The Casino enters the arena + Guillermo Rauch of Vercel on AI factory builders

0:00I think we need to break down the logic of why this week people decided that the AI bubble has burst. And there were some key things that happened that I think we can deconstruct and decide whether or not they're actually worth, you know, being a hater over. The first one was Sam Altman had a dinner that I was not invited to with reporters where he discussed, among other things, and it was all on the record, you know, GPT-5 and some of the disappointments around that, which are very real. And also at some point said something to the effect of, I don't have the quote in front of me, basically like, yeah, I think we're probably, there's some exuberance or we're in a bubble right now where some stocks are very overvalued because of AI.

0:35But then in the next sentence also was like, but also AI is transformative. It's a classic power move. Elon does this too. It's like you're in this super hypey thing. There's almost nothing to lose by being like, yeah, I don't know. People are really think I'm hot shit. Maybe too much, you know? Yeah. Yeah. My lovers love me too much. My haters don't get it. But if there's something wrong, it's because of something other people did. Right. I just want to disregard almost everything Sam says these days. I mean, it's just he's on he says so much and it's so contradictory that it just doesn't even even though it probably did play some part in the sell off of AI, you know, AI driven stocks, the idea that, oh, Sam Altman has declared a bubble.

1:14So we must be near some sort of a top. And then there was this MIT survey that came out. And I think that probably had the most effect on a lot of people, which headline number was that 95 % of enterprise AI, generative AI projects fail, just have zero impact on a company's efficiency and bottom line. And that is a bad number. The problem, of course, is that a headline number versus what was actually in the survey is pretty different. And this was not like a survey that was put out by a fully disinterested organization. It's effectively a pro-AI organization. It's always funny when somebody runs away with one line that you said, but then you're like, oh, but I'm sort of trying to make a pro-AI point here.

2:01Yeah, yeah. It's almost like a rat fuck in that sense. Like if you're like one of these people who decides to buy the headline and then you actually like distribute the survey and then anyone actually reads it, sees that like the key points that it makes is that AI is not incapable of transforming a business. Just the implementation of AI and its inability to learn and adapt to people's workflow is what's causing it to be unsuccessful. My takeaway from actually reading through this thing quickly, quickly was that like the 5 % of companies that have been successful with it are like going to win.

2:33Like it's really about like the fact that they implemented it better and we're able to use this technology is why like it is actually a transformative tech. And like one of the co-authors of it is a product manager at Microsoft. I was just looking him up. So like these people that are writing this, how they they have like a dog in this fight. And it's like long term. I think the flow of the argument is basically everybody sees the potential of ChatGPT and Claude. They try it out, but then they almost and they just don't do enough to actually get their data integrated into whatever AI tools they're bringing to their companies.

3:07And so then it ends up not being more useful than just like consumer grade stuff. And like, here's what you actually need to do to be better than just like using ChatGPT. Right. Like that was the key point. Here's what you need to be doing to make this successful. And that's going to end up probably being the talking point from all of the salespeople at the cloud software companies that are selling this stuff is like, oh, yeah, you read that report. They made these mistakes. You won't make this mistake because you're going to buy it and use it in this way. So it ends up the whole thing was an op.

3:35I've decided. I will say I texted a lot of investors this week. Just like what's your read on the bubble? And like, you know, people who are like, you know, investing in these companies. Often I'm interested in what, you know. Yeah. people who are trying to make money like you know it's like if it's an early bubble it's like oh i need to keep going but you know they're they're trying to time the bubble for financial reasons and i did get some you know somebody was like full bubble now trying to decide whether this is the start of 2021 or late 2021 obviously everything unwinds from the pandemic at the end of 2021 there's still uh upside to be seen at the beginning um and as we talked about selling are they they are i am in tread lightly mode right now ha ha the uh somebody else was like i'm watching the fed you know a lot of people are like i don't know what do you think like yeah i mean so nobody's like what an absurd question you know andreessen horowitz who sort of dispositionally is like why would you ever sort of position yourself as a bear our job is to fucking be professional bulls just came out with a piece that was you know knocking down Basically, I thought, Tom, trying to fight with your article about Cursor.

4:45I think the sophisticated critical take on this moment. Well, they just meant that I have an MBA, so they just view me as the MBA. The sophisticated critical take, I think, as we're about to say tomorrow, it seems like foundation models, revenue is still strong, but application companies like all the coding companies have pretty negative margins. They're built on top of money losing businesses and themselves lose money. How is that all going to work out? And Andreessen and co, you know, I think it's, I assume it's Martine Cassato and I think Sarah Wang sort of, you know, push back against your take.

5:17What do you think about that as somebody who is worried about app company margins? I think the margins are less the issue than like, I think there's an interesting dynamic, which I tried to get to in that story, which is the relationship between the model providers and the application companies. and it's clear with Cursor's growth that you can build a huge user base on an interesting application, maybe it has some brand name loyalty to it. But like, especially with developers, they will just switch to the thing that provides them the most bang for their buck. That's going to be the best quality product.

5:49And like the growth of Claude Code over like six months, which I know wasn't impressive to Ed, but is to me, you know, getting to like a$400 million ARR shows that people will gladly switch to a new thing that seems like it'll work well. And Anthropic has, I mean, their money losing too, but they're going to have better margins than Cursor will because they're paying wholesale access to the model versus the retail prices that Cursor has to pay. So I'm not incredibly bullish on application layer companies in a world where model companies build the same software. If they decide they don't need to, that they really think they can make enough money through their API business or like a consumer, a pure consumer play, then maybe there's a world for application companies.

6:30But like, I think it's a very, on this particular sector, it's a very narrow moat. And I mean, I was talking to him. I sort of agree with the Andreessen people. These companies are not idiots. They're going to figure out like some of the stuff, like the very expensive stuff, they're going to offload to cheaper models. I agree with you that like the big business question is just like, how sticky are these products? I think that yeah it's like how sticky are they i don't and i don't i don't really have an answer but i don't think the bubble is going to swing either way it's like oh they're not sticky though because the people are moving to another ai product you know at the end of the day coders want these coding tools the margins will be figured out they're going to consume some ai product either foundation models or companies built on top of it either way it's good for the ai hype train well and i to defend the piece at least like i wasn't yeah no no i don't i'm just saying to andreessen because apparently they wrote it at me.

7:22Look, I think, you know, that the cursor is not running out of money. Like the story was very clear that, you know, yeah, negative gross margins are bad. But they have like a billion dollars or something. And they're losing, you know, apparently their burn is like in the single digit million. So it's really an issue of like, you have plenty of time to figure these things out. And I mean, you mentioned Uber, like I covered Netflix during its most cash burning days where I'll never not bring this up on the show. Like made a career for a time writing columns saying netflix is a house of cards right has you written a mea culpa no we never do we move on we're like the we're like the uber haters and the ai haters i don't played it i was the factual i provided where's your mea culpa about uber i was like the gun runner of the uber skepticism era you know what i mean i was like giving all the haters the like ammunition they needed to like shit on ubers like money losing but i was always like i don't know.

8:16And then I always got annoyed that the people who took my stories and like, oh, they lose a lot of money, did all these like insane math formulas based on them. And I'm like, there's no way. My numbers are like so like there's such impressionistic, you know, like Uber was giving very like rough numbers to people when they were trying to back out their economics out of it. I was like, this is a lunacy. Yeah. Well, the problem with the hater argument there is it relies on the investors who see more than we ever get to really just being dumb. Right. I mean, it's the idea that like they don't understand it but we as the skeptic and the hater do and believe me i don't like giving investors credit like it's not fun it makes my job worse but like they do kind of do it for a living like that's the one thing they should be able to understand right is like the basic economics we should get haters on here too i want to get some more haters right no no we like the ad episode one of the things the youtubers somebody got mad at me for saying do you believe in capitalism you know like it was like some sort of shibboleth but it was it's sort of a, it was a sincere question.

9:12Like some of these people, I do want to understand like what premises do we share? Because like, to me, part of believing in capitalism is like, investors are fairly rational. They're making different bets. They have their own, you know, it's just like, I, it's useful to know how much people will think like the whole capitalist thing doesn't ultimately direct us towards likely outcomes. Like to me, markets are great truth mechanisms. And like, we play a part in that by, you know, point poking at things and interrogating them and then people change their ideas and then they eventually move their money.

9:44But when people have commentary that acts like investors won't listen to a good idea and change their strategy, if it's in their incentive, yeah, it feels like they don't believe in the market. The truth mechanism is over time. I mean, like the periods of irrationality in the midst of a bubble can give people the wrong impression of like the, you know, solidity of a business. Like, I think that's what Ed was arguing. It wasn't like capitalism is failing because these companies exist and keep raising more money. It's just like it hasn't reached the point yet where like, you know, whatever the Warren Buffett line about like the shore, the shoreline going out and, you know, finding out who's naked.

10:19Right. And I mean, one thing we really believe in, and I think smart business journalists are like, there are people who can be behaving according to their incentives and driving us off a cliff. Right. I mean, this is sort of the like Tiger Globals and the soft banks. Like often I've made the point in the newsletter that it makes sense career-wise to be the like biggest bull of the biggest mania right you're like oh at least they were the most important person you know like in that moment like the tesla longs and stuff like what's her name kathy wood like even if you have a terrible performance you sort of like win fans just for being like really extremely bullish and so even if you like believe in capitalism like i do certainly i think there are all these actors who are like you know almost like taking advantage of human psychology rather than trying to make the most money they can.

11:09They're like, oh, I'm going to be able to, if I'm the best bull in the world, I'll be able to raise the most money again in the next bull run. And my game is just to run as hard at the bull market as possible every time. And that's a game people play with great success. Speaking of taking advantage of human psychology, Chamath is back out there again. Welcome back. Scam in the arena. Scam in the arena is back. No crying at the casino, Chamath. Right. I know. What a, what a, he's so good at it. He's so good at it. He's like, like he's basically calling himself like the casino and it's like, sure.

11:43The casino, the random outcome generator. I understand. He's literally like, don't invest in me if you're not willing to lose all your money. And if it's like trivial to you, like who invests like that? Even if you're rich, no rich person wants to lose their money either. Like everybody is investing to get a return. Like, I know it's just like a bullshit thing you say, but this is the unique twist of the Trump era. Right. Is that like, he has discovered there is a whole cohort of americans who like being scammed who like uh well that's true i mean sports betting is the biggest thing in the world like yeah exactly like yeah i lost a lot of money on sports betting over the weekend yeah yeah god yeah that was just fun it was just for the fun of it was just for the fun of it yeah there i just went down to the sports book and i put 50 on a horse called duck duck go and at least it was in person you got some you got an experience out of it my issue with the sports betting apps is like what are you even getting you know like i think it raises the stakes of watching a game right if you're not watching the game you're putting money on it then that's a real that's real sick right i did invest also i put a bet on australian rules football because i thought the spread was so ridiculous but turns out it was not that team that team lost by like 150 points which i don't know what that actually means anyway chamath is yeah i think he absolutely represents the peak of trump era we like to be scammed mentality where he is actively calling what he's doing a casino that there will be crying and you will not make any money i will make money from it he made money last time i mean you like wrote i thought a great piece about like his scam the last time through like what are you expecting this time around two pieces on shmoth i mean one thing that makes me so sad about the world we live in is just how much your internet brand and your real person brand can be so far apart like real people in Silicon Valley think he's like a huckster, like people who work with him.

13:29It ends poorly for them. Many of his professional relationships have gone poorly. He didn't make people money on the SPACs. He made money through fees. Like he's looking out for himself. And to some degree, you still want somebody who's like looking out, who cares about caring about your reputation is good because it means that the people you partner with and work for and invest their money for you you care about your long-term reputation you want to be good by them and this is someone who hasn't minded his long-term reputation it hasn't you know it's not his reputation as an investor but if you look at the way he positions himself he wears his like i don't know the fucking brand name suits he loves to be rich yeah yeah and so like again not to make everything just about trump but this is all part of the same thing people in the real estate world knew that he was an absolute dud as an investor like all of his projects would go bankrupt he was a brand name to to you know add a modicum of flash on top of an otherwise shitty project here you're like you're like bring back the wasps where were the rich people who cared about i mean what old money just the people who inherited their wealth noblesse oblige you know we need it we need like people who are not we just need the carnegie's i am watching gilded age right now so i have a very strong attachment to to that era of of wealth but yeah those guys look tremendous compared to the Chamaths.

14:50I mean, they've done nothing or he's done nothing, but he's built an image that I'm sure he will have no problem getting people signing up for his SPACs. Well, it's that sort of fatalism that makes it possible, right? It's just sort of like, people are like, oh, he'll raise the money. We should do it. Yeah. And I guess maybe the last point to talk about - I am not cheering for him. I don't know what to say. I would be very sad if good people lose money on what are certainly going to be failed IPOs or whatever you call them, SPACs. I do think, to be fair, you know, we're business journalists. I do think he changed his structure this time.

15:21I do think he's slightly more aligned now with the actual outcome of the SPACs, though, knowing Chamath, he's found some other way to make money as well. But burdens on him to prove that he's not scamming people. He should get this. Well, you believe in capitalism, don't you? There's infinite numbers of shots in a free market. Yeah. But I mean, this is always this is one of these, I don't know, to me, psychological weaknesses. The elites, once you're in the club, you're like, oh, you're in the club. You should get to do it again. It's like there are tons of human beings. Like try it with somebody who hasn't lost people a lot of money.

15:53Like to me, this sort of desire to like keep giving money back to the type of people, to people who just like gamble the money rather than saying, maybe we should try it with somebody new. That to me is like a human psychological weakness of just like loving fame rather than success. It's never gone away. I mean, like Michael Milken in the 80s, the junk bomb king still like runs a large financial conference in Los Angeles, the Milken conference. Nothing nothing tends to really happen to these people for the long term. And some of them do get like banned from trading. But that's not even close to what's going to happen with not anymore.

16:25Yeah, yeah. That's like I'm not accusing Chamath of anything of that level. He just was an opportunist and fucked over a lot of people who didn't. Anyway, we're looking at fights. So Chamath, come on the show. Yeah, I don't think he is. That would be a big get for lots of reasons. Probably the person who's written the most negatively about him. I'm not betting on that one. But if you're a hater, positively, negatively, we're ready to argue with you. We like this arguing format. So we want to have arguments. Not quite an argument. I like him too much. But after this, we're going to have Guillermo, Guillermo Rauch.

16:58He's coming on the show. I think he had a really good prediction about where things are going. We talked about agents. um he obviously runs a no code company and i continue not to i have not built my no code startup empire if it's so easy to no code like where are the apps that i'm using maybe you should stop getting into fights with lovable i know i don't know if people know what you're talking about we don't yeah that can be deep lore for newcomer fans you can look up eric's tweets trying to get his money waste your time i i lost it on sunday just because i i got charged twice from lovable after trying to cancel they have extreme dark patterns that they say they're gonna try to reform literally you click a big red button that says cancel and then you still are not canceled from lovable they're like oh that was canceling within lovable then we had to send you to stripe and then you have to obviously run through the stripe but anyway they they swear they're changing they're gonna fix it maybe cancel in swedish means something else maybe it means like i'm still down i'm gonna give it another shot the company i would have come i was just like i'm not using it this second i would have come back now i don't know i'm pretty angry with them but hopefully they're reformed we're big supporters of europe tech over here on newcomers so we long-term long-term bulls on lovable and every european tech company all right we should probably cut on over to your interview with uh guillermo all right i'm here with the founder and ceo of ursell guillermo rauch uh welcome to the newcomer podcast thanks for having me Last time we were hanging out, I feel like you convinced me that Purcell would be every company in the world.

18:31So we'll see what you brainwashed me into by the end of this conversation. Where were we? I think it was HumanX, if I'm remembering. I think we had lunch off that. The great founder visionary that I was like, oh, what won't this company do? You're obviously touching a lot in AI. you know, like you've got VO now with sort of your own vibe coding product, but you're also sort of powering a lot of like the vibe coding that everyone's talking about and sort of some of the infrastructure to make it possible for people to sort of spin up sort of websites and applications quickly using artificial intelligence.

19:13But also you're just like a fun founder who's willing to sort of like say what's going on and, you know, not just let the venture capitalists dominate the chattering among the Silicon Valley classes. And I'm terminally online. So you can ask me about anything that's happened on X five minutes ago and I'll know. So I just want to start off with, yeah, like the existential question about like the mood. I mean, I've been honestly been texting everybody today about like sort of animal spirits or like how's the market? Like, you know, what's your read on sort of the AI mania? Do you feel like there's still a lot of room to run here?

19:50Or are you getting signs that there's some paranoia about the euphoria? You mentioned Vercel is in a very specific and special position that we see almost everything that's being built on AI has to have some kind of user interface to the world. And so traditionally, we've been supporting founders in building these AI portals, AI applications. now increasingly agents. And one of the things that I've been noticing is that there's basically three chapters of AI so far. Number one was assistants. Number two, and it's the arc that I think we're currently in, is agents. I believe that there's a third phase.

20:30I think what's really interesting being so close to developers is that I've always kind of called out that as developers, we're very self-serving. So if we get AI, we're going to apply to our job first. We're going to make our own life easy. And so what I'm seeing with developers is that the next generation is going to be teams of agents or multi-agent architecture. We've gone from assistant to agent to multiple agents. The alpha developers today, what they're doing is they're, instead of just limiting themselves to like one agentic session, they're spinning up 20 in parallel or 10 or 5 or whatever.

21:04And that gives you a glimpse of what I think is going to be the next phase of AI. You can think of the current phase of AI as you have a virtual coworker. you can think of the next phase of ai as i have a virtual team of co-workers and i'm the manager because the challenge with just having the virtual co-worker is in some ways the human gets the lame part of the job where it's like i have to sit there and be like sure yeah keep keep doing the hard work like yeah keep doing it yeah like it's tedious and perhaps you don't get that 10x effect right you know i do see a lot of debate healthy debate sometimes of like Like, is AI a 2x or is it a 10x for my job?

21:42I saw an article that a programmer put out the other day saying, like, look, in certain areas of my job, it definitely feels like a 10x. Because the example that this gentleman was giving was, like, I don't write compilers every day. And so, like, the fact that I was just able to tell the AI, can you write me this, like, compiler transformation is, like, whoa. Like, I feel like a superhuman. But then he was saying, like, in other areas of my job, like, I don't know. Sometimes it, like, kind of gets in the way and whatever. to sort of really, I guess, go directly at the current moment. I mean, yeah, what's your reaction been to like chat GPT five, I guess, like to GPT five, because in some ways, I guess, I think if that were amazing, the lead here would be like, oh, the models are going to keep coming up with new ideas.

22:24And that's where we're going to make progress. And just by the fact that you're saying, oh, we're going to find ways to use the existing models and agents to like get more out of them by having them collaborate to me is sort of a sign that we're not having the like, oh my god chat gpt or gpt5 has like blown all our minds do you agree with that or what's your read on it i agree with you that analyzing the gpt phenomenon is really important to the industry because you're right like it came out and it didn't come with a short proof of the remnant hypothesis exactly where's our exactly in the future for cancer and whatever yeah right but But something that was really interesting was that OpenAI is taking the coding problems really seriously.

23:07Prior to its release, they came to us and were like, can you please run this on vZero? Can you please run your evals with it? They were asking us, what are the vibes from your team? What are the vibes from your tests? Is it good at design? So there was a lot of attention being paid to the topic of coding. and the simplistic view of that is that the market is becoming hyper competitive on the enterprise side and that anthropic is making a ton of progress with coding there's amazing chinese models coming out like quen etc they're really good at coding and so the simplistic view is like oh coding is a hot market so that's what they're going into it my view is actually that because agents are the future not assistants and not one-off one-shot things the future to superior and higher intelligence and more productivity will be agents writing code to solve problems.

23:59And so the thing to pay attention to is not a consumer observation. In fact, it almost backfired for consumers, right? Because we were like, can you please bring back my boyfriend or girlfriend? Right, we don't want it to be smart. We just want it to be, yeah, likable. That was the main thing. You know, part of me had almost anticipated that this was going to happen because they did the following thought experiment. if we could revive Albert Einstein and we all get a digital copy how many people would be jazzed? I know a lot of people here in Silicon Valley you and I would be like holy crap Einstein in the box you're a crazy guy you don't want to talk about reality television or whatever why don't we want to talk to you all?

24:39I see the point the average person would be getting too much horsepower hey Albert what should we watch on Netflix tonight? and he's like I don't know I don't watch Netflix let's talk about general relativity Right. And so I think GPT-5 had a little bit of that of like, it's becoming intelligent in a way that's going to enable this like emergence of intelligence that you can't easily probe for. The future of intelligence will be, and we're seeing this with like test time models, like going in a loop, spending a lot of energy, writing code, testing it, exploiting multiple branches of the search algorithm.

25:16And these are things that a consumer cannot possibly ascertain. like the most that a consumer can do is you know i have friends that keep questions in their head that they know like ais are not very good at and so like they do their own little benchmark of like oh let's see if gbt5 gets this right now testing the intelligence or the aq of ai in itself is becoming really really difficult that's why open ai was so interested in like what is what's the b0 point of view you're creating a coding agent that you know is specializing in in vibe coding etc etc and so that means you have a lot of tests that means you have a lot of benchmarks like you know what does that mean for you i believe every company should be concerned with creating these benchmarks of their own institutional knowledge and intelligence some of it you know it's like for me it's like i put it in like oh is it good how good is it now at writing a story like me how how's you know because it keeping track of yes proof-free problem you know you you end up having your specific challenges so when you're in an industry it's not that hard to figure You're out like, oh, is it doing a better job for me or not?

26:21Well, you could also make the case that you could be working on a writing agent that is more than just one forward pass of like, and this is another thing that kind of backfired, but it's also very interesting is that they try to ship a model router, right? Like the default thing was auto. And then it's going to choose if it's going to think hard or if it's going to give you an immediate response. another thing we've learned about ai that's fascinating to me is that there is this metaphor of like thinking fast and slow for which there is a book and like people have been talking about for years like prior to like ai existing and it's it's proven true there is two modes of thinking there is fast fast twitch muscle fibers or like you just want like hey like can you prove read this really quick and find me typos and then there is a like no no like let's analyze like are you repeating words too much.

27:15And that requires like a slow thinking. And so OpenAI try to, because they're in the pursuit of creating a good consumer experience, they were like, okay, we're going to try to route automatically. That appears to me to be an extremely hard problem, if not impossible. It's hard to know from the query if it's a hard problem or a slow problem. We have a related problem in computer science called the halting problem. Like by just reading some code, we don't know for how long it's going to run. It could run until the heat death of the universe or it could run really quickly. But we have to run it to actually know.

27:50And so there's almost like an uncertainty of like, should I spend a lot of energy thinking here or should I respond really fast? In some ways, this is the argument for the role of startups in AI and sort of narrowly focused companies. It's like really you're saying the model companies should almost be an API layer. they're not going to be great at deciding in every sector whether to be a faster slow thinker and what context to bring in or how many agents to use it so where i was going to go with your case is that it'd be really cool to be crafting the ideal writing agents i i know most people listening to this will have an intuitive sense of the answer to this question but like i'm curious to hear you define it what what is an agent to you like does it need to take action like i mean deep research itself is an interesting case where it's like, Oh, I mean, a consultant is like an, an act, you know, taking actions in a certain way.

28:45And deep research behaves like a consultant. On the other hand, and people have probably heard me say this before in this podcast, like to me, the gauntlet for an agent is like, can you go spend my money? Like, will I let you really make sort of permanent sort of decisions that, that have real consequences in the world? I don't know. How do you think about what, what sort of the minimum requirement for would make something the minimum requirement is that it produces an artifact an output that is generally longer than an answer so it right like if if i i make that decision between like an assistant and an agent so if i'm asking like you know what's the province uh main problem largest province in argentina versus build me an application funny enough for us that was like one of the biggest jumps in how people have perceived the intelligence of v0 v0 started being what we call one shot you would tell it give me a user interface for a document collaboration system and the feedback that we got was like some people like literally have because this was so early like it was basically maybe a few months after chat gpt launched some people would tell us all right there's not gonna be any jobs anymore i just saw god like holy crap what do you guys do and some people tell us this is the worst piece of crap ever because on in the one-shot world quality is so divergent it's almost like playing the lottery in fact some naysayers of ai for coding are saying that like what drives the revenue is not the quality is the lottery effect which I completely disagree with, but I wanted to tell you this is funny.

30:33It's a dangerous idea, VZero. Yeah, it's a grabby idea. Interesting. The next big jump for us was when we made VZero really work like an agent. And so what it does is that it makes that one shot, but then it looks at it. VZero asks itself, does it work? Does it compile? The most recent version of our agent even physically looks at it, like using computer vision. As an example, say, I want to make a website for my daughter's birthday. Please theme it like, I don't know, Disney Princess. It'll then look at what it cooked and say, does it look like what I was asked? And so an agent is taking a multi-step approach, much like a human would, in order to produce a higher quality output.