Ep 67: Brad Gerstner on the AI Supercycle & Restoring Faith in Capitalism with Invest America

0:00If we had started this 30 years ago, a 29 year old today would have over$250 ,000 in their Invest America account. It's hard to hate capitalism. It's hard to hate America. It's hard to be financially unconcerned when you open up your Invest America account on your mobile device and you see that you too are a participant and winner in this system.

0:28Many of you know my friend, Brad Geersner. He's an amazing investor and leader in Silicon Valley. We're going to hear today a little bit more about his background, how he sees the world, what are the major trends in the past, and what are the trends going forward today, what's going on with today's macro situation in America. We're going to hear about a really awesome program he's creating called Invest America that can realign our country with free market capitalism, with growth, with bringing everyone forward together. Excited for us to chat with Brad today. I'm Joe Lonsdale. Welcome to American Optimist.

0:56Brad, thanks for being here today. Good to be in Austin, Joe. Tell the audience a bit about your background. You're an amazing investor, a pilot, working on some really cool projects right now. Where'd you come from? I grew up in Indiana. My dad was first generation college. He was an only child. So kind of his father sacrificed everything and mother to put everything into him. He became an engineer and decided in 1977 to kind of strike out on his own and start an auto parts manufacturing company in a small town, Northwest Indiana. Now, the only problem with that strategy is he had a young family of four kids.

1:32Interest rates were double digit. Inflation was double digit. We had an oil embargo in the Middle East. The Japanese were ravishing our auto industry and we had hostages in Iran. I'm sure we'll get to it. Some rhymes and rhythms with what's going on in the world today. There was no such thing as venture capital in Indiana. Instead, when you started a business. You mortgage your house, kind of mortgage the car and you put everything on the line. And so I was in middle school and I watched this kind of heroic struggle for about five or six years. Ultimately doesn't work out for my dad. He refuses to declare bankruptcy.

2:09He works the rest of his life to pay the bank back all the money that he borrowed. But I think that set me off on this journey. My grandfather, his father said, rather than becoming entrepreneurs, I want you all to become professionals. So you have to doctor. There are four grandchildren. You either need to be doctors or lawyers. I went to law school. You day traded to pay your way through law school. I did. My grandfather that I referenced. So he sacrificed everything his entire life, drove old cars, live very humbly. So of course the grandchildren were surprised when he passed away that he left$25 ,000 to each of us, which was an extraordinary amount of money.

2:46I had never had any money. I'd never had an investment account in many ways. You know, we, uh, you know, in a rural town, uh, having parents that were struggling financially, I was on the outside looking in, but when I got this$25 ,000 from him, I was really determined to turn that into more. And so I'd end up going to, you know, day trading it to put myself through law school and business school, got my series seven and 63 in law school, you know, and I think part of it was just my journey to reconcile, like, what was it about this business economy that took my dad down? Um, and you know, we all have dragons that we have to slay that are byproducts of our childhood.

3:31That was, that was your dragon. That was my dragon. And just on the day trading for a second, because I think probably the average person shouldn't be day trading is my guess. How do you figure out how to do that? Like, what was the, what was the theory at the time? Well, I, you know, I had a fascination in high school. I was already, you know, going in before school, pulling open the newspaper, plotting stocks. So, you know, mathematically inclined and had an orientation in this regard. And frankly, it was just my hack. It was my way of trying to figure out a way to make money. I can't say that intellectually I had done a lot of studying that this was a refined way to make money.

4:07But it seemed to me that I could study a company. I could study stock patterns and I could figure out mispricings. And I have to say the first time I bought a stock, right, it was not the best reason for buying it. But I bought IBM and they had just they had just put a new CEO in charge. And the CEO's name was Lou Gerstner. and and i you know no relation but i was immediately like attracted to the fact that okay there's somebody's name i recognize and he was um you know would eventually write the book elephants can dance you know and he really remade ibm and at that point in time um they were kind of having their second uh second wave and so made some money on that first stock and then i remember sitting in business school in 1999 i would sit in the back of the classroom because we had Bloomberg terminals outside of our classrooms.

5:01And so I could sneak out, pretend I was going to the restroom and I could get on the Bloomberg and do a little trading. And at the time it was the heyday of internet 1.0. And so remember companies like CMGI that went to$2 ,000 a share and they were moving in 10 and 20 % increments. So again, I wasn't moving a lot of money around and was able to do that and ended up graduating, you know, went to Wabash college, spent time at Oxford law school and business school and graduated debt free. Went to Harvard business school, graduated debt free, got involved in the tech world. And you started your own fund in 2008 with$3 million from friends and family.

5:37Is that right? Correct. So the journey really began in 1999. I was hell bent to get to Silicon Valley, like a lot of other students at that point in time. I had come out and met with some startup companies at the time. One that sticks in my mind is tell me. Another one was a little search engine called Google. My classmate who became my wife decided we were going to stay in Boston. I'd met David Fialco and Joel Cutler. They were thinking about starting their own venture capital firm. And I partnered up with them to help them launch their first business, which was a company called NLG, an early online travel company that we had sold to Barry Diller in 2001.

6:17I became the co-CEO of that business. and so it was really helping them start gc starting that first company we had two more companies i started open list we sold to a public company in seattle room 77 sold to google um got back to the investing side of the business knew i wanted to start my own business and the idea really was to build a crossover fund that was venture first based in silicon valley by a founder that invested in early venture all the way through the public markets. And so that's what drove me down that path. You've been really great at identifying some big trends. Tell us a little bit more about your investing philosophy.

6:57You've been managing billions of dollars now, obviously. Had a really good 15 years. What are some of the trends you've looked at? How do you think about investing? I know you and I have talked about this. One of the things that I thought was interesting stylistically in my first exposure to venture back in 99, 2000, is they were generalists. people would walk in off the street, two people and an idea. And it seemed like the, the office was always full of people doing kind of random things, frankly, from restaurants all the way through, you know, even today on Twitter, Paul Graham's like, you shouldn't actually say you're focused on anything because you should back the best entrepreneurs.

7:31That's right. Tweet yesterday. Yeah. That's right. Um, I kind of, and maybe this was my legal training. Maybe it's just my DNA, but I kind of consider myself more of a researcher and anthropologist. You want And so what I had, you know, when I was studying the internet in 1998, 99 and say, where will durable value accrue? It seemed to me there are a couple areas. One was organizing all the world's knowledge and information. Another one was organizing all the world's products. So helping us find and buy things, helping us discover knowledge. And you could build effectively a tax collection machine that sat in front of those.

8:06So for a decade, I started and invested in search businesses, horizontal like Google and vertical search engines like leading the series B and Zillow or Faircast or Sidestep or Kayak or Booking.com, etc. By 2008, 2009, we had this thing called the iPhone and we said, wow, something's really changing here. That's no longer going to be search first. That'll be something else. And we saw these icons evolving on page one. And so how do you become an application? How do you truly leverage? So companies like Uber and Airbnb, companies that were taking advantage of the social graph, like Facebook, that became applications and were no longer paying the toll keeper, the search engine, in order to gain access.

8:54And then I think we were early to the cloud. You know, people forget, but in 2011, 2012, the cloud was not viewed favorably. And the reason for that is it was more costly. It was less performant and was viewed as less secure than running computing your own data center. Yeah, we had a different opinion there. And so our fund, you know, we run, as you know, a long short hedge fund and a long only hedge fund. And those are permanent capital. And now we're on our seventh venture fund. But back then when I launched our first venture fund, it was almost all dedicated to the cloud. So early investments in Snowflake and Mongo, Twilio and HubSpot really powered the returns.

9:36We were in the same wave. It took a long time to get the big institutions to actually trust the cloud, but it was clear they were going to. And that's where it is now. You know, Brad, a lot of people argue today is harder than it was 10 or 15 years ago. I'm curious what you think. They say that, you know, AI, it's a lot harder, especially for venture, to take advantage of that, given that the existing companies could do it as well. There's a lot of debates about what the returns next 10 years are going to be versus the last 10 years. Like, what are the big trends today and how are you seeing it?

9:59It's not surprising that those arguments are reemerging right after 2022. Yes. Okay. Those same arguments existed in 2001 after that correction and existed in 2009 after that correction. And ironically, as investors and thinkers, we tend to be overly influenced by the most recent events. So I actually think this is the best of time, the intersection when prices have corrected, but you're early in a super cycle. Yeah. I think AI, or I like to talk about augmented intelligence, will be more important to humanity than the first three super cycles I've lived through, which are Internet, mobile and cloud.

10:38I think it'll be bigger. And so I don't buy that thesis. Of course, as Bill Gurley, our friend here in town, likes to say, you know, venture capital is cyclical. Right. We have not suspended the laws of gravity. Interest rates matter. Right. And so that overlay matters. But none of that changes. the never ending waves of innovation that we drive in this country. And when you can get early in one of these super cycles, those tailwinds provide extraordinary opportunities for return. So we're seeing a lot of a hundred million,$200 million AI around some really hot competitive stuff going on the Valley.

11:14Is that what's going to be that makes the money or how do you play AI? Well, oftentimes, you know, as you and I again have seen is being early can be tantamount to being wrong. Okay. So think about 1998. Every venture capital firm in Silicon Valley realizes the internet's going to be big, actually realizes that search organizing the world's information is going to be important. And the mad scramble was on. Everybody wanted a search logo. Lycos, Alta Vista, Ask Chiefs, Infoseek, Go, go through the list. Again, those logos maybe wasn't as good of an idea as it seemed at the time. And here we are.

11:48You could have waited until 2004, before Google's IPO, you would have captured 90 % of the upside ever created by search. And you would have avoided all of those zeros. Remember I talked about CMGI started by David Wetherall that company in 2000, he gave the graduation speech at Harvard business school. He was on the cover of time magazine. He re he bought the naming rights for Foxborough stadium in Boston, renamed it CMGI stadium and was bankrupt a few years later. I've never even I hadn't heard of him. I was 18 years old at the time. Because he beat out Barry Diller in buying Lycos. That's fine.

12:25Had Barry bought Lycos, it may have ended him as well. Wow. So I think being early can be wrong. That doesn't mean that the fundamental thesis was incorrect. In fact, it was right. Internet was going to be bigger than we all thought. Search was going to be bigger than we all thought. But you didn't have to be there and pay those high prices. I think we saw this in early mobile. Danger, Sidekick, BlackBerry. You know, there are a lot, Palm, there are a lot of great mobile efforts before you really had the emergence of the super cycle. Same in the cloud. And so we're early in AI. We're seeing really interesting stuff in the tooling layer where investors in the public market and NVIDIA, Silicon layer has obviously been ignited because of this.

13:06We're going to launch more. We're going to deploy more compute in 2024 than in all previous years combined. combined. Yeah, the data infrastructure and compute stuff does seem to be a good play, obviously, the last few years. That's an amazing amount of money being spent there. Right. And so, you know, the condition required to participate in AI is you have to aggregate all of your data and you have to set it free and get it frictionless into the cloud. So we're seeing reacceleration in terms of that entire stack. But if this is as big as we all think it will be, this will play out like the internet did over decades, not months.

13:41Let me run my favorite idea by you I'm working on right now. We're not talking about too much in public, but I think there's a lot of services businesses in our country where I'll give you one example. Healthcare billing,$250 billion a year is spent. People throw tens of thousands, hundreds of thousands of bodies at these crazy billing situations. And it seems to us, we have some really talented ex-palanteer guys working on it. We've been looking at things like this area. It seems like you can actually make it two or three or four times as productive. That means you have businesses that are worth billions of dollars, where if you fix them, the margins go from 15 % to 50, 60, 70%.

14:13Some of this stuff looks pretty interesting to us that could actually happen the next few years. Are you guys thinking about services businesses with AI or all that stuff? I mean, and by the way, I remember talking to you early in your journey at Palantir, and you guys were way ahead of your time. And Palantir is in many ways just coming into its own, right, in terms of the significant transformations that it can have on businesses leveraging AI. And so I think that, you know, I was in Omaha recently having dinner and you look at the Berkshire portfolio, its entire portfolio is already being transformed with AI.

14:47This is not something that's going to be, you know, discreetly preserved in the tech community, right? This is going to remake how United Airlines interacts with customers. It's going to remake how, you know, furniture manufacturers finish their goods in the US. So I think this is probably the single most important step function we've seen in productivity in this country since the Internet. And I can give you a couple examples on that. When do you think we actually see the productivity statistics? It's always been somewhat surprising to me that we do all this stuff in the tech world. Productivity hasn't gone up.

15:21Are we finally going to see productivity shooting up in the late 2020s? It's hard for me to think about the performance improvements that we're hearing about without seeing that flow through to productivity gains. So a couple statistics. Copilot, which has 30 ,000 beta customers at Microsoft, I think is the fastest growing product in the history of Microsoft. Most companies are reporting. I think Amazon Code Whisperer, so this is a code generation copilot, is reporting that they've seen 56 % increase in engineering productivity as a result of using Code Whisperer. That's awesome. Okay. You look at companies like Meta that have compounded engineering headcount at well over 20 % a year for the trailing five years, now saying we can hold engineering headcount flat to 1 % to 2 % as we look forward over the next few years.

16:13So I think it first manifests itself, Joe, that you just do more with the same people. The next phase is call centers and things like this where you can actually get higher net promoter scores with far fewer people. And so I think we're early in this playing out. 2023 was the year of testing. They tested it in the call center. They tested it in the sales with the sales teams. They tested it with their engineers. 2024 is going to be the year of deployments. We're going to start seeing those gains. You will not see mass layoffs. And then 2025 and beyond, I think you're really going to see those transformations kick in.

16:50I'll give you one other example. I heard this recently. ByteDance, where we're investors, has about 40 ,000 content moderators. Okay. These are folks who are flagging, you know, content. Making sure it's not too pro-US or anti-China. Just kidding. Just kidding. Well played. You and J-Cal, my rivals on this. You know, but flagging content. They suspect that they'll see a 90 % reduction in content moderators over the course of the next year because that work can be more efficiently and better done by AI. I think this will play out. So think of that. One product, one company, 35 ,000 heads replaced.

17:29I think this is going to be the most disruptive moment in labor markets in the history of modern capitalism over the course of the next five years. And so part of the things that you and I are both working on is how do we deal with this as a capitalist system? Well, let's switch to that because it's not clear our government, unfortunately, is in a strong spot right now to respond cogently to these challenges. So it was very interesting. You talked about how you were touched by having this money available for you when you were young. It was a surprise. And you're working on something like this for everyone in America called Invest America.

17:59Exactly. Tell us about this. Exactly. So, you know, some really shocking statistics have come out over the course of last five years about how Americans think about capitalism and free markets. According to Pew, over the last few years, we've seen a 10 percent decline in people's faith and confidence in capitalism. Joe, among the age group 18 to 29, 44 % of that group believe socialism is a superior form of organizing government than capitalism. It's a disaster. Capitalism support is in the 30 percentile range. And, you know, you think about Ray Dalio's book about the changing world order, right?

18:44And what causes that? effectively you have come you have countries that become complacent uh that become decadent wealth inequality grows inevitably that leads to infighting and eventually the rise of other powers so i look at this problem in the united states i said this doesn't you know although dalio uh you know has this incredible view studying 2 000 years of history about the rise and fallen nations. One of the things he says, these are dynamic systems. They don't just happen to us. We can influence the outcome. So the idea of invest America is very simple, harnessing the power of compounding and capitalism to give everybody skin in the game.

19:28It's legislation that would cause the treasury department to create 3.7 million private investment accounts a year. So we have 3.7 million children born a year. Treasury would create 3.7 million private accounts where each of those families has private ownership of those accounts they would seed it with a thousand dollars from the federal government set up a 401k match so companies or parents could match up to two thousand dollars tax-free um each year um and then just let that compound if we had started this 30 years ago a 29 year old today would have over 250 000 dollars in their invest america account wow it's hard to hate capitalism it's hard to hate america right it's hard to be financially unconcerned when you open up your invest america account on your mobile device and you see that you too are a participant and winner in this system it's really interesting because in some ways it's like oh this is the top-down status solution but on the other hand you're you're doing that you're doing this in order to create markets and create more liberty and create people who are aligned and want america to be functional and this what's this cost per year it's 3 000 times 3.7 million that's just about 10 billion dollars well it's a thousand dollars it's a thousand dollars a thousand only a thousand seated by the federal government up to two thousand that can be matched so for example i've talked to uber talked to united airlines and others right the 401k match in this country the corporate contribution annually is 75 billion dollars wow okay if this was one tenth of that yeah one tenth of the 401k match then the child would have$2 ,000 or$5 ,000 in the first two years of life.

21:10$5 ,000 compounded by the age of 60, you have a million dollars in your Invest America account. Okay. So that's if you don't have contributions beyond the first two years, which of course you would. So it's a significant amount of money. Here's the problem. 70 % of families in America don't have and will not have an investment account they will not have skin in the upside of america that's bad for all of us who want america to win exactly and we're gonna this is gonna be solved in one of two ways you're either going to get bigger government programs more entitlement more fighting for ubi more redistribution or we can harness the power of free enterprise and capitalism to reconnect everybody with the civic power right with the specialness of free enterprise and capitalism we can allow them to see firsthand the power of compounding imagine this i was in trenton a few weeks ago trenton like a lot of schools in the middle school is starting to try to teach financial literacy if a kid has parents that don't own anything and the kid has never owned anything it's very hard to teach them a language which is completely foreign to them.

22:27But now imagine that sixth grade classroom. The teacher says, pull out your phones, which they all have. Open up your Invest America account. It has$17 ,000 in it. And you see the top five holdings in the S &P 500. Apple, Tesla, UnitedHealth. Your share, your ownership in America. Let's talk about how you got$17 ,000 in it. It's ironic. The Marxists will not like this. It's good. They don't want these kids having this kind of alignment, which is, but we, but we do want them to have this alignment. I mean, there's good guys and bad guys here and we want, we want them to be aligned with this. This is not a question in my mind about, um, you know, having a foot in either camp.

23:05You're either on the side of free market capitalist democracy, or you're not. And this unequivocally and unabashedly is. It's interesting. We have, I think a$2 trillion deficit this year. You're asking for a$3.7 billion program, which is tiny compared to that. What we've spent in Ukraine to date would pay for this program for 20 years and 75 million children touching almost every American household. Fast forward 20 years. Can you imagine every household in America touched by an Invest America account? Okay. For the same price on just the incremental effort that we've given to Ukraine. Or in the last stimulus package, I think there was 75 billion for incremental IRS enforcement.

23:5275 billion. I know it's, it's a little bit crazy. How is Congress receiving this right now? What's the response? So I will say that, you know, I've spent 30 years like you engaged in the public sector, trying to have impact in a variety of ways, just as an entrepreneur looking for product market fit. I've never worked with something that has quicker product market fit than this. From groups on the left to groups on the right, we have bipartisan support emerging in the house and the Senate. With any luck, we'll have this introduced in the spring of next year. You should need a speaker in the House, hopefully, to help you out.

24:29That was a little bit of a setback for us, but we're working through that. We have set up the 501c3 and C4. I've got great help from the likes of Matt Lira, who you may know from, um uh you know who's driven a lot of innovative reforms include including opportunity zones um who's respected by both sides uh of the aisle and so you know i'm putting millions of dollars up against this uh we're inviting others to stand with us shoulders this is a fight for american free market capitalism by empowering every family and by the way yes this will disproportionately benefit those currently left out of the system.

25:15But one thing I was, I was talking with at an event with former president Clinton and somebody said, yeah, but you know, shouldn't only certain groups of people get this and not other groups of people get this. And we should only allow them to invest in certain companies and not all companies. And Clinton snap called him and said it has to be universal we have to bring people together not divide them and if the s &p 500 is good enough for everybody else in america it's good enough for this program and he's exactly right yeah no you don't want to let a bunch of woke nonsense get into this and fight over which companies qualify or not all this kind of like bullshit that's the whole that's the marxist stuff we're pushing against right and i and by the way what's the greatest weapon against that.

26:03It's making everybody benefit from the upside of capitalism and free markets. If we don't do this, Joe, if 70 % of the people are left out, if tens of thousands of people are displaced because AI is going to displace their jobs, we're going to have a bigger problem, as Dalio correctly points out, in the future than a smaller problem. So you and I, and folks like you and I, can do things proactively to get in front of this. and so i'm going to fight like hell for this because i think it's important for the future of the country actually do you think ai at some point makes the markets melt up if it actually does what you and i think with productivity which means we need everyone aligned with them what do you do about i mean there's obviously all sorts of issues this one's maybe too controversial but my guess is that a lot of people won't want the incentive for people from south america to rush here and have babies across the border in order for the babies to get free accounts like i guess you need to do border security better with this i mean listen listen i hope we don't need another excuse to have secure borders yeah right like if the present conditions in the world right aren't screaming at us loud enough hell i think even the current administration has recently said you know we need to invest more in border security that i you know that to me we don't need this program to remind us that we need to have secure borders and as i've said let's have secure borders and then let's actually have a strategic policy in this country to recruit the world's best and brightest 100 right like we ought to be more aggressive more strategic to invite the world's smartest to build their companies here and to build their families here we just have to have a system that respects fairness and rules when it comes to entering the country we're on the exact same page well i think this is a really compelling idea brad obviously you're eager to be helpful on this one hopefully we can get some of our listeners just to step up on it as well Where can they find out more, by the way, about it?

27:52So Twitter handle Invest America 24. And we'll be launching more. I follow my Twitter handle at AltCap. We've pushed out a few 15, 20 second spots that give you a sense of kind of where we're going to go in the campaigns. But we're going to be pretty aggressive. We have lots of people who've indicated a willingness and a desire to get behind this financially. We've got greats, right? The greats of finance and investing who want to spend their time and energy helping us build the financial literacy that's going to go into middle schools and high schools that's built around Invest America. This is something that really can unite us as a country, unite Democrats and Republicans around a cause that we all believe in, which is American democracy supported by free market capitalism.