Thomas Laffont, Coatue - Anthropic, Citrini Paper, AI Volatility & Next Mag 7

0:00Thomas Laffont:In three or four years, if Cloud Code can rewrite their entire business, that's harder for companies to control. It's one of those companies where, depending on which day you're picking, you're going to kind of have a different metric. You're going to want to outperform the index over a long period of time. You're going to need exposure to these companies. Some of them will probably go public in the next 12 to 24 months. It is unbelievable the amount of innovation that is now coming from this group of companies. Most companies are now reporting back to their boards the adoption of these tools inside of their organizations.

0:31Thomas Laffont:They all want to make sure that they're using the best tools, that they're being the most AI for. They don't want to be out-competed by someone who's using those tools. And so there was a slide in one of the board meetings that said, look, we're spending X on this tool and we think it's way too low. We want it to be much bigger. We expect the spend to at least triple. I read this entry-to-paper. I don't think that screaming fire in a crowded room is obviously productive or safe or frankly something you should do. And some people have kind of made that analogy to that report and I don't share that.

1:00You and your brother, Philippe, run the firm. I promised not to make a brother joke, but why does he have a French accent when you don't?

1:18First, before we start, a big thank you to Mark and Carrie. That was a very lovely introduction. I'm quite flattered. I'm so excited to be back at the Upfront Summit this year. There's clearly lots of volatility in the market and a lot of fun, exciting things happening in AI. We have someone here who knows a lot about that and studies both the private and the public side of things. So today we have Thomas Lafont, partner at KOTU. They manage around$70 billion on the private side. They manage around$30 billion. And most recently, I think this is your first interview since leading Anthropics$30 billion round.

1:57So let's start there. Did you expect when you invested into Anthropic that every clawed release would break the market?

2:04Thomas Laffont:It's been amazing to watch the evolution of the company, even from when we first kind of started discussing this fundraise that just got announced to eventually when it did get announced, which usually in most of these processes takes about two or two to three months before a company announces the fundraising kind of formally. What was interesting about this one is the projections and the scale of the business grew materially in between the fundraising kind of being discussed to eventually kind of being announced. And I think that speaks to just the incredible adoption of ClockCode in particular, which we can dive into.

2:50Thomas Laffont:No, I don't think we predicted that ClockCode would take off as quickly as it did. I think it's indicative of a very kind of powerful trend that it's underlying that we can discuss. I'm actually really proud that the inventor of CloudCode, Boris, who's a friend, worked at Code2 for two and a half years developing software for us. He's been on an incredible trajectory. So, you know, it's funny. I was in a board meeting yesterday. And so I'm just off the cycle of maybe having done six or seven board meetings in the past few weeks. And most companies are now reporting back to their boards the adoption of these tools inside of their organizations.

3:31Thomas Laffont:And I think they all want to make sure that they're using the best tools, that they're being the most AI for. They don't want to be outcompeted by someone who's using those tools. And so there was a slide in one of the board meetings that said, look, we're spending X on this tool and we think it's way too low. We want it to be much bigger. we expect the spend to at least triple kind of next year on these tools. So, you know, when you see, you know, board decks are such a treasure trove of information, right, and insights. And so when you see the same kind of pattern repeating itself across companies, you know that you're onto something big.

4:10Thomas Laffont:And I think all of them, by the way, whether it's Cortex or ClockCode or others are benefiting from that. There's some quite viral charts about their growth. So when you invested, what were those metrics like? I mean, it's one of those companies where you can't even pin, depending on which day you're picking, you're going to kind of have a different metric, right? But they publicly released as kind of part of this announcement kind of where the revenue was, right? And I think they disclosed like in excess of 13 or 14 billion or something like that. I mean, it was definitely materially lowered when we started.

4:45Thomas Laffont:I think also the fact is like these companies do live in a bit of a, especially these very late stage companies in kind of a quasi public or private environment, right? People do tend to know the revenue scales. Stripe, right, publishes an annual letter, which they just did kind of yesterday. They go on CNBC, they disclose a lot of their metrics, not all the metrics the way a public company does, but they did disclose in Stripe's case, as an example, accelerating year over year revenue. They disclose kind of TPV growth. So these are companies that even though they're private and not in the public market, you do have kind of some disclosure and kind of insights into.

5:26Since we are in a room full of LPs and institutions, how do you think, as a pretty famous crossover fund from both sides. Value and capital shifting in the private markets in the next five years.

5:42Thomas Laffont:Look, my default has been a public market investor. That's where we started. We started the fund in December of 1999. From when we started to about two and a half years later, the market was down 80 % over that timeframe. And so I do have to remind some of my colleagues who weren't there, even maybe in OA, that markets can go down kind of that much, right? So my default view has always been that the public market is the best kind of valuation mechanism. It offers transparency. It offers liquidity. It offers opportunity of access, right? Which in a world where we now have Trump accounts, as was kind of discussed on the State of the Union yesterday, which are essentially accounts that are given to children when they're born.

6:29And hopefully that can grow over a long period of time. I do think giving access to the broader public,

6:37Thomas Laffont:to all of these companies is incredibly important. So I think that's either going to happen one of two ways, right? It's either going to have to happen where companies create and have incentives to go public, or we're going to have to create more methods to democratize access to private companies. So I think it'll probably come from both ends, right? But regardless, if you think about the innovation of these late-stage private companies, or, you know, one thing we kind of look at is the Max 7, which has been a significant driver of returns in the public market over the past few years, has essentially kind of been flat over the past year-ish, right?

7:16Thomas Laffont:And that's because Microsoft, as an example, I think has lost almost a trillion dollars of value over that timeframe as people are questioning their positioning kind of in AI. So then that leads you to think, well, what would the next Mac 7 look like? Or who would be other candidates to kind of fit into the index of the future? And I think the names that all of us in this room would probably think of are names like SpaceX, are names like OpenAI and Anthropic and Revolut and Databricks. So I do think it's a really important class of companies. I do think if you're going to want to outperform the index over a long period of time, you're going to need exposure to these companies.

7:58Thomas Laffont:So some of them will probably go public in the next 12 to 24 months. So that'll be kind of one impact of it. But it is unbelievable the amount of innovation that is now coming from this group of companies. We used to see startups disrupt other startups. And now we're seeing startups and viral expos and the Centrini research paper apparently clobber markets. So with that kind of really like hot flash type of volatility, how do you as an investor think about management? Yeah, I read the Centrini paper, obviously. Look, I'm kind of of multiple minds on this, right? I don't think that screaming fire in a crowded room is obviously productive or safe or frankly, something you should do.

8:49However, I don't view...

8:52Thomas Laffont:And some people have kind of made that analogy to that report and I don't share that, right? I do think bringing up these conversations early is really important, right? I think by definition, if everyone thinks we're in a bubble, then we're not in a bubble, right? So I think these points being brought up, preparing investors, preparing companies, I'm very happy that in all of our companies, the sense of awareness about AI is incredibly high. That means that our companies aren't head in the sand. So I think the fact that both for governments, for regulators across the world and for big companies to already be thinking about where this could be going is actually incredibly healthy.

9:37Thomas Laffont:So I know that the volatility, trust me, is difficult on a daily basis. And I live through it every day. But I would much rather have daily volatility, daily questioning, than no volatility or no questioning, and then like a massive crash like three years later. So I think the fact that all these questions are being brought up forces governments, forces companies, executives, founders to constantly be worried and also aggressive about what AI could do to their business. I think that's actually probably pretty healthy. I made a joke when we started that each cloud release is clobbering the markets and erasing hundreds of billions of dollars.

10:23Each cloud release is going after different categories of SaaS. And so SaaS has been the pinpoint of the volatility. Do you think SaaS and public markets is going to stabilize to a different premium? Do you think it'll always have a premium? Where do you think it lands?

10:40Thomas Laffont:Yeah, so I think it's a question that has a lot of different kind of variables. So I'll try and unpack at least my view into them. One of the things I try and explain to companies is you have to think about the opportunity cost and who's the buyer, right? The public market will continuously be comparing the value of your equity and the return of your equity versus others in the market, right? And I think if you look at SaaS, part of why SaaS was so popular amongst investors for a long period of time is that SaaS just grew faster than other sectors. So you could kind of compound, you know, a lot of SaaS companies were compounding mid-20s to low-30s for a long period of time.

11:20Thomas Laffont:There were no other companies in the market that could offer that kind of growth. And so obviously, that was really attractive to investors. I think what's happened now is, by and large, SaaS companies have significantly decelerated. So I was on a workday earnings call yesterday, which is an interesting example of founder kind of stepping back in to kind of help lead this company through its next chapter. It's now growing organically revenues about 13%. So I think now investors are saying, well, you're not growing 30 % anymore, you're growing 13%. And if I look at your multiple of earnings, and I look at gap earnings, which investors are increasingly turning to gap earnings as the gold standard, you're still trading high 20s to maybe 28, 30 times in that range.

12:11Thomas Laffont:So investors are now saying, well, hold on, I can own a semi-company that's probably growing. Avago, as an example, is growing almost 40%, right? Avigo Broadcom, and it's trading at a cheaper multiple of gap earnings. So I think it's a combination of decelerating growth and expensive valuation. So one of two things are going to have to change. Either companies are going to have to benefit from AI and re-accelerate the top line. And I think if you, again, listen to the Workday Earnings call yesterday, Anil, the CEO, essentially said his job is to come in and re-accelerate the company through AI.

12:49Thomas Laffont:So he's a product guy and I think he could do extremely well at that. We'll see what happens. So they're either going to have to re-accelerate, right? Or the multiples are just going to start to re-rate to where other companies in the market trade at. And that's some version of 20-ish times gap earnings. So to me, that's the dynamic that I see. and we haven't even talked about the threat of AI yet, right? That's an even third bucket. But the threat of AI for these companies isn't actually related to their current valuation or frankly, even their current business. It's more related to the terminal value of, okay, maybe some of these companies are not benefiting from AI today.

13:39Thomas Laffont:They haven't re-accelerated. Okay, so it's not impacting the business today. But in three or four years, if Cloud Code can rewrite their entire business, kind of what happens? That's a much harder... It's a much more sentiment kind of driven... That's harder for companies to control, especially kind of in the near term. So markets will kind of flip a little bit over whether a company is well kind of positioned or not. And ultimately, their product execution will determine that. But I think it's a lot of it is the combination of the first two factors now combined with questioning of the terminal value that's leading to, you know, the significant re-rating that we've seen in these companies.

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17:34Thomas Laffont:Yeah, I mean, that's kind of the$64 trillion question, right, of today. What I can tell you is not a single one of the companies that we're kind of involved with is saying, wow, we're seeing so much more efficiency. We want to cut our engineering staff in half, right? What they are saying is we hope our engineers are significantly more productive so that we can do way more things, so that we can do features that have never been enabled before, right? And so you could think of companies like Cursor in R &D or Rippling in SG &A, right? Payroll. Well, what if they move actually from selling you software, which is kind of what they do today, to selling you work, right?

18:25Thomas Laffont:which is kind of different. In one, you're an HR software company, and in the other, you're saying, I'm actually selling you HR. So what does that mean? Well, that means, well, as you know, companies have to hire HR people that have to handle a lot of incoming requests from employees about, okay, why is my payroll different this month than last month? Why did my computer benefits not get approved this month? Or why was I not reimbursed for this? And there's just tons of daily actions that are generated. Well, actually, what if I could have the system handle most of those for you? So now I'm actually not selling you software that an HR person will use.

19:08Thomas Laffont:I'm actually selling you the work of an HR professional. That might mean that my current HR professional now can be repurposed into something that was not strategic but important operationally into something that's way more strategic. strategic. Like maybe we need to redo our review process, right? Or maybe we need to rethink how we recruit our engineers or whatever. So I ultimately believe I'm not a doomer, right? And I love kind of the bank teller example. I think it was cited in the report in case you haven't read it. But in the 1970s when the ATM started being introduced, there was a famous New York Times article that called and said, look, branch tellers are dead.

19:55Thomas Laffont:We're going to see 70 % reduction in branch teller jobs. And actually what ended up happening from the 70s pretty much through the early 2000s was an explosion in bank teller jobs. So what happened? Well, the ATM brought the cost down of branches by a lot, which means companies were able to introduce way more branches, which means that maybe you had fewer employees per branch, but you had so many more branches that the overall kind of TAM increased, right? So I think it still remains to be seen what kind of the impact will be. If engineers in the US become so much more productive, maybe you'll have fewer outsourced engineers in India as an example, right?

20:40Thomas Laffont:So there's just a lot of different dynamics at play. I can tell you for us, we're not looking to cut our investment staff or our, you know, in half. We're hoping that they can do significantly more things and analyze more companies and just be better at their job. If that's possible, we'll want to hire more of them, kind of not less. I had Michael Barton, sector head at the hedge fund on the podcast a couple months back. And he was saying, and I'll clip this and it'll go viral. But he said that 85 % of his job could be automated. He could get AI agents to automate that work. How are you and KOTU thinking about experimenting with autonomous agents?

21:23If you are, if you have a ton of Mac minis around, I'm not sure. How are you thinking about that within your own organization? We do.

21:31Thomas Laffont:So we brought in someone that recently from Goldman Sachs, who's a cloud native and is really pushing us everywhere in the organization to kind of adopt coding first kind of approaches. So we're definitely spending a lot of time on that. I do think there's an element, especially to big idea investing, which is something that I spend a lot of my time on and frankly enjoy the most that I do think is creative. And ultimately how machines will do that, we'll see. Are they just assisting the creative process or are they replacing the creative process? To me, big idea investing is both a creative and actually a reflective of someone's kind of taste at the end of the day, right?

22:18Thomas Laffont:I remember when the iPhone first came out, right? You know, some people liked it and some people thought, no, it needs a keyboard or it doesn't support flash or it doesn't have 3G, right? These are all the things that were pitched against the iPhone in 2007. And obviously, we kind of know how that kind of turned out. So I see it definitely for myself as it enables me to express myself in much more interesting, coherent ways. I use all of these tools every single day for different purposes, whether it's communicating an idea, whether it's replying to an email, whether it's thinking through a difficult situation.

22:59Thomas Laffont:If you don't use these tools for that, I really encourage you to. They're incredible at just teasing your brain and evaluating different scenarios. So, yeah. So for now, I'm investing a lot of my personal time just on how to use these tools. And I found that they make me better. I did hear from a couple of your employees that you are the big idea guy. You were the one who brought in NVIDIA. You got conviction on it. Can you talk about NVIDIA for a second? And then also how big ideas permeate throughout the organization? Yeah, I mean, I love big idea investing, right? I think we have a moniker internally, which is a BFI, which you might guess stands for big fucking idea.

23:42Thomas Laffont:And the reason that we keep kind of the swear word in the middle is when you hear BFI and you hear a big fucking idea, it's jolting for a little bit, right? And it says, hold on. And that's what a big idea kind of should do. I personally have a view that a lot of entrepreneurs, when they pitch you an idea will come and pitch you a TAM, right? And it's usually big and it's hundreds of billions or whatever. And I have a personal view that I've developed, which is actually the size of the TAM is irrelevant. So I never listen to whenever an entrepreneur will pitch me a TAM, I really don't think about the TAM.