Benchmark’s Chetan Puttagunta on the Past, Present, & Future of Software

18:55Chetan Puttagunta:And that's when you can clearly see my Twitter activities start to fall off. And so once we reopened our office in San Francisco, the number of people that wanted to just meet in person and went through the roof. I think there was just, we had basically been meeting everybody on Zoom for over a year. And I think there was a moment where as people started to move back into San Francisco, the early stage entrepreneurs just wanted to do everything in person. And so we saw probably around the summer of 2021, a lot of activity moved to in-person. And a lot of people just wanting to meet in person and reconnect in person, much like we're doing now.

19:42Chetan Puttagunta:And I think that's like when we may have also met for the first time around that time. Or maybe we met in 2019.

19:49Turner Novak:I think we met before COVID. Okay. I'm trying to remember.

19:52Chetan Puttagunta:And then we met again because I think you made a trip out after.

19:55Turner Novak:Yeah, there was one. We got breakfast.

19:56Chetan Puttagunta:Was it like at the Rosewood? Yeah, in Meadow Park. That's right.

20:00Turner Novak:Maybe the second time we met. That's right. Maybe that was the first time actually that we met in person. I can't remember.

20:06Chetan Puttagunta:I can't.

20:06Turner Novak:Yeah.

20:07Chetan Puttagunta:Because we met a bunch of times on the Zoom while we were in the pandemic. Anyway, so I think like, as a result of like my schedule, just going back to mostly in person, I stopped interacting. I just stopped tweeting. And I just thoroughly enjoyed meeting people in person far more than listening to earnings calls and stuff. And so I just stopped listening to earnings calls. And then, you know, if you stop listening to earnings calls, there's not a lot to summarize. And then I just slowly stopped paying attention to public software companies as a result. And you always still pay attention to public software companies in your own personal time and to understand the industry and stuff like that.

20:51Chetan Puttagunta:But I wasn't paying as close of attention as other people were. And I wasn't looking at it first and offering first impressions. So it started to go back to the standard practice of like, I'd read earnings releases maybe like two weeks after they came out or I'd read like analyst report two weeks after it came out. And whereas in the pandemic, I would read it like the day of.

21:16Turner Novak:It was like your entertainment event was like, oh man, sales force. That's right.

21:22Chetan Puttagunta:That's right. That's what I was doing. And so once we came back into the office, it was just delayed again. And then I think like if you didn't, if you didn't tweet about it right at the moment, I think there was like a moment in time interesting too, which I thought was interesting that revealed itself, which is like, I tried a couple of tweets that was like on earnings that were like a month old or two months old. And it was basically like people were like, I already knew this. Yeah, you usually need a chart.

21:48Turner Novak:Like you need like a good chart that showed like how AI adoption maybe was like changing in Salesforce or something of it. But you run the rest of like the day of earnings. Somebody probably grabbed that and tweeted it.

22:00Chetan Puttagunta:That's right. And so there was a timely nature to it. So I didn't do that. So I stopped doing that. And then I think I'm back more on Twitter now with all this AI stuff happening. And I think the reason that I've started to re-engage is... Watching launch videos? Yeah, sure. Launch videos are really impressive now. They are very good. Very high investment. And I think the thing that I'm starting to tweet more about is just that the stuff that's happening at the application layer with AI is a fundamental shift. And I think that it is a fundamental shift on the same scale of on-prem to cloud. And on-prem to cloud took a long time.

22:48Turner Novak:Can you maybe give us like, so Everett on your team was like, oh, you got to ask Jason, like, give us like a, like a history lesson on like, key areas of software. Absolutely. Can you maybe walk us through like, as early as you can, you know, recite and talk us through all the way to today?

23:03Chetan Puttagunta:Go all the way back to the advocacy. Like, start there. So King Nebuchadnezzar back in the Babylonian Empire. Right. That's right. So we came up with the number system. No. And then, look, I think it started, it started with mainframes. Like mainframes is when we started to get real application software level stuff. And we went from...

23:22Turner Novak:So this was like massive machine that weighed 50 ,000 pounds.

23:27Chetan Puttagunta:That's right. And like you would create... That's when people started to create custom applications to automate stuff. And whether it was for like the defense sector, whether it was for the public sector, whatever, for like private enterprise, that's when you started to automate things using mainframes. that then transitioned to, you know, client server. And then you had the internet show up and then the internet, you know, obviously changed everything with regard to application software. So all of a sudden you had consumer applications and then you had B2B applications. Internet also helped centralize servers and how like clients were served.

24:07Turner Novak:It created edge networks. Why is that all important? And how does that change kind of the business model?

24:13Chetan Puttagunta:It allows, there's two. So every new wave, two things happen. The number of applications created exploded each time. Every time? Every time. Like the number of applications created to serve either businesses or enterprises exploded each time.

24:28Turner Novak:Is this like it increases like an order of magnitude, like 10x? Yeah, yeah, yeah.

24:33Chetan Puttagunta:But the internet was like 100x. So it was like two orders of magnitude. So each time there's like a big jump in the number of applications. and then there's also a big jump in the number of companies creating applications for either consumers or businesses. Okay. And so these are enabling technologies and then you had internet, internet showed up and then you went from client server and then you went to basically the cloud model, which was, you know, you centralize where all the servers are hosted and then you serve people by the internet, the browser, and that ended up being sort of the genesis of cloud.

25:08Chetan Puttagunta:And then the cloud thing ended up being extraordinarily transformational.

25:14Turner Novak:What was the biggest kind of transformation?

25:16Chetan Puttagunta:I think number one of all was Amazon. And so Amazon, when they released EC2 and S3, which was like, you know, cloud computing and cloud storage. You know, in 09, 10 and 11 is when you started to really see that become very, very significant. And if you were in, you know, around the Bay Area around that time, what you noticed was a dramatic shift in net new companies. They were all using Amazon. So if you're an app developer, when the app store first came out in 2009 and your app was like really working, you still had to go get server storage in downtown San Francisco.

25:58Turner Novak:Like you had to buy computers.

26:00Chetan Puttagunta:You had to buy a rack and then you could go to Equinix and they'd sell you space. And then you'd have to rent servers from them. Or you'd have to go to Dell or HP. Or you could go to Quanta if you really wanted commodity boxes. And they would sell you these servers. And if you bought your own, you'd have to come put them in and then install them and wire them up. Or you could get the person that ran the facility to rent the servers from them. We could buy the servers from them. But you had like, this is what it required. And this wasn't the crazy thing is that not that long ago. This is 2009, 2010.

26:40Chetan Puttagunta:Like it's not just, it's just not that long ago.

26:42Turner Novak:Yeah, that's like relatively speaking. I mean, I guess I'm almost 35 now. So like I was graduating high school.

26:48Chetan Puttagunta:Like to me, that's not that long ago. Not that long ago. And that was like really the cloud. And it just so happened that it coincided with the launch of the App Store, which was in 2009. And so you had this cloud thing happening and you had mobile devices about to explode worldwide. And so the total demand for applications from both consumers and businesses was about to go like, it was going to like have two factors that were going to like increase orders of magnitude. So it was like 10x multiplied by 10x. So it was like you had cloud happening, which basically meant like more application developers could develop applications.

27:27Chetan Puttagunta:It's just easier to get off the launchpad. That's right. You didn't need to think about servers. You didn't need to think about renting space. If you were running demo apps or prototypes, the standard way to have done it was to buy a server and plug it into your apartment. And that's where you'd host it. And then if you were a solo entrepreneur, this is how you do it. And then you'd be like, go ship it. Once you were ready to launch it, You'd like go get some servers, plug it in and then like hopefully it would work. And like this thing was just, it was one capital intensive. Because you had to like, you had to go invest the capital on compute and storage.

28:09Turner Novak:You also had to figure out how do I run this server thing? A hundred percent.

28:15Chetan Puttagunta:And it was like, it was expensive. And so the barrier to entry was high. And again, this is the other thing about each wave of technology. each wave, the barrier to entry for developing an application went down. And so with cloud and mobile, it was, one, the cost of deploying a prototype or an initial version of application went way down because you could go put it in the cloud. And then two, the cost of getting to an end user also went down because you had this amazing distribution mechanism through the app store.

28:48Turner Novak:So just like a kid in the class would be like, check out the Snapchat thing. 100%. All these kids just downloading it and using it.

28:55Chetan Puttagunta:That's right. And then you could pay Amazon on a credit card and it would be consumption-based.

29:00Turner Novak:You technically didn't even actually really pay up front. That's right. You could not pay your credit card for 30 days. That's right. You got a 30-day loan, essentially. And so it was a remarkable unlock.

29:15Chetan Puttagunta:And you saw an absolute explosion in AppLayer. Like obviously mobile apps, like anything from like Instagram, Twitter, Snap, like that all was unlocked there.

29:30Turner Novak:Uber, Airbnb. You're just listing off benchmark portfolio companies. That's right. That's right. Airbnb wasn't. Yeah, Airbnb wasn't. But did you guys have like a, did you guys have a bet in the space? Of like rentals? Home travel type of. This was before my time. So I don't remember. You're not an expert on the portfolio.

29:48Chetan Puttagunta:No, I should be. But I'm not, unfortunately. Bill's going to be listening to this like, come on. We may have had something. But I think they did great. I think the, you know, the 2011 fund is legendary for having just gotten mobile and cloud, like, perfectly right. Even WeWork. WeWork wasn't even mobile or cloud.

30:10Turner Novak:How did that even get in there?

30:11Chetan Puttagunta:You know, like, that was Bruce.

30:14Turner Novak:And so, you know, you're going to have to go to him for the history on that one. I don't know. Yeah. What was that fund? Like what's the performance? Benchmark seven. And we don't publicly talk about our performance. You can find it on the internet. It's like plenty of... Okay. What's the number on the internet? What does the internet say? That's a good question. I don't know. I think the last thing it said is...

30:37Chetan Puttagunta:Yeah, you should Google it. I'm Googling it right now. Benchmark seven.

30:41Turner Novak:I'll tell you if it's like high or low. said it was a around$550 million fund in 2011. It says it was roughly 25x before fees.

30:53Chetan Puttagunta:There you go.

30:55Turner Novak:Sounds pretty good. Directionally correct?

30:57Chetan Puttagunta:Correct. Directionally correct.

30:59Turner Novak:And then you added in your Manus, 1 ,000 % higher. Yeah. Pretty good.

31:04Chetan Puttagunta:So that really unlocked the number of applications, ease of deployment, lowered the capital required. So that was mobile. That was cloud. We've been on that wave basically until, call it 2018, 2019.

31:23Turner Novak:I think when you started -

31:24Chetan Puttagunta:And then COVID was like an incredible theory also.

31:26Turner Novak:Yeah, it was a huge accelerant.

31:28Chetan Puttagunta:It almost like put on the gas even. That's right. Huge accelerant through 2020. And then the other thing that was happening though, was that the SaaS companies incumbents were starting to get really dominant. like the control distribution and they would start to eat up not only their core category, but would start to eat up adjacent categories. And so this is how Salesforce went from being just CRM. They did CRM, service file, integrations, et cetera, et cetera. Like it became huge. Same thing with ServiceNow. They started with ITSM and then expanded into like HR, sales, all this kind of stuff.

32:03Chetan Puttagunta:Like these SaaS companies started to get really, really big. And if you just looked at it from a startup perspective, it was actually harder to get distribution in like 2020, 2021 because the incumbents had gotten so big and so powerful and like basically penetrated every enterprise account. And if you were a brand new startup, you would show up and be like, well, I can do this like niche-year thing 15 to 20 % better. And then your buyer would be like, well, I could just go to the Salesforce thing and ask them for a discount and it'd probably just give me 5 % off and that's probably easier. And so it was frictionful, like having a net new company to find its sort of niche and to be able to like really go after a big horizontal category was really hard.

32:53Chetan Puttagunta:And so what you ended up seeing 2020, 2021 was like a lot of hyper vertical application software companies get created.

33:03Turner Novak:Like give me an example.

33:05Chetan Puttagunta:There were a whole bunch of companies that were created for the construction vertical, as an example. There were a number of companies created for the compliance vertical. Some of them are doing really well now, of course.

33:15Turner Novak:So it's basically like a what are things that Salesforce isn't doing or won't do?

33:19Chetan Puttagunta:Salesforce, Workday, ServiceNow. What are they not doing? There's still opportunities. Then people would go attack them. And some of them obviously became successful. But you didn't see the same Cambrian explosion of applications that you saw in 2009, 2010, 2011, 2012. It just wasn't this extremely fertile ground to create new startups, especially at the application layer.

33:43Turner Novak:It was mostly just a big, got most of the value or restored most of the value.

33:48Chetan Puttagunta:And obviously things dramatically shifted starting in 2022. Yeah, so how do you dissect what was going on in 2022, 2023? So, you know, GPT APIs were available in 2022. And this was the earliest signal we had gotten at Benchmark that people were thinking about developing new sets of applications. So we would meet entrepreneurs that would be playing with these APIs and saying like, hey, have you guys seen this thing? Like it generates like, you know, you can make this API call, you can do this and that it's generating all this interesting stuff. Maybe had like Jasper was maybe like a break at that time.

34:30Chetan Puttagunta:There were a bunch of like people doing like copywriting as sort of the first use case. Because you could only interact with these things through APIs.

34:41Chetan Puttagunta:And in 2022, November of 2022, obviously ChatGPT comes out. You know, I think everybody that used the product that moment in time thought it was like the most magical thing. And I think feeling like it was magical wasn't a particularly unique insight. I think everybody thought it was like, it was like, wow, this is incredible. I think what we as a firm did at that moment in time, which I look back on was particularly insightful, was to then say like, this is obviously the way of the future. This is clearly what the experience of the future is going to look like, which is there is going to be some automated system at the back giving you the answer or finishing the task.

35:32Chetan Puttagunta:And it became pretty obvious to us around the table that that was the way of the future. And so what we decided to do at that moment was focus heavily on AI applications. And I think this is one where if you've just been investing in software, like I had for, you know, at that time, probably over a decade. You know, this is like the best thing that could happen to you as a software investor. Because now, as an early stage software investor, you're a late stage software investor or like a private equity software investor, you're like now have a lot of like portfolio companies that might be threatened.

36:12Chetan Puttagunta:But if you're an early stage software investor, if you recognize the catalyst of a shift change And you think this is the next shift change. Yeah. Like as next catalyst as big as a cloud, it's like incredibly exciting to go all in on software applications again at that moment. So then it became pretty clear to us that every large horizontal category was up for grabs again. And it was a good time to go back into it. So the Salesforce, the Workday, the ServiceNow. Like all horizontal categories like were up for grabs. And all we needed was entrepreneurs that saw the future by playing with like HGPT and the opening APIs.

36:57Chetan Puttagunta:And then there were also like net new categories to be created. Like you don't only have to go after incumbents. You could like create brand new categories and sell software into areas that hadn't bought a lot of software before.

37:10Turner Novak:And that's because the software could solve new problems for you. that I couldn't

37:15Chetan Puttagunta:And so this is where coding assistance and legal software very specifically, those are not categories of software that are pre-established. Legal as... That was a dead zone. That was like a do not touch. It wasn't great. I mean, to be fair, I had one successful company there, a company called Logical, which was an e-discovery, which I invested in and had a very successful outcome. It was acquired by a PE firm. Of course, because like, you know, it's like once you get eDiscovery customers, there's a lot of cash flow that shows up as a result.

37:51Turner Novak:What is eDiscovery? This is like the process of learning more about the case and like collecting evidence or something like that. Yeah.

37:57Chetan Puttagunta:So basically, whenever you have to go through like litigation, you know, you have to go discover a bunch of facts against that case that shows up in like emails and documents.

38:06Turner Novak:So this is like when someone says, when we see those posts about like the Steve Jobs email, like an app. Like it was through the discovery process.

38:13Chetan Puttagunta:That was like an e-discovery software that found that email. And so those companies ended up being pretty interesting. There was a company in Chicago called Relativity that ended up becoming big.

38:24Turner Novak:There were like some companies in Europe. This is basically just like a SaaS document storage. It was like verticalized for legal.

38:30Chetan Puttagunta:With search. Yeah.

38:31Turner Novak:Okay.

38:32Chetan Puttagunta:And so that was like the only category in legal software that worked. But, you know, when AI shows up, you now can like start to meet entrepreneurs that are dreaming big again in horizontal categories. And that also allows you to invest in AI app enablement. And so it's like all of the frameworks, all of the like new cloud infrastructure to host all these AI things. Like these are all, these all open up as opportunities. And so if you look at our investments on 2022 onward in AI, there's one central theme to it all. It's like all AI applications and application enablement. And that was very much on purpose because we just found that there was tons of opportunity there.

39:17Chetan Puttagunta:In our view, it was also opportunity that a lot of people weren't paying attention to in our industry. because I think people at that time saw the magic of TAT-GPT rightfully. And then, you know, a lot of AI labs ended up getting funded at that moment in time in 2022.

39:38Turner Novak:How many did you guys invest in a benchmark?

39:40Chetan Puttagunta:We invested in one open source one.

39:43Turner Novak:That feels like a classic benchmark approach. It's the open source version of something. Oh, yeah.

39:48Chetan Puttagunta:I mean, we, you know, as you know from our history, We deeply believe in open source. And in this case, it would be open weights. And, you know, there were a lot of open weights models, including LAMA models. But then more recently, if you look at, you know, models that are coming out of China that are open weights, like these are really unlocking a lot of additional models in the U.S. that people are like borrowing techniques from these open weight models. They're borrowing these open models themselves and then, you know, customizing them, crafting them, fine tuning them, applying, you know, RL to it, all that kind of stuff.

40:33Chetan Puttagunta:And so open weight models in general are a category that I fully believe in. And I hope that, you know, Lama continues, Meta with Lama models continue to keep them open. But, you know, I think that we spent a lot of time meeting with entrepreneurs building AI applications and entrepreneurs that wanted to enable the next generation of

40:55Turner Novak:AI applications.

40:57Chetan Puttagunta:And so if you look at that fund and you look at the investments that we made, we made a number of seed and series A bets at that time in 2022 in companies like Sierra, Lagora, Fireworks, level path, laying chain that just are entrepreneurs building very horizontal applications that are attacking gigantic markets with truly innovative tech. And when you open this application and you experience it for the first time, the SaaS comparable looks

41:42Turner Novak:really bad. Like it just looks like... So give me an example of one of those contrasts that I might come across in the wild.

41:50Chetan Puttagunta:I think if you just ever interact with Sierra as an enterprise customer, like if you were to buy for this podcast, if you ever wanted a customer agent, you have two options. You could go to like a traditional SaaS provider, legacy vendor. Who would

42:04Turner Novak:that be?

42:04Chetan Puttagunta:Like you could get a ticketing system plus a CRM system plus some kind of autoresponder. So what get Salesforce, you could get HubSpot, you could get Zendesk, you could get like piece together a lot of these software. And like, by the way, like, we invested a lot in these SaaS companies, and I invested a lot in these SaaS companies. So like, they're all great companies, have a great deal of respect for all the entrepreneurs. They have good distribution that they've built. Incredible. But it's the same thing that happened with these cloud vendors versus their on-prem rivals. So Salesforce versus Siebel and Oracle.

42:43Chetan Puttagunta:Zendesk versus Remedy. We forget the name. Remedy was like the ticketing software before that. Workday versus PeopleSoft. Like the on-prem incumbents when the cloud software showed up just felt like a terrible piece of software because they were slow. They They had all the setup. They were expensive. They were not interactive. They couldn't be accessed anywhere.

43:12Turner Novak:Why didn't they just go to the cloud? Why didn't they just go to cloud app and fix it?

43:18Chetan Puttagunta:Because it's really hard. I think you've read Innovator's Dilemma. And it applies to technology companies. I actually haven't read it. Really? I mean, I know the premise of it, but I haven't actually read the book. Maybe I should actually read the whole book.

43:29Turner Novak:You should.

43:30Chetan Puttagunta:You should read that. You should really read it. And you should read also competitive analysis. And so it's like, it's like classic business books. And it's, if you look at sort of like, if you have a great business that, and then you make a technology architecture and you build a large application, you now have built an application that's serving thousands of customers. And then you've built a huge distribution force to take that out and sell. And so the business machine that you've built runs on this thing sustaining. So if you need to re-architect your platform, you need to pause everything, pause distribution, break your architecture, move it to the cloud, by the way, and then actually get it to work, have it scale and all that kind of stuff, and then teach your distribution networks to distribute this brand new product, and then basically start from scratch.

44:28Chetan Puttagunta:It's really hard. That's hard to do? It's really, really, really hard. The thing that I think people really forget is that when Salesforce was really growing really fast, Siebel created a product called Siebel On Demand. That just sounds like a not good product. Siebel On Demand was the Siebel answer to Salesforce. Okay. And there were people that were covering Siebel at that time that said Siebel On Demand would crush Salesforce. That would be the end of Salesforce, would be Siebel On Demand.

45:00Turner Novak:Were they both publicly traded at the time? Yes. Okay. So I'm sure Salesforce stock dropped like 10 % of the day of launch or something.

45:06Chetan Puttagunta:Whatever. But like Siebel On Demand didn't work because like the Siebel On-Prem product was just so profitable that like, and like Siebel On Demand may have worked as a product, but it had deficiencies against the Salesforce product. And then Salesforce was, because they had built that company from scratch, was able to distribute it far more efficiently than Siebel could. Like, just the company structure was built for selling like licenses for$5 ,000 or$10 ,000 to a company. Where Siebel was built to distribute licenses that were million dollars or greater. And so, you know, Siebel on Demand would come and quote you like$100 ,000.

45:49Chetan Puttagunta:And the Salesforce rep would be like, you can have mine for$10 ,000. And yeah, Siebel on Demand is like 10 % worse. And so like, you know, and so... you even sign up for if you're doing any research at all. It's so like that competition becomes so uneven.

46:05Turner Novak:So that the distribution wins, that assumption assumes that they're not going to look at comparable products. Correct. When it's so easy to just Salesforce.com, click a button, we're in the product. You can put in your credit card and use it.

46:19Chetan Puttagunta:That's right. And so this is like, now we're fast forward to today with AI applications. We're going through the same thing again. Like for an AI application to become, you know, like for a SaaS company to beat a native AI application, I would argue that they would have to break their fundamental architecture and rebuild the application and redo the business model and reteach their distribution on how to distribute the thing. the advantage of having an AI application company start from scratch is you build this thing AI first from point zero like you don't create any code that's not AI friendly the first set of sales people you hire and the first set of marketing hires you make are all intended to distribute this like AI product priced as like however you want to price it consumption seats whatever but it's priced like an AI product and you go against the SaaS vendor in these things it is To me, the early signs are astounding how fast these AI applications grab traction and grow, and how quickly they're able to displace traditional SaaS vendors.

47:28And, you know, I think on Twitter, or X, we're seeing a lot of...

47:32Chetan Puttagunta:You didn't call it Twitter.

47:33Turner Novak:I refuse to call it X.

47:35Chetan Puttagunta:I think you see a lot of people saying, like, you know, the SaaS companies can be really replaced by cloud code. I'm not sure I buy that.

47:45Turner Novak:I think that you like, hey, make me Salesforce. That's right. Make no mistakes. That's right.

47:50Chetan Puttagunta:Yeah. Or like build me a billion dollar software company. Make no mistakes. 10 billion. Right. Right. I don't think that is what's going to happen. But I do think that if you look at legacy SaaS, their business models are seriously going to be challenged by AI applications that deliver 10x the value for a third of the price. And if you're an enterprise and you can buy an AI native version, you will buy it. I can't see why you wouldn't. Like you see the experience and it's that stark. And I'll give you a couple of examples. If you look at Sierra and you deploy it as a customer service agent, it is absolutely a mind-blowing experience.

48:37Chetan Puttagunta:Like you don't need a ticketing software. You don't need call routing software. where you don't need all this stuff to make tickets, like customer issues that are coming into your company go away. It just goes into Sierra and there's a resolution. And guess what? Your customers are happier and you're basically replicating your single best customer agent to infinity. That is what Sierra is. So all of a sudden, your customer satisfaction goes to the roof. your business metrics get a lot better. Like your renewals get better, your expansions get better because like customers are actually happy with their experience.

49:16Chetan Puttagunta:And so comparing that with legacy, which is like chaining together four or five software solutions, it's just like hard to really compare them. And then the question then becomes like, why doesn't an existing software person just like do it?

49:32Turner Novak:Yeah, because I was going to say, if I'm Mark Benioff, Salesforce, I went through this. I see why I won and I see like the advantage I had over Siebel. Do I look at it today and it's like, oh man, this could happen to me. Like I should know that this is coming, shouldn't I? That's right.

49:48Chetan Puttagunta:I think that if, and of course, look, I think Mark Benioff is one of the greatest entrepreneurs of all time. He's also been an extraordinary friend of startups and how open he's been with Salesforce APIs and the ecosystem and all that. I think I only have great things to say. I think that Salesforce should buy a lot of companies now. I think that one of the things that Salesforce has always done really well historically is buy the right companies at the right time.

50:19Turner Novak:I was going to say Slack as an example. Is that a bad example? No, it's not a bad example. I feel like that one's been ridiculed. Of like too high a price, maybe.

50:27Chetan Puttagunta:Too high a price, yeah.

50:28Turner Novak:I have a friend at Slack. She's like, they fucking ruined it. They ruined it? Yeah, she's not bullish on Salesforce. Or Slack as a part of Salesforce.

50:37Chetan Puttagunta:Yeah, if you just look at Salesforce history, I think people forget that it was founded in the late 90s. And just in different ways. For example, when Marketing Cloud took off, they went and bought a great Marketing Cloud company. When Commerce took off, they went and bought Demandware. They were making key acquisitions at the right times throughout their growth trajectory. and they were actually very good at M &A and Salesforce Ventures is an incredible investor. They've like invested in great companies and they continue to invest in great AI companies. I think one of the things that they should do, and of course I'm telling a public company what to do.

51:17So I have great level of humility

51:19Turner Novak:to assume that they would listen. But I do think that like - I'm going to cut that part out, by the way. I'm not going to let you say that. I'm going to make you look like - No, I'm just kidding.

51:27Chetan Puttagunta:I think if you're a SaaS company right now, you should really think about spending 10 % to 25 % of your market cap to buy AI applications. I really think that's a good idea. And I think if you're an AI application company like Salesforce or ServiceNow or Datadog or whatever, name your favorite SaaS company that's public or private. I think they really should go buy AI applications that they then could feed into their distribution networks or these AI application companies come in and build them a new distribution network. I think it's one of those things, if you study the history of software, the history of application software, there are moments in time when the on-prem vendor should have just bought the cloud thing.

52:19Chetan Puttagunta:The best example of this is BMC, which was ServiceNow before ServiceNow, should have bought ServiceNow way before it got as big as it got.

52:33Turner Novak:Aren't they like the seventh or eighth biggest software company now? Yeah, of course.

52:37Chetan Puttagunta:But like they should, like BMC should have bought it. And there were moments in time where I think BMC could have bought it. And like, I think if they showed up, like they had the market cap to buy it. They had the wherewithal to buy it. but they didn't because like, you know, it was like, well, we're trading at X revenue multiple and I don't want to give Salesforce or service now, you know, 20 X revenue multiple, whatever. Like, but in retrospect, it was, you know, completely changed the game. The other one is like, obviously, you know, Salesforce. I mean, there were times when like, it was rumored that Microsoft was going to buy it or rumors that like, you know, could Oracle ever buy it?

53:21Chetan Puttagunta:Like, Like, you know, like Salesforce just sort of like completely cleaned out CRM from all the on-prem vendors. And like all those businesses just ended up going to zero. And so like, they could have taken Salesforce out much earlier in its journey. So if you just look at every big category winner in SaaS, there was like an opportunity for the on-prem company to make a big acquisition and make something of it. And like, they didn't. and I think that if you're watching the AI application thing happen you're starting to see M &A sort of pick up but it's not really at the pace that I would encourage these companies to think about it which is just like you really should jump into this game and buy some of these things because companies are about to get gigantic like they're getting to 100 million I mean Manus went 0 to 108 months like these companies are getting really big really fast.

54:22Chetan Puttagunta:They're getting 100 million really fast. Once they're getting to 100 million, they continue to scale beyond that. You know, there's lots of questions about margin profile and all this kind of stuff. And I'm telling you these like AI application company P &Ls, like maybe they don't look as pristine and as predictable as like super mature SaaS companies. But, you know, the early days of SaaS companies, those P &Ls don't look that pristine either. like people just should go look at the workday s1 and look at the gross margin of workday in the early days so interestingly the software had around 80 75 80 gross margin but they were selling services to implement the software and negative gross margin so blended you know they had gross margin some years in the 50s or even below 50 that was fine and like i think there was one year if you go to pull up the s1 either it was like the first or second year they had like negative gross margin, which is fine.

55:18Chetan Puttagunta:Because you need S1. Yeah.

55:20Turner Novak:You're going public as a software company.

55:21Chetan Puttagunta:Like one of their original years was like, we have negative gross margin. Yeah. And then it got better, obviously. Yeah. And then, you know, like the year, the year right before they went public, they had great gross margin. But like, you could see that evolution in that S1. And so to me, it's like, if you've been around software long enough, you've seen some of these patterns before. It's like, do not complain about a negative gross margin software company if you're seeing the patterns that you saw in the last phase, which is like people are implementing these things, treating these things as systems of record, whatever.

55:56Chetan Puttagunta:There's like some kind of gravity around the workflow or the data or whatever. And these things like end up becoming a core part of a business. They're not getting ripped out. the only way that business account goes to zero is if the sort of business customer goes bankrupt or goes out of business. Like otherwise they're paying for this piece of software. It becomes that essential to the business. And if you look at that kind of trend, it's like, yeah, this is happening. And I think you're going to start seeing the first set of S1s for these AI applications, 2027, 2028. And I think people are just going to be really surprised at how much these companies look like software companies.

56:37Chetan Puttagunta:It's like, yeah, they look like software companies. And then instead of paying a ton of gross margin to the cloud vendors, we're just paying a ton of gross margin to inference providers. We're either paying OpenAI, Anthropic, Google, or paying CoreWeave or Fireworks for inference tokens. That's where the cost of goods is going. And that's okay. And then companies get better at optimizing that, getting more efficient. And so it's a real wave. And I think the private markets have fully realized this opportunity. And I think this is why you're seeing like application companies are, it's like a very attractive category for venture today.

57:24Chetan Puttagunta:But I'm not sure that the public markets have quite embraced this. And I'm not sure public companies have quite embraced this.

57:33Turner Novak:Why not? Because if I'm public market CEO, I look at my stock and I trade like three times revenue or whatever. And I'm like, these fucking kids are getting like 200 times revenue. That's right. And they're so small. Maybe they're going fast, whatever. Like, why? Why do you not think they pulled the trigger on some of these acquisitions?

57:55Chetan Puttagunta:Well, I think it's human nature. I mean, imagine you're a software company that's run the company for a long time. And you're trading at three times revenue as a SaaS company. And you're like, okay, I should go buy the AI version of this thing. And you have to now pay 20 times revenue, 50 times revenue. you're at 90 % gross margin. Your AI alternative is at like, I don't know, let's say 20 % gross margin. That's like a pretty sort of like...

58:30Turner Novak:Bad deal. Yeah, like it seems pretty stupid. The way you just described those numbers. That's right. Sounds not good.

58:37Chetan Puttagunta:So like imagine being in that room where you're trying to like pitch that deal to your management team or to your board

58:44Turner Novak:or to yourself. And it's probably like 20 % of your market cap. or something like that, where it's like almost a bet the farm. That's right. It's probably close to that threshold.

58:53Chetan Puttagunta:This is, again, I would just ask people to look at the public markets of 2012 and look at where SaaS companies were trading then and compare them to their on-prem rivals. SaaS companies were trading at like 20, 25 times revenue. Like if you just look at where ServiceNow and Workday went public, like they were trading at, at the time, And you could just look at their coverage of these like valuations. People were calling them absolutely insane. That's what they were like calling them. And Salesforce was always considered an ultra expensive stock in the beginning. So was ServiceNow and so was Workday.

59:31Chetan Puttagunta:They were all considered like wildly overpriced.

59:34Turner Novak:Well, a lot of it too is just they don't have any cash flow profitability. Like if you're straight up the financial statement, just like, oh, like according to the statements, free cash flows, they're trading at 800 times free cash flow. It's overvalued. Sure.

59:48Chetan Puttagunta:All that is fair. But the interesting fact on ServiceNow actually is that they were cash flow positive from like year two or something. Something outrageous. It was like an ultra efficient business. But most good businesses are. Yeah. They've become very capital efficient. Like Salesforce was very capital efficient too. So if you just look at 2012 as a case study, look at where SaaS companies were trading and look at where the on-prem vendors were trading. And we just, you know, I just talked about how like those on-prem vendors should have bought the SaaS companies. They should have just paid 20 or 30 times.

1:00:20Chetan Puttagunta:That would have been the right business answer.

1:00:21Turner Novak:Yeah, I've heard actually from Benioff. It's like he would have sold. It was just he needed a 40 % premium and people would only offer him 30%. There you go. He just never sold. There you go. Because he never got the price he wanted.

1:00:32Chetan Puttagunta:There you go. And so there were good deals to be had. But at the same time, they look like bad deals to the on-prem companies. because it was like, I'm trading at 20 times free cash flow or two times revenue. And you want me to pay 25 times revenue and 800 times free cash flow to buy this SaaS thing? Like, it seems like... SaaS could be a fad. 100%. SaaS could be a fad. AI could be a fad. So this is where you get into the circular thinking of not doing the deal. And you just get stuck. And I think if you just play this out, these AI application companies were much cheaper to acquire in 2023 than they were in 2024, than they were in 2025, than they're going to be in 2026, than they're going to be in 2027.

1:01:23Chetan Puttagunta:And it's happening. It's like happening right in front of us. Like we're just seeing this happen. And I have to tell you from a venture investor perspective, it's a really fascinating cycle to live through because I was an investor in the first cloud cycle. and you know i would always think like why aren't these people making the move like they should buy these sas companies like this is obviously the logical thing to do and here we are again for me like sitting in a second cycle and i'm saying the same thing and it's really interesting that the sas companies have forgotten their own state that they were in like they have forgotten their own position in 2012 and 13 and 14 and what it would have taken for an incumbent to buy them.

1:02:11Chetan Puttagunta:They are now the incumbent and not sort of embracing what it takes to buy the upstart.

1:02:18Turner Novak:So if I'm an upstart, like I'm the founder of an AI company, and I just heard everything you just said, why would I sell? Because I'm going to beat the SaaS companies in three years. Yeah. You don't need bigger than that. Why would I sell to them? That's right.

1:02:29Chetan Puttagunta:I mean, if you, you know, like you mentioned, some founders, There's just no, you know, there's a number. And, you know, there's all these famous stories about like Google named a price to Yahoo. And Yahoo said, no.

1:02:45Turner Novak:Yahoo could have been like the largest company in the world. Don't Google, Facebook. Right. I bet they talk to Amazon. I'm sure.

1:02:52Chetan Puttagunta:You know, there's a story of like Facebook and Yahoo, something like Yahoo ordered a billion. And then there's some kind of counter or something, whatever.

1:03:02Turner Novak:Like there are these famous stories of like... And Zuck was like, well, what would I do if I sold? I would just start another social network. That's right. So why would I sell it? That's right.

1:03:11Chetan Puttagunta:So there are these notes in history where companies, they named the number, the incumbent, and said like, okay, just have to get here.

1:03:20Turner Novak:Yeah.

1:03:20Chetan Puttagunta:And of course, in some cases, the incumbent did get there, and that's how you have giant SaaS acquisition. Or the incumbent didn't, and then those companies went on to be independent and got gigantic. And so... I think that some founders may just have a number in mind that if the incumbent hits like, you know, 40 % premium to, you know, their current stock price or whatever, like that might be attractive. But I think like what I'm surprised by is how few people are trying. Like you would have, I would have, would have expected many of these doors to be, you know,

1:03:59Turner Novak:M &A people all over those, those companies being like,

1:04:01Chetan Puttagunta:what would it take?

1:04:03Turner Novak:Do you think part of it is that there's so much late stage capital that if I'm a founder, it's not as hard as it maybe could be or should be to fundraise? And yeah, I could take a deal, I could sell to Salesforce, but also there's 18 people that are giving me$100 million to keep going. It actually makes that easier to stick on the path.

1:04:28Chetan Puttagunta:Absolutely. The private markets have gotten way bigger today than they were in 2012. And 2013, 2014. So that makes it much better. I think the other part of it is going public has gotten harder for companies. And I think this is harder.

1:04:50Turner Novak:It's the same thing. Yeah. I mean, what's so hard about it now?

1:04:54Chetan Puttagunta:So the difference between today and even like 2007 and 2008 is like the number of things you have to do to be a public company. there's just more to do now is it really difficult no you just hire a couple more people yeah that's right hire a couple more people pay a couple more consultants and they'll do it for you and so and so what i think is going to happen and i think you already see it from the bankers is there is a growing demand from public software investors software pms because they're looking at

1:05:27Turner Novak:their universe and that's right this thing's shrinking that's right like what is up with

1:05:30Chetan Puttagunta:this company. And so you can already tell from our conversations with investment bankers, they're already telling us. The software investors are telling us to bring them the AI application companies. And so for the first time in a long time, you're starting to see investment bankers talk to companies under$100 million of run rate saying, do you guys want to start doing non-deal roadshows where you start meeting PMs of public software investors. Like people, you know, this is quite a shift. A couple of years ago, people would say like, oh, you need 500 million of ARR before you can like talk to any public investors.

1:06:07Chetan Puttagunta:Because like, if you don't get there, like nobody wants you to go public. Yeah. Very different. Whereas like, we just had a conversation with a banker who was like, who wants to organize an on-deal roadshow for one of our companies. The company's not yet at 100 million. Because it's like fundamentally really interesting technology. And there is a great deal of demand from public software investors to meet these companies. And for the first time in probably a decade, I'm hearing bankers say things like, yeah, 100 million ARR, we could probably take that public. Haven't heard that in a while. Really.

1:06:48Turner Novak:And it's probably just because, I mean, it's really the companies are growing fast. And that's all investors care about. They just want to grow as fast as possible. That's right. In a semi-healthy slash will be healthy at the end state.

1:07:01Chetan Puttagunta:That's right. I think if you just look into the public markets, how many companies in software are growing greater than 30 %? It's like zero. That's right.

1:07:10Turner Novak:It's zero right now, right? Yes. It's like you can't be growing less than like 3x to raise like a Series A in Ventureland. There you go. Like if you're like below 3x your growth, like I would say it's probably better to get the growth rate up. Like figure out how to grow faster versus spending time.

1:07:28Chetan Puttagunta:Actually, I think it's like the 3x thing is probably overdone. Like I think if you're growing like 2.5x, still pretty good. Okay, well, fair.

1:07:35Turner Novak:But there's like a lot of private companies like double from 50 to 100. That would be really attractive.

1:07:41Chetan Puttagunta:And there are a whole bunch of private companies that went 50 to 150. Yeah. And it's just... And there's public market PMs that are like, give me that. Like I want that. That's right. That's exactly what they want. And they know because, you know, public market PMs also are stepping into private markets and meeting these private markets companies on their own and saying like, wow, there's like a ton of growth in these companies. If you're sitting here as a software PM, you're looking at your universe of software companies that are available to you as a public market investor.

1:08:12Turner Novak:Yeah.

1:08:14Chetan Puttagunta:If I was sitting in that seat, I would be demanding the bankers bring me this application. Because again, if you're a software PM that invested through SaaS, and I was talking to a hedge fund manager who was at one point through SaaS, he was telling me he was long on a hundred software names. Oh, okay.

1:08:34Turner Novak:And it's probably all growing like 50 % a year.

1:08:36Chetan Puttagunta:He was like, we, you know, he went long software starting in 2010. And he just decided like, this is clearly the future. And like every time a software company came public, like he figured out a way to enter that company. and they were extremely successful, etc. And his comment to me is, when are you bringing your AI application companies to the public market? We need those in the public market because we're completely starved for growth and all the growth is being just taken by these AI native companies. They're all taking all the growth. If you just look at net new ARR added, where is it going?

1:09:17Chetan Puttagunta:Like it's really just going to all these like AI companies.

1:09:21Turner Novak:I think maybe you saw this stat. You might know what I'm talking about. Since ChatGPT launched, I believe this is about a quarter ago that I saw this stat that OpenAI and Anthropic added as much revenue as every single publicly traded software company. Did you see this stat? I buy that. And it's, I mean, this was three months ago, so it's probably even bigger now.

1:09:40Chetan Puttagunta:Right. And so, you know, I think, you know, there's press about OpenAI revenue that has gone from like$6 to$20 billion this year. I mean, that's a lot. That new$14 is a lot.

1:09:55Turner Novak:Yeah. Well, and part of the argument, though, for some of these AI companies is like, oh, the valuations are so high.

1:10:02Chetan Puttagunta:Yeah. Like, how do you square that up then if you're like, you're thinking about like, what am

1:10:08Turner Novak:I investing into? Maybe you're doing a Series A, you're doing a seed round, or you're doing the public company. But like, how do you justify the higher valuations on some of these companies?

1:10:17Chetan Puttagunta:I think it just depends on your fund size and your strategy. So we have a very specific fund strategy. We're a$500 million fund with four equal partners. You know, you know, Eric, you know, Ev, you know, Peter, you know me. I actually don't know Peter. I've never met Peter before. Oh, well.

1:10:32Turner Novak:I want him on the podcast. It'd be cool to meet him and have him on sometime.

1:10:35Chetan Puttagunta:So it's four of us and we're investing in seed and series A companies. And the primary goal of each of our investments is that we want to be the primary board member for the company. Like that's the goal of every investment. And if a company is not looking for that, then like we kind of don't have a role to play. And so, you know, the valuation, frankly, is like not the governor in our investment decisions. Like if you were to be, you know, a fly on the wall in one of our partner meetings, like the discussion really isn't about, you know, the valuation or the deal structure. We don't spend very much time on that at all.

1:11:19Chetan Puttagunta:That conversation is really about the company. And does the partner that's advocating for the company want to work with that entrepreneur? And do the rest of us want to work with that entrepreneur too and help them support and build something really meaningful? And oftentimes what you'll find in our conversations is that when one of our partners is excited about a company, you'll quickly find that the other three partners like encourage you to like lean in. I think this is like where our incentive structure really helps because we all share economics equally famously. And so if my partner is excited to work with an entrepreneur to help them build something big, I want them to go do that.

1:12:01Chetan Puttagunta:It's like, yes, please go invest. And go make me money. Yes, 100%. And so our incentives are fully aligned on that. And so when somebody gets excited, it's very clear like the firm like helps rally and sort of like helps them gain elevation, helps them finish that investment. And so to us, like that's the governor. And then the other side of that is also like by, you know, having four partners. Each of us probably has capacity to do two investments a year. And so as a fund we're doing, call it eight, nine, maybe 10 investments a year.

1:12:39Turner Novak:Someone gets really excited. That's right.

1:12:41Chetan Puttagunta:And so that means that you have on any given day, sort of like your time as the governor of like, where do you want to spend time with? Who do you want to spend time with? And so that's ultimately it. And that's our strategy. And so that means that we have decided that that means that there's a typical investment size and a typical ownership that we'd like to go for. and of course we're very flexible on that it's like there's no rules like we don't have written rules that say like

1:13:14Turner Novak:we're only going to do it if we get this much or that much classic venture models like 20 % series A yeah $15 million check or something like that

1:13:22Chetan Puttagunta:well or maybe I don't know when I started in the business it was a little bit less than that I don't know

1:13:27Turner Novak:it's just all over now yeah I mean I saw a$4 billion seed round the other day there you go I don't know like what is this anymore

1:13:35Chetan Puttagunta:but I think for us to be clear, we still have those rounds where you can write small checks and get meaningful ownership. You're just like, this is part of the incubation effort that we have. So we have EIRs, we're like helping incubate companies. And I think those opportunities still exist when you're building relationships that early. And then there's certainly like companies that are much further along that have a little bit of traction or whatever and they're commanding a different market price. And that's okay. And like for us, as long as we have a relationship with the entrepreneur and can serve on the board,

1:14:11Turner Novak:that's cool.

1:14:12Chetan Puttagunta:We're flexible on that.

1:14:14Turner Novak:So what's the most untraditional kind of venture round? Like when I'm like a venture purist, I would like scoff. What's like the one you think that would be the least characteristic?

1:14:29Chetan Puttagunta:You know what's really interesting is that if you look through the history of Benchmark, there are times when Benchmark did these non-traditional investments. So if you look at the internet era, I don't know if you know this, but Nordstrom spun out Nordstrom.com and Benchmark invested in that corporate spin-out as an example. I know you guys invest in Jamba Juice.

1:14:50Turner Novak:That was probably the craziest one. Yes, there you go.

1:14:53Chetan Puttagunta:So if you want to scoff at traditional venture, there's examples like this throughout our history. And perhaps the most famous, And I remember because I was just entering the ecosystem then was when Benchmark did the growth round at Twitter. That was like a very unusual move for Benchmark at the time.

1:15:15Turner Novak:Was it like a Series C or something?

1:15:17Chetan Puttagunta:Yeah, that's right. And it was like, may have been a Series B or a Series C. And that was like considered a late stage round at that time. And it was very unusual to see a very early stage firm like Benchmark do that round. And so I think the thing that people like this narrative of like, somehow there was only like one set of ideal deals that Benchmark has ever done for since the founding for, you know, 25 years. and all of a sudden the model has to change. It's like, no, the model has always been you have a small set of partners working with companies that they really want to work with, a set of partners that really want to buy a certain of fundamentally game-changing ideas that end up becoming really large standalone companies.

1:16:07Chetan Puttagunta:And that idea then has resulted in lots of flexibility on the other side of what does that structure look like? And the one thing that we haven't done is created a family of funds. And we haven't gotten big as a partnership. We've continued to be small.

1:16:29Turner Novak:You kind of, there was an era like early benchmark. You like went to Europe. I remember. Yeah. Like an Israel fund maybe too. That's right.

1:16:36Chetan Puttagunta:There was benchmark Europe, benchmark Israel, benchmark US. And, you know, I was in the venture business then. I wasn't at Benchmark, but yeah, Benchmark had and then decided to get small again. And we've been small since. And you think that was the right move? Absolutely. I think now other people have built incredible franchises by getting big.

1:17:02Turner Novak:Yeah, there's people that do more in management fees every year than your fund size. That's right. So multiples of our fund size in management fees.

1:17:10Chetan Puttagunta:I think it's a great business. And I think you'll eventually see venture firms that are public too. I think that's okay. I think that's great. And I think ultimately, you have to come back to the partners themselves and what kind of organization do they want to be a part of. And for us, we want to be a part of an organization where you could do deals like Manus and Sierra and Lagora and Fireworks and LinkChain all in a span of 12 months. All of those deals are completely consistent with how we want to practice the venture business. when specifically in all of those, you have a benchmark partner, partnering with a founder, doing the board, and working with the entrepreneur

1:17:54Turner Novak:to create a really big business. Did you think that is maybe like an outdated model of like that we must own 20 % in your Series A? Like that approach of like, I have this rigid portfolio construction based on the rules that have become memes over the years or whatever. Like, is that not a good approach to venture anymore?

1:18:14Chetan Puttagunta:I think everybody should approach venture however they want to approach it. I have like, everybody's on their own journey. Everybody has their own strategy.

1:18:21Turner Novak:This is like the most complex. But I mean, I've heard like Eric told me, he's just like, we're trying to find people building the best companies and just be there and own a part of it. And that's how you make money. That's right. And I think like, look,

1:18:35Chetan Puttagunta:there is a model that works really well, which is the YC model. They have a very specific structure, a specific amount of money. there's an incubator program, and there's specific ownership on the other side of that. And I think that's a fantastic model. And I think YC is like great value for founders. Like whenever founders ask me the question of like, should we do YC? I say, absolutely, yes.

1:18:56Turner Novak:A good chunk of your personal portfolio companies have done YC. That's correct. Yeah.

1:19:00Chetan Puttagunta:Like I am a huge fan of YC. I think it's like a great program. I'm a big fan of the partners there. And so I think like YC has a very specific structure. There are other incubators and other early stage funds that have very specific things that are like, we only want to do deals that are this specific tech size, this kind of ownership. And I think that's a winning strategy as long as you don't have FOMO and you like very specifically focus on, you know, I only want to do these kinds of investments. Like, okay, great. But the way we're structured is we're generalists. We're a group of generalists.

1:19:40Chetan Puttagunta:And we want to invest in really exciting companies. And look, the last investment I did was a crypto company. Well, this is FOMO.

1:19:48Turner Novak:That's right. I was like, what the hell is this? You're like enterprise. I always thought I used enterprise software. That's right. Manus, consumer AI.

1:19:58Chetan Puttagunta:Yes. And crypto. Yeah, consumer crypto. So if you look at the two investments that I made in 2025, were both consumer apps. So you're rebranding,

1:20:07Turner Novak:you're going through like a Phoenix moment of like enterprise SaaS has been burned to the ground by the public markets.

1:20:13Chetan Puttagunta:But I think like fundamentally, if you go back to, again, what is that motivated by? I just was, I just thought the entrepreneurs in both cases were extraordinary. And as a generalist, you kind of understand what they're working on. You have a deep appreciation for the product they're building and how they're approaching the problems. And honestly, I just wanted to work with both of them. I just really think at FOMO, it's Paul and Say, they're amazing. They're just extraordinary entrepreneurs that want to bring a totally brand new experience of crypto to consumers. You're well worse than crypto.

1:20:58Turner Novak:I mean, I don't know. I'm just like, it's all a scam. It's just people scamming you. So what's the different thing? Are they scamming you in a more polite way?

1:21:05Chetan Puttagunta:Absolutely not. Crypto is, to me, the way I think about crypto is that it has a huge on-ramp. And there's a big barrier to entry. I think that's part of why there is fraud and scams. It's because it's very hard to onboard onto crypto and very hard to manage crypto.

1:21:26Turner Novak:Yeah, I remember buying my first NFT. Everyone was like, oh, this is the future. It's so easy. It took me like 30 minutes to get MetaMask up. And like I bought this NFT and I was like, there's no way. That's right. There's no way this is like your plane ticket is an NFT. Like, come on. This is not.

1:21:41Chetan Puttagunta:The experience is so frictionful that... And then it's like very easy to like analogize back to my own personal experience, which is like crypto to me has been hard for me to experience as a software investor because it was such a frictionful experience to get crypto or to get an NFT or to experience anything on chain. And I met Paul and Say and they told me to download the FOMO app and try something. And I did and it was like consumer grade. And I was like, whoa. And there's a built-in social graph and all this kind of stuff with like UGC. All these kinds of elements that are like very classically software just applied to a new industry If I search FOMO in the App Store, will it come up?

1:22:28Yeah, absolutely.

1:22:29Chetan Puttagunta:And, you know, I think that it's, these are the kinds of things that, you know, I look for.

1:22:36Turner Novak:It kind of begs another question of what, what do you or what do you feel like benchmark looks for in founders that you're trying to back? Like, we've talked a lot about a bunch of different stuff. But if I were to like soundbite this, what is it that you guys are looking for?

1:22:49Chetan Puttagunta:The through line for the entrepreneurs that I've worked with is that they have some deep insight on the problem they're really passionate about. And it could be just like really going backwards from like the investments I've done. It's like, could be consumer crypto, could be consumer AI, could be legal AI, could be document processing, could be sales tax. It could be stable coins, it could be payment rails, it could be integration software, all of these things. The common line in all of them is, you know, I'm typically investing seed series A. Usually there's no product. Usually there's no revenue.

1:23:26Chetan Puttagunta:Usually there's no metrics. Like for example, Manus, I did pre-launch. Like this was a beta product. And there's some deep insight that the founder has, some deep perspective that the founder has. And intuitively, as soon as I hear that, you're like, yes, that's absolutely obvious. And that's how the world should function. and you know when I hear that I want to work with those founders and for me that's like the number one thing above all else and the great thing about being an early stage investor is you get to go with these founders on these journeys and then it's okay if it doesn't work the thing that is a mistake as an early stage investor is missing out on the companies that work not investing in companies that don't work if a company doesn't work, it's okay.

1:24:19Chetan Puttagunta:Like, it's a 1x error. If a company works, it's, you know, it can generate a lot of returns. A thousand percent IRR. Yes, that's right. And so you just want to be in companies that work. And so you don't worry about the downside. And so when you have this, like, view, as I do, that you just want to work with founders that have a deep passion for a sector or a problem and have some unique insight as to why that opportunity is now available and why they're uniquely positioned to address this problem, I want to back up.

1:24:57Turner Novak:Maybe this is an interesting, probably like last thing we can talk about. You told me that one of those interesting insights was with CodeGen, like things that you saw, some stats. It's also a company where they publicly, there's like negative gross margins. There's people like, oh, these companies are, you read some of the consensus maybe a year or two ago. It's like six months and these things are going bankrupt. So what was the thing you got excited about there? And then the margins, how did you get comfortable with that?

1:25:25Chetan Puttagunta:Look, we're investors in Cursor. I think code generation, and look, one of the mainst primary use cases was also code. I think that we're very early in how much code can be generated for the world. And two, the thing that surprised me is how much demand there is for code generation. across consumers, B2B, prosumer. There's just massive demand for code generation products. I do think that the margin question at the moment is a little too early to make a final verdict on. We don't know. And the thing that is happening that you may have seen, for example, is where Eric is on the board of a company called Terebris, which is a very specific AI chip that speeds up inference.

1:26:14Chetan Puttagunta:Once that chip sort of starts to propagate and you start to see AI technology run on that chip, as an example.

1:26:20Turner Novak:It's like an AI native chip, right? That's right. It's like built for running AI native workflows.

1:26:27Chetan Puttagunta:So inference goes way faster on a Cerebris chip, as an example. So if you speed up inference dramatically, so the thing we don't have yet is we don't have AI-specific chips beyond NVIDIA. We don't have AI specific clouds. We're starting to get that. We're starting to get AI chips. We're starting to get AI clouds like fireworks. We're starting to get AI infrastructure built. Once all of that gets built, then we're going to start to see a stabilization of like the infrastructure parts. And then only then are we going to actually understand what the gross margin characteristics of these things are going to be.

1:27:03But right now, I think it's like too early to judge

1:27:07Chetan Puttagunta:the P &Ls of these things. all you can actually just get a sense of is the consumer, prosumer, and B2B demand. And right now, we haven't hit the ceiling of that demand. Like, the more we produce coding models, the more we generate code, the more we make code generation faster or more efficient or more accurate, there just seems to be more and more pull of it. And I think, like, if you just look at the amount of revenue generated by code generation, it's gone zero to like a couple billion really fast. And you can count that at the inference layer. You could count that at the application layer, whatever you want.

1:27:48Chetan Puttagunta:Like it's probably the fastest growing software market in the world right now. So you can judge the demand side of it. And I think it's like way too early to understand what the long-term margin characteristics of this sector is going to be.

1:28:03Turner Novak:Is there anything else you want to talk about at all?

1:28:05Chetan Puttagunta:No.

1:28:07Turner Novak:I had a bunch of other stuff I know we gotta get going I probably need to eat this banana before we cut the actually do you know how to break a banana in half? have you ever seen this?

1:28:17Chetan Puttagunta:wow

1:28:19Turner Novak:that's amazing yeah it's one of my skills in life it was a lot of fun thanks for having me I'm good that's a good place to cut it right there you refusing my banana offering and thank you for listening a quick thanks again to numeral and flex for supporting this episode put your sales tax on autopilot at numeral.com and upgrade to flex elite to get a thousand dollars on your first card using code turner at the waitlist link in the description if you enjoy this conversation please like comment subscribe and share with a friend who runs a publicly traded software company that should buy an ai startup make sure to check out the back catalog of over 100 episodes with the founders of companies like robin hood mercury box and some of Chase's portfolio companies like Numeral and Reducto.

1:29:06Turner Novak:Tune in over the next few weeks for guests like Mike and Nikhil at Footwork and Scott Stevenson at Spellbook, the fastest growing AI company in Canada. If you don't want to miss any of these, subscribe to my newsletter, The Split, linked in the description to get each episode plus a transcript emailed directly to your inbox every week. Thanks again for listening. See you next time.