AGI, Seriously + Foundation Model Polyamory (With Kyle Harrison)

27:46We've got VCs excited, markets be damned, except maybe a little bit worried, but we won't talk about it now because we're still doing deals. Eric, you had a nice chat with Kyle Harrison about VC polyamory. How did that go? Yeah, he did great thought leadership. He made a viral image on Twitter, the ultimate influencer. That's like a research report in venture. Anyway, so Kyle Harrison at Contrary, friend of the pod, came on to talk about venture capitalists investing in many, many foundation model companies and his chart of all the incestuousness in venture and foundation model companies. So it was a fun coda to Tom's reporting on the state of models.

28:26Kyle and I talked about how venture capitalists are playing all the money flowing into foundation model companies. Give it a listen. Hey, it's Eric Newcomer. I'm here with Kyle Harrison of Contrary, former investor at Index and KOTU. Thanks for joining me. Thanks for having me. We are here to talk about one specific thing, infidelity among venture capitalists, where you had a viral image in tech world that shows all the different investments that VCs are making into foundation model companies. And a lot of the VCs are making investments into competitors. So fun topic. Do you want to just start off like the impetus for making the graphic and then sort of walk us through what you found?

29:11It was kind of a vibe that I had been noticing over the course of several months where I would see these fundraising announcements and it would be a big firm talking about, I think it was XAI was the one that really triggered me where I saw people that were like, we're so excited to back you on again, a generational company building And it was all this stuff about how great the business was. And I was like, wait, didn't these people invest in OpenAI or Anthropic or whatever? And I went and looked and was like, oh, they did. Like, oh, I guess people are making a lot of cross-multi-layered investments and stuff.

29:41And then in a non-account that I really like, who's one of the best LP accounts on here, is this guy in Downman Eddie. He was like, okay, wait, is backing competitive companies allowed now in venture? And I was like, let me go look at the cross-section. It's like, yeah, I guess so. Yes, clearly is the answer. Do you just want to walk us through it? Like Andreessen, you have SSI, Ilya's company, XAI, OpenAI, and Mira's Thinking Machines. What are some of the other interesting ones? Yeah. I mean, I think the biggest thing was that you've got, and I think even some of these I missed, like this was not necessarily a purely academic exercise, but what's crazy is that - No, you made a screenshot.

30:19Now you are the scholar on this topic. That's right. That's how it works on the internet. This is much more baked than most VC takes. Anyway, go ahead. Yeah, no, Harvard sent me a degree in the mail. Yeah, exactly. I feel like the biggest thing is like, you can kind of clearly see, and I think somebody actually retweeted this and pointed this out, that it's like a very specific strategy. We're like, the one who's most active is Andreessen, which is consistent. Like Andreessen is super broad and investing in a lot of different companies. Martin Casado, who I love, sat on stage at Cerebral Valley when I was like, how do you know which, segment of AI to invest in.

30:56He was just like, why not all of them? They're like openly going for coverage at this point. And apparently even in the key categories with competitors. Yeah. So that's Andreessen. So Andreessen, I think is everywhere. You've got Sequoia, who is also quite active, a little less than Andreessen. So a little bit more, you know, Demura or whatever. And then I think you have firms like Founders Fund. Sequoia is interesting because they obviously, what, Affirm and Klarna. They have these famous ones where they've done both. They try, I think, to be loyal, but they would have more of a story of like, you know, I don't know.

31:34It's getting pretty broad. There are a lot of them. I was going to try and do some spin that it's like, oh, they're an ex in that sort of relationship with the Rulof world. And then they invest in the leader, which is clearly open AI, in my opinion. I don't know. But yeah, with any Sequoia analysis? I think because it's also you think about the story of like, I don't know if you remember this, but they invested in Phoenix back in the day on the payment side and Stripe was pretty upset about it. And so Sequoia was literally like, our bad, keep the money. We won't take an equity stake. It's just a donation.

32:05So they're definitely more thoughtful about where they're investing. I think to Sequoia's credit, one of the things that they've been very deliberate about is that they are more selective in the earlier stages. Somebody else, I think, pointed this out in a retweet where it's like, once it gets into the later stages, you're largely just garnering exposure to assets. Like it's not as much. Once these guys are raising$10 billion plus rounds or whatever, it's like you're really just getting exposure. I think Sequoia is a little bit more protective of their reputation at the earliest stages. Lightspeed is another one.

32:41I mean, Anthropic is going to be one of their biggest positions overall. Like, because, you know, I dug into their returns and that was like, I totally didn't realize that. And then they're in Mistral and XAI. I think they're also in one other. Somebody else, I can't remember which one, but somebody pointed out that maybe there is one on here that I missed. Because Lightspeed has also been super active. And I would argue that I think Lightspeed has been playing, not necessarily like catch up, but they're really trying to like deliberately demonstrate that they want to be in this bucket of like the Andreessen's GCs of the world.

33:17Like just be very, very active. What's funny, where is GC? GC and NEA, like if you're going to do the Andreessen style blast them all approach, shouldn't you be in the defining category of our time? Yeah, it's a good question. And I will defer back again to the lack of my... It's like, hey, do you blow your like a – They might be in five of these and I just didn't want to look up another Crunchbase profile. We also didn't look up everyone. Okay. They'll be like, no, we're sluts in this. I don't know. Who are the serial monogamous here or who do you think of the sort of big brand firms has sort of stuck to one bet?

33:57Well, I think that – and that is actually a sort of oversight on my side like in making this chart because originally it was supposed to show the cross-section. but I kind of just started at the bottom. I said, okay, open AI, who's in that? Boom, boom, boom. And I worked my way around with the companies, adding firms as I went. And what I realized when I posted it and it kind of popped off is that I had left Founders Fund on there, despite the fact that they are actually monogamous in this particular strategy. And the other one that I didn't put on here, but that called it out is Thrive. And I think that, again, going back to this, this is actually a pretty indicative sampling of different firm strategies.

34:33I think that Founders Fund and Thrive are famous for being really dedicated to running an incredibly concentrated portfolio and just doubling down, tripling down into their winners. And Founders Fund, despite being perceived as, I don't know, perceptive and early... Airbnb was like a Series C. Some of these, they're like, what is the momentum company that's going to define the generation? How can we back up the truck into it. And, you know, clearly they see open AI here. Well, and I think that's one of the reasons why they're not afraid to admit when they did, even if they didn't get there as early as possible.

35:11Right. I think that, and probably in that, in that vein of monogamous, I think Kostla is another one where they've been all open AI all day for as long as possible. Like you need to roll that company into Jesus. Just write it. Jesus, write it. Yeah. That would be insane. I think to diversify away. It's one thing, you know, I think a consideration for a lot of these is they're getting an open AI. It's such a high price that it fits into the growth story where you're talking about, where they were like not traditional venture investors in open AI. They're just like, we can't miss the company of our generation.

35:40And then they're like, well, let's try and do real venture investments in other model companies if we get a shot at it. Yeah. But I think to Founders Fund's credit, even if they're not there at the earliest days, they're willing to acknowledge that like, hey, listen, this is clearly broken out as a category definer. And they'll say that too. Like I've heard Trey say this multiple times where they talk about, listen, like our perspective is that there's one company. And like, if you're going to invest in space and you didn't invest in SpaceX, you probably lost money. If you want to invest in defense and you didn't invest in Anderle, you probably are going to lose money.

36:11Like that's their thought process. And so even if they're getting there a little late, they're going to back up the truck. And that's Peter Thiel's like, you want to be a monopoly business. It's sort of like, you don't want to be in a company that's creating a category necessarily, because then you have all these competitors. You want to be the company in a category that chokes out all the oxygen for everybody else. That's right. I also think that there is a narrative here, and we can talk about this if you want to, that there is increasing differentiation. It's very subtle, and it's going to start overlapping again.

36:40But there is some semblance of different companies trying to prioritize different places. We can talk about that if you want to. No, I think, yeah, let's talk about it, especially in light of OpenAI potentially purchasing Windsurf, formerly known as Codium. That speaks to them demolishing everything, but also speaks to the idea that if you're an investor, it's hard to know where these companies are going to go, right? They're sort of going to lean into where they're successful. Foundation models in particular, it's like you could become an application. You could be infrastructure. It's hard to know.

37:13So are you really, no one is saying VC shouldn't invest in WindSurf. And if WindSurf is part of opening eyes turf, then it's sort of like, you know, the floodgates are open. Or what would you say about that? So I think that it's actually very, it's very, very similar to what happened with the hyperscalers, where you look at like the Amazons and Googles and Microsofts of the world. The difference was that their sort of amalgamation of a bunch of different faces happened long after they had been founded, long after they'd gone public. the difference was it's not it's not necessarily because even like think about like open ai launching a social app and and i had a friend of mine tweet and say so are just like our network effects dead like does nothing mean anything anymore all the businessy stuff that we've learned is is nonsense and it's like if you think about it it's not that any of the fundamental principles have changed it's that the velocity or like speed of the thing happening is just so much faster than it's ever been before but at the end of the day like if open ai does launch a social app, and it does turn out to be successful, it's going to be for the same reasons why when meta launched threads, they also got up there pretty quick is because they have a big, broad, established install base they can benefit from.

38:24So it's exactly the same dynamics, but they can play into different strategies. And so when I think about each company, each model company, I feel like they are trying to carve out their niche in the universe. Some are fuzzier than others, But I do think the clearest distinction is when you look at the projected revenue of specifically Anthropic versus OpenAI. I think it was like 2027 revenue estimates that somebody had leaked or put out or whatever. But it was basically like, hey, by 2027, Anthropic believed that they would have like 5x the API revenue that OpenAI was projecting. And it wasn't Anthropic crapping on OpenAI.

39:05It was OpenAI's forecast for 2027 compared to Anthropic's forecast. And Anthropic assumes they're going to have five times as much API revenue than OpenAI. And it becomes really obvious that OpenAI, whether they meant to do this or not, is going to become largely a consumer-driven business. Like ChatGPT is their cash cow right now. And whereas Anthropic is trying to squarely plant itself in the API world, sort of the B2B world. That's a clear distinction that's defining a lot of the decisions those companies are making. I love Anthropic and they're very competitive, but the infrastructure API business is under threat from open source in a way that having a dominant consumer application is a type of moat that we're all familiar with.

39:54It feels like besides OpenAI having a lot of users, everybody else is sort of like, we need to run faster than our competition to have sort of incrementally better stuff. Obviously, over time, we build customer relationships, sales missions, sort of product differentiation. But it is totally, I mean, that's absolutely the bear case on Anthropic is that progress is just too quick for you to get in and establish any real meaningful enterprise install base. Whereas I think on the consumer side, that's different because when you see these surveys that say something like 65, 75 % of adults in the US, like not in tech, but like period, everyone has used an AI product.

40:36The vast majority of them are ChatGPT. And I think about this all the time that like when we look back at the end of 2022, when ChatGPT came out, what's so interesting is when you talk to the people who are the sort of experts in this world at that point in time, that was not a technological breakthrough. Like it wasn't, that wasn't something that a lot of the companies who were operating in 2022 couldn't have done. Like they could have put a chat interface on their model, but they didn't. OpenAI put out it as like almost an experimental tool to say, hey, in this neat, you can kind of play around with it.

41:06And it exploded because it was people's first direct experience with generative text. Everybody was too afraid of their tails. And only OpenAI was willing to unleash AI onto us all in a cavalier way. Yeah. Well, I think they even think it was an accident, right? They didn't expect it to do that either. Right. But I mean, clearly, I think some of the breakaway anthropic was the rollout of chat GPT and everything. I do think there's a lot of room for consumer adoption just because I feel like I'm begging people to use OpenAI or to use chat GPT in some cases. I'm like my family members. I'm like, it's great.

41:42I'm like, you know, super excited about three, spending a lot of time on it. And it's, you know, people, these companies clearly need to find ways to bring the product to people in a way that doesn't take as much work. And that's going to be a huge buildup. Going back to venture, because that's really the focus of this conversation. Do you think what we're seeing with the models is playing out in other categories? Or do you think this category is unique where VCs invest all over the place? So I had one of my, much smarter than me friends kind of articulate this analogy of like, when you think about the dot-com, there was sort of, you know, almost the three layers of what was happening that really drove like the distribution of the internet.

42:28And you basically have, there were folks on the infrastructure side, you're building physical, you know, almost like compute and stuff like that. Then you have the networking where the Cisco's of the world getting to broaden out and get access to the underlying tech. And then you had the applications, right? The pets.com and stuff like that. The difference there, when you think about how that is similar to today, is that you look at the chips company, the chips company once again are ripping, right? The underlying infrastructure is still powerful, regardless of what's getting built on top of it.

42:57That's very powerful. And so I think that segment has more problems with geopolitical stuff than it does distribution. But what's really unique about this point in time that makes it really difficult for venture investors is that in the dot-com, you had networking companies that were like, we're just trying to get this out into the world. And then you had applications coming and saying, we're going to get this package and deliver it to people as a service. Today, you have the networking layer, which is effectively the model companies also building the application. So it's effectively as if Cisco was launching pets.com, it would be really difficult for pets.com to compete with that.

43:32And maybe it falls apart because it wasn't the underlying thing. But today it is like AI is the underlying aspect of that product. And so when you see folks like OpenAI buying Windsurf, like that is a, it's a perfectly logical extension, right? To reframe what you're saying a little bit, you're saying the non-monogamy or the polyamory with foundation models is polyamory with everything. Because the models sort of are competing with everything that's investable and interesting right now. And so it's like, yeah, if you're doing applications, infrastructure, whatever, inevitably, you're going to be a collision course with your model investment.

44:08that that seems okay it's just i think it's just the pure model on model that feels like oh my god like what you know how many how many closed source models do we need i guess is a backdrop question well and i guess the question i think the the thing that people are sort of struggling with is that um like the the not just the progress of individual companies but the progress from model to model i mean you look at like people's reactions from claude 3.5 to 3.7 And it's like, that's a misstep that could make or break the game for a while, right? It can happen that quickly. Or I think somebody else tweeted this of this constant, we're so back, it's so over cycle of like, oh, I actually think 4.5 is not very good.

44:53And then it's like, oh, 3 is incredible. And like, it's so quick with each model that it's so much harder that like at the end of the day, yeah, if you're a massive multi-billion dollar firm, you've got to go get exposure to everything because you don't know what's going to come out on top. This is what we want from capitalism, isn't it? Everybody's competing, lots of money flowing into an interesting space. And like, yeah, you got to be the best of the best if you want to extract value. I don't know. I'm not... And it's a category where I'm like happy for the world to burn some capital, you know, trying to crack it.

45:25But so I don't know. Dot com. The problem with dot com was like there was no distribution. It's like they didn't you couldn't there wasn't the customer base when you set up the Internet. Now in all the other bubbles, it's like, well, there's still a distribution to quickly get a bunch of customers. I mean, you you invoke dot com. Are you are you worried about like a big bubble? So I my biggest concern is this idea of like like hype cycles are built on momentum. value cycles, if you will, like actual value creation happens when you're able to push through all the hype and all the excitement and all the experimentation and get to the actual creation of business value.

46:06And if there is underlying business value that's consistent and replicable and changing the way an organization works, then you can capture some of that value. My sense is that the volume of capital and the volume of hype is not commensurate with our ability to articulate and execute on actual business value. Those feel wildly... And part of what made that possible this time is every enterprise in the world was willing to spend money initially to say, oh, how do we figure out AI? But that could be a sort of false signal on how much they stick around when they don't get the value. And that goes back to your question about the biggest thing that we have to unlock is we have to figure out how do we get people people to use this more consistently in a way that creates value.

46:54That's not just true of like you and I trying to convince our mom to use chat GPT or whatever. That's also true. Yeah. We look too similar. We can't be saying stuff like that. But it's, but like that, that kind of stuff, like it's from the consumer side is also true on the business side. And I think all the time about like, yeah, we've seen crazy like scale ups. Right. But it's like, okay, what are probably the three companies that have made the most money from this pop. And it's like NVIDIA, which is like, okay, demand, demand, people need it, whatever. OpenAI, which is like offering it to people to play around with and use.

47:30And then like Accenture, who's like making an ungodly amount of money, helping people figure out like, what do we do with this? Like, how does this actually impact our business? But like outside of that, like there haven't been a ton of case studies, at least that I've seen of like, oh, like John Deere is suddenly ramping up. You hear some stories, like I think it was the Klarna story of like - Yeah, Klarna and Shopify, but some of it feels very aspirational. Like they want to be seen as getting it. Yeah, and I want, yeah, totally. I would love for that to happen. Like I think that like, yeah, the fears of like job destruction and stuff like that.

48:04Like I agree that it's the same as like Willy Wonka or what's his name? Charlie in the Chocolate Factory's dad getting displaced by a robot and then getting a job, fixing the robot that took his job. There's lots of opportunities for evolution. I'm not afraid of that. I want that to happen. The question is just, is it capable of doing that? And I don't know that we're there, which could set us up for a very painful pop. But you look back at the dot-com and Amazon and Google came through the dot-com. There will be businesses that get built that are still generational businesses, despite the fact that they will participate in short-term pain.

48:39Sam Altman, OpenAI, did reportedly try to scare investors off investing. You know, he had that list that was reported. You think that was just like a total failure or any observations about that? Well, so what was interesting is if I remember correctly, one of the biggest sort of stinks that was made about that list was Glean, was people not investing in Glean and in OpenAI. And here's the thing. So to go back to the question of you're not as worried about the infidelity for between the model and application layer, I actually don't think that you can distinguish because at the end of the day, increasingly, it seems that it is going to be the same thing because you're not...

49:22not like the, again, like your point, like the API revenue, it's really difficult to believe that that's long-term defensible. Like I thought it was fascinating when I dug into all of the co-gen agents, right? Where you look at like the cursors and windsurf and lovables and bolts and replets of the world and stuff like that. They're all using Cloud. Like at the time they were using Cloud 3.5. This was a couple months ago, but they were all using that model. But it's like tomorrow we can all switch over to this one because now Gemini is the better co-gen model or whatever. Like that progress means that it's going to be incredibly difficult for any of these companies to justify their existence at the model layer, which means that, well, where do you make money?

49:59You go pay$3 billion for Windsurf because that's where you're going to make money because people want to have a thing that they use. The bigger question there then for Windsurf users is like, okay, wait, but am I going to be stuck now then on GPT models? And it's like, not if they want to keep that install base, like they're going to have to let people use different models. And on that acquisition, there is people are like, oh, you can also train your models on the behavior on windsurf. So there's an argument that, you know, you could be open AI, leave it, leave customers allowed to use whatever model they want and then learn a lot to then make your model better so that eventually they want to use your model again.

50:37Yeah. But if I think about like, OK, if I'm open AI and I want to rule the world and I'm not because I do think also like, again, going back to this, like some of these companies will differentiate. I think that SSI is going to be sort of go off on this like AI safety, like let's save the planet stuff. And it's like, let's see how that goes. I don't know what that's going to evolve to look like. But it's clear that OpenAI is not, you know, again, maybe the narrative and the marketing is making AGI accessible for everybody or whatever. And it's like, right, they want to own the world and they want to make a lot of money.

51:08And they're trying to be a for profit so that they can raise more money to make more money. Like they're clearly trying to own the world. And it's like, okay, if I'm open AI and I need to justify a hundreds of billions of dollar valuation, how am I going to do that? It's not going to be, I promise I'll keep making the next best model and like a constant, you know, a hamster wheel. It's going to be, I'm going to be the thing for your workplace. I'm going to be the thing for your planning and your personal life and your AI agent and whatever. I was going to say initially, OpenAI is a uniquely problematic juggernaut from an investor perspective, because it is a nonprofit.

51:44And because it had the ousted CEO and everything, it's like, I can see why you'd want to sort of hedge your bets that maybe it's sort of like a shakier dominant player than in past generations. But then you reflect and you're like, wait, Uber had the Travis stuff, like Facebook, Mark Zuckerberg was like firing his whole executive team and had to like pivot to mobile. In some ways, like the juggernaut status company was never like so clearly anointed as we write the story. But, you know, going through it, you're like, man, OpenAI could totally fail to become a for profit. And then I better have an investment somewhere else.

52:21I wanted to ask, and I guess let this be sort of the last question. Without talking your own book, what should a founder do based on this information? Or what do you think... If everybody's investing in everybody, do I need to go to KOTU and thrive? Or it's like, I need to just accept it? Or what advice would you give to a founder faced with this polyamory? So increasingly, and I don't know that I'd go so far as to say that polyamory is rampant in every category, at every stage, for every firm. Like everybody's different. But what we're seeing here is a symptom of something that you and I have talked about a lot before of this like sort of capital agglomerator like rise of the blackstones of our industry, right?

53:08Like that's what's happening. This is a – The megafonds, for lack of a better term. Yeah. Yeah. This is a subsystem of that. And I think that in thinking about that, because it is true that they're going to do more, there's going to be more applications that they're investing in that may be competitive and whatever, because they're just trying to deploy capital. What founders need to understand, and what I've spent three years writing about on my sub-sec, is that increasingly venture firms, at least the business model of venture firm, has increasingly become more focused on asset management. That's not the marketing.

53:42They still market themselves like they are the scrappy John Doers of the world from the early 2000s or whatever, and the benchmarks and stuff like that. But that's the marketing. The business model of most of these firms has become asset management. And if they're going to build themselves as asset managers, you as a founder need to treat them as asset managers. They are not your, even if they're on your board, they are not, just because they're on your board does not mean that they're your buddy. It does not mean that they're your therapist or your sounding board. There are firms and there are investors that you can go get who will be your confidant and your friend and support and whatever.

54:17And their firms are set up more aligned with your outcomes. These larger firms are not that. And so people need to take a crash course in how public companies manage the asset managers that buy their stock, because that's the way you need to treat some of these firms. And that goes to things like information rights and strategy and who you let into what round and what percentage of ownership and how much they control of your parada and your majority voting rights and stuff like that. You need to manage them as the asset managers that they are and be very, very careful. It's not bad. It's a good weapon that you can use in a big fight, but you have to be really careful.

55:00Kyle Harrison, Contrary. Thanks so much for joining us. Thanks for having me. We'll be right back.