The AI Slowdown Debate | Nico Wittenborn, Scott Keogh, Mitchell Green, David Rosenthal & Ben Gilbert, Faraj Aalaei

25:05It's more of the duopoly dynamic. And I think that's because, and I think he sort of alluded to this, that there's just a lot of companies that are like, I am comfortable doing business with an open AI, an Anthropic, a Google, of course, something that's on ABS, something that's on Azure. yes I could just download the weights for DeepSeek but I'm not really comfortable with that I don't really want to deal with that I don't want to deal with the scaling and uptime of that and so yes there are APIs out there that are reasonable but none of them are as mature as the as the frontier labs not in terms of the intelligence but in terms of the actual if I implement this in my business will it reliably give me the right results is there high quality SLA will the service stay up Will uptime be good, et cetera?

25:50So there is a world where you could get to a place where this is bad for the frontier companies business-wise. And Sam has talked about that in an interview with Fortune, saying, like, if it's bad for our business, like, we have said to our investors at every step for, like, a decade that, like, this is kind of a nonprofit. This is a, you know, there are a whole bunch of different ways in which this is not purely aligned to shareholder interests like other companies. I forget the actual term for the structure that both Anthropic and OpenHack use. PBCs, yeah, public benefit corporations. So I think both Sam and Dario feel very confident about being able to go to their investors and say, hey, we're doing something that's going to slow down revenue growth or tank margins or just reduce the market cap of the company.

26:49But we think it's the right thing to do. So deal with it. And you can't really sue us because you invested in the PBC. But no one's really giving them credit for that. And everyone thinks like, no, this is cynically what gets them to 10 trillion. This is what gets them to 10 trillion. And I don't know, maybe it is. But it definitely seems like if we're on the mid-curve, you know, bell curve meme, like the dumb guy thing is like slowing down is bad for business, right? Like the mid-curve is like slowing down is actually good for business in the 4D chess. And like you don't want to be the best and have 100 % market share.

27:27You want 20 % market share because you let everyone catch up to you. Like, I'm not super convinced of that, but, you know, there's plenty of people that are making that case online. Anyway, let me tell you about Cisco, and then we'll bring in our next guest. Cisco, critical infrastructure for the AI era. Unlock seamless real-time experiences and new value with Cisco. Nico, welcome to the show. Thank you so much for taking the time. Come on down to the TBP and Ultradome. Hello. What's happening? And I thought it almost looked like some merch we would make. I know. I was trying to match the colors.

28:00You did it. You did it. Right in. Nailed it. Yeah. Nailed it. Introduce yourself. Give us a – let's begin at the beginning. I want to hear the story of how you wound up in your current role, your mission. And then there's a million things we can talk about, the market and your strategy. But take us back to the beginning. Where did you grow up? The beginning? My beginning? Yeah. I grew up in Germany. Okay. Yeah. South of Germany, small town, Tübingen. Beautiful. It was not destroyed in the world. And Germany is in Europe, right? It is, yeah, just a bit east of the U.S. Yeah, okay, got it. My geography outside of the United States is rough.

28:35I can help you. Thank you. When did you come to the U.S.? So I ended up doing an exchange here in upstate New York. So my junior year of high school, I ended up in a super small town, three and a half hours north of New York. Cool. And so that's when I first got to New York, and I was like, I want to live here. And so I started looking for ways to get back. Going from a small town in Germany and passing through New York City and going three hours north has got to be such a trip. It's true. Because they're obviously entirely, you're like, I'm going to New York. And then you have this idea of New York in your mind.

29:14And then you end up again back in a tiny town. So I opened a letter from the organization that places you. And it's like, you're going to New York. Kandor, New York. They're like, where's Kander, New York? And you look it up. Never heard of that. It's small. But it was a great experience. And so the interesting part to that, though, is that I was in the middle of nowhere in the U.S. And then I also got to go to the middle of everything in the U.S. And so I had a really good exposure to both sides of the U.S., the kind of elitist coastal urban life and also the small town living. So that was the first time I came here.

29:51Then I went back. I did an internship here after school in New York and then studied in Germany, Singapore. And during my studies, I started selling refurbished iPhones. So the iPhones first came out in like 2007, 2008, and they were locked into a contract in Germany. It was super expensive. So I bought a refurbished one and I started reselling them. Okay. Was that like jailbreaking them or unlocking them? Yeah, there was a tool called Red Snow. Okay, yeah. Yeah, and they could use on any carrier. Yes. Got it. Because it was locked in in the beginning. Yeah, yeah, yeah. And it was locked into like a two-year contract.

30:26Yeah, yeah, yeah. It was very expensive. So that's my first. I remember all the names of like software like that, like Red Snow. It sounds so sketchy. But it was like the names of all that kind of like unlocking, jailbreaking, all those names were. Yeah, that was a pineapple one. Yeah, yeah. Yeah, so that was my first like foray into, yeah, business. But like, you know, yeah, small internet entrepreneurship. And then I read about a group in Berlin that was really the pioneers of the German internet scene at the time. So everything happened a bit later in Europe, right? And so in like 2010, came across this firm in Berlin.

31:03I just reached out to them cold. It was an incubator. So back in the day, they were building companies. And then they had a small 6 million euro fund on the side. And so they were like, why don't you come during your studies and work with us on this like small investment fund? Must have been a good cold email. I don't even remember. It was important, though, because I had an offer from a consulting firm that would have paid twice as much. But I opted for the opportunity to go into startups because that's where my interest was. And that led to this. So it was really an important decision back then.

31:40And they gave me a shot. I learned about venture. I then finished my studies. And when I came back from Singapore, which is also kind of an exchange, I ended up doing a, again, sending an email to the same group, this guy, Pavel, who was working there. And he offered me to come back because they decided to spin out the fund. And it became PointLine, which was the first institutional venture fund in Germany. Not in Germany, in Berlin. There was another one in Munich. And so I started working there straight out of school. So I just got lucky that at the time, venture was not what it was. It was just the start of the European venture ecosystem.

32:17And so I kind of fell into that. And then it was a super small firm. It's also historically the best performing early stage firm in Europe. So they did super well early on. And I got a lot of responsibility. I was there for five years. And they were originally focused on enterprise software, SaaS tools. They were early in Zendesk and Loom later on here in the U.S. Really? So it wasn't just limited to Europe. You were investing all over. So we called it Remote VC. So it was kind of, we were based there, but we were trying to look for the best things across the globe that had, you know, that were fitting our thesis.

32:54And then I was recruited by Insight Partners in 2016. I left to join Insight. And that's when I moved to New York. That's a grind, right? 10 years ago. It was very different than the small, humble partnership. It's like a hardcore culture, right, for venture. It's like you've got to be working a lot. Well, it is. It's just, you know, the way it works is that they built, they innovated this. So the founder of Insight, Jeff Hoaring, started the firm when he was 26. Yeah. $20 million fund. It's now$100 billion, and he's still running it, right? Founder. No, he's a legend. Yeah. And he ended up innovating on this outbound sourcing model.

33:34Yep. So they have analysts that are just cold calling. It was literally the phone in the beginning. Now it's emails and everything. Sort of a price for every company in mind. Yeah, and discover every company. Yeah, they want to know everything. Exactly. Exactly. Discover every company. Very interesting model. Yeah, it makes sense and it still works. Yeah, really. So they scaled that and they bet on the right trend. So I was there and so I had learned that at Point 9. I had done some SaaS and I did that too, but I was always, because of this iPhone story, interested in consumer software. I was there when the App Store launched.

34:02And so some of my investments at both Point9 and at Insight were consumer mobile investments. And so I decided to leave Insight. I signed the separation. It was 2018 that we agreed on everything. Early 2019, I left. And then I started working on Adjacent. And I guess what's somewhat unique at the time is that back then it was not normal to do it by yourself. You know, like that SolarGP was not a thing. And I didn't opt in to be. Two years later, it was the main thing that people were talking about. Yeah, and today, I think last year, the majority of new funds were solo GP funds. Yeah. So it became a real thing.

34:44And in fact, that's also one of the things that I try to support now. I have invested in a lot of those funds, like two dozens or so, and also anchored a first solo GP fund now with adjacent. So I kind of like accidentally fell into this, started at JSON, but then also trying to build this kind of rebel alliance. What was the infrastructure like when you started as a solo GP in 2018, 2019? 19. Because there were some people that were using AngelList for certain SPVs and they were rolling funds. And there were some tools that you could use, but did fractional back offices exist? Or did you sort of have to roll your own solutions to certain things?

35:24like what was actually required? So it just started that AngelList were offering services. Carta was starting as well. The big difference there was that I was actually looking at what makes sense for the structure. I knew I wanted to be in New York, but I also was looking at European structures and the infrastructure in Europe was way behind the US. So I opted off doing it in the US and I didn't go for the services and the reason for that was mostly that I didn't feel like they were institutional grade yet because I wanted to have institutional investors and there was limited flexibility. I think that all changed now, which makes it much easier to start.

36:00But at the time, it just started. So basically just hiring law firms and accounting firms. You have a fund admin, which is easy. Then you have audit as a firm, separate firm. Now really what supercharges is AI now because you can do so much more. you can automate things you have agents but also research like diligence like sourcing yeah i was going to ask how at what point does uh does like insights initial strategy just become fully democratized where like there's out of the box obviously if you're doing this yourself you're always going to be able to find different edges and things like that but yeah it feels like you might have access to like a comparable level of understanding of the market with like one person Yeah, I'm not sure.

36:53I think that certainly it gets easier, but what they're really good at is discovering things when it's still relatively unknown, right? So like from the outside, you don't know what a stealth or a new company is doing. Once there's signal and press and more data, then the AI picks it up. But I think this broad sourcing still makes sense. And then the other important aspect to it, which actually works for me too, but is that the analysts are not just sourcing, they're also relationship building, right? So they're reaching out to someone and you still want a human-to-human interaction with a founder because they don't want to work with a computer.

37:24Not yet, at least. And so you have this relationship, and you stay in touch with them over two, three years, and then you invest, and I think that will still work for them. What was the LP strategy for actually raising an initial fund? Straight shots on endowments, fund funds, high net worth individuals. What were you thinking? What worked? The first close was hard. The whole fundraiser was hard. It was 18 months. to get the first fund off. And what made it harder was COVID started at the same time. And my now wife got pregnant with our first kid. So it was just like, it was an intense 18 months.

38:04But what I did is essentially, the first close I started going back to the founders that I had invested in that had already proven and made money. So the founder of Revolut, Nick, was one of my first LPs. the founders of Calm which we had invested in with Insight and then a bunch of GPs that the founders of Point9 where I started working Jeff Horing related invested as well and then I had friendly friendly funds like Thrive and Founders Fund that actually helped me with the first fund and so that was the first close and then the first family office came in which was SES to give them credit they were also very early in both Thrive and Founders Fund that's how the relationship started And then based on the first$10 million first close, I just started investing.

38:51And the second investment I did was Speechify, which ended up doing very well. I love Speechify. Cliff is a man. Cliff is a character. He's amazing. And so with some proof that I could also function by myself, I then went to the institutions and then was able to get a$40 million first fund together. Sure. And then since then, I've been pretty consistently increasing it. So I just started investing out of fund four now in this year. But I've been kind of pacing it in some ways before it was cool in the growth from one, two, three, four, adding roughly one LP per fund. Sure. Nice. And that has gotten somewhat easier because there's more proof.

39:36We just had Benning Spoons go public. Yeah, yeah, yeah. Talk about that. How did that initial investment come together? And did that always feel like on your more thesis-driven than most VCs, I would say, in general? I try. VCs will say they're thesis-driven, but they have like eight active theses. The other thesis was buy low, sell high. That one always works. That's a good thesis. Old reliable. Well, I don't know if you're in San Francisco today, that's not what they do. Buy high, sell. Benning Spoons buys for 10 % of the peak market cap, right? Who knows where we end up here. That's true. But yeah, how did that initially come together and what did you see?

40:21Yeah, so when I started at Jason, and the thesis has also evolved since then. We can talk about that more, what led to other investments. but initially so in 2019, 2020 then the COVID time if you remember there was this crazy SaaS explosion multiples went up everybody went crazy never going back to the office no it's all cloud and crypto actually so those were the two things so all the new funds were doing the same and because I had success in consumer I ended up deciding to start a fund initially focused on consumer and especially consumer subscription companies And that was just essentially a transfer from the SaaS and then seeing the App Store and subscription launch on the App Store and being close to some of the first investments that did well there.

41:07So I was quite differentiated in that. So the first fund and the second fund to the most degree were very focused on consumer subscription. There's one problem, though, with these consumer subscription companies. I mean, there's advantages, disadvantages. But one of the problems as opposed to SaaS is that they're much more churny. So at one point, depending on how deep the market is, you hit a ceiling. and this can be at millions, tens of millions, hundreds of millions but if you want to go for big outcomes you still need to grow at a really high clip at hundreds of billions of revenue and ChatGPT to some extent has done that in the beginning 75 % of their revenue was prosumer so the thesis was good but I'm not an open AI but it was just a different game and I ended up picking the right trend but also wanting to have a little bit of like a hedge against it in some ways because you could see that these companies kind of get to revenue relatively quickly, pretty cash efficient.

42:03They need much less people and OPEX and distribution costs than a SaaS company in terms of headcount. And so there were like tens of millions or hundreds of millions, but very profitable. So we already had this thesis of like, there's actually a really big play here to aggregate companies because if you can... And spending. Synergies, yeah. I was actually, I had an investment in a company called Blinkist, which back in the day, I don't know if you remember. Yeah, short book series. Yes, exactly. Which was very innovative at the time. And subscription-based, yeah. Subscription-based. This was one of our inside investments, and I knew these guys from Berlin since 0.9 times.

42:36And so one of the founders, Niklas, actually came as an entrepreneur in residence to Jason for a while, and we were thinking about incubating a company that did this. And then I was on a webinar with Luca in 2020, and I was like, I think we should just do that. He's amazing. and he was already like doing it. And this was pre-ChatGPT. And then I think AI also helped them a lot in actually building the synergies and the transformation engine that actually then makes... Well, it also helps them by, you know, knocking 90 % off of the market caps of some of these other companies. So there's always some luck involved in that.

43:14Yeah. So that led to Benning Spoons. And then when did you actually, when did you do Aura? So I want to, I heard you say this in the beginning and I just want to make sure that I did invest in Aura, but this was around the time of the first close. So I couldn't, I didn't have a fund yet. And it was a round that was like, I don't know if I should even do that with a first$10 million first close. And so I ended up investing personally with a group of friends in an SPV. It was actually, and the friends of mine that I did this with was the team that I was leading at Insight. And they left, also started a fund called Left Lane.

43:48Oh yeah. This guy, Harley Miller. So we did it together. back then, yeah. What was the initial portfolio construction thesis for that$10 million fund? Well, one last thing on Aura. It's just interesting, I think, also that the reason we understood Aura back then, even though it was a hardware device then, with no subscription, was that we had done Calm, and Calm had inflicted by launching Sleep Stories. So a lot of the growth actually came from people not wanting to meditate, but needing to calm down before sleeping, because sleeping was such a big problem. It still is to a large extent, right?

44:21in the Western world. It's like the foundation of your health and psyche and everything. And so we did Aura and then we were pitching also the move to subscription. And hardware and subscription work and that then also did this hardware subscription thesis which led to Bored, Backbone, Tractive, a company we sold also this year. So that was that. What is that company? Tractive? Yeah, Tractive was the, it was probably the biggest exit in Austria ever. So it's a small town in Austria and they built a tracking device for pets. Oh, okay. So you put it on the color. So Aura for pets in some ways, but plus location.

44:57So if you're in a remote area, you know where your dog is. You can call them back and you see them on the map. You see how they move, how they sleep and things like that. Yeah, it's cool. And actually, who bought it? Benning Spoons. No way. Yeah. Wow. It was like fun, fun, fun. Yeah. Nice. Yeah. It's great you're monetizing both sides. Yeah. Yeah, this is like, I said it on the way up. are fascinating because your pet doesn't come to you and say, hey, I want to churn from this dog food. Exactly. No, this is literally. Blue Apron was like a subscription food company. And eventually people would just be like, I want to try something different.

45:34I'm just sick of this. That's why Farmer's Dogs works. Yeah, yeah, yeah, exactly. And track it the same because actually the average subscription was years by purchasing it. Yeah. Whereas people might even take off a Fitbit or something and be like, I'm out of this fad. I'm onto the whoop. I'm on to the, and move around a little bit. So, so it's hard to get sticky. The thesis has, has expanded, but I want to get, uh, your updated, updated kind of point of view on consumer right now. I feel like, um, a year ago, people were really pounding the table being like, now's the time for consumer, consumer AI.

46:06And yet, if you look at the iPhone charts, it's been still like the time of language models, right? So like most of the new apps that maybe weren't in there five years ago are various chat apps. And then the other sort of popular apps that you're seeing are like short AI drama slop stories, which is... Yeah, it's consumer. Which is, yeah, which is consumer, but, but, um, maybe not the explosion of, of different types of, of applications that I think a lot of people expected. And I think part of that, my point of view is like the chat apps can just do so much. Like there's so much, um, you can maybe, maybe, uh, uh, the example I use, uh, that's not super relatable for most people.

46:56It's like checking the surf. Like if I want to get an understanding of like Swell and Tide and all these things, I actually don't need a net new app for that. I don't need like the AI for checking the surf app. I just need like ChatGPT or whatever someone's preferred LLM. So how are you thinking about the overall landscape, especially right now because you have a new horse race with Instinct and Muse? So it feels like we didn't have the end of history with consumer yet. Yeah, I mean, it is definitely true that the world changed after ChatGPT, right? So like 21 launch and then the coding help. So one interesting trend is that the number of new apps, one of the other proxy investments I did with FundOne is a company called RevenueCat, which is powering 60 % of the new launched apps with their subscriptions today.

47:49And through that, we can see it's just like an immense increase in new apps that are being launched. So for venture, for me, I actually had to move on somewhat from consumer at the time. I think there will be new applications in consumer plus AI, and I'll talk to that. But it definitely decreased the barrier for new things significantly, right? So the ceiling, if you think just like theoretically, the competition increases significantly because so many more new apps. So getting to a venture scale outcome is even harder, right? So even though we have more niches served, the venture outcomes are more difficult, right?

48:23So I think that if it's very simple, it doesn't make sense. There is consumer things. I invested in Popcorn, which is a next-gen telco. So they're building their own core infrastructure for telco. They have an eSIM. You download an app. You get the international number. But also they have AI features integrated. So you can use a call assistant and stuff like that. So I think if the technology goes deeper, more differentiated. Never put a phone call through to me ever. No. That's basically what I want. I have an assistant, Jenny, that calls. instead of voicemail she picks up and says what is this about what is this about yeah and then if it makes sense better have a good reason because I'm not putting you through I get so many spam calls my phone's always like do not disturb I don't have so the most annoying thing to me is someone calls you but they don't leave a voicemail like I don't really want a voicemail but if I get a call that I'm not expecting and then there's nothing I'm just kind of wondering then but I don't want to pick up the phone I don't want to take a random call do you remember those spam calls that you get where it would play the Chinese music in the background and then you'd hear Chinese pitch for something.

49:27It was like a scam call. But they specifically put Chinese music in the background. You ever got those? No. Where did you sign up? My phone number goes everywhere because I've started businesses and my phone number's leaked all the time through customer service and stuff. So I always have gotten the weirdest spam calls ever. But that was a fun one. So I have now one number that's my spam number. that I use on the internet for two-fant notifications, and then I have my popcorn number, which nobody has except real people. That's good. I need that, for sure. Anyways, I do think there's a new era coming, which instinct, I mean, there's just a lot of instinct palsy.

50:06There's companies that are now doing things that are prosumer, consumer, that are personal agents. And I think, I do expect that there will be a lot of things that work there, but also it's very difficult today to understand what of that will be eaten by the labs. Right. So how vertical can it be? And then also you have meta playing for it. Right. Like the problem. So essentially it's just it's so crowded and so many big companies are playing for that. That for me that wants to go in early and not at 500 million or a billion dollar valuation. It's very difficult for me to play there right now.

50:37You know, and there's also like plenty of scaled unicorn decacorn companies with founders who are live players, maybe reengaged. and they are monitoring the model releases on a daily basis and saying, I'm going to implement this on day one, have a team that's sprinting to implement this feature so that there's not an opportunity for my SaaS company plus AI getting funded because I'm doing it on day one. Yeah, and I think Muse is a great example of that. I think the speed at which Meta moved on this personal agent trend and launched Muse is really impressive. It's still unclear to me when they actually started working on Muse.

51:16Because it feels like, I mean, I'm sure they tried to buy Instinct, but that doesn't necessarily mean they weren't working on some personal agent before. I think they've been working on it for like six months. Like, Nat Friedman's been there for almost a year, maybe more. But the level to which Alex has just been like taking direct shots at Instinct all the time. Does he have a nickname for it? What? Does he have a nickname for it? Oh, yeah, Insect. crazy. I wasn't sure if that was a typo or intentional. But it's rare to see a trillion dollar company hackling and while cloning a startup that's 11 months old.

51:54Yeah, they didn't really do that with TikTok or Snapchat. They were pretty quiet. They were just like, we're excited to launch stories. We're not going to say anything about... Well, yeah, no. In that case, it was like Evan would be kind of taking little shots. Yeah, yeah. And that's what you'd expect, right? Totally. The underdog takes a shot. But this time you have a trillion dollar company punching down. I don't know. But that's the reason why the stock market has been driven by a lot of these companies that are just still compounding. Same with Alphabet. It's been hard for VC to actually benchmark themselves because the markets are so great because all the tech companies are just doing amazing things.

52:32How are you thinking of investing in Europe, considering that there was some proposal I just saw that was saying, like, Europe basically needs to spend hundreds of billions of euros to try to sort of, quote unquote, catch up in AI. I have a buddy from Austria, and he's working for an American company right now. But I was like, what are you doing not just like starting like a neocloud right now? I was like, I know people in the U.S. that are dumb as rocks, and they're going to be billionaires because they just picked a hard problem with an exceptional amount of demand and have just been working on it for years, and I feel like Europe's lagging a little bit if you just roll up your sleeves.

53:17You're dumb as rocks. You can do this? No, the point was you seem very, very smart and capable, and if you just focus on figuring out how to get a powered shell and some chips, you're probably going to be able to figure out some demand. But how are you thinking about it? Well, look, in my career, Europe has been super important. Revolut, Bending Spoons, Aura, those are companies that are really important. But also, they oftentimes were in the category that was not yet very hot in the U.S. It's not easy. I mean, it is true that Europe, we have not done enough to support innovation. and this is everything from regulation to the bureaucracy and like labor laws.

54:01Like there's a lot of problems that like startups are tied into the same regimes as big established companies. So that doesn't allow us to move as fast. Right. And that's a problem. I hope that changes. But I do think Europe has amazing talent and Europe has also the ability to build new things. AI completely missed it. Probably as a consequence of having already not done as well in software and the infrastructure build out that's required to actually do it as well. I mean, just pattern matching on the last cycle, it seems important that Europe never got European Facebook, but Europe did get Spotify, which was built on top of Facebook and benefited from the Facebook network and algorithm.

54:43But it wasn't a direct clone. Yes, exactly. And when I see these things where it's like Europe needs its own LLM, I'm not entirely sure about that. I'm not entirely sure. Like if you're going to do China and you're going to do firewall, then you get the Chinese Google, the Chinese Facebook. Europe hasn't gone far enough to actually, you know, truly create an area where you could have a European Google and make it so hard for Google that they get kicked out. And then European Google wins. But you can go and do a Spotify, which is an actually new idea, wins and is not directly competitive. Actually, very compatible with Facebook.

55:21They were, you know, obviously a lot of investors in common and stuff. Yeah, I think it's very hard to catch up in AI, hopefully. We will to some extent. But there's also, like, energy and defense. Like, we had dependencies for too long. Yeah, for some of those, like Helsing and stuff, you can see that being a clear line. But when it comes to just, like, global innovation, like running your own race, seems to make a ton of sense. It should be differentiated into their own strengths. Yes, exactly. And I think that we'll keep going. And we started later, right? We have Spotify soon. We have a Revolut.

55:54But those companies, it takes some time to trickle down. And so it's important that, like, Benning Spoon says, we're an Italian company. We're listed in the U.S. because that's where the markets are, right? And we acquire companies in the U.S. But we're an Italian company, right? I think that ecosystem is the same with Daniel Ek. He's doing a lot now with Fumor Materia to support companies, Helsing and Nikko and stuff in Europe. And I think that it's just, like, hopefully with time, that also works. Do you spend any time in Estonia, the birthplace of Skype? Well, yeah. So I don't. I have one company that is actually a Ukrainian defense company.

56:31They're based there. So there's become a bit of a defense hub in Estonia for that. But I think the original founder of Kazaa has built up. He was one of the first investors in Anthropic back then and stuff. So there's a lot going on there. It's just like not one of my core geographies so far. What do you think about the disconnect between what Bending Spoons will currently pay for a software business and what VCs will pay to invest in a potentially future Bending Spoons portfolio company? I mean, I would not be surprised if Bending Spoons buys a lot of the hype AI companies. Yeah, yeah, yeah. No, and I've just been...

57:13For the same price. Yeah, yeah. No, I feel very, very strongly that that will happen. Even though the companies have great teams, they're growing revenue super quickly, but it's just extremely notable that when you look at some of these software businesses and you look at, I see, you know, in some of these acquisitions, you can imagine that Bending Spoons was like the real only serious, like, bidder for some of these companies. And so they get to set their price. And so two things need to happen. one, Bending Spoon's thesis plays out and people sort of globally realize, hey, we should have been more comfortable with the risk associated with this.

57:53Buying a software company at three times revenue could be stealing it. So if their thesis plays out, there becomes more buyers like Bending Spoon's because there's plenty of capital. So that could help prices come up. But it feels like the The most likely scenario is we get these companies today where I look at them and you'll have a company,$100 million of revenue trading in the billions and you just see this company is... How many more of these hype... Yeah. I mean, since VC works in a way that it's very FOMO-driven, consensus-driven, everybody thinks everything is going to be very big and then we have these hype cycles where...

58:37I'm not saying AI is a hype. Obviously, the technology is super powerful and it will change the world, is changing the world. But with that always comes a lot of money chasing things that do not turn out, right? Most of the venture bets do not turn out. And they are orphaned at one point, right? The founders move on. The VC moves on. People just want to have some money back to invest into the next hot thing, right? And that's what the core insight is that's driving the success of a company like Benning Spoons. Yeah. It will be interesting. Yes. But it's notable that, like, it's not like the wave of Bending Spoons' big high-profile acquisitions was, like, five years ago, and now we're doing it again.

59:18It's like all these things are getting priced now while we're doing it all again in the same present moment. And it's like... It repeats. The cycles repeat. It's repeating in real time. Yeah. Why? What brought you to LA? Well, okay. Last question here. No, I'm happy to keep on. No, I wish we had more time. No, I know. I am here. So one of the first breaking away from the thesis was a company called Inversion Space that is here in LA. They're doing hypersonic delivery from space. So they partnered with Unreal on the Golden Dome. They just did a contract with NASA also. So I'm here to see them. Amazing.

59:56And then one of the funds that I like a lot in San Francisco, Cantos. Ian, you had Ian on? Yeah, yeah. So I'm a small LP there, and he's hosting an event on Wednesday, so I'm there for that. Great. Awesome. Well, thank you so much for coming by. Thanks so much for coming on. We'll talk to you soon. Let me tell you about Railway. Railway is the all-in-one intelligent cloud provider. Use your favorite agents to deploy web app servers, databases, and more, while Railway automatically takes care of scaling, monitoring, and security. Scott, thank you so much for taking the time to come on down to the TBP and Ultradome.

1:00:29I would love to start with an introduction on yourself, but also just the story of Scout Motors. It's a fascinating company. It goes back decades, if I'm not misinformed. To the 60s, yeah. Tell me the story, yeah, of both the company and how you got involved and where you're going next. Wonderful. I mean, I'll start with myself. Please. I think where it starts with me, of course, is New York, the automotive business. Obviously, with my last name, I have an Irish background. My family is a classic American tale. They came here with a suitcase. They came to Ellis Island, And my dad was in Brooklyn, my mom was in Rockaway, and they wanted to make their way in the world.

1:01:05That's amazing. And, of course, it brings me here to today. I think if you look at Scout Motors, how it all came about, I think first and foremost, as you know, it's an iconic American brand. It basically invented the SUV segment, invented a lot of these things back in the 1960s. I think what happened to Scout is exactly what happened to America in the 1970s. So high inflation, stopped making things, outsourced a lot of things, had troublesome labor relations, high inflation on that. And this American dream, this American icon went away. And how it came back to life, I think it's sort of three things came together.

1:01:42I think first and foremost was, let's say, the business necessity. The Volkswagen group at the time said, how can we get more successful in America? and the way to be successful in America is to go after these profit pools where the trucks and rugged SUVs are. And, of course, they had purchased a company called Navistar. Navistar had the heavy truck business of International. Of course, they had the rights to scout. And there came the genesis of this idea. Could we bring back this magical icon with the backing of a company that knows exactly how to make things and get good costs and bring it back to life with a clean sheet?

1:02:17And that was the premise. And that was four years ago. We had one employee and a couple of PowerPoint slides. And now fast forward, we have 1 ,600 employees. We're industrializing a factory in Blythwood, South Carolina. We're going to show you a pretty cool prototype car behind me in a little bit. And here we are. I think the other thing that's important to look at is sort of the softer side of the thing. And for me personally, I think a lot of us during COVID, I drove across the country with my family. and you drive across the country, right? You go to Ohio, you go through Pennsylvania, you go through Indiana, you see some of these manufacturing towns and you do have to ask yourself, what happened?

1:02:57Why is this? I think at the same time, we saw a lot of the geopolitical environment with Tavis and the resurgency of saying, let's build things again, let's do things again. And then the other final sort of piece of the puzzle is Scout was a super cool, glorious icon. It's like, why do we let these things go out of business? Why do we let these things fade away? Why don't we do it right? And you put it all together, and we're here at this magical moment doing something difficult for sure, but doing something really cool. So that's the background in a nutshell. Yeah, yeah. I mean, the idea of reindustrialization, making cars in America.

1:03:34And today feels like there's a ton of tailwinds, but 2022 is a different era. Is that a lot of luck just being in the right place? Because when I think about all the tariffs and everything, I'm just like, oh, this is a win for Scout. There's another win for Scout. And I mean, we were watching the president talk about AI. Literally the question right before was about making cars in America. And so there's a lot of positive economic forces that are working. was the plan that this was coming and that there would be more re-industrialization movement in the future, regardless of who is in the Oval Office?

1:04:14Or was this just like a lucky break that happened down the road? Lawrence, look, we're profound geniuses. We looked into the crystal ball and we knew everything was going to happen. No, I think there was a, let's say, movement sort of gentle drumbeat, if you were listening. You saw the transition, let's say, from NAFTA to USMCA. And clearly you can see where that was heading. That was the worst back in 2016. You also knew from COVID that supply chains were becoming, let's say, tenuous. For lack of a better term, it was difficult. And then you knew in this segment, if you look at this segment, majority of the segment says, I want to buy things that are American.

1:04:54I want to buy things that are made in America. So Scouts' whole premise was always going to be that. But based on that, of course, a lot of other things came their way, from tariffs to geopolitics to everything I know. So I think it was a good core idea. It's a phenomenal core idea that's gotten more tailwinds as it's come, which has been great. Yeah. I recently heard that the life of a new car has basically doubled since, I believe, the 70s. And new cars will often last until 250 ,000 miles, whereas it used to be 100 ,000 miles. it's time to get a new car. Is that a secular pressure that you think will, will be overcomerable with new technology?

1:05:38Or do you think that's something that we're going to settle into? Or maybe there's a world where people wind up with more cars. Just I'm thinking of like, what are the general pressures that you're worried about around new car purchasing? Yeah. Look, I think you raised a key point. I think a lot of what's driving that of course is a high cost environment where people want their cars to stay with them a long time. I think that's particularly true of this segment. This is a segment that's not what I'd call a flip and purchase for a vehicle that's just going to get you down mainstream. It needs to do real work, real play, take you somewhere, do something.

1:06:11So we've fundamentally engineered the car to be super robust. The second thing we've engineered the car for is to bring a lot of do-it-yourself type of business back into it. I think a lot of people where they've engineered these cars, they're complete spaceships. Just look at them. Don't touch them. Don't touch them. And I think we've intentionally brought a lot of mechanical, physical characteristics back so you can do the actual work. I think the other thing that's breaking down, and I remember this back in my Mercedes-Benz days, was electronics, can't update them. 100 ,000 miles, it's going to be gone.

1:06:45Or batteries. That was the one on batteries, right? They're going to last. And I think that myth is being broken all the time, but these batteries are holding their power. They're holding their charge, and they're holding their robustness. I think the right way to look at it. I saw someone put like 300 ,000 miles on a Model S recently. Yeah, exactly. People thought that was impossible. And the depreciation curves are still really rough for electric vehicles. We can go into that. But, I mean, it does feel like the fear of like this battery will be impossible to repair and the car will be total because of the battery.

1:07:16That has been pretty. How much does your segment care about autonomous driving? and how much and do you think they'll care more about it in a couple years i don't think it's core to the segment i think we've engineered the vehicle where this is a vehicle that you want to have control of the narrative and control the vehicle so we've intentionally made a vehicle where yeah i want to put a real door handle on the thing when i get into the vehicle i want to use real switches and get that mechanical connectivity if you will and driving i think it's the same exact thing this is a vehicle that has to work wants to play they want control of vehicle.

1:07:51Now to that end, the Scout will have level two plus because I think where you can offer that highway convenience, if you will, where driving is more tedious, 100%. But I think this segment and what it stands for in terms of, let's say, freedom and control has much more to do. And honestly, if I look at autonomous, you wouldn't build this type of vehicle. You'd build a much more A to B type of vehicle. Take me for here, take for there. You wouldn't have solid body on frame. You wouldn't have solder axle. You wouldn't have 1 ,000 pound-feet of torque, 800 horsepower, all of these capabilities. I think you'd build a much more, let's say, cyber cab, not to give sort of a simplistic vehicle.

1:08:29So I don't think it drives this segment. I think level 2 plus for sure is where we'll be and what we see they want. But we want to be a little bit more, let's say, old school where we can put the driver and the customer back in charge. That we see as a mega trend. Like I want to be in charge. Screens aren't taken over. Yeah. So you said, what was it, 2021, 2022, there's one employee. Yeah. There's hundreds now, thousands now. 1 ,000, 1 ,600 employees. With first customer deliveries in 2028? In 2028, exactly. 2028. So when do you actually start building out the plan to hire all those people? What will the company look like in 2028 when you're doing deliveries?

1:09:09So the plan is a ramp-up. When we look at 28, at the factory itself, we'll be roughly 3 ,000 employees. If I look across the total workforce, we'll be roughly in the zone of 3 ,800 to 4 ,000, somewhere in there. The preponderance of the workforce is going to be basically being and doing two things. You're either making a car or you're selling a car. I think one of the things we've done very smart is get all of the overheads out. SG &A, extremely tight. overheads extremely tight because we want people doing active things which is buying a car and and of course and of course manufacturing a car at the plant itself if I look at the 1600 more than half of that are down in the factory right now as we speak and that's because we're building the very first early prototypes and I think this is a pretty cool thing that we're doing what most companies would do would outsource that to a third party they would then hand you the car and you'd integrate into your plant okay since it's a new factory We're training new workers.

1:10:07They've never made cars before. We want to get that muscle memory now. So we're building these prototypes. It'll make us much more stable for ramp-up, which, as you know, is critical. What is the state of dealerships in the automotive world? How is it changing? Tesla's taking a different approach, but there's still shops where you can go see a Tesla. What will your strategy be? How has it evolved over the last couple of years? Our approach is clear. We are going to go direct to consumer. So we will be selling the vehicles directly to the consumer. And in my mind, I look upon it as three fronts.

1:10:41One, there's no debate that we can handle the transaction far smoother and far straight with a lot more transparency. We're going to build the ecosystem to do that. I think if you look at a brand such as Carvana, they've without a doubt proven there is a good digital path to sell a car and make it happen. I think the second thing today, I think there's no world where if you don't control the relationship to the customer, have all the data that comes of that relationship, you can't be successive. And the third one, without a doubt, is we are going to do a lot of work to build the infrastructure.

1:11:14I think where a lot of the brands you mentioned fell short a little bit is you have to have the service infrastructure built ahead of the wave, not behind the wave. And those are the big things we're focused on. We're executing that. And it's critical. What does that actually look like? I mean, it seems like one of the biggest challenges because you need to have service. Are you going to have a central service hub? Or I imagine that that's tough if you're having to ship cars around all over the U.S. Is there specific key regions that you need to be set up in? I'm just curious. You got exactly right.

1:11:46I mean, the good news is it all starts at the factory. From the factory, we've laid out nine distribution networks that we will have. We can put these in very smart locations where you can have lots of space. relatively inexpensive and let's say line up the cars there. Then from there, they'll move in to the retail stores. We will build a hundred stores over time, but what this allows us to do, we can be way smarter on inventory, way smarter on cost front. And then what you have now is a lot of these dealerships, you have extremely expensive inventory, extremely expensive parking, and we can put this in much less expensive real estate.

1:12:21I think the other thing, speaking of real estate, where we see the action being is we can build in sort of class A fronts where we can get off of Main Street, get off of the expensive stuff, and build it in smart locations. 85 % of the investment will go into service since that's where the most critical function is. And that's what we're building pretty much as we speak. But again, if we have the data from the customer, the data into our factory, and the data into our suppliers, we can sort of get out of this world of let's build a couple of thousand cars and send them across America and hope they sell.

1:12:54Then they sit in a parking lot. They sit there for 120 days. You throw incentives on them. The RVs collapse. We can avoid that. We can be way smarter using data, using intelligence, using AI to get the right car into the place and basically hold pricing power. How important is the test drive to conversion in a direct-to-consumer relationship? Is it unnecessarily high? Like should more consumers be buying cars without ever test driving? them i feel like i'm i'm a psycho i've bought like probably six cars without ever test driving them that feels like but is that the future or is geordie actually a psycho look i think but i but yeah part part of that is like i grew up buying things online yeah very comfortable looking at a picture and a video and maybe a review and saying cool looks good and there's so many trusted car reviewers doug demuro forest auto reviews that if there's a consensus across three or four people that I trust, I'm probably just going to be happy buying the car.

1:13:55But what does it look like now? What do you think the future looks like? Look, I think what we're planning for, we're planning for, we're a startup brand that people don't know that well. And in order to get to know well, you're going to have to establish trust. It's the number one word. I think we'll have phenomenal reviews. We'll have phenomenal reservations, which we have already. But when you come to these service centers, we want to have an environment where you can take a test drive. Beyond that, we're going to set up test drives, obviously, in the big markets and get this done. I think there will be a huge group that's going to say, I love this car, send it to my driveway, done.

1:14:26We'll take care of that. On the flip side, there will be a group that wants verification. So I think at this early phase, I would say 85 % is going to want to get in this vehicle, drive it, test it out. We have new technology with the E-Rev. We have a new vehicle. And I think the more we establish trust, the more units in operation, the more all of that happens, then that's going to be fine. It looks, it just looks, I can't wait to see it outside, but it just looks, it looks incredible. It's awesome. It's awesome. I was wondering you guys to look at it. It's exactly what consumers want. I mean, you look at some of the new Toyota and Lexus models are solid and have been...

1:15:01Yeah, a lot of these longer, newer projects, by the time they make it to market, they look outdated because, oh, clearly the designs were from five years ago. This feels perfectly where the consumer is. What happens with, it feels like the legacy manufacturers and brands, they get very stuck on certain like interior styles and materials. And the updates go from, you know, everything I've seen from the interior with the Scout, it feels like you guys really considered materials and patterns and the touch and feel and all these things. And have thought about it from the ground up. you would think that other manufacturers would just say, hey, why don't we just redo?

1:15:46Why don't we, when we refresh this car, why don't we fully redo the interior? And what I typically see is these more like, hey, it's like 5 % different, but fundamentally it still looks exactly the same. Why is it so hard to do a full, basically cosmetic interior refresh for these brands? Look, you nailed it. One of the things we loved is the power of a clean sheet is one you have to take maximum advantage on it. What unfortunately happens in giant OEMs and giant companies is to make any change, there's a big giant machine, there's an existing factory, you don't want to alter tooling, you don't want to have new supply bases.

1:16:25so every little thing gets so expensive and so challenging and so difficult, which is why you see a world of, yeah, these swipe tweaks. And they say all new and all this, and basically it's a tweaked fabric or whatever it is. I think what you see here, and I'm glad you appreciate it, this is a grueling labor of love, love, love. We have fought every last thread on this vehicle. And I think it started with, boy, we're bringing back this icon. We do it wrong. were going to get mocked. And we couldn't just throw a scout label on a vehicle and say, hey, here's this. That's a good motivation. Because the OGs will honestly reject you.

1:17:05We knew if they rejected us, we're dead. It's over. Once we got them on board, then away we go. And that's why we're off to races. But the reason it's so hard is you just get stuck in this big company world. Yeah. The way that the car market moves, it oftentimes feels like manufacturers don't listen to customers. But I have to imagine they do look at social media comments and they are well aware of the feedback. But is it because of the planning cycle? So I'll pick an example. So like the Ferrari community, I'll say. Nice mainstream example. I'd like to know. And when I say Ferrari community, I mean the group of people that care about the brand and then the group of people that care about the brand and our actual buyers.

1:17:51But both of the groups are oftentimes confused with a lot of the actions of the brand. And I just have to imagine it's like, is it the kind of thing where the actual response from the manufacturer is somewhat delayed, where it's more like this sort of like, yeah, we've been aware of this issue for five to six years, and now these sort of newer iterations, they'll be responding to that? Is that just because of the supply chain? Look, the simplest thing is, look, at the end of the day, let's say you want to make a change. So the two big drivers of that change is, okay, what's going to cost CapEx-wise to make that change?

1:18:34Because you're going to have to retool at the supplier depending on how big it is, and that's a few million dollars, just for one slight little change. Then you may have a material cost change on the bottom of the bill of the car, and then you multiply that by 10, 20, 30, 100 changes. and all of a sudden you're talking$100 million of CapEx and, I don't know, a couple hundred dollars of material cost on the vehicle. So every change is just brutal. I think the other thing is they work in big cycles, right? You have your classic launch of the car, then your product improvement, three, four years later, and then the thing.

1:19:03I think the other holy grail for us, and certainly Tesla has done this quite well, is can you get changes that don't impact the physical hardware of the vehicle, which is all of the OTAs and all the things that we'll have capable on this vehicle as well. But why you don't see that is cost and cycle tooling and things. It's not like these people are asleep at the switch and aren't aware of it. They're certainly aware of it, but it's the cost, the time to go get that done, period. Yeah. Which is why you want to get it right the first time. We know this is a problem, but fixing it now would cost a billion dollars, and if we just wait another cycle, we'll be able to address it, but in a much more cost-efficient way.

1:19:41Exactly. And then potentially you can find 50 of them or 40 of them or 20 and do it all at once, cycle it up, and get it through the one change. Because, of course, depending on how extensive the change, retooling the factory on top of whatever the supplier did, potentially change training within the factory, the knock-on effects are massive. Retrain your dealers to sell it, depending on how big it is. Does Scout have any history in off-road racing that you're aware of? You want to do Scout Challenge? I do want to do the Scout Baja Scout Expedition. The car? The Paris, the car? The car is another way to go.

1:20:15No, 100 % it does. Scout raced back in the big off-road races back in the day. We've been doing something. There's a cool guy up in Venturi here named Sean Barb. I don't know if you know him. And we sponsor him, and he's taken a couple of the vintage Scouts, and he's done some racing. And then we can't wait to get the real deal and go kick some serious. No, it feels like you should try to put 100 of them together and even get a pool of buyers that just is buying them even for just racing. Yeah, mod. Yeah, exactly. No, I'll have to show you some stuff, but Sean's doing some cool things. Let's go check out the car.

1:20:48The car's outside. Let's do it. I'll let Jordy throw on that lav, and we'll walk outside. I think we have our cameras ready to rock. Let's go take a look at this vehicle outside. Here, come this way.

1:21:06The outside of the TV and Ultradome. We are outside here, and we have our new sign-up. Here it is. the Scout. Oh, look at this. Looks so good. So this is it. I love it. One of the first things you'll notice, we made this one the more urban version, if you will, right? Yeah. So it doesn't have the spare wire on the back. It doesn't have the off-road packages. We made this one more urban cool style. I think you'll still notice 35-inch wheels. Is that like a cork? Beautiful, recycled. It's walnut, but it's just super recycled stuff amazing and then jordy you can see kind of what i was talking about here just like get some real switches back there these are all for the uh accessories nice these are all for the lockers that you can control this is a lot of hardware mechanical functionality kind of you know people let go a little bit on this front i think the other thing for both of us there we go I love the two-tone.

1:22:09Yeah, it's super, super well done. This is great. Yeah, it'll hang on the thing. And then what we didn't talk about is, you know, the magic of this vehicle is what's underneath. So it's body on frame, which means you have a frame. You put the hat on top of the vehicle. It's got a solid rear axle, which is super old school technology. We integrated the e-motor inside the axle. First time that's ever been done. Just to give you a sense of it, this is 1 ,000 pound-feet of torque, 800 horsepower. this vehicle zero to 60 in four seconds so it's very like a serious serious machine and will you make a like a non-performance version as well less power and torque no what we all want to do is offer one platform one foundation we'll let your right foot your right foot can control the pedals are amazing too go check those out one of the other cool things of course is super short front overhang very hard to do with this type of vehicle so you know yeah really crash you got a lot but this gives you all of the approach angle on this which is awesome another nice little touch the designers came up with I think most brands as you know centers everything yeah center we want to make them much more like a piece of art so anytime you see scouting off on the right hand side like the signature side and this is another nice design element this is the range extender so this is where the gas goes in obviously on the other side is where the battery charge will go in this is what we call earth's plaid so it takes us back to you know the original international harvester and uh super slick uh super slick how does the texture on the the fabric on the inside here is just amazing this sort of plaid so great so how the uh how the range extender works which we think this is a piece of technology america is basically looking for both of the axles are driven like a battery car.

1:23:58There's an E-engine right here, E-engine right there, and then that is driving the car. It gives you the torque, gives you the instant pop, instant response, and then there's a generator in the back, which is basically a gas engine. A four-cylinder engine. And that, of course, is what gives you upwards of 500 miles of total range. So generates electricity that charges the battery, that then powers the car the same way. Yeah, so the reverse hybrid, you're flipping the hybrid system effectively, which is amazing. The battery is the lead, it's the engine. There's no range anxiety. You can do the cross-country trip, two-minute stops for gas, and you'll be totally fine.

1:24:34Precisely. Yeah, I've seen this pitch as the future before, and when I saw it, I was like, America needs that immediately. This is so logical and will satisfy the last remaining hurdle for so many EV buyers. The view on the back here is just incredible. Yeah, really good. It really makes you think like we perfected the car in the 60s and 70s. And then everything since then has just been like, you know, we tried to do too much to change it. And then we're just going back, back to the future. Exactly. And what we wanted to do is, you know, obviously there's cool technology now, but put it behind the curtain.

1:25:10Yeah. As opposed to like a good one, right? I just spent some time with door handles and things like that. It's like there's no need to make a flush electronic door handle, right? Americans know how to open it. Just make it mechanical. pull the thing away you go and everyone claims that like oh the range will double if you make them flush and i'm like i don't believe that maybe you're taking two miles off by giving me a normal door handle but the security of actually being able to grab something and just open it like any other door is pretty uh hard to beat hard to beat and for a work vehicle that's going to be out in bad weather you're going to have gloves on and everything else you don't want to be mucking yeah and i feel like the suburban configuration i mean this is i i can't exactly it looks bigger than the images, but at the same time, this feels easy to park and parallel park in a city.

1:25:55I don't know. Two vehicles that you mentioned, right? You mentioned the Defenders. You mentioned the Toyota Land Cruiser and things like that. So lengthwise, it's in that zone. It's a little bit wider than those vehicles. Yeah. One of the things you don't see here. Yeah, it's that wide body that's so attractive. Yeah, the stance is incredible. Yeah. And what you don't see here, of course, is we're making a pickup truck as well. Yeah. And I think the phenomenal thing about the pickup truck is basically the vehicle stays the same to here. So we can get almost 75 % carryover, speaking to your question of scale and that.

1:26:30And then bed comes back, five and a half foot bed. Sure. Separate cab. And, yeah, no, I think we've got exactly what the market's looking for. It's fun. I assume no plans for two-door version. Not yet. I've heard that two-door SUVs, none of them have ever been large, like widely successful for the long term. They've all faced hurdles among customer adoption. People say they want them. They get in there. They think about their family and they want four doors. Exactly right. Exactly. I mean, I think what we can execute far easier. It seems like the right decision. Would be a third row, right? Yeah, third row.

1:27:08You can easily extend the frame and go out and put a third one there, which is something. and even if it's a heavier and you lose a little bit of electricity on the range you can make up for with the range extender like you're still in very functional territory which is great yeah and you mentioned a smart thing i mean the ability to upgrade the range extender is super easy right you can either add more power to the engine you can tweak the chemistry you can add a bigger gas tank if you really want to get super range on the thing and so it's it's flexible the other thing is in the factory right you don't have to completely retool and change the factory this It can be fully electric.

1:27:43Come back. Come back here. Mix can hold. Very cool. Yeah. Congratulations. This is awesome. Yeah, thank you. We're doing something cool. You guys have to... You have to come down if you get a chance. Yeah, come down the whitewood. Yeah, we'd love to. I think everyone talks about industrializing America. This is happening in the real world. Remarkable. The presence is insane. It looks really good. For this size vehicle, it feels like you have the presence of a range rover or defender, but in this form factor that's like just perfect size. Yeah. Yeah, obviously we didn't talk pricing, but the vehicle's going to start in the high 50s.

1:28:19And so a vehicle that's this capable is a phenomenal price. And I think that was one of the things, you know, that makes this work is the struggle that startups has if the suppliers can never give them good costs, right? And so they get murdered on bomb costs. I think we can count on the Volkswagen group to get good parts pricing, get good material costs, make a good margin on the car right off the start, which is huge. Yeah, this in the high 50s compared to when I feel like people go chasing this style and silhouette, it's almost always in the high 70s that it starts. Transacts at 88, 86. Yeah, yeah, yeah, exactly.

1:28:58And then you end up with a car that doesn't feel as special from an interior standpoint or any of these things. Sounds great. I'm thinking of what's that chemical company that brought back the legacy Defender? Oh, Ineos. Ineos. I know a lot of people that are going that'll buy. I think the project's incredible. The cars look great and everything. But people buying the Grenadier, they want it for that sort of silhouette and that sort of feeling and that lifestyle. But again, you're coming in much higher and it doesn't feel like it's necessarily as designed for everyday life. which is why they're buying it as a daily driver, right?

1:29:38So you want the silhouette, but in a daily driver package. And at this price point, there's going to be extremely competitive. No, you hit it exactly right because a lot of people jump into the segment, but then it becomes a fourth car in the drive or it becomes a beach car. So I'm like, no, no, we want this thing to be an everyday killer. That's great. Well, thank you so much for showing it to us. That's great. Thanks, George. Excited to drive it. Watch you guys all the time. Thank you. Come back on as you get closer to lunch. Thank you. Yeah. Cheers. We're going back in the studio. And we will be joined by Mitch.

1:30:18The latest with the. Sasspocalypse. Short everything. Short everything. Who knows? Who knows? We'll get. We'll get his take on everything. But first. Out. Let me tell you. Price point. Yeah. really really impressive let me tell you about figma agents meet the canvas your ai agents can now create and modify your figma files with design system context and while we're bringing in our next guest i'll also tell you about crowd strike your business is ai their business is securing it crowd strike secures ai and stops breaches and crowd strike founder and ceo george kurtz uh had a very detailed thread on x today i don't know if we have time to read through it all but we should get to it.

1:31:03You should go read it because he talks a lot about what pacing the frontier means for cybersecurity. And all of the cybersecurity companies are up and to the right today in the stock market as people take the threat of botnets and AI malfeasance more seriously. People are more optimistic around cybersecurity companies than ever. Yeah. And CrowdStrike was up around 100 % year to date. So nice to see them up another, another 13 % or something. Yeah. Um, yeah, great stuff. Uh, yeah. Scout motors. Very, very fun. I'm really happy that Scott was able to come by and break that down for us. Uh, what, uh, what a fun vehicle.

1:31:46And I'm, and I think the thing that sticks out to me the most is the gas extender. I saw forest auto reviews, uh, demo a Chinese SUV that had that technology. And I was like, ah, I can't, I don't want them to be ahead of us. We I don't want them to be ahead of us in anything to do with gasoline. That would just be very un-American. Yeah, yeah, yeah. And so you fill it up, and then you get extra range. And so there's just no, oh, I can't drive to San Francisco in this EV. I'll have to stop for an hour and charge or whatever. That idea just melts away when you're just like, oh, yeah, I can just put some gas in it, and I'm good to go.

1:32:23Anyway, I believe we have Mitchell Green in the waiting room. Let's bring in the founder and managing partner of Lead Edge Capital back on the show. great to see him as always Mitchell whoa how you doing he is

1:32:37Mitchell Green:what's going on nada how are you uh I'm a little tired John had a rough weekend I had a little too much time on my my new simulator oh yeah he's late late late by the way I'd like by the way be careful going on it like an hour or two hours before you go to bed because you'll be like, oh, one more lap. No, that's it. That's it. Every single Friday and Saturday, kids go to bed. I'm like, great. I'll get on the sim. Eventually, I'm driving for a while. I look at the clock. It's like 10. I'm like, oh, great. I can go another 30 minutes and go to sleep, get a good night's sleep. Next thing I know, it's past midnight.

1:33:21night my wife's texting me being like you're really like waking up basically in the middle of a night's sleep being like are you seriously still on the simulator but it's the most it's

1:33:32Mitchell Green:the most addictive it's one more lap no it's a lot i can do i got this one more lap then you get like the second to last turn you're like oh god darn it screw it up gotta do like another lap yeah i'm well aware and then by the way you're probably like pouring sweat so you then get into bed take a shower and you're just like then your brain has been fried with light so yeah yeah yeah it's People say don't look at the small iPhone screen before bed. You're looking at a wraparound triple monitor setup. But John built a track that we'll all be on. Yeah, so we have a true evaluation for these AI models.

1:34:06We've debated a lot how capable are they, are they actually useful. I had GPT-6 Astra go and find satellite footage of thermal and try and create a track in Assetto Corsa. we should try to drive it then yes i i took i took it for a spin yesterday i don't have a full simulator so i was driving with the keyboard not the best experience but i'm sending it to jordy he's going to demo tonight 2 a.m he's going to be putting up hot laps and uh we'll see how good it

1:34:35Mitchell Green:is i'll send it to you i joke that there needs to be like an ai racing there needs to be like an ai racing league so i've debated like some of the best gt3 drivers in the world like road drivers and I'd be like, oh, you realize that AI could build a better car that could go around the racetrack? No, no, impossible. You do realize that Elon Musk can take a missile and land a rocket on the thing the size of my desk. Trust me, we could build one. And then I'm like, you know what we're doing? Each of the model companies can then sponsor a team. Gemini's a big F1 sponsor. You've got CrowdStrike sponsoring.

1:35:14I say get the big labs on there.

1:35:16Mitchell Green:You can get like Kimmy. You can have like a global AI racing league where all the companies have to like fund their own AI racing team. Real life racing. There might be some backlash from the drivers though. The real test is can you put a humanoid in a simulator and actually get a competitive lap time. We're in a real car. Yeah, real car. A humanoid, that's pretty good. Yeah. Look, I think AI. I've talked about it with a bunch of like guys that are principals of F1 teams. Yeah. You could get, it would be the, it's theoretically possible to get a, not a perfect lap, but you can get an AI, an AI could drive a lap, but like, I will tell you actually on the simulator, the AI, um, and iRacing, like for practice is actually pretty darn good.

1:36:04Mitchell Green:Like the AI cars. Yeah. Like I do believe in real life you could build an AI with enough money, some billionaire, some company, if they wanted to build an AI, a car that would drive around the racetrack, I think it would be faster than any pro. Yeah. Yeah. I guess. Yeah, but it's going to be like chess, where even once the AI is superhuman, you still want to watch Mitchell tearing it up. Yeah. That's true. I know. Maybe not me, but... Give me... Antonelli. Other people. Yeah. Yeah. Well, I mean, the AI story is growing a ton online, all the debates that were paced in the frontier. but I feel like at every moment you've been very solidly grounded on what's happening in the real business world, what's happening in these real companies.

1:36:50So what have you seen since we last talked over the last couple of months on the development of just software companies, the real economy, overall health of the investing philosophy that you've had since you started LeadEdge? Like what has changed? What has stuck out to you is particularly notable in the last couple of months.

1:37:09Mitchell Green:Yeah, that's a good question. I think software continues like the big enterprise, sticky software. I'll talk software, then I'll talk everything and everything, AI. And, Frank, I think there's people that you have that would know a lot more about the AI stuff than I would. We have – the best way to understand what's happening in software companies globally is watch public company software earnings. Yeah. Public company software earnings have been pretty strong. You know, Workday, I think, had said, I think they said like 400, 600 million or something of revenue was coming from AI now. It was some number and it was pretty large, was coming from AI.

1:37:51Mitchell Green:I think big companies, you know, big enterprise companies want their vendors, ideally, to create solutions for them and work with them versus trying to rip people out and use new vendors and things like that. I do think, though, that the pace of innovation, you know, because of AI and agents and all this stuff is only going to increase. And so, like, every company has a risk of being disrupted. I don't, you know, if you're if you're Stellantis and you got a ton of debt and Ford has no debt. Well, if you believe like robotics and humanoids and AI are going to like dramatically change manufacturing, then Ford can invest in like Stellantis probably can't because they're paying their debt load down.

1:38:38Mitchell Green:Take I think you can take that to every sector of the economy. And so the people that are not innovating are going to get left behind. And yes, it's easier to start companies now, but it's also easier for incumbents to be able to develop new products as well. Yeah. So when I look at like public company SaaS, I am typically keying in on something that's much more founder and or even just management team driven. Like if I see that there's a founder or a CEO who seems extremely locked in, aware of what's going on, they're early, but they're not exactly aping talking points. They're thinking about the capabilities in a rational way.

1:39:20That makes me more optimistic. Is the actual capital structure and debt load of these companies maybe under discussed as a weight?

1:39:30Mitchell Green:I think it just depends on the – I think private equity gets – unfortunately, people bucket all private equity assets have to – people bucket them as, oh, they have tons of leverage. They're all in trouble. Yeah. I don't think that – by the way, it's like, oh, private equity-owned software assets have tons of leverage and are in trouble. But again, if you're a private equity owned automotive company and you have lots of debt or if you are a non-private equity owned asset and you have lots of debt, you can't innovate. I think the debate needs to be more on like companies that are very, very highly levered will find it harder to try to disrupt themselves and continue to innovate.

1:40:12Mitchell Green:And just because you're spending more and more money on interest income. And by the way, rates are only going probably one way. I think one thing that's not appreciated, I don't think people are talking about it enough, and I'll actually talk about it from the car world. And you could talk about it like the collector cars, collector cards, like memorabilia, is like real estate in San Francisco, real estate in Aspen, real estate in Jackson Hole, Santa Barbara, LA. How strong parts of the U.S. economy are right now compared to a lot of parts of Europe. and you can just look at like if you look at like the ferrari world the same car in europe like an sp yeah half the price just you know sold in pebble beach for like 17.8 million right yeah um that car in europe had never sold for more than like eight million euros or seven and a half million euros in an auction like a month before and i think it just speak and by the way you can't bring for the audience users why why you bring the european car to the u.s you can't for 25 years so i i think it just speaks to the strength of the economy or at least some segment of the economy in the u.s versus anywhere else globally like the amount of wealth creation that's happening is just astonishing yeah what what is actually driving the wealth creation and the effects in the car market because uh it it feels like it's super easy just to be like it's all tech and ai money but i feel like there aren't that many tech and ai people that are actually into the particular cars that i see yeah yeah there's a guy there's a guy who sold a big internet company who's got a lot of porsches yeah um but like uh he's got he's got a lot and buying every color and every shape but um no i think it's americans wealthy american if you were wealthy three years ago and you were in America, you owned, and this applies not only to collector cards, it applies to, probably not art, funny enough, because the art market actually hasn't gone crazy, but like the collector card market's gone crazy for sure, like Michael Jordan's and something like that.

1:42:19But I think it is a function of, people were wealthy three years ago living in America,

1:42:25Mitchell Green:and a lot of those people owned equities. Yeah. And so today, look at the stock market. Yep. They're exponentially more wealthy. And they've since realized that they can't die. And they're not getting younger. They're only getting older. They can't take it with them. They're like, you know what, my son or my daughter is 28 or 32 or my grandson is 15 and is into cars or into watches or into whatever. And I think it's the same reason. And I think it's a combination of equity markets, AI, secondaries, and venture. I think it's all of it conflated together. And people are just spending money. Yeah.

1:43:05Mitchell Green:I heard another interesting thing. More concentrated here than anywhere else in the world, I think. Yeah. I heard another interesting random thing that some family offices are allowing a portion of a trust to be invested in cars. And so sometimes the second or third generation might say, okay, great. Like we're going to allocate 3 % of this massive fortune to cars. I get to go to curated with a$50 million shopping list and buy one of everything. And so there's more people sort of securitizing and seeing this as like a financial asset. I think it's like planes too. Somebody told me that you can't even get a NetJets or FlexJet plane right now.

1:43:44Mitchell Green:Like you can't get one. Because if you try to go become like a new NetJets customer, they'll be like, we're sold out. And it's only going to get worse. Somebody gave me the stat. You guys probably know it better than me. But like the number of people, if you believe that Anthropic is worth a trillion or a trillion and a half dollars, and you believe open AI is worth that and where SpaceX trades. Those three companies create more gains than the entire internet bubble. Those people are going to go spend money. If you want to know where to make money in collectibles or in cars or art or real estate, just figure out, sit outside Anthropics headquarters and be like, hey, what do you plan to do after the IPO?

1:44:21Mitchell Green:What do you plan to spend money on? But I just think the amount of money that is – And by the way, if somebody has made a crazy amount of money very quickly and, you know, there's a and they want to be at a house in Jackson Hole or in downtown San Francisco and it's six block radius and there's three homes for sale. Yeah. Well, you know, then the buyer is the buyer is kind of like price agnostic. You know, I really want to live there. I just made a bunch of funny money. The seller knows there's no inventory. And actually, I think the big problem in real estate right now is people are locked in the low-rate mortgages from 2020 and 2021.

1:44:58Mitchell Green:There's like no incentive to sell. Yeah. Yeah. Yeah. Hence, a lot of the poster cars going up in value a ton. If somebody had it on their poster of the car on their wall when they were a teenager, they make money in their 30s or something, they got to go get that car because that's the car they looked at every day when they were growing up. How many luxury car clubs do you think that Southern California can support? You have Thermal right now. You have Elsinore Ring. Oh, yeah, the Elsinore Ring. You have Willis Springs. Is that Willis Springs? No, no. That's a new one. These are two new developments, track-focused driver communities, clubs, whatever you want to call them, that are springing up, that are bringing on hundreds of new homes online.

1:45:43My guess is Tim Rupp.

1:45:45Mitchell Green:Look, I'm a member of Thermal. Tim Rogers, who runs it, is a great guy. He's been at it for 15 years. My guess is he's probably like, good luck. But I think it's a lot harder than people think. You need to build a track. You've got to get enough members there so you can have member race weekends. Who wants to be the first five houses? I think it's tough. It's a tough cold start problem. I like that the Elsinore ring had a funny brand to it. that, oh, yeah, I know the Nürburgring. I'm never going to get to Germany, so if I can have that experience. But I looked at the length, and it's like one-fifth as long as the Nürburgring.

1:46:25So it's not bringing that experience necessarily. It's like roughly the same length as, you know, the GTC.

1:46:32Mitchell Green:I also think people need to – look, I truly believe that it is extremely dangerous to drive streetcars on a racetrack. Okay. I think the most dangerous is to drive streetcars on a street crazy fast. That's total insanity. People do it. People also die, like Call of Duty, like the guy that died in LA. It's crazy dangerous. The next thing is driving a streetcar on a racetrack. And the thing that's crappy about America is, in Europe at least, when you buy a fancy car, they can put four-point harness seatbelts in them due to European car regulation. in america you can't do it they don't do it um driving a car down a racetrack at 170 miles an hour with a lap belt i think it's totally insane like when you can literally and these are multi-million dollar cars when you can literally go buy a hundred to three hundred thousand dollar proper race car that is very safe like look at race accidents on instagram or youtube and look how people walk away from these things versus you hit the wall in a streetcar at 100 miles an hour, you're dead.

1:47:44Mitchell Green:So I think that's something that people don't appreciate enough. But I think a lot of these country cliff cracks should actually not even really allow streetcars on the track. If you want to be a member here, you need to get a race car. It also just makes way more sense to use track-only cars on a track. like economically you can get a way like if you're looking for like a specific style of car the track only version of the car will be half the price yes correct so why would you not yeah so what are all your guests up what are all your guests telling you guys about like ai what's going on like well i think i think the thing that was i'd be curious to get your opinion but this weekend was like the most amount of infighting that i've ever seen in tech and and i don't know throughout your career have you ever has there ever been a moment where you felt like there was this much sort of like fighting and disagreement from within the same industry right i couldn't believe the three guys the three guys that all run the companies actually all agreed though yeah which is causing a lot of people to be like oh this is a conspiracy they're colluding they're trying to create a cartel or a monopoly and so i think that's what people are debating there they're both debating like is the risk real i don't know although i don't know all three of I've heard Sam, by the way, is in the cars.

1:49:02Mitchell Green:I do not know Sam. I do not know Dario. And I don't know Elon Musk. Never met him. But I would bet that those guys are genuinely concerned that if this stuff advances too fast, it's just the unknown. I don't think they would say, like, we definitely know this is going to happen. But this stuff needs to be regulated. And by the way, I also think it's valuable that we have open source models because I don't think all the power should sit in the world of three companies either. But let's bring it back to racing. I mean, pacing the frontier, to me, there is a racing analogy, which is, you know, you can be going extremely quick without risking at all, right?

1:49:48Correct. And I've been on the track with you, and you're driving at what you feel like is a very, you know, comfortable pace. and I might feel like, you know, we're going to go into the wall, but for you, you're fully in control. You're quick, but you're not going to risk it every corner.

1:50:09Mitchell Green:What I do find interesting, though, is when the quickest guys are then telling you the car is too fast, we should slow it down a little bit. You probably might want to. The Halo in F1. The Halo in F1 does slow the car down. It is extra weight and yet it saves so many lives. You can see the video of Lewis Hamilton almost taking a wheel and it hits the halo and he's fine. And yeah, that's an example of like the tradeoff. Look, I think what this really means, and we've said this for a while, this stuff is going to be regulated. It is not – I think if anything, the one fear is government overregulate things.

1:50:47Mitchell Green:But when you have the best equivalent, if you had Lando Norris, Kimi Antonelli, Max Verstappen, and Lewis Hamilton and Charles Leclerc and Fiastri all saying, hey guys, we need to do some of this stuff. It may slow the race down a little bit, but we think it's important. you probably should listen to them because you effectively have the same thing and how happening with these three companies. And you probably should listen to them. Now again, it probably just means it doesn't mean that AI is not going to be important that it's not going to change the world and all this stuff. I think they're just saying like, hey, we probably need some regulatory frameworks.

1:51:32Mitchell Green:And by the way, I think the Chinese, I credit these guys are saying this actually because I think China is already thinking about this stuff and I think they've been thinking about this stuff for a while. how to put in place proper regulatory frameworks around AI. Yeah, DeepSeek found that. Well, yeah, and even the sell-off today I didn't understand because I actually understand why it's happening, but if you read into their messages, it's not saying we don't want to still go fast and still continue to innovate. It's just that we don't want to hurdle off of a cliff. Correct. I think that they're just like we want to work as an industry to, we want to work as an industry to make sure the proper frameworks are put in place.

1:52:19Mitchell Green:I mean, it's kind of crazy. We read that, you know, you read that, it was funny, like a month or two ago, whenever the OpenAI hacked, whenever the OpenAI model hacked Hugging Face, like, can you imagine if you read like, oh, sorry, like JP Morgan accidentally hacked Goldman Sachs. Yeah, it's a crazy, crazy storyline. It's crazy. It's sci-fi. yes and so like I think that these guys these people that run these guys, gals that run these companies are like some of them are probably like genuinely concerned listen we're not saying we gotta stop we're not saying we gotta pause let's make sure we're all on the same page and where things are going you know by the way there will be people that use these nefariously for sure it'll probably increase but like I mean I've talked about it for a long time It's still shocking to me that nobody's built in the security world.

1:53:14Mitchell Green:I think voice fraud is going to explode. If you can recreate somebody's voice very easily, then think about what you can do by using somebody's voice to commit all types of fraud. Apple still hasn't fixed the – Ryan Peterson was talking about this this morning or yesterday. Apple hasn't fixed the phone call spoofing. So you'll get a call from Google. Oh, really? And it says on your iPhone, Google. No way. But it's a scammer that's trying to get you to reset. And if I wasn't aware that that was a thing, I would be much more likely to engage with somebody that's just calling from Google saying, hey, there's an issue with your account.

1:53:59We got to reset the password. So there's so many of those.

1:54:04Mitchell Green:I'm not. We've made a couple of very successful cybersecurity investments. We backed Doug Song at Duo Security and he built a huge business. Andrew Peterson at Digital Sciences. And literally, I think that the biggest risk today might actually be a cybersecurity attack. The biggest global risk. Totally. Think about it. People get mad when for a day or for like three hours, they can't buy an airplane ticket on Delta because the CrowdStrike Microsoft update. now imagine the internet goes down for like three days yeah it would be a big big deal and that was and that was actually dario's biggest shift was uh you know in the past he's he's talked about like existential risk and there's a lot of people in anthropic who have talked about like you know wiping out of all humanity which is such an extreme scenario you wind up having to deal with like well what about people that aren't on earth because they're in space or what about people that on remote islands and then the Amish, but, uh, but, but, but, but he actually grounded it a lot more reasonably just saying like, like, I think that there is a small possibility that in the next year you could have a massive internet outage via a botnet that takes over the internet and that would be bad.

1:55:16And, and, and that's much more tractable to get through. It's like, Oh, okay. Like, yeah, you just get something that's misaligned and it just gums up all the systems of everything. And that's really annoying to everyone. and you don't have to jump straight to like the most extreme sci-fi doomsday scenario uh to be yeah let's avoid that here's a question for you when do you think american venture capitalists band together to create a an american uh bending spoons because you got to imagine you got to imagine that there's some frustration of like well we invest you know hundreds to billions of dollars in these companies and then mr ferrari comes in and buys them for pennies on the dollar it'd be nice if we were also the buyer of our bets that don't actually achieve the you know tremendous

1:56:00Mitchell Green:by the way you're gonna get joe lamont i don't know him i know of him joe lamont ran a business called trilogy software that did like back in the 90s and 2000s like and by the way he tried to start his internet company failed and he's built a giant business i don't know what's happening i know it's still a huge business but like somebody's gonna do it in the states it's like probably some of these are good businesses they're just to over capitalize they were over well in part of my view part of the reason why like i think that bending spoons is going to print on a lot of these deals is is that there aren't a lot of buyers like there aren't a lot of people that are willing to say yeah i'm going to spend a billion dollars for this company that's not growing anymore yep uh but when you're paying three three times revenue and you and you and you can get a lot of efficiency when you're paying when you're paying look if you if when you're If you're basically about a business where you pay three times revenues and you think you can run it for, you know, so you buy$100 million our business for$300 million our business, and you think you can run it with like$70 million of EBITDA or$60 million of EBITDA, well, then you basically paid yourself back.

1:57:06I mean, that's an amazing free cash flow yield on it.

1:57:10Mitchell Green:So these people are going to build like factories. Somebody else, I'm actually surprised you haven't seen more of them. private equity back when it's happened. But there's a lot of investors that are And private equity, venture capitalists, buyout, everybody, like they just can't let go. And sometimes it's just like, hey, guys, we've been in this thing for 15 years. Just sell. Who cares? Just get out of this stupid thing. And I think people struggle with that. Yeah, I think people have been surprised by Bending Spoons because they're buying like not household names, but household names in tech as opposed to Trilogy bought a lot of companies, but a lot of smaller businesses that were not high flying venture backed.

1:58:00The founder's been on podcasts and now Bending Spoons is going and saying, let's get these companies that you know and we're hot and we're backed by tier one VCs. And so it's just a different sort of flavor and narrative to it. But I agree. Someone in the chat, John Exley is calling out Octave Capital. Our friend Jeremy. Potentially working on that. And I think there's other people too. Yeah. Interesting stuff.

1:58:24Mitchell Green:There's a lot of assets they get to pick. I can say that. There's going to be a lot more too. There's going to be a lot more. I think, look, there's going to be some of the world's greatest companies created over the next 20 years. Who knows if they're even the anthropics and open AIs of the world. There might be companies that never even existed. that I've used this analogy, but like, had we sit here in 99, we wouldn't have talked about ByteDance or Facebook or Snapchat or any of these things. Social media is a$5 trillion market today. And then, you know, like a huge amount of people that are building new companies will fail.

1:58:59Mitchell Green:I mean, it's just like the failure rate will be high and you'll have a few, but like the prize is gigantic for the guys that win. And so, but yeah, there's a lot of companies from 2012 and 2015 and 2018. sitting around in 2022 and it will be 25 in a few years that people don't know what to do with yeah i think a lot of the founders want to move on start a new company do something that's with a fresh team and we actually saw it with betting spins one of the companies they acquired was able to spin out their ai products experimentation division take the founders some key employees who wanted to go on that journey other folks were able to stay with the business and there's a whole different uh story and chapter emerging yeah but always great to catch up thanks so much for See you.

1:59:42See you guys soon. We'll talk to you soon, Mitchell. Have a good one. Goodbye. Let me tell you about public.com. Investing for those that take it seriously. We've got stocks, options, bonds, crypto, treasuries, and more with great customer service. And I'm also going to tell you about MongoDB. What's the only thing faster than the AI market? Your business on MongoDB. Don't just build AI. Own the data platform that powers it. And we have some very special guests joining us right now. We have Dick Rosenfall and Gilbert from Acquired. I'm not even going to call it the Acquired podcast. I think it's just acquired.

2:00:12We need to adjust the cameras a little bit, but thanks so much for being here. Congratulations on all the progress. What's the latest in your world?

2:00:21David Rosenthal:You know, talking about home improvement. Yes. David and I have spent a lot of time doing DIY. You knew what was going to be viral this weekend, and you were like, everyone's going to want to get away from AI psychosis, touch graphs, and go to Home Depot. We actually have already gotten a comment on our Home Depot episode that just came out. It was, thank God, something took my mind off AI. Yeah, I can imagine that. How did you pick Home Depot? What stuck out to you about the company? Was it just the next one in the queue? Or was there something that drew you to this company in particular that got your wheels turning?

2:00:55I know you found a lot of interesting stuff during the process, but what was the inciting element?

2:01:01David Rosenthal:So it's like a top five listener requested episode. There's probably a lot of people thinking that's a boring company. I don't know why they did it, but we would get emails every week, David, for the last two, three years saying, when are you going to do Home Depot? Okay. And where did you start? What was the initial research process? Well, the most curious thing is how large it is. Yeah. I mean, every giant retailer does everything. Walmart, Costco, Amazon. These are general retailers. Home Depot is a specialty retailer, but somehow is worth fluctuating between$300 billion and$350 billion because home improvement is just an absolutely enormous category.

2:01:47David Rosenthal:And they own, depending on how you sort of frame the market, like 50 % of the market. And so they sort of – they picked the most interesting category to be in and then they built a business that had scale economies so they could negotiate the best prices, do the most volume. And so they're this giant business in a giant category. Is the only source of strength scale economies? Has that been the story the whole time or is the brand also important? Like what else plays into – College game day, baby. College game day. Okay. No, brand has been very important. Lots of things. I mean, come back to that in a sec, but we picked it for the reasons Ben said.

2:02:31David Rosenthal:But then when we got into researching, we realized Home Depot is actually the greatest total returning stock, U.S. public stock, since the day it went public. So, like, you could have bought any other stock, Apple, NVIDIA, Microsoft, whatever, on any other day. since 1981 when Home Depot went public you would not make as much money as you would have if you had bought Home Depot on the day of its IPO I thought Domino's was the best performing stock Domino's, Monsters Monsters is up there too Monsters number two even if you bought Nvidia on IPO day in 1998 nothing will exceed your total return with dividends reinvested compared against buying Home Depot on IPO day in 1981 So there were people that put in$1 ,000 and what do they have now?

2:03:24$17 million. $17 million from a$1 ,000 investment. And it feels like is Home Depot, because it has a consumer-ish brand, does it actually attract a different cohort of investors? Like is the actual investor base more diversified? Are there more employees who participated in that? Yes.

2:03:50David Rosenthal:So they had this strategy that one of the unique things they did early on was instead of recruiting employees that you would for any retailer, you know, Walmart employees, they recruited former tradespeople. So plumbers, electricians, people that could actually help you with your home project. And the goal is, hey, if you buy a successful toilet and you manage to install it yourself, you're probably going to get interested in redoing a bathroom or building a shed or an ADU or something. And their goal was to kind of level you up. And they were in a category where they could take someone who was originally in to buy a 10-cent washer and eventually turn them into a$100 ,000 customer.

2:04:33David Rosenthal:That doesn't really exist anywhere else in retail. Yeah. And because they could do that, they kind of bet the company on being able to do it. And so they built this whole engine around this like shoot the moon strategy of we're going to get really big. We're going to get big fast and we're going to motivate our entire employee base to do so. So even back in 1980, they were giving out compensation to employees like retail employees on the floor in the form of stock. Wow. Wow. These people became like multi-millionaires. It's awesome. Yes. How important are the founders to the story? How singular is the founding story versus potentially a violation of the great man theory of history?

2:05:17Take me through the role of the founders in that journey because, yeah, basically till today. Yeah.

2:05:25David Rosenthal:I mean, Home Depot is crazy because Bernie Marcus was the CEO and sort of the primary person. But it was this team and they all had different superpowers. So it was Bernie Marcus, Arthur Blank, who owns the Atlanta Falcons today, a guy named Pat Farah, who was the merchandiser. And then Ken Langone. Some folks listening might know who Ken Langone is. He was an investment banker, but he was one of the co-founders. And it was all part of this strategy. So like Ken took the company public when it was basically a year old, two years old at this tiny valuation because he could. And then he helped architect.

2:06:03David Rosenthal:$32 million. There's a$32 million market cap at IPO. Wow. And is that just like – is that just his unique ability as an investment banker to get that deal done? Because we've seen smaller IPOs happen through like SPACs. And there's some oddities out there in the market where I could see, oh, if this company 1 ,000Xs, it could be a crazy story. I've actually been surprised that we haven't seen a super subscale company do an IPO in this market, right? Because you could imagine if you just took, for example, three decently smart AI researchers and you put them in a vehicle and took it public. Yeah, but it would go public at$10 billion already, so you don't have the upside.

2:06:48You can't. Like, there's no scenario with a$32 million IPO. Well, okay, yeah, yeah, that's correct. But at least the bankers would be able to price it much, much lower than that, and then it would trade up to some insane. And right now there's too much incentive for venture capitalists to say, don't do that. That would be crazy. Let me give you$500 million, and you can take some secondary or whatever. There's a lot of reasons not to do it.

2:07:13David Rosenthal:Robust private market financing, especially not for a retail concept. I mean, the retail concepts, they're capped, right? How big could it possibly get? But they sort of invented this, like, giant category and then took half of it. And it almost happened with the VC dynamic almost happened with Home Depot because Ken Langone got famous because he took Ross Perot's company public, EDS. And so when he and Bernie and Arthur were starting Home Depot, Ken took them to Ross and was like, oh, we'll just get my buddy Ross to finance this thing. And Ross, there was a deal on the table. Ross Perot was going to own 70 % of Home Depot and bankroll the whole thing at 70%, which today would be worth about$230 billion.

2:07:58David Rosenthal:and the whole thing blew up because Ross tried to dictate the type of car that Bernie and Arthur were going to drive they drove Cadillacs and Ross Ross was like it was like my guys don't drive Cadillacs they drive Chevrolets if you're going to drive a Cadillac that's going to be a problem for me and so the Home Depot guys walked away it is sort of seemingly kind of random to be Cadillac guy building. You have to remember that back then, like a Cadillac was like a Mercedes G wagon and a Chevy was like a Ford Taurus. Like the brands have now co-alassed. I know, but still, it doesn't seem like similar.

2:08:41It doesn't, I don't think of Cadillac as like the, it was like, oh, you're spending money. Yeah. But you're, you're, you're running a home, home improvement, you know, contractor supply business. Like no Cadillac was what you get around on wall street on. It's a limousine company. No, but I just think that's notable. They're not driving like an F-150 or whatever.

2:09:01David Rosenthal:Because the founders, including Ken, they weren't home improvement guys. They were retail guys who saw the opportunity in this category, had gotten into it in another company in the past, and then started Home Depot. Home Depot was basically their prior company mashed up with Costco. They knew Saul Price, who had started Costco. They saw what Saul was doing with Costco in San Diego, and they were like, oh, we can do this same thing with home improvement. at all crush what was their rotisserie you want my money you got a larp you have to larp his blue collar uh so what was their rotisserie yeah did they ever think doing a membership model like costco did they ever pull anything else from costco they pulled a lot from walmart interestingly i mean the the obvious stuff they pulled from costco so it's going to be a giant warehouse we're not going to face the labels out you're going to have to go up to the pallet and you know just grab it off yourself however it shows up in the pallet yeah um there's those obvious parallels interestingly they got a lot from walmart uh the employee compensation stuff they got from walmart and then the um uh what was the other thing they got oh everyday low prices okay walmart sort of invented that idea of like things don't go on sale sure it's just everyday low prices and obviously they moved away from that now but that was home depot's ethos for a while too yeah but no what was it was it only was it up only or was there some dark days Like what was the...

2:10:22David Rosenthal:The company almost completely died in 2006, 2007 going into the crisis. But not for the reason you think. You would think like, oh, home improvement company is probably falling apart because the macro is changing and actually housing is at the root of it. They had brought in leadership, a new CEO in 2000 who was just... The first few years were good, but then just absolutely the wrong person for the job. and the culture got kind of messed up. The whole value proposition to customers became like less and less clear. And they really tried to focus. It was a GE guy that came in, really tried to focus on Six Sigma.

2:11:04David Rosenthal:We're going to be as efficient as possible. We're going to have as few employees on the floor as we can. We're not going to hire expensive, specialized employees. We're going to try to get more general retail staff. And it really watered down the whole value proposition. And actually, Frank Blake, who became CEO in January 2007, is credited with saving the company. If you ask Ken Langone, he said, Frank absolutely saved the company. Wow. What was COVID like for Home Depot? Crazy. The greatest thing that ever happened to them. They grew. So you're saying they may have been behind it? You're pointing fingers.

2:11:40David Rosenthal:That would really be a conspiracy. They built up an astonishing amount of supply chain and e-commerce readiness in the like three, four years leading up to it. And I mean, they just had so much capacity for everyone who was trapped at home, wanted to improve that space in their home, but also didn't really want to go to the store to get all of this stuff. It was this like ridiculous, perfect thing that fell into their lap. How do you square the fact that Home Depot has been on this tear? America seems to be very into these DIY projects, into building things. There's been this, you know, centuries long build out of the American home.

2:12:20And yet there's so many talking points about we can't build things in America. There's a housing crisis. There's not enough housing. How can these two things coexist at the same time? What's actually going on here?

2:12:31David Rosenthal:Home Depot is the perfect end around this, at least in the early days, because it's DIY. You don't need permits when you're just doing this yourself. You don't need permission. That was the whole ethos of the company. Contractors and pros now are half the business. But even still, it's mostly residential. And a lot of that just skirts around all this bureaucracy. Got it. And I completely agree with you that America's not building enough housing, especially single-family homes. We're building a lot of condos and townhomes. But people want to live not necessarily in cities, but near cities and in single family homes.

2:13:05David Rosenthal:And we aren't building many of those. Home Depot is experiencing like the most ridiculously awesome secular tailwind from that ever because America has a giant housing base that gets older every year. Oh, yeah. The median age of a home is up like 15 to 20 years versus when they were getting founded. And so for them, it's just this like almost an annuity that people need to be working on these old houses. So new homes don't need as many trips to Home Depot. So you think Home Depot might secretly be behind the housing crisis. Look, you're the conspiracy theorist. You keep trying to put words in our mouth.

2:13:47David Rosenthal:Behind Google. Wow, this goes way deeper than I thought. This goes way deeper. It's the most powerful company in the world. Forget the AI companies. That's a side show. You would have made more money investing in Home Depot than in Video. You need to apply the skepticism that you apply to every AI leader's blog post to the Home Depot team for sure. Did you guys do any projects as part of your process? Did you add a fourth bedroom or something in your house personally? I did some shopping trips. I didn't do a major project. Every time I go, I'm back seven times. That retention, it's sort of like anti-churn.

2:14:24Like you can't get out with just one trip because you go and you're, oh, I need a different nail. I need a different screw. And then you're back there a couple of times.

2:14:30David Rosenthal:There's so many beautiful dynamics to it. This is it. Like, you know, at least for the DIYs and for the pros, jobs can't stop. You know, if you're trying to get something done on a weekend yourself or if you're a pro, it's your job. You run out of nails. You got to go to the Home Depot. Yeah. What is the retail footprint strategy? Have they been just growing the number of locations continuously? Continuously? Have they been consolidating? Is this a leading question? Do you know the answer? It's nuts. Okay. Home Depot grew stores like crazy. I mean, seriously, it was like the original Blitzscaling company from 1979 until 2006.

2:15:11And we're not talking like McDonald's scale, but we're talking thousands of stores? 2 ,300 stores.

2:15:16David Rosenthal:2 ,300 stores. Okay. And then they stopped. Okay. Dead stop in 2007, and they essentially didn't build another store until two years ago. Whoa. Wow. That's crazy. And was that just because they were going through that? That had to have driven so much of the performance because you have one of your primary costs of all this CapEx, and then suddenly you're like, no, we're pretty much good. We have our storefronts. And they just focused on e-commerce buildout and building more fulfillment centers and specialized fulfillment centers for e-commerce. and it was this like, okay, we already have most of the good real estate.

2:15:54David Rosenthal:We're just going to focus on store efficiency and building all of this fulfillment supply chain stuff. And now they've started building again. They're like, okay, we took, what was it, a decade and a half off and time to build. So they went to all the other leaders in the space, told them let's just stop the expensive CapEx right now, make sure the margins are in a good place so we can get out, performing the public markets, you know, tinfoil out here. Yeah, they wanted to pace the frontier. Pace the frontier. Pace the frontier of their retail expansion. Is there, but on the structure of their actual retail footprint, is there a similar, you know how people will McDonald's, and I think you've illuminated this a lot on like, is McDonald's just a real estate play?

2:16:37Like they own all the real estate. What is that dynamic with McDonald's? And then is that, is it the same with Home Depot? Is there a value to a company of just getting a lot of retail space or owning a lot of buildings? Or is that always just a sideshow that people put too much focus on?

2:16:54David Rosenthal:I actually don't know for McDonald's. The thing I do know for Home Depot is it's not like you just look at their real estate portfolio and say, oh, that's half the market cap right there. Sure. But it does benefit them in that when they build a Home Depot somewhere, all this other stuff gets built around them. And then they don't have to go renegotiate the lease in 10 years or risk losing it to their competitor. So they now do own all or most of the stores because it's sort of a durability thing. What are some examples of things that get built up around them? Like HVAC repair shop or something?

2:17:28What are you referring to there?

2:17:31David Rosenthal:Food, beverage. They anchor shopping centers. Oh, okay. Like there might be a Best Buy across the street or something. Or Target. Okay. Grocery stores. Yeah, it's not specific to what you need to do a home home. They actually don't want you going anywhere else. The whole strategy is if this should be your one stop shop, we're going to stock an insane amount of stuff and you shouldn't have to go anywhere else for your project. I, I, I think that robotics are going to be another tailwind for them, because if you assume that if you assume that a humanoid and let's say like, you know, let's be generous with the timeline, a humanoid in like a thousand years.

2:18:08200 years. Depends how much we base the frontier. 10 years. 10 years. Assuming you're walking out of your house in the morning and you can tell your humanoid, like, hey, I actually want a fence there. Build, just spend the day building a fence, right? And it sounds crazy, but today we do a lot of digital work like this. We're like, hey, I want to understand. I want to build this piece of software. I want to do this. This is going to transition into the real world. And it's just not that hard to imagine doing a lot more because you have this sort of like latent labor capacity that you already have as like an individual, somebody with a house or whatever.

2:18:43And you're going to probably want to do a lot more than if you have to coordinate with somebody and then there's someone else's fee and all this stuff. So I think that's interesting.

2:18:52David Rosenthal:I think you're even more right than maybe you're thinking about because the logistics for getting this stuff to your house is quite unique. Like imagine trying to put, you know, 3 ,000 pounds of lumber through the Amazon logistics system. You know, and Amazon has built out some side channels to be able to do this. But this is all that Home Depot has been investing in for the last 20 years when they haven't been building stores is this. It's like you can get 3 ,000 pounds of lumber in two hours at your house. Have there been any like misadventures where I actually need lumber? Where they've considered like going up market or going into potentially like home decoration, furniture.

2:19:36There's a whole bunch of adjacencies that could be opportunities, but also risks. Yeah.

2:19:42David Rosenthal:So the biggest one is HD supply. Yeah. In the early 2000s, they bought a bunch of companies and tried to sort of squish them together and then make this distribution business, like a different way to distribute to pros, pro contractors outside of using our physical store footprint. That ended up being this like big distraction. They needed to spin it off. Hilariously, a decade later, they ended up buying the most valuable part of it back. And it actually is part of the business now that they're sort of ready to do that expansion. Interesting. The other one is China and international. Yeah. Just the culture around DIY and home improvement is not the same in most places in the world and definitely not the same in China.

2:20:24So they tried to expand their footprint there and were basically unsuccessful? They opened a dozen plus stores, maybe dozens of stores.

2:20:32David Rosenthal:And yeah, interestingly, in China, it's not cool to be working on your house on your own. Like, why can't you hire someone to do that for you? uh the wealthy people want to live in cities which don't really need much diy um so it's very different are new yeah seems very un-american over there i don't get it potentially a completely different country lowes is roughly has like roughly a third of the market cap was there ever a period where where they were more neck and neck obviously um yeah break break down maybe that like the most kind of competitive period before they seemingly kind of ran away with it so lowes is over a century old it was lowes market for the longest time and home depot started you know many decades into lowes existence and then just went and basically discovered this new business model of giant warehouse store five times the amount of square footage that lowes or any of these other sort of regional chains at the time essentially hardware stores had.

2:21:37David Rosenthal:And it turned out that your ROI on a giant store that had everything was much higher than your ROI on a bunch of little stores that had a limited number of things. And so Lowe's, to their credit, when Home Depot passed them in 1989, Lowe's really woke up to this and said, okay, we're completely changing our whole business. And so they started shutting down the old store concepts and building basically Home Depot clones at first. And then they kind of develop their own twist on them. But that's why they're so similar today. Interesting. Do you have an idea for how Home Depot's e-commerce penetration maps to other physical stores like a Walmart?

2:22:19It just feels like the urge to, I need this particular nail. I'm going there right now. The project must go on. I would assume that Home Depot, even if they've been successful in e-commerce uh they haven't been as successful as at shifting the revenue there as other uh other retailers but what's what's actually happened so the sleight of hand there that uh you

2:22:43David Rosenthal:did unintentionally is for most people most retailers e-commerce equals delivery yeah and that is not true at home depot an enormous amount of their e-commerce is in-store pickup because Because in your case, you're home, you're doing the project, you have the wrong size nails, but you have four hours to finish this project. You've got a family, you've got to go do TBPN stuff. And so you're not really willing to wait the extra hour to have it delivered to you. You're just getting in the car, but you want to know that when you get there, it's going to be ready for you. It's going to be super easy to pick up.

2:23:18David Rosenthal:So I don't remember the exact set, but it might be like half of their e-commerce is actually pickup. Yeah. I wonder where all this goes because I recently door dashed something from Best Buy and it was an amazing experience because it was faster than me driving to Best Buy and back because they found a local driver who was able to just pick it up. So there was like no way that I could ever outperform it because. That was the first time you ordered like local delivery or? I mean, it was just it was the first time I ordered delivery that wasn't like food. John discovers getting a product delivery.

2:23:51I'm wondering if they're more optimistic on that or drone delivery or anything else. Do you have any idea of where the current management team is seeing the future of Home Depot? What are they actually excited about? Because sometimes it's just e-commerce. Sometimes it's basic AI stuff. Sometimes it's new delivery trends. Every management team always has a stump speech for where they think things are going. And maybe it takes a couple of years to get there. But what are they excited about?

2:24:14David Rosenthal:Well, a huge focus of the company and most of their growth for the past decade or so, COVID excluded, has been from pros, from contractors and getting bigger and bigger contractors and builders more deep into their supply workflows. And e-commerce is actually a big part of this, too. You know, a lot of the smaller contractors, residential GCs, they're already Home Depot is their primary just-in-time supply and increasingly like their main supplier. But if you think about like really big builders, multifamily, commercial, you know, cranes, big stuff. Historically, Home Depot has not been penetrated into that.

2:25:01David Rosenthal:They've been penetrating a lot more into that. So now you need like corporate relationships. you need like orders aren't just like coming to the store you need to be able to deliver it or go to the store but it all needs to be in a very different enterprise kind of system yeah but it's not drones like it's not any of the things you were just saying it's ai a little bit they talk a lot in their annual report about the ways they're using ai to better help people find the right products that they want and use the website and build their it systems and all that but they sell big heavy stuff yeah yeah i'd be a little worried if they were like we're getting into drone delivery it's like oh i'm here you're gonna be flying yeah you're last though uh rentals is a big part of their business so you think about uh you need a concrete mixer you need some kind of specialized tool you need a backhoe yeah okay so i i needed this episode i needed this episode to happen like two weeks ago because i i got a bunch of dirt delivered i wanted my my uh my oldest has like an electric dirt bike thing.

2:26:05And I was like, well, he's got an electric dirt bike. He needs a track. So I got all this dirt delivered thinking, Oh, it's gonna, I'm just gonna, you know, use a shovel or whatever. I started getting out there with a shovel and it's like, okay, now I'm basically doing kettlebell exercises for four hours straight, like moving dirt around. I even had a Nick on our team stop by to hang out and I was like, get ready to shovel some dirt. Felt, felt bad about that one. but I was not even aware that I could just get that equipment delivered. Question from the chat, is the smell natural or is it engineered?

2:26:42They're funny stories. Because that feels like it's a part of the brand now. And so it's something they need to, like if they lose that, like they lose all the nostalgia and all the memories that kind of come flooding back when you walk in there. Is the smell mostly sawdust? Is that what it is? I don't know. Anyway, what do you think?

2:26:57David Rosenthal:Do you want to tell the store opening? Yeah, yeah. So I don't know about the smell today. I assume it is intentional, if not engineered. But in the early days, there's a famous story about the first two store openings. The store managers thought they were going to surprise everybody and do a really fun thing for the store opening. They hired a cleaning crew to come in and polish the floors the night before. And then the founders come in at like four in the morning and they lose their tops. And they're like, what are you doing? These need to be action places. We can't have polished floors. And so they grabbed a bunch of forklifts and started like skidding them around the floors.

2:27:36David Rosenthal:And they sprinkled stalled us all over the place. Wow. Yeah, that's super thoughtful. Last question for me. I feel like you guys are fantastic at finding archival images, just odd documents. Was there anything from this process that stuck out as your favorite piece of Home Depot lore or fun fact or obscure image or document or something like that? Yes. So we launched a new website this year. And we've been working with this fantastic designer. And she, she found this, she launched this thing called Artifacts. So if you go to acquire.fm slash artifacts, you can see the artifacts we discovered from any given episode.

2:28:23David Rosenthal:She found the Moody's manual from 1977 and 1978 that Ken Langone referenced when he looked at the original share price of Handy Dan, which is where the founders worked before they started Home Depot and became interested in their company. So I thought we were pretty good at this, but what Ellie has found is nuts in terms of some of the old stuff that she's doing for our artifacts page. Some of these annual reports are super, super cool. The visual design of the first annual report, so much imagery there. I feel like, I don't know, this would be like dunked on in the modern era, being like too many images, not enough facts, but I think it tells the story really, really clearly.

2:29:08This is acquired.fm slash artifacts. slash Home Depot. The team's showing it on screen right now. What acquired episode should people go listen or re-listen to to have some historical? What's the companion piece? No, no, no. Oh, Costco. No, I was going to say historical context for this moment in AI where in tech where there's like extreme tension, extreme infighting. You know, people that are generally aligned on a bunch of things are suddenly deeply misaligned and have different interests anything that stands out

2:29:48David Rosenthal:this was before acquired episodes were good so i always hesitate to recommend this one um we were still warming up but standard oil oh yeah in like 2017 18 we did uh uh feeling yeah the other one i throw out is uh lockheed lockheed martin um obviously coming out of the wars world war ii uh but last supper that there's this famous moment in the defense industry yeah where the yeah the secretary of defense gathers all the prime contractors around at the end of the cold war and says we are shrinking our procurement budget and expected to shrink basically every year for at least the next decade and so there's gonna have to be less of you uh i don't have any say over antitrust so i'm not really advising you to do anything anti-competitive but you need to figure out how we have less mouths to feed.

2:30:42David Rosenthal:And then sort of the punchline of the whole episode, which we didn't know going in, but discovered is Lockheed and the military industrial complex created Silicon Valley. Like literally Lockheed created the town of Sunnyvale. Yeah, that's crazy. And I think there were something like 10 times more employees working in the secret Lockheed, Lockheed missiles and space than the rest of the tech industry combined at the time. I mean, it's like they literally brought everyone here and started it all. All those early Silicon Valley startups selling chips, who do you think they were selling to? They were selling to Lockheed and the military.

2:31:17Yeah. Wow. Yeah. Amazing. Well, we'll listen to those. Great to see you both. Great to see you. Let's hang out soon. Let's hang out soon. Great to see you guys. Yeah, congrats. Have a good rest of your week. Hangar. We'll talk to you soon. You guys. Goodbye. Cheers, guys. Let me tell you about console.com. Console builds AI agents that automate 70 % of IT, HR, and finance support, giving employees instant resolution for access requests and password resets. Our next guest is with us in the waiting room. We'll bring in Faraj from Cognitif, the founder and CEO. Welcome to the show. How are you doing?

2:31:50Great to be here. Thank you so much for having me. Thanks for hopping on. Since it's the first time on the show, I'd love for you to kick us off with an introduction on yourself and the company. Sure. Thank you for the opportunity. My name is Faraj Alayhi. I'm the founder and CEO of CogniChip. I've been in this industry for over 40 years, the last 30 of it in any productive business. Yeah, I started when I was only two years old, guys.

2:32:20Straight out of the crib. Exactly, yeah. Prior to founding this company, I founded a semiconductor company back in the late 90s, took it public on NASDAQ. Then I took another startup, built it up, and took it public on NYIC in 2017, sold it in 2019 to Marvell Semiconductors. I went on for two, three years and did investing, helping other entrepreneurs get their ship off the ground. And that's when I learned enough about AI to kind of have the light go on and realize that perhaps with AI, I could actually solve some of the issues that I had as an entrepreneur building two semiconductor companies.

2:33:05And that's really kind of like spin the mission for me now in the last two and a half years. Amazing. What is your process for finding opportunity and how has it changed? Because are you looking at the applications of how people are using chips, where there's demand, where the bottleneck is, and then going and working backwards to design a chip that improves things? Like you've been doing this for so long that it's clear that there's not a one size fits all solution. So what is your process for actually discovering opportunity? Yeah. So, you know, a lot of times, you know, ideas that, you know, you pursue in life come from your own experiences.

2:33:43Right. So building these companies over time, I started to realize that the cost of developing any kind of chip is just getting, you know, bigger and bigger. When I started my first semiconductor company, I raised 50 million. When I took it public, I had 17 left in the bank still. The second one, I raised$200 million. And frankly, I took it public because I didn't want to do another private round. I wanted to just go public and raise public money. And now it takes several hundred million dollars to do a chip. Cost of developing chips has skyrocketed. Complexity has gone up. Time it takes to build a chip, to design a chip, it's two to three years.

2:34:26And then it takes another year or so to get your customers up and running. with it. Then you get five years, six years, start to make some money. And the problem is that the software is moving so fast that leaves chips behind by almost six years, right? And so we need to close that gap. And the third problem in our industry has been that we have diminishing number of electrical engineering students graduating to keep up the good work as the industry grows. So we have diminishing resources, more complexity on the chips, higher costs and longer time, and we're completely getting out of sync with software.

2:35:04So my thought process was, as I was learning more about AI by investing in AI companies and learning from other entrepreneurs in that field, that it was a great intersection of these two really awesome technologies to be able to solve all that problem, collapse that time by a large factor, reduce the cost it takes to do a chip, And then we can do these chips a lot faster, and that gets the software going faster, right? So you get this, essentially, this flywheel working. And so it led to the idea of building a frontier model lab that focuses only on semiconductors. So unless other large frontier labs that are working on general intelligence, I set out to build artificial intelligence for chips.

2:35:55So we call it ACI, artificial chip intelligence. And giving that focus and that particular sliver of the world knowledge required really to bring together scientists from math and physics and pair them up with people who have 20, 30 years experience actually designing chips. You know, people in this company on the chip side have done hundreds of tape outs, which is the process of completing a chip and sending it to a fabrication facility. And then bring in other software people that can kind of encapsulate all of that knowledge and capability in an enterprise class product that then chip designers can use to make the chip design a lot faster.

2:36:41What a lot of people don't realize is that 90 % of the time in the chip business, our engineers are spending doing things that can be done by these models now. And so what we need to do is to get those folks, instead of wasting their time, to be on the creative side where they can think about new products, new markets, new capabilities, and then use essentially these digital designers to help them get the project through. So that's been really a passion of mine for the last two and a half years. How, you know, we've had a bunch of new chip startups on the show, and you were kind of mentioning this earlier, just like how significant the timeline is to get from concept to tape out to, you know, powered and actually, you know, doing workloads.

2:37:30how much like these startups are taking some amount of technical risk obviously execution risk but then there's the other technical risk of like is the architecture still going to be relevant by the time uh and can i scale up my production enough uh we had a founder on the team yesterday that pretty much all the labs and the hyperscalers are saying like i don't just need to know that this is going to work and be relevant when when you're ready i need to know that you can hit gigawatt scale. So how much, right now it feels like there's just demand everywhere. And so these companies are getting funded and they're getting kind of pilots and stuff like that.

2:38:08But how much do you worry about the sort of technical risk that these teams are taking on, knowing that every, there's so many different players that are going to be innovating over the next five years that by the time they actually are ramped up, will there be, will there be a real market for them? and honestly you put your finger on one of the toughest jobs for people in the industry when we start a brand new project whether you're in a small company or in a startup when you start a new project and you know that this chip is not going to go in production for another five years i mean nobody on the planet has that kind of clarity five years from now what is needed right Because the world is changing and we're all limited as human beings about how far in advance we can see and analyze.

2:38:55And so the risk you're taking on acceptability of this device in the market is one of the overriding things. And the way we deal with it in the ship business, we used to deal with it, is recognizing it's going to take five, six years to get there. Is we pack these devices with a lot of things that may or may not be necessary. But it's sort of like our insurance policy and essentially hedging against what might change in the industry, right? And so it's a very, very tough place to be because the chips get bloated, their power consumption goes up, their cost is unnecessarily high. And even with all of that, you don't really know whether you're going to get there and there's going to be a, you know, your hunt is not, whether the dog is going to hunt or not.

2:39:38But so by collapsing the time, the collapsing time that it makes to do a chip, you're actually getting rid of all of those unknowns. You're increasing the probability of you hitting the market dynamics that you want at the time you want it with the right kind of power and performance. And that we have not had in semiconductor industry for a very, very long time as chips have gotten more complex. And what my vision is and what I love to do is to be able to return our industry back to a point where, like I did with my first company, you know, four or five of us went to Sand Hill Road, raised a reasonable amount of money and were able to bring a chip to the market and, you know, and get it deployed and take a company.

2:40:25That possibility needs to return back to our industry to bring the innovation back and, frankly, keep up with the world that is now woken up with the chip thing. We're going to have a lot more competition on the world scale, right? And so we need these kinds of innovations to get us there.

2:40:43There's been a variety of teams working on math-specific models. and it's been interesting over the last month or so as we've seen generalist models actually go out and solve some of the most important open problems and we saw Navier-Stokes and everything. Why do you think that semiconductor design is going to work out differently and why is somebody going to be able to go zero to one with a new chip, with CognitChip and not with a more generalist model? Is that because of having the right data sources? How do you sort of compete over time, assuming that the frontier will just continue to advance?

2:41:31So the models are as good as the data that you use to train them. If they've never seen enough of the examples, then they actually don't know how to get it done. And so no amount of reasoning is going to get you to something you've never seen. So it's very fundamental that you use the data from your industry to train these models. The reason large-scale LLMs are not good in chip design is because chip design data as an open source is actually not available. Very little of it available. And what's available is not very useful, frankly. So what you need to do is to start from ground zero and build data sets that can be used to train a model.

2:42:17And then you train that model with that data. So the knowledge is inside the model. The reasoning is inside the model. And in that way, a specific model trained on a specific technology becomes very, very powerful. Right. So the reason, for example, software, these LLMs do a good job in software, because for the last 30 some odd years, software has had a history of having open source data widely available. And that's why a lot of these large frontier models do pretty well in software, because they're all essentially consuming the same data. That doesn't exist for semiconductors. And we're the first company that actually took that on and for the last two and a half years has been building a data mode that we think today is the largest data set in the industry for semiconductors.

2:43:13So if you train them on the right data, then they get the right intelligence. But that's also kind of not frankly enough because semiconductor industry is the process of getting a chip from idea formation to architectural innovation all the way out to something physical. that, you know, it's going to have transistors that are physics items, right? All put together and working well requires complete understanding of the workflow that a mature semiconductor industry goes through to ensure that everything works. You know, when we talk about putting hundreds of billions of transistors on a piece of silicon and they work, they work because not one of them can be misplaced, right?

2:43:58So you can't make things up. It's not like poetry. It's not like talking about some trip planning. You need to bring that precision. And that precision of workflow really can come from people who've done it and putting them alongside the mathematicians who can use the train. And that's how we built this company out. We wanted to do the hard work because we think this is going to be, for a long run, a fundamental way that we're going to design chips. Our industry cannot go on taking four years to design a chip and cost hundreds of millions of dollars and not know whether there's going to be a good market for it or not.

2:44:35That's not sustainable. That's not investable. Yeah, it feels like we're going to have like biotech style or pharma style mechanics where you have this massive, massive investment. And then it's like almost a coin flip on whether or not or worse on whether or not there will actually be a market there and it'll function and scale. You said you raised$50 million for your first company. It's still a lot of money, but it was definitely a lot more money back then. What was the prehistory? Why were you so successful on Sandhill? Yeah, so this goes back to the days when people were using dial-up modems, right?

2:45:18And we were inventing this new way of building a chip that was DSL technology. It's the way broadband is served to many of our homes today. And we had a good, solid approach, a great team. It was one of the funnest times of my life when we were building that company. And we went from opening the door to having a chip in hand that we were selling and generating revenue. And we took the company public almost three years to the day we opened the door. That still holds the fastest record that any productive company has gone from inception to go on public. But, you know, in these kinds of things, you need to have a good idea.

2:46:02You need to have a great team. You need to have good timing. You need to have good luck. All of those came together for us, fortunately, in the first company. And it just kind of all clicked. And we had a hell of a time doing it. And so that's how it came about. On the second company, we built a product for data centers. So data centers at the time were transitioning from 1 gig to 10 gig. And we built those world's first 10 gig chips. And that was the success there. So this time I'm not building a chip, but I'm building a system that helps everybody else build chips faster. Amazing. Makes sense.

2:46:43Very, very cool. Well, we'd love to have you back on as you continue to make progress. And it's amazing to meet you. Yeah. Thanks so much for helping on the show. Thank you. Wait, also, give us what's the art on the wall that the chat was asking about? Is that Tom Brady? That's Tom Brady. I'm a big Patriots fan. And so, yeah, Tom Brady all the way in the Pats. Amazing. Go Pats. There you go. I bet you could get Tom in the next round. Yeah. He might be awesome. It'll be fun. Make it happen. Awesome. Great to meet you. I'll talk to you soon. Good talk today. Let me tell you about Codex. Codex is a powerful workspace for getting work done with AI agents.

2:47:24Whether you're writing code, analyzing data, creating content, or automating business workflows, Codex helps you move projects forward from start to finish. We've got some breaking news. What's the breaking news? The president just phoned Jensen live on stage at the All-In Summit. Whoa. Jensen was on stage? Yeah. Or the president was on stage. Jensen was on stage and he gets a call from Donald Trump. Trump says the great thing about Jensen is that he can create the best AI chip in the world, but can't figure out how to put me on speakerphone. What? That's a wild, wild thing. Very big, big moment.

2:47:59So anyways, that's that's crazy. Apparently, yeah. Mike Isaac says, OK, wow. Per folks there. Trump called Jensen in the middle of his interview. year he was on stage and Jensen put the phone on speakerphone. Whoa. Okay. Jensen thanked Trump for his social media posts this morning pouring cold water on alarmism. Yeah. Jensen's been anti-doom for this entire cycle. We'll see. We'll see where it all goes. I'm sure there'll be more. Brad Gerstner chimed in. Does it have a new? Oh, there's a video. Do we want to play the video? Trump calling Jensen live on during the all in pod interview. and I mean we just read it out so I think you know what's going to happen but this is a wild moment

2:48:58he's on speakerphone he's on speakerphone I think he must have had a hard time getting it set up Okay. Mr. President, you're now talking to the planet. The great thing about life is that Jensen can develop the most complex... It's the joke again.

2:49:16Mitchell Green:Nobody can copy for 10 years, but he can't figure out how to put me on speaker. An odd joke. Okay. Well, anything substantive come out of it? I'm sure we'll know more tomorrow. We'll be back. We'll be back at 11 a.m. Pacific. Thank you for tuning in. Leave us five stars on Apple Podcasts and Spotify. I'm off to go get some rest. And we'll see you tomorrow. We love you. That's our newsletter, tbpn.com.