Investing for the AI Shift: Masters in Business with Songyee Yoon

30:02AI is not, but the solution to that is not just AI. It's many different kind of, it could be redesigning the curriculum. It could be redesigning the kind of school system, the kind of thinking about how we evaluate their achievement and how we retrain our teachers. AI could be a tool for doing that, but it's not the solution for everything. So I think there is a huge difference there. All right. So let's bring this now out to the world of the economy and business. the probably the the biggest narrative i've been following about ai outside of it's a bubble or we're all going to lose our jobs and i kind of ignore both of those extremes is that successful companies have wide moats and we're starting to see ai compress those moats over time think about industries like lawyers, tax preparers, accountants.

31:03There's a lot of stuff AI can do in a fraction of the time and with a greater accuracy level. Everybody knows about reading x-rays and MRIs. So if we know our moats are going to get compressed, how should companies be using AI either to protect and expand those moats or somehow use AI to expand their competitive advantages while they last?

31:33I mean, I think that's very interesting because I think there are some of the industries and professions that will become much more productive and probably need a lot less profession to solve certain well-defined problems. But that doesn't mean that humanity as a society is left with no problem to solve. I think we have like so many other problems to solve that AI cannot address. For example, I mean, I think there are like very old problem of like the politics is how we are going to redistribute the resources. what is our societal priority in solving in enhancing the agency of everyone and kind of helping them to achieve their full potential i think those are the things that we don't have a good solution for while ai can take care of some of the things of a well-defined workforce providing that expertise to make a more efficient way we'll have time to work on other problems to progress humanity forward.

32:43And I think that we have prepared to accept new type of roles and new type of kind of professions that will exist and enabled by this technology advancement. So I think we're all in agreement, it's going to be a very disruptive technology. Am I hearing you say essentially, hey, it's up to everybody to learn how to use these tools and adapt, but the change is coming. You have to be prepared. Yes, right. Exactly. Yeah. So you've operated at the intersection of artificial intelligence, gaming, telecommunication, and social platforms. That's a great conversion of a lot of different technologies. How is that evolving?

33:25And how are both consumers and institutions really adapting to that sort of AI-driven economy?

33:38I mean, I think it's a lot of people recognize that this is one of the greatest platform shift in our lifetime. And there's a lot of excitement.

33:51But as many people say, I mean, the camp of seeing it as a kind of we are at the very early inning of how it's going to fully pan out. We don't even know what is coming in the next three to five years. And I'm really excited to see all this kind of the use case and application of technology fully using based on the creativity of this AI native generation. And I think that people who think with AI as part of their tool and at their fingertip will come up with different ideas and kind of apply their creativity. And I think that that's what I'm really excited about. So you founded Chameleon as a corporate venture arm, and now you run a fully independent early stage venture fund.

34:45I'm curious, what are the differences between being part of a corporate venture fund or an independent? What are the strengths and blind spots that you end up with in each?

35:00I think we work with the strategic investors, LP. then I think there is a certain... I think the objective is different. I mean, as a GP, we work for our LPs and kind of who is providing capital and what is the objective of the firm. And I think those are very different. So at the PVP, I think we focus more on type of investors who would like to be at the forefront of the innovation and then capture the value being created. regardless of the kind of the area, it doesn't have to be confined in like entertainment and consumer space. We were able to kind of look more broadly. So corporate is pure strategic and independent is strictly ROI.

35:47So let's talk about some of the companies you've backed. Together.ai, Cartesia, Sesame. These all seem to be pretty core infrastructure plays. Tell us a little bit about those. What was it about each of those that made them so appealing? I mean, I think it's a really tricky time to make an investment because, I mean, as we say, I think there is a lot of kind of excitement about this technology. There is a kind of the rushing mentality. So I try to invest in companies that's going to be durable in the coming decades. So I really like companies that are building infrastructure technology that has multi-purpose as this platform and technology evolves.

36:32So I think Together and Cartesia, both of them have great founders, have a vision of building infrastructure and foundational technology that's going to be used in many different AI platform companies that are going to be building. And I think Sesame was an interesting case because it's building the voice applications that I know from my gaming experience is the kind of importance of it and importance of focusing on certain features that will provide certain experiences to the users. And I think the founders got what was important. And I think their capabilities and talent was singularly focused on making that technology push.

37:18So I really like what they were doing. And that's one of the reasons I ended up investing in Sesame as a company. But I think there are other type of companies as well that we're excited about in this very, in this kind of like standing on this kind of shifting grounds. And I think those are the companies who are in a position of building this data flywheel because one of the non-deniable characteristics of the companies that will be durable in this environment are the ones who have appropriate access to data, the data understanding of customers and consumers and the business, and build a technology, unique technology on top of that.

38:01So we also are investing companies that are building this data flywheel that over time building very defensible mode. Really, really interesting. Coming up, we continue our conversation with Songyi Yoon, co-founder and managing partner at Principal Ventures, discussing the state of venture investing into artificial intelligence today. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. Thank you.

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40:51For just 27 cents a day, their platform reads your policies and explains where you are vulnerable. They don't sell insurance, they deliver transparency. Before you trust your policy to protect you, let My Policy Advocate tell you what it really says. Go to MyPolicyAdvocate.com. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Songye Yoon. She is the founder and managing partner at Principal Venture Partners, an AI-focused VC. So that's a fascinating phrase. You don't really hear a lot of that up until recently. What is the key problem Principal Venture Partners is trying to solve in the world of AI today?

41:39So we started to back AI native companies. And I think when we first talked about AI native companies, that was not a very common phrase. People asked me, like, what do you mean by AI native companies? And I had to explain what it meant. And I think it's these days, I think it's a more widely used term. and we would like to back companies who are fully embracing the technology of today and tomorrow, led by founders who understand the technology and limitations of it and able to come up with org design that reflect the importance of this. So I think in terms of the size of the department, I think it will be very different from companies It's built upon last generation technology tech stack.

42:32And I think a type of leaders and talents who are going to lead all those departments are going to be different in terms of the use of technology and their vision. And solving the problems that's relevant in the AI native era are the companies that are really excited. And then those are the companies that we are focused on investing in. So every time there's a new technology, everybody just kind of sprinkles a little bit on it to catch a little bit of the buzz. We had it with the dot-coms. We had it with the metaverse. We had it with crypto. And now everybody's claiming they're an AI company or at least a lot of companies.

43:08How do you distinguish between what is truly AI native and what is just let's put a little dash of AI salt on this? That's a very good question. I think I have unfair advantage by like working in a gaming company. And I think gaming company actually gave me experience in gaming industry is like having a lens into the future. Right. Because a lot of the technology and innovation happens in gaming first. and it gives us kind of sense of like, is this type of technology adoptable and will the consumers accept this type of application? So like in terms of application and platform, I think that that's really an interesting guiding North Star for me.

43:57And then in addition to that, I think that companies that are fully AI native are built around that tech stack, Whereas if you are trying to splinkling AI, I think you kind of ask a question, like, can you do the same thing without AI? Like, why do you need it? Why is it indispensable? I think there are kind of businesses and business operations that they're using, for example, like agent technology. But like a lot of the applications, you don't need an agent. You just need some kind of good data analytics. So I think there are many ways that we try to understand how businesses are operating and see their kind of full potential in their strategy.

44:41So on the one hand, I know AI has been around a long time. There was, you know, when Deep Blue beat Kasparov, that was a big deal. And then I forgot the name of the AI app that ended up winning Jeopardy. These are like 10 and 20 years ago. So it's not a brand new technology. However, it feels like we took another level jump with ChatGPT and go down the list. Claude, notebook, perplexity, whatever. How do you think about this moment in time? Is this similar to early broadband, early smartphones, early cloud use? Like for someone who's a tech investor, they want to know, hey, is it early? Is it late?

45:32Is it so early that nine out of ten of the startups we're going to see are going to go belly? Like how do you think about this moment where we are today? That's great. Actually, it's older than that. Do you remember like in 60s there was an application called Eliza? That sounds very familiar. Telephone or? Liza was a kind of very early incarnation of chatbot. And I think there was even a newspaper headline, The End of Psychotherapist, because it was doing so well in terms of rephrasing what we were asking and kind of giving them comfort when you're asking about very personal questions. And they said, oh, we don't need a psychotherapist anymore because it's doing good enough.

46:22And I think since then there was a lot of kind of AI winters and summers, ups and downs. And I think there's a lot of hype. In terms of like comparing where we are in terms of the kind of platform shift. And I think what's surprising to many people about this time and moment is that the AI shift is closer to the introduction of the railroad than the introduction of the PC or internet. Because the biggest breakthrough that allowed us to come here was actually the scale. So it's not just a new, it's not new algorithm. It's not new software, kind of new way of doing things. But it was a scale. Let's do it like kind of pouring a lot of resources to make it really big.

47:21And that's where we saw the tremendous jump in terms of the capability of AI. So with that, I think kind of rolling out that as an infrastructure has been the focus of the last two, three years. And on this exciting new railroad that's built out, I think there will be interesting new businesses that will emerge out of it. So, yes, I think we are very early in terms of kind of fully appreciating what's possible on top of this. So I love the idea of interesting new businesses. And I'm always fascinated with what do the public markets know? You know, they're more or less kind of eventually efficient.

48:09And very often, though, when a new technology comes along, they very much underestimate where it can go. So what's a sort of use case that the public markets might be underestimating? Where might this go? You look at dozens and dozens of new companies. What direction is just mind-blowing that nobody is really anticipating? So there are – I think there are a lot of things happening. One is that one interesting thing about this technology is that while it has been, it beat many people's expectations about what it can do. However, I think there is a lot more innovations coming along because in terms of this architecture design and fundamental design of the framework, there is a lot more innovation coming along.

49:09So we're not done with what is the most efficient railroad design. I think there could be other type of railroad that can come along online that will allow faster and more kind of more comfortable ride experience. And once there is a railroad, I think there was an interesting business that emerged. Like, for example, like mail order. It's really hard to make a connection. But that type of new businesses was made possible because railroad was in place. But I don't think it was the kind of first thing that came in mind were kind of rolling out the railroad as a kind of across different states. Well, broadband and fiber optic led to so many different – everything from YouTube to really the build out of Amazon Web Services and online retail.

49:59Online games, right. All that stuff. Exactly. Exactly. I think so. So that's why I'm really excited about AI Native Generations and creativity, what they're going to build on top of this. So I think there will be new type of businesses that we don't comprehend today that will be enabled by this infrastructure. So when you're sitting with a founder of a company that's looking for financing, what sort of questions do you ask? What are you trying to figure out about their model, about their direction, about their team? it's so unique and cutting edge. I mean, I think it depends depending on what they're building.

50:38I think the set of questions that I ask when they're building more of the infrastructure technology versus kind of business applications are different. But especially when they're building business applications or vertical applications, I always try to ask what is the real value that that is going to bring to the end users. We are not investing in companies that are building amazing kind of tech demonstrations and the features. We're trying to find the companies who are solving real-world business problems and do it in a way that's sustainable and more efficient and using any other type of technology.

51:21So you're looking at infrastructure-type companies. What other type of AI applications are you looking at? We're looking at the companies that are building vertical applications by developing data kind of flywheel and data mode. So there's been a little bit of a lightning rod from a regulatory standpoint. There's, you know, all the LLMs have copyright complaints and issues. You sit in a really interesting intersection. When you look at a term sheet today, how do you think about the regulatory risks, the litigation risks? I mean, when LLMs first came out, I didn't for a moment think, oh, no, all that was stolen content that they were crawling over and using as their training tools.

52:13How do you think about regulatory framework and geopolitics? It seems like there's a lot of novel moving parts. Yeah, I think that's a really great question. And I think that more than ever, understanding how the regulatory body thinks and the policy is going to evolve over time is important at making these decisions, especially in the venture space. We are making a bet. We're making investment that should last over a decade. Right. So I think it comes from the kind of the belief and understanding that the innovation and the research is really kind of is very precious for all of us as a humanity.

53:05and the kind of the

53:13this kind of peer review the kind of the tradition of the peer review and the open forum has really propelled us to where we are today and it's going to continue and I think the collaboration and openness will better serve our end customers so the transparency is important And I think with all of those beliefs, I mean, I think we don't have the crystal ball to say like what the policy framework is going to be like, what is the kind of geopolitical tension it's going to be like in the next one or two years. But we have the belief that human kind of our collective work will converge in a direction that serves our humanity in a positive direction.

53:58And I think that's kind of where I'd like to see that ultimately that's what's going to be implemented and incorporated. And under that type of the world, whether these companies and founders can test a pressure test to sustain. And I think that's how I see and when I evaluate the companies how it's going to sustain those kind of policy changes. All right. So before we get to our speed round, let me ask you one last question, which is what do you think investors in the AI space are either not thinking about or not talking about but is important and perhaps they really should be paying attention to?

54:44I think that the saying that says we are at the very early yiming means a lot. I hear someone even saying that we are still in the car getting to the stadium. We are not even in the first inning. That means all this kind of the models and structures can change significantly, can evolve over time. And nothing cannot be seen as kind of engraved in a stone. So with that, I think that a lot of the investment decisions has to be reflecting the fact that it kind of has to remain nimble and flexible because we should be able to adjust to when those changes and new breakthroughs come around. All right.

55:37So I only have you for a few minutes. So we'll click through these really quickly, our speed round, starting with who are your early mentors who helped to shape your career? I would say, I mean, I think I was fortunate enough to have a lot of mentors when I was a student. But one person that stands out is Dominic Barton, who was the global managing partner at McKinsey. When I first started out as an associate at McKinsey, his office was right next to mine. So he was literally my mentor. And I think I learned a lot from him as a leader. and as a mentor. And I think still today I reach out to him if I have to make tough decisions, and I think he has been always very generous with his time.

56:31So I really appreciate it. Let's talk about books. What are some of your favorites? What are you reading right now? Oh, so I read a lot of books, but I think I kind of read many books. I'm of the type that I read many books kind of simultaneously. I have one chapter here, and then I jump to another book. But the book they recommend to everyone these days are two books. One is The Empire of AI, and the other is Power and Progress. And I think that those books kind of help us understand the dynamics of what's happening and what we need to think about as a society. So let's talk about streaming. What are you either listening to or watching these days?

57:14So, I mean, I listen to music through Spotify a lot. My son is a big fan of Taylor Swift. So, I have to listen to Taylor Swift when I'm in a car, driving a lot. Also, I watch K-drama on Netflix. Really interesting. Our final two questions. what sort of advice would you give to a recent college graduate interested in a career in either artificial intelligence investing or gaming? I mean, I think kids just graduating today, I mean, I think it's the one thing that's not going to change. It's going to be very bumpy and it's going to be like disruptive. and the world they're going to be working in is not going to look like the world today.

58:09Like that's the constant, right? And I mean, I think what I would like to remind them is like, don't try to find, like kind of follow the trend. Really have to stick to what you are, I mean, it sounds like a cliche, but like what you're passionate about. I mean, you remember in the 70s, the most popular major to go in was, What was that? It's like kind of material science and then like chemical engineering and then like electric engineering and computers. Like just to see that those those the popularity of those major kind of plummeting. Like we have witnesses like so many of those cases. So it doesn't really it.

58:49I don't think it serves well to find what try to kind of follow that that kind of fashion or trend. So be a generalist and be flexible. Could be, yeah, right, yeah. All right. And our final question, what do you know about the world of venture investing and artificial intelligence today? Might have been useful to know 20 years ago. I mean, I think the patience. So, I mean, it's also the power of compounding is not just in finance, but also in, like, human capital and our understanding of technology and also the relations, too. It seems very slow today, but if you're persistent and for 20 years, I think that what you can achieve is really tremendous.

59:39Well, thank you, Sung Yi, for being so generous with your time. We have been speaking with Sung Yi Yoon, founder and managing partner at Principal Venture Partners. If you enjoyed this conversation, well, check out any of the 600 plus interviews we've done over the past 12 years. You can find those at iTunes Podcasts, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. I would be remiss if I didn't thank the crack team that helps us put these conversations together each week. Alexis Noriega is my video producer. Anna Luke is my podcast producer. Sean Russo is my head of research.

1:00:23I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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