, for example, Jacob Helberg is working on something called Paxilica. And it was like, okay, for every part of the supply chain, can we invest in more capacity and figure out what the independent paths are? I don't think that means it's all got to be created in the United States.

42:26Comparative advantage is real, but having more than one source is a position that everybody wants to be in. When we think about the components that we've invested in. We've invested in the labor gap for data centers and robotics. We've invested in nuclear energy. We've invested in alternative chip architectures. We keep looking at people who are essentially data center builders, solar and battery installers of some kind. Part of this is the actual capacity buildup. That's a very operational business, like somewhere between operations, some technology and real estate. And financing. And financing.

43:03Absolutely. That's probably the dominant thing. We have not invested in it yet, despite looking very closely. I'm not opposed to it, but fundamentally, I'm a technology investor. I want to understand what it is that is the durable product asset people are building. What are the base debates inside of Conviction? You've got such an interesting team. Mike, your partner is a very technical person, amazing engineer. The young talent in your firm brings really interesting perspectives. So I'm imagining great, lively debates about things that matter, et cetera. What are the big debates today? A lot and I have a podcast called No Priors.

43:38This premise of some of the things you believed, especially about markets as a pastor, like no longer true, is an interesting one. And regularly, we look at companies in domains that are not traditional software domains, not even traditional software domains, but can you make money in this market at all? venture investing in semis companies, lip-boot-tan aside, was like a god-awful business for the longest time. The returns... Everyone told me this. Yes. It was really bad. That's like an example of Bella, a partner on our team, started looking at a bunch of these companies, and it's obvious that the demand is there.

44:20Now I think we have arrived at the conclusion that others are as well, which is, well, the market is different today. We are seeing consolidated at scale demand for accelerators or even supply chain independence because the big buyers of it want it too. We can't all be stuck on one line at GSMC. All of that is very, very valuable. And that changes the risk equation for these companies. We start with pretty aligned beliefs about the direction of travel or the problems that are worth working on. And then a lot of the debates are like, is the market friendly to a venture-backed company or not? Space is not a friendly market to a venture-backed company, but is it possible?

45:05Is the distribution of outcomes worth betting on? That could be true in solar and batteries, in nuclear, in turbine manufacturing, in robotics and biology. These are not your favorite software markets from 10 years ago. Each of them is a new debate. Biology is an interesting one where by virtue of seeing the data empirically, I have now strongly moved to one side of the debate. What side is that? You can create and capture enormous value with models in biology. And there could be different AI software in biology. We're the first check in a company called Chai Discovery. And Chai is working with a number of top 10 pharma companies in really significant ways to accelerate some part of the R &D process.

45:52The conventional wisdom when we invest in this company, and I've been looking at computational biology companies of different sorts for five plus years at that point. The conventional wisdom was the only way you make money in biotech or serving pharma is by make a drug and then get BioBucks deals and then decide how far along that risk path you want to take. And what that means for the capital structure of the company is, okay, The great traditional biotech firms find these principal investigators and they own 40 % of the company and they're kind of assembling these things, turning them into candidates.

46:25But most of it doesn't work. So it's just like a very different distribution of outcomes and structure and way to invest in businesses. Dumb software investors, you can't make money selling software to pharma or build platform businesses at pharma. The debate is, does it change with models? I'm a strong yes. Now, we still have a question to solve on regulatory. There's the speed of the physical world and safety is not something you can overcome easily, but I think we should see a massive acceleration in cures. What flipped that for you? What evidence did you see from we don't know yet? We invested when we didn't know yet.

47:03As part of the fun adventure, we were like, it is possible that it is worth trying. There's no genius here. That's a$10 million contract. The other piece is actually you just talk to the scientist at the customer or somebody who leads a user of the tool or you see there are also end user adopted tools product-led growth tools that are working in the space well the customer knows if it's valuable or not the light bulb moment for the industry is when we will have a new indication or a new drug that clearly the trajectory of the thing was changed created by AI. We should see a huge wave of investment and rightfully so, but it's going to happen.

47:46I'm like very impressed by the speed with which pharma and healthcare overall has said, yes, this is going to make a difference. And we actually think it's going to change the business. Why do you call it conviction? It's aspirational. The most traditional form of early stage investing is you start early with a company, you have a significant position, you never sell the position, and then you work on the company until it works or is sold or dies. There's wonderful alignment and simplicity to that. Mike and I have both had the benefit of being part of the journey for some companies where it took a minute to begin to work or it's like not obvious at the beginning.

48:23Sigma, Notion, Rippling. You wouldn't bet on a company hoping that it's going to take four or five years to like find the thing. I think everybody is a product of their own experiences, including investing experiences. The first couple years at base 10 were like very non-obvious as well. The ability to take a point of view that is not obvious in the market because the market or because the people's backgrounds, whatever reason, and then just suspend doubt and act with full belief until it's true or not. That's a great way to be a partner to somebody building a business. I am trying to build a partnership, and I deeply believe this is a team sport.

49:06I was talking to a friend who runs another investing firm where he's like, we don't have individual ownership of our investments. And I'm like, that is nonsense to me. How could you run a business that way? Because somebody has to own the decision. I don't know if this is right or wrong, but I don't know any other way to invest by saying, Patrick, you must make the decision. Do you believe, convince us, how can we help you make that decision? What have you learned about risk-taking? Behind conviction, it sounds like there is often a leap of faith of some sort. Obviously, if you knew everything and it was obvious, that would be priced in and there'd be no return opportunity.

49:39Is there always a leap of faith? Is that risk-taking by another name? Unlike my good friends at Founders Fund, I don't have an instinct to be contrarian, but But I do think it is so fundamental to decide what you think and not worry too much about what other people think. Other people is the dominant narratives of the period or even what different players in the ecosystem that are really important declare one way or another. I think you just need to find the truth. The way I would relate that to risk taking is if you find the truth and it is wrongly priced and you hold on to that, you're in a good position.

50:18You want asymmetric information and then the confidence to hold the opinion when other people haven't come around to it yet. I think a lot about how to make sure we have the information that is better than other people's and then protect ourselves from noise. Describe that in one more level of detail. That's a great way of asking what conviction looks like today. You're building that shell. What are the keys to doing those two things well, both having the truth and protecting yourself from the noise? I like want to spend my time when I'm learning about the world from somebody who is making it happen.

50:49Our portfolio founders or the many founders who are doing amazing things outside of portfolio who are doing something that surprises me or advances the frontier or like really smart believe something I don't. There's like three different categories. And I'll give you an example. Mikey Shulman at Suno is building an amazing business doing music generation. Shame on me. I knew Mikey, a mutual friend of ours who's an investor, like asked me to like invest and I stupidly said no. But I was just like, oh, I don't think that many people want to make music. I make music. But can you turn into a social network?

51:21How much consumption is there going to be? A lot of questions. My intuition is just wrong. It's been actually somewhat wrong because I have underestimated the amount of expression or entertainment and creation for a lot of AI tools. I've learned something here by talking to Mikey about his business. and what people are trying to do. So if it is founders who have companies that are creating a behavior you don't understand, somebody working on research in an interesting direction, businesses that are like, here's my plan for AI, all that is super educational. I think the circular logic sometimes of what do people believe about the big lab strategy today?

52:02How can any of the applications live? It's actually not that instructive for your decision making. The way I think of it is any organization has a couple of key priorities. Let's assume the priority for OpenAI and Anthropic and DeepMind is AGI or ASI in a safe way where they capture a lot of profit. The priorities that ladder into that probably look like chat GPT, ads, coding. Maybe there's an expansion after that. Cowork, the ability to get different types of users to do richer tasks and more interfaces. I think you have to judge the actual competitiveness of any of those efforts, the reasonable scope of them, and then look at them relative to each of our companies or opportunities that we're looking at.

52:52But coming up with some grand strategic framework for like what layer is going to win here, I think is not useful to me. And I feel like people spend so much of their investing energy thinking about versus I want to spend my energy figuring out if we're 1 % of the way in, what is the next 99 % of diffusion? That's where we try to direct our energy. For fun, as we wind down here, understanding this is like a purely speculative question and it's meant more fun than raw prediction. What are some things you think are true a year from now? based on all these incredible people that you're close with, the research community, the entrepreneurs like the Sunday founders, you add it all up, things are moving fast.

53:32A year is a long time and it's like reverse dog years now. What do you think is notably different about the world of technology a year from now? I'm hopeful that a year from now, we see Jevin's paradox in practice, as we have agents and products that do more of the mundane more effectively in all the domains of our lives, it should look like the transformation that has happened in software engineering. You have companies, I have companies where they're like, we're just going way faster. I expect that some analogy like that will happen everywhere else. And we see it in our companies where I'm thinking about in one of our portfolio companies, the marketing department is like a person in the house.

54:23This is a company that serves lots of customers. They need to do very traditional things, sales enablement content. What happened was the guy in charge of marketing is interested in like creating leverage for himself. And he's like, I made an autonomous marketing department for us, the company. in every function, as you learn faster, do less of the mundane, you will repurpose that time somehow. Do you work less now that you are more productive with AI? Yeah, I work more. And I think this is like a core wisdom of Jensen's, which is we're all going to be more employed and we need to make sure that people are given access and education to the tooling that will allow that to happen.

55:09Well, what you built is incredible. We've loved through the Colossus side, getting to know your whole world. It's so distinctive. You are a great example that there's always room for great, meaning there was plenty of early stage investment firms when you started conviction. And yet here we are four years later or whatever. And if you ask the people you've worked with, you've made a real huge difference in their lives. There's just always room for great. I think that's like a great, awesome lesson, especially because I love how you described the early pitch was not like here's how we're differentiated at every level of the funnel.

55:38We're just going to run at this thing. By the end, I got so frustrated. I was just like, it's an execution game. Totally. I ask everyone the same traditional closing question. What is the kindest thing that anyone's ever done for you? I love this question. I'm going to give like a collective answer. I think there are so many people who are extraordinarily accomplished in Silicon Valley who care very little for pedigree. As soon as they have a conversation with you And they're like, maybe you can help me or you have an interesting idea or maybe I just think you're promising. And the dominant factor in their own willingness to invest in a relationship or a person is just their assessment of the idea and the person.

56:19I think that's amazing. That is not how most ecosystems work. And so Ashim Channa and Anil Bussery and Joseph Ansonelli and Reid Hoffman, who hired me at Greylock, I started when I was 23. People love to make fun of young VCs where they're like, oh, what a barnacle on the ecosystem. It's a terrible experience for entrepreneurs. I don't know anything. They're trying to advise people. Who gave this kid money? And I'm like, well, one, my job was just to make other people successful at the time. You can take any task in any job and just try to be great at a task with mimicry and first principles thinking.

56:52We hire earlier career people at my firm, but I do think, oh my goodness, thank you for taking a shot on some random person and then investing the time to like teach me how to be an investor. I think there were a few people who gave me advice starting the firm who I think they would think of this as entirely trivial. I'm just giving you my opinion. But Ravi Gupta, who is now co-CEO of a new thing called Ithaca, Dylan Field and Elena Natalinsky, John Lilly, who's been a longtime partner and friend. There are a few folks who were just like, you can definitely do it. I was going to do it either way, but having the encouragement of people who believed that there was room to be great and including some of our first LPs, I will be forever grateful to, I guess, the people who took risk with me.

57:43It's beautiful the world runs on faith, belief without evidence yet, and still conviction in someone's ability to do something. Pretty cool. It's faith in people. We talked a lot about how people's ideas and our opinions of them are intertwined. But I think that's a beautiful thing because you don't need any particular advantage to have an idea. The fact that folks will evaluate that and put faith in us, I could not be more grateful. I've learned a lot watching you operate and talking to you. This has been really fun. Thanks for having me. Thanks. If you enjoyed this episode, visit Colossus.com.

58:20You'll find every episode of this podcast complete with hand edited transcripts. You can also subscribe to Colossus, our quarterly print, digital, and private audio publication featuring in-depth profiles of the founders, investors, and companies that we admire most. Learn more at Colossus.com slash subscribe.

58:46Thank you.

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