Why a16z Launched the Machine Age Fund | Jen Kha

0:00South Korea, by the way, just announced that they're giving premium AI to every citizen as sort of a public utility thing. So very, very topical.

0:09Jen Kha:But by the way, it's not just them. It's El Salvador. They implemented Grok in their schools, for example, for free. And they're utilizing AI doctors, for example. And you see these different examples around the world where they're accelerating their AI development and adoption way faster than in the U.S. We might also see the influx of a lot of this data center supply chain buildup happen overseas because of this sentiment in the U.S. as well. For decades, venture capital moved further and further away from hardware. AI is pulling it back. GenCob, managing partner and head of global partnerships at E16Z, joins Theo Jaffe and Sophia Du on NTS to discuss E16Z's machine age fund.

0:52and why the physical infrastructure underneath AI is suddenly one of the most active areas for founders. They get into why the existing stack wasn't designed for today's AI workloads, what needs to change across chips, networking, memory, cooling, and data centers, and why hardware has gone from a 20 fraction of the pitch's A16Z sees to more than 20%. Jen also explains why this infrastructure race is increasingly global, How governments and institutional investors are thinking about AI as a national priority. And why, as she puts it, what's old is new again.

1:30Sophia Dew:Hello everyone and welcome back to MTS. Andreessen Horowitz just launched a new$1.1 billion machine age fund focused on the physical infrastructure underneath AI. From chips and networking to data centers, robotics and energy. And joining us today is Jen Kha, who's a managing partner and head of global partnerships at A16Z to talk about the machine H fund and the investment thesis behind it. Jen, welcome to MTS. Hello, hello. It's good to be here. Great to have you here. Great to have you. I know Theo just said a big woo, but it's pretty exciting. And we wanted to talk about why this machine H fund, why now?

2:07For sure.

2:08Jen Kha:By the way, the classic adage is sell in May and go away. This has been the most prolific summer. And the fact that we're announcing a fund on August 28th, when typically Wall Street is dead, is like a classic sign of where we are in the cycle and the time, which is just there's so much going on. But we announced this$1.1 billion machine-age fund to invest into all of the physical constructs of the world that is now so bottlenecked, given all of the demands in AI. And think about it as everything below the software stack. So we've got our Infra Fund, which invests into products for developers.

2:42Jen Kha:We've got our Apps Fund, which sells into, you know, business to business and business to consumer. This is below all that. All the physical parts of enabling AI from data centers to chips to custom silicon, networking, Raxxas, all the stuff in the physical world that was honestly largely an uninvestable category for the most part for the last 30 years. Because we kind of built that infrastructure out for the last era of the Internet and then, of course, of SaaS. That's all now getting rebuilt because AI is way more mathematically intensive and compute intensive. And all that infrastructure, sort of the poor man's version that we're limping along with today, needs to be repurposed for the AI age going forward.

3:24So why a separate vehicle rather than doing this investment through like the mean like growth infra and other funds?

3:32Jen Kha:Yeah, so our view is, you know, our job is to follow the entrepreneurs. My partner, Chris Dixon, calls it following the nerd energy. Like, what is the nerd doing on nights and weekends is probably what us normies will be doing in the future. And oftentimes, entrepreneurs are that early signal into that. And so the reason why we decided to establish a separate fund is, one, there's just a groundswell of opportunity. So we went from, you know, Mark had famously said software's eating the world. Turns out AI has solved software, right? Any software need you have today, AI can actually do it. but we have to solve for all the physical constraints in order for AI to actually solve for software.

4:12Jen Kha:And so by creating a separate fund, we're putting out the back signal to the world, two entrepreneurs who are building to spend time with us, first and foremost. Second of all, just from a organizational perspective, it's very helpful to have a dedicated pool vehicle for these type of investments. Because if you think about, you know, when these companies typically raise capital, they will raise quite a bit of capital to kind of get off the ground. And typically what happens is if you put it like for like against another, let's just say Infra deal or Apps deal, for example, there's so much in the way of investment you have to do ahead of time that if you do the like for like, you're almost always gonna bias towards that sure thing with Infra, what it's doing, you know, a billion, two billion in revenue, like off the bat and off the cuff.

4:58Jen Kha:And so by separating it into a fund, we're kind of staking in the ground, A, our commitment to the space, and then more importantly, B, from an organizational portfolio construction perspective, that the intention of this is to capture those winners at the earliest stages, maximize ownership. And then when you have that$75 million check that you're going life for life, you have that dedicated pool of capital to really pursue after that category.

5:19Sophia Dew:Yeah, Jen, one thing I'm curious about is your specific role, because I know you lead the partner relationships and you're in charge of almost the entire capital raising strategy. Have conversations with institutional investors changed? What are the conversations like? Like what makes them want exposure to the AI hardware now?

5:37Jen Kha:Yeah, it's a great question. So first of all, we raised, I think the number is close to over 23 % of all venture capital at this year's. Wow. We've been on a tier. But as a part of that, you know, I think this is representative of a few things. One, if you look at most of the value accrual in AI, that's largely been on the private side, not the public side. And so people are just starved for private capital in general because that's where all the growth is. Two, if you think about most of the data center supply stack on the public side, those stocks have been ripping. We were joking around internally on our all hands.

6:16Jen Kha:Sanjay, the CEO, has become the Taylor Swift of the industry, right? He's made much credit to him. He's been grinding the grind for a very long time. But, you know, companies also like SK Hynix, like Samsung, These are all kind of companies along the data center supply chain that have gotten so much interest because we're so constrained on the supply side. And, you know, entrepreneurs are looking at it and saying, gosh, I know those are inefficient ways to build for the future with AI because it's not, again, configured appropriately to it. And if you were to rebuild from a blank sheet of paper, it would look very much differently than kind of shoehorning the current infrastructure today.

6:53Jen Kha:And so we kind of follow, you know, the entrepreneurs as I was alluding to earlier as a part of that. And all of that is at the earliest stages. And then the last one I would say is, you know, we've seen in the last couple of months, so obviously with SpaceX going public, Anthropic coming shortly, you know, OpenAI just on the tails. I think people are now seeing this shift from what has historically been private staying longer and longer, no liquidity coming out. And now you're going to see multiple trillion dollar businesses go public. And so people will have access to that. But there's a whole swath of companies on the private side that are not yet public.

7:32Jen Kha:And so people want exposure to that. And they don't want to, quite frankly, continue to invest into other asset classes like private equity, et cetera, that are built off the prior technology cycle. And so this momentum shift, again, it would have been when I started my career off, it would have been impossible to close a fund. effectively in two months over the summer, right? People are off on vacation, etc. Like the fact that this happened so quickly was a reflection of the fact that there's so much demand for this from the private pool capital side and from LPs who recognize where the puck is going.

8:04Absolutely. One thing I'm curious about is, you know,$1.1 billion is a lot of money. But on the scale of like the global hyperscaler build out, I think like American companies are going to be spending something like a trillion dollars this year, a thousand times as much. What is the specific niche of what the Machine Age Fund is going to be doing at this scale?

8:27Jen Kha:Yeah, so it is, this is the subject of a lot of debate, Thea, when we were chatting internally about how we should size the fund, right? There's a partner who I will name unnamed, who said, gosh, we're going to deploy this fund in like six weeks. Like, what are we even talking back here, right? So here's where I would reconcile on the portfolio construction side. So what we want to invest, so we're early stage investors. So we want to come in at the seed, you know, series A, and then kind of invest at the inflection point. And oftentimes, you know, what we are trying to endeavor to do is maximize ownership at the very earliest stages where we can put, you know, 25, 30,$35 million and have a very substantive ownership.

9:07Jen Kha:That's very different than if you're a late stage investor and slash or a public market investor that has to come in at at these later inflection points to get any ownership and also ownership that's substantive enough to drive fund returns. And so I think that we're just looking categorically two different things. So I'll give you an example. You know, we invested in a company called NextHop, which is building kind of AI-first high-performance networking. And this was a company that was at the Series B inflection point, but we put in, you know, 65 million at the growth stage. That's a great opportunity for our growth fund to be coming in at that inflection point where they're taking off.

9:44Jen Kha:Ideally, though, what we're doing is actually investing into companies like Unconventional instead. So this is the Naveen Rao company who was formerly with Databricks that we've known for a very long time. And this is a company that's actually rebuilding the chip from the design perspective of if you were to design a chip for AI. And so what they're trying to do is target much simpler structure to enhance performance in the chips themselves. And they're kind of going off in the cave and they're going to go and do this endeavor and project. But, you know, we invested at the seed. And, you know, subsequently, you know, they raised a huge up right after that.

10:21Jen Kha:And so, like, it's really important to come in at the early stage before these things start to inflect and then to be able to maximize ownership and therefore put capital work at maybe smaller amounts that we would otherwise not be able to just waiting.

10:33Sophia Dew:Jen, one of the things that you explicitly wrote about as well is you are looking for partners that can provide more than just capital. So this includes market access or things like geopolitical relationships. What are the specific needs that you're seeing hardware companies need that maybe prior companies you guys had worked with before didn't?

10:52Jen Kha:Yeah, this is a great question because this is now coming to the point where it's at a national level. So a month ago, the president of Korea came to the U.S. And their first and only stop in the U.S. was in Silicon Valley, which is really interesting, right? If you think about the context of the fact that companies now, NVIDIA, you know, at 5.5 trillion is the same size as countries in terms of their GDP. So NVIDIA is larger than all of the G7 countries except the U.S. Wow. And so that scale is just totally different in terms of Mark, our partner Mark Andreessen calls it, you know, technology is the dog that caught the bus.

11:31Jen Kha:And as a byproduct of that, you know, we are now a bigger and bigger, technology is a bigger and bigger part of the economy. And as such, countries are viewing this as a national priority and interest to get their citizens, to get their government onboarded into the AI age. And particularly, you know, if you look at countries of the last 100 years that were the most militarily, culturally, economically successful, they were the ones that industrialized first. We think countries of the future are gonna be the ones that adopt AI first across defense, across public safety, across healthcare. And that infiltrates all throughout the government and then also comes bottom up from their citizens utilizing it as well.

12:12Jen Kha:And so in that vein, to answer your question, Sophia, how we think about our relationship with our LPs, who are oftentimes global in nature, thinking about these national priorities, is to say, how can we help them, you know, utilize the latest and greatest technologies, which are oftentimes U.S.-based technologies, right? How can we help America and her allies accelerate into the future by not only investing in our funds, but potentially utilizing these technologies by adopting these technologies and then also oftentimes coming alongside of us in investing directly in some of these companies as well.

12:45Jen Kha:And then by doing so, you could actually accelerate the adoption process locally in way more ways than the distribution of prior technologies and prior technology cycles as well. And so to your earlier question around, you know, what the intention of global partnership means is, you know, we want to be partners not just in the capital construct, but also in how a country and government is thinking about technology if we can help them accelerate that adoption. And then also, quite frankly, benefit from the economic development of it as well. South Korea, by the way, just announced that they're giving like premium AI to like every citizen as sort of a public utility thing.

13:24So very, very topical.

13:28Jen Kha:Yeah, South Korea is like the most extreme form of democracy, by the way. And it cuts both ways because, you know, I don't know if you saw this, Theo, I bet you saw this. Like a third of South Koreans got margin called earlier this summer with a situational.

13:44Jen Kha:So they take democracy in extreme forms. and also they are, we oftentimes joke and turn, like Korea is like the country of the future, right? Like they've got the number one, you know, boy band in the world with BTS. They have the number one girl band with Black 20. They have like Squid Games. They had, you know, gosh, K-pop Demon Hunters, right? And so like they're like the new Hollywood of the future from a content perspective, but they're also full board into AI. So it doesn't surprise me that they're rolling this out. But by the way, it's not just them. It's El Salvador, who, you know, President Bukele has been super aggressive around utilizing AI.

14:21Jen Kha:They implemented Grok in their schools, for example, for free. And they're utilizing AI doctors, for example. And there's a lot of countries that you wouldn't expect. And sometimes there's city-state countries like Singapore or UAE, for example, where it's easy, easier, just given the population, to adopt technologies and then also, you know, make it subsidized or free, for example, in some of these instances. But you see these different examples around the world where they're accelerating their AI development and adoption way faster than in the U.S. And unfortunately, you know, in the U.S., we've been seeing a lot of political tail headwinds with, you know, obviously data centers and, you know, in some instances around surveillance, et cetera, that are just falsehoods.

15:06Jen Kha:But, you know, we potentially view that as an opportunity as well, where Elon's building data centers in space, we might also see the influx of a lot of this data center supply chain bill that happen overseas because of this sentiment in the U.S. as well. I'm interested in that aspect of it. Like, how does public backlash against data centers like affect this fund at all? Like, is it, I can imagine going either way where like maybe it becomes much harder to build data centers and that's bad. But also like I can imagine us being in a regime where like if anywhere in the US allows data centers, then the data centers will just get built there and then things will be basically fine.

15:46Or is it something more in between?

15:49Jen Kha:So for the fund itself, I, I, um, obviously it would be a much easier process if everyone was on the camp of, you know, being positive on data centers. It's just not the reality of where the world is today. But unfortunately, the narrative has gotten in the way of reality, which is if you look at most data centers, and particularly the modern ones, so I'm talking about, you know, AWS, you know, Meta's data centers, Switch data center, which is one of our portfolio companies, for example, they are actually modern versions of the data center that are built by tech people, not real estate people.

16:28Jen Kha:And they're actually building for all the nuances of the sensitivities people have around data center. So in the case of Switch, for example, they actually contribute power back to the grid. They don't take away. And they built their infrastructure to enable that. They use very little water. And then particularly, you know, they're one of the very few data centers that are actually capable of being able to manage around fluidics in the future for chips. And so there's increasingly, you know, everyone paints data centers with a broad brushstroke, but there's a very small percentage of bad actors with data centers.

17:03Jen Kha:Vast majority have actually configured for the new form factor. And where we are investing is the next generation of those data centers like a switch that have optimized for the future on not only some of the politically more sensitive things, but even things like, for example, the next set of chips are going to be DC powered versus AC powered. And most data centers aren't actually built for that infrastructure. And by the way, there's less than 2 % of electricians in the US that are actually trained on DC power because it's very dangerous and like you could potentially kill yourself and it's very volatile to work with.

17:36Jen Kha:And so you're just seeing all these bottlenecks in the infrastructure that need to get fixed in order for AI to proliferate. And this is where the vast majority of the focus of the fund is already to run.

17:49Sophia Dew:But even expanding beyond just data centers, you know, you guys have a mandate specifically, it includes robotics, home AI hardware, you just have a broader thesis. Can you share more about what your broader thesis is?

18:01Jen Kha:Yeah, for sure. So it's everything think of, again, below the software stack, but you can almost even analogize it to anything in the data center we are focused on. So, accelerators, CPUs, custom silicon, memory, storage, again, all things that were forgotten language, if you will, from an investable category perspective the last several decades, liquid cooling, you know, all of that physical stuff that needs to get built out. And then related to that, you know, robotics within the data center, for example, system software, et cetera. And so, you know, the thesis around it is, you know, kind of at a very top level.

18:39Jen Kha:We all know the demand for AI. You know, agents are using five times the amount of tokens as humans are. And we just crossed over to agents before on the volume of agents are now more on the internet than humans are. And so that's just going to continue to go parabolic, especially as consumers start to have personal use cases like, for example, with BrockBot or Instinct or others. And there's less than still 5 % of AI usage today. And so that's the kind of demand side. The supply side is the thesis of this fund where we want to invest into everything that is guided by computer science on the infrastructure side.

19:15Jen Kha:So we don't want to invest into regulated industries like power, for example. That's more of our American dynamism team. But everything on the computer science guided side inside the data center is the focus of the fund. Mm. So relatedly, I'm also curious about like you said earlier, like people are saying you might deploy the entire fund in six weeks. I'm not sure like how joking that was, but like, how long does it actually take? For my LPs listening, that is joking. There's just so much opportunity, right? And in ways of which, you know, we have, again, seen this groundswell of entrepreneurs coming out the woodwork and saying like, I know that this process is incredibly inefficient for what I see in terms of demand.