AI Innovations with Joe Lonsdale

0:00I'm Hannah Fry, and as we rely more and more on artificial intelligence in every facet of our lives and businesses, I'm on a mission to find out how we can build the internet internet. AI needs. Learn more later in the podcast.

0:40on the edge of what we think we know. Wherever you get your podcasts. Bloomberg Audio Studios. Podcasts, radio, news. This is Masters in Business with Barry Ritholtz on Bloomberg Radio. This week on the podcast, wow, this is really so exciting to share with you. We hosted a conference out in Huntington Beach, California. My firm, Red Hills Wealth Management, along with Advisor Circle, called Future Proof. It's a giant event on the beach in Huntington Beach, California. Part of the event is a series of panels and interviews and fireside chats. I got to sit down with Palantir co-founder Joe Lonsdale.

1:33He's really a fascinating guy. He's been a serial entrepreneur, managing money for Peter Thiel, interning initially at, of all places, PayPal, which he then just one successful company after another. Just a fascinating guy. So we spoke for about 30, 35 minutes. I thought the conversation was fascinating. And we talked not only about Palantir and the defense industry and how the world of warfare is changing. Lonsdale is a serial entrepreneur who has had success after success after success and is still a relatively young guy. And there's more fascinating things to come from him. Here it is, my discussion with Palantir's Joe Lonsdale in Huntington Beach at Future Proof 2024.

2:25So I just highlighted a handful of things about your career, but I really want to delve into the specifics. You're at Stanford studying computer science, and somehow you land a job as an intern at PayPal. Tell us a little bit about that. Well, this was a pretty cool place. So Elon Musk, with his smartest friends, started a company back then in the 90s called X. and Peter Thiel and his smartest friends started Confinity, and they were two of eight competitors, and they decided rather than destroy each other to merge. It was actually interesting times. People were working so hard that some of the people working for Peter at one point had not gotten enough sleep and were suggesting ways to bomb the office of the other guys.

3:07They realized this is barely bad. We should probably stop this. And so the companies merged to form PayPal, and a lot of the most talented people from Stanford Computer Science went there at that time. It was an amazing place. Elon kept trying to rename PayPal back to X.com, which they didn't let him do. So I guess he eventually got his way 20 years later with Twitter. But no, it was a really fun place to learn. And a lot of my friends there, these guys were like 10 or 15 years older than me. A lot of people who were working there ended up going on to start YouTube and Yelp and LinkedIn and all sorts of great companies.

3:39So it was a fun place to learn. Right. That was quite a brain trust over there. Your next role is at Peter Thiel's hedge fund, Clarium Capital. You describe that as one of the top intellectual think tanks in the world. Tell us a little bit about your experience working with Thiel at Clarium Capital. Yeah, sure. That was a global macro hedge fund. And so that's a really fun part of finance where you just get to try to figure out at a high level what's going on in the world. And lots of arguments about politics and economics and history and financial markets. and you try to, on one hand it's quantitative, you're modeling different things like, you know, the Australian currency versus the price of commodities versus, you know, what's going on in China.

4:22And on the other hand, you're kind of just discussing what's going to happen the next five or ten years. And we, you know, we had a really good ten-year run. But while I was there, I tried to hire a bunch of my smartest friends to help us. And they thought finance was boring. And we started a project based on how PayPal was going after all the bad guys. Because, you know, the Chinese and Russian mafia had been stealing our money at PayPal. and we ended up building these investigative tools and creating Palantir out of there. So that's what I ended up doing instead. So I just want to put a little flesh on the bones.

4:50You said you had a pretty good run. You ended up with a very nice 10-year track record, but first two years out of the gate, something like plus 30 % and plus 50%. Am I getting those numbers about right? Yeah. I mean, if you want to know, this is macro finance, right? So it's a fun area. Like an example of one of the best trades we've figured out that worked for a few years is Greenspan had cut interest rates and there is more money than ever before going into the GSEs, Fannie Mae and Freddie Mac. And so you had this massive amount of money there. And because these guys were so big, when they would hedge their mortgage portfolios, it would move all the global fixed income.

5:27And so what happened was, you remember like late 2002, you had like five, six percent interest rates and the rates started to fall. And so people started refinancing their homes and when people start refinancing their homes the duration of mortgages goes down. So in order to balance the durations Fannie Mae and Freddie Mac had to buy huge amounts of 10-year notes but they had to buy so much that actually made their interest rates go lower which led to more refinancing which led to have them having buying more. So it's this feedback effect and you're able to measure the feedback effect you got down to like one year duration 3 % 10-year notes back then and and then all of a sudden was snapped back really quickly because all the money was in the economy.

6:03So anyway you can kind of map this stuff out figure We wrote how to trade fixed income. It's a fun environment. That must have been a fun environment. So you mentioned Palantir. I have to mention, how old were you when you were one of the co-founders of Palantir? You were a young guy. I was 21. I'm 42 now, so that was a long time ago. And since now we're going to talk about Palantir, congratulations. They're entering the S &P 500. It's an awesome milestone. At 21, did you ever imagine something like that happening? Yeah, I was a pretty obnoxious kid. Actually, Palantir was great. We gave offers.

6:39We were known for having the top engineering culture. Peter was an investor in Facebook at the time. So our competition was Palantir and Facebook for the best engineers. And you really had to convince these people this is going to be a big upside place. And so you'd give them offers, and you'd give them three options. They could have a higher salary, but less equity, less stock, medium, medium. Or you'd have a lower salary, but more stock. And I'd draw up on the option. For the first 200 people, we'd put a table. we'd say, here's how much your stock might be worth if this company's worth half a billion dollars or a billion dollars or five billion dollars.

7:10I got so much shit for including five billion dollars as one of the possibilities. People are like, this is ridiculous, Joe. And the market cap today? It's about 82 billion now. So it worked out. It took a long time, but it worked out. 20 years for 80 billion dollars. It's a well worth trade. So when the company launches, it's a big data analytics company. Today, the focus is defense, commercial, and government. Was this a natural evolution or was there a pivot somewhere along the way? No, we started the company to kill the bad guys. Yeah. Let's be clear. I don't know if we're supposed to say that.

7:42Post 9-11. I don't work there anymore, so I can say it now. We started the company after 9-11 to kill the bad guys and stop attacks, and we ended up helping run the targeting systems in 40 allied countries and wiping out over 10 ,000 terrorists, including a lot of the most important ones. And it protects civil liberties, too, but let's get the bad guys. Yeah. And it turns out the hard data problems you solve when you run an infrastructure could be used for a lot of other things. You're basically building ontologies of information and workflows and organizing all the data. The government, and when we started Palantra, the government at the time spent like 38 billion dollars gathering data.

8:15So I don't even know what it spends now, but massive amounts of information and tens of thousands of databases. How the hell do you make all this stuff talk to each other? And so by solving those problems to kind of organize that, it turns out you now have the data in a form where AI can be used really easily. So today, Palantir has really caught the AI wave because it enables AI workflows no one else can. And am I correct in saying during COVID, Palantir helped governments figure out how to monitor, how to track, how to roll out vaccines? What was Palantir's role during the pandemic? Yeah, I mean, it's used by the armed forces to organize all their logistics and supplies and everything.

8:53So it's a very similar problem. How do you use all the data coming in about how to prioritize things in a pandemic? Because you're coordinating just massive numbers of things and production and all sorts of stuff. I mean, you have a lot of Fortune 500 companies using it to manage all of their and optimize all of their production and distribution. So obviously it works very well for that for the pandemic. I think like 36 countries used it for that too. So it's good. So it's a proven technology today. What was it like getting governments to recognize the value of this in the early 2000s. They were distracted.

9:26It was almost as difficult as it was to get REAs to take Adapar seriously the first five years. No, it's actually very funny. You think after Palantir we were like, oh this is gonna be easy. No, it's... listen, governments are very funny. They want to use things that are new and innovative, but they want to use things that everyone else is already using. So breaking in is a very chicken-and-egg problem that's very hard. It turns out that there's a lot of money in the Special Forces and Special Operations units who frankly their lives are a lot more on the line than almost anyone else because they're all they're constantly doing really dangerous missions around the world and they're running a lot of the most important things that our armed forces do and those groups have such bold and such confident people that we're able to break in, work with them, get them to prove that it worked and then that kind set the precedent for other parts of government to then work with us.

10:19So thank goodness for our special ops groups. So wasn't DARPA that first started with you or did you have any work with them? I think DARPA was helpful a little bit, but it really, the thing that really matters is people using it on the ground where lives are on the line. You want, if you have something that's the best, you want to, it's going to break in because people need it, because they're, because something, something's existential where they're going to die if they don't have it. They're not going to be able to do the mission if they don't have it. So DARPA is more of an academic thing that's smart, but I'd much rather work with the people whose lives are on the line, and that's how you really break in with the best things.

10:50You mentioned Adapar and AI. Just so you know, ChatGBT is what told me it was$5 trillion, not$7 trillion. Well, ChatGBT is behind. So you found the company in 2009. Today, you're the chairman. It began life as a cloud-based software platform specializing in data aggregation, analytics, and reporting of portfolios. What was the original business model? Well, you know, I had my family office at first, right around then. It was a smaller family office, and I had a lot of friends and people I talked to who ran family offices, who ran REAs. There were new groups on the west coast like Iconic and others building these firms around the tech world on RIA land, and everyone hated their software.

11:38And I looked at it, and it was like, this is a mess, and there's not a really good solution here. And, you know, we were mapping out. There's a lot of new possibilities thanks to the cloud, thanks to what you could do with data. So we said, let's build something that's better. And I naively thought we would have something that was significantly better within a year or two. It turned out it took us hundreds of millions of dollars in several years, but I am quite confident it's the best at this point. So the genesis was, hey, I have to manage my own capital and the tools aren't good. I'm going to create it.

12:05Or was the original plan, I have an idea and everybody should be using it. It was a business. I think in general, when you have an area that you realize is broken for you and for people you know, rather than just build it for yourself, I think it's a good excuse to build a business around it. So I was actually CEO full-time for a few years, getting us off the ground. Eric Poirier, who's running it for over 10 years now, is a much better CEO than me. So I'm I'm a proud chairman now. But no, we built it as a business. I mean, listen, you guys, when we first hooked, there's 7 ,000 custodians in the US.

12:35And so when we first hooked up data, the biggest custodians are people like Fidelity and Schwab and others. And we get this all set up. We spent like, you know, a bunch of time on it the first year. We hook up the live data. We're getting going and it's all wrong. And we're like, oh, what did we do wrong? And it turns out, even those custodians just have bad data. This space is a mess. It turns out there's lots of hard problems to solve to make this stuff all work right together. So everyone wants to customize things differently. Every RIA has their own way of doing things, their own way of showing things.

13:04And so it turned out it took us several more years to get it right. So$7 trillion, you have some very large RIAs on it. You have broker-dealers like Morgan Stanley on it. How big can Adapar scale? Well, I think there's about$250 trillion globally that's addressable. Maybe only 150 or 200 of that would use a resolution. So even though we're growing really quickly now, I think we're growing like over 30 % a year still. We are still probably at least in our decade of fast growth. I mean, this is a giant market and, you know, we're still learning. I think they're still learning every week from clients about how to serve them better.

13:41There's, I think, about 1 ,200 firms or so, give or take, on the platform now. And, you know, I'd love to see them triple that over the next few years. So most of what Adapar focuses on are public markets, stocks, bonds, mutual funds, ETFs. But you also said, hey, this private market thingy is going to get big one day. Well, being able to report on every possible thing someone owns is key for Adapar, but Adapar itself doesn't help people access the private market. So let's talk a little bit about Opto and that platform. the idea behind Opto and your chairman of Opto Investments is to focus on private markets.

14:19Tell us what you see in that space. Well, what I saw is that the way people tend to come to you, so it's obviously, I run an investment firm, a lot of my friends run investment firms, have a lot of strong opinions about private markets, right? And this is an area where in the 1990s, there was a lot more public companies, there's a small number of private companies. Today, you have more private companies and public companies and frankly a lot of my smartest friends, people doing things that are changing how the world works, are mostly doing that within private companies. And so today if you're not accessing private markets you're gonna get left way behind your returns.

14:52I think especially the next 10 years given how AI is changing productivity in so many parts of our economy we could talk about. It's very clear you get left behind and that's messed up that a lot of people don't have access to what's clearly the higher returning areas if they're done right. And what I saw is the way people were trying to sell people on private market stuff is basically purely a brokerage model where they come to your firm and they say, we're going to make money by selling you kind of mediocre crap. That's how a lot of these things operate. And I think that's actually frankly disgusting.

15:24It's just misaligned. It's not how any of us would do business normally is that you don't want to put money into the things that you're getting paid to put money into. You want to have an aligned model where we all make money together by accessing the best things. And private markets, especially venture capital, but frankly, certain parts of PE, certain parts of alt credit, all these other things, they have very high disparity. You really want to get in the top decile, top quartile stuff, and you're going to do great. And if you get in the mediocre stuff, you're going to have mediocre results.

15:51And so just the whole space just seemed misaligned to me. And then on top of that, it's really stressful for a lot of people to get all their clients into these things, because there's just lots more paperwork, lots of messes, lots of legal stuff. Why not make it as close as possible to doing something in the public markets, to do something in private markets? And really, technology and AI can't solve that. So Opto, it's about making people aligned. It's having one platform where you do everything. And frankly, it's about using my network and my friends' networks to put what we think is the very best stuff on it that my family office is doing, and let's share that with others.

16:23So at this event, we have over 2 ,000 RIAs. Of these, some of them are single practice, small operations. Some are really big firms with tens of billions, hundreds of billions of dollars on them. How can large and small firms integrate Opto into their practice? There are both lots of small firms and some very large firms now on Opto. The goal is that it makes it as easy as possible. Similar to Adapar, which has obviously been around longer. It is a giant company now. I mean Opto is growing very quickly and we want to learn from REAs like what about this could be easier for you to use it. But we have dozens of firms that have created custom funds on it for their clients and access things that I think otherwise they never would have accessed and made it really easy for them to do it.

17:12So I would love people's feedback on what we're doing here. This is a younger company but growing really fast and I'm really proud to kind of get people the best access in the alts world. I think this is such a fun, interesting world that a lot of people really don't know how to approach if they haven't been doing it in the past or if they have been doing some, but maybe they don't have certain expertise in other areas. Sometimes for our custom funds, they'll choose certain areas, certain managers they know, but they won't complement it and help them do that with other areas they haven't studied as much.

17:37And so, a lot of people's feedback. As our use of AI expands, how do we make sure it doesn't end up breaking the internet? I'm Hannah Fry, host of The Exponential Era a series that explores the real world impact of future network technology and I sat down with two experts to discover how we can support the massive connectivity needs of AI Find out what I learned at bloomberg.com forward slash Nokia

18:10This is Caroline Hyde and I'm Ed Ludlow inviting you to join us for Bloomberg Tech a daily podcast focusing exclusively on technology, innovation and the future of business. Every weekday, we bring you the top headlines from the world's biggest tech companies. From finance to defence, AI to entertainment and from startups to the magnificent seven. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets. We do this all every weekday, then bring you the most important conversations and analysis in our podcast.

18:43Search for Bloomberg Tech on YouTube, Apple, Spotify, or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech Podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today, wherever you get your podcasts. So you wear a lot of hats. You're chairman of Adapar. You're deeply involved in Opto. Tell us about your day job, 8VC, a venture capital firm. Yeah, no, at the end of the day, I'm an entrepreneur. I like to build things. And a lot of the people from Palantir, from Adapar, have gone on to build lots of other companies.

19:23And so I've been coaching, I started coaching a lot of them. just like with PayPal where we had 16 billion dollar companies come out of it after eBay bought us, Palantir's now had over a hundred successful companies come out of it that people have started over the last you know couple decades and and so you know I ended up ended up saying you know it makes sense to actually build an investment firm. My mentors told me I basically was doing an investment firm didn't have enough money or enough people so so we so the last 12 years we put together a pretty big firm in the venture capital space we we build we've build and launch companies we back companies early and I mean we're not yeah, it's nice in venture if you don't raise big funds, they become very, very oversubscribed, so I'm not here to raise money for 8VC, but it's a fun area, and I'll tell you, since you're asking about, there's really two areas that were probably really well known for the last few years.

20:08One of them is defense. We've started multiple new defense companies, including nearby here. We actually backed early Andrel with Palmer Luckey and some of my ex-Palantir colleagues, and they're becoming new defense prime, which is really cool. If you haven't checked it out online, there's amazing videos of the things they're doing. And then the other two, one of them, you know, drone swarms have become a huge problem. It's really hard to stop. We're spending two billion dollar missiles to shoot down cheap little drones with bombs coming at our troops and they'll swarm a hundred at once. So we figured out how to use new technology to send out microwave radiation really, really far from pretty small device to shoot down swarms of drones.

20:44And we're now deployed live. It turns out the AI chips can get the power to hit the gallium nitride emitter all at once, turn them off. So we built that and we have another company building thousands of ships for the US Navy, smaller ships, because it turns out China has 200 times our shipbuilding capacity, which is frankly a huge crisis. You know, it used to be in World War II, Germans had better ships than we did, but every time we lose a ship, you'd build three more, because we have the best building capacity. America now, with literally 200 times the shipbuilding capacity in China, very scary for our ability to deter them.

21:13So we're figuring out how to take our best and brightest. Frankly, Elon Musk, who's a good friend, has like really revitalized advanced manufacturing in America. We're taking some of that talent, putting it into military areas as well to make sure we stay ahead of the bad guys. So we're doing a lot in defense. And then the one other area I'll mention is what we call AI services. And so there's a huge part of our economy right now that we're showing we can actually double or triple the productivity using AI. And so this is stuff like healthcare billing, logistics billing, back office processes.

21:43In the alt world, it's like how do you manage and subscribe and deal with all the alts paperwork and stuff. There's just lots of these areas that are going to just be completely changed. And so we think there's multi-trillion dollar opportunities in those areas and building a lot of companies that are succeeding in them. I want to stay with defense a little bit because you're involved in so many really interesting areas. I first heard of Palmer Luckey with the Oculus, which you were an early investor in, before I think Facebook ended up buying that. Yeah, Facebook bought it for over$2 billion just a few years in.

22:14You made him a billionaire at like$22 billion or something, which will go of your head pretty fast. And then not too long ago, maybe it was Wired Magazine did a profile on really interesting things that Palmer is doing with drone technology and defense technology. Tell us a little bit about what's going on in that space. Yeah, so basically Palantir and SpaceX were the first two companies to break in and effectively become some form of defense prime, the first new ones in 30 years. Because you had all these old primes, they all consolidated after the cold war ended in the 90s and they basically had a total lock on DC and Palantir took us a long time a lot of stubbornness to break in and then and you know some points that we had to sue the US government because they were doing crazy things and we won.

22:57SpaceX similarly had to sue the US government because they just discriminate against new things right and obviously SpaceX good thing they won because they're obviously a hundred times better than the alternative. Frankly after doing Palantir I said this defense stuff is just really stressful it's really you know hard to break into I'm gonna do out of par instead. Turns out you guys are stressful too. But, you know, I'm like, I've done enough defense. And we started being pretty bullish on things going on between China and the U.S. and very naively thought the world was just going to go in a kind of more peaceful, more prosperous direction.

23:27And we saw this guy, Xi Jinping, come in. And I have friends with a lot of the guys who built these companies in China. A lot of them believe in free markets. Reid Milton Friedman, like, share a lot of our values. These are not, just because they're Chinese, they're not bad people, they're not CCP themselves. And we saw Xi Jinping start cracking down on these guys. A lot of them disappeared. They've had multiple friends who knew really well, who died in their sleep in their 40s, after being tech billionaires. And we saw him also making a lot of our friends force their top engineers to work on defense projects.