20VC: Benchmark's Sarah Tavel on Are Foundation Models Commoditising | Why Frontier Models Will Be Closed Source | Why the Value is in the Application Layer | The Future of AI is "Selling the Work" Not the Tools

26:29And so there's kind of that upfront dilution that if you accept that, then, and believe it will be invested in a way that creates a vote for the company over time, then you're going after a tremendously big market that has a very rare moat because of the capital required to even be on the field fighting that fight. That's the only way that I can rationalize a little bit what's happening right now. Otherwise it just feels like there's us VCs we always get into this which is the FOMO capital deployment mindset which doesn't always lead to good things. I'm throwing the grenade in here. I feel that we haven't learned all lesson at all and This is where I'm like the ground.

27:09We're goldfish. We're goldfish. And so do you worry that you fall, like not you, but like, because we have to be pressient not to fall into the FOMO field and remain disciplined. It's something that Benchmore did incredibly well over the last few years, actually. You guys were one of few firms which did retain discipline. How do you think about that in this generation? What we always try to do is just remember what the ENSE game is here, which is ultimately building a company that can become an independent and enduring company. Imagine what that might look like in the future and pulling forward that future into the present to think about the dynamics of the company and or doesn't have the type of dynamics that lead to those types of outcomes.

27:53Usually what I think about is that escaping competition idea. If you find those types of companies something with a network effect as an example, you should lean in hard as a founder, as an investor in that opportunity because they're very rare and when they work they're lead to very large outcomes. That's very much of picking your battle type orientation. Like our way of thinking of things at benchmark is that each of us makes one or two new commitments a year. It is this kind of stars aligning sometimes feels like almost an unreachably high bar to getting to yes but then when we commit it is like the full partnership up committing behind that company, somebody who is only taking on one or two new investments a year doesn't have a team to whom they're delegating any part of the job.

28:41And those are the ones where we pick our battles. Otherwise, it sometimes feels like it's more a capital deployment game as opposed to really focusing on the investments that you're making and how to make those really big. Does the nature of network effects change in a world of AI? When we think about a world of selling the work and not the service or the tool, does the nature of network effects change? B2B software has very rarely had network effects. What it has had instead is more economies of scale. You could think of it that way, where you build a product for a very specific use case. You execute on the go -to -market to grow that product into the hands of a lot of users, and then you are able to add more and more features over time to that product so that you are able to charge more, that gives you the advantage that as you charge more you have, you know, a positive net revenue retention, you have a go -to -market that can afford to scale and have better and better efficiencies.

29:39That is, to me, most of what has been the B2B kind of way of building really outstanding value. And I think that's still the case for AI startups that are doing a B2B use case. You mentioned very kind of specific use cases there. You wrote about, you know, Hey Jen, D -Pel, 11 Labs. I actually spoke, I spoke to all the founders before the show. I told you I've fought too much free time. And it was actually Matthew at 11 Labs who said, I would love to hear Sarah's take on models focus on one modality versus a model doing all modalities. And how you see that playing out. I'd love to hear how you think about that.

30:16You know, Sam and the podcast that you guys did together, I think one of the things that Brad said, Sam was so good at, was almost keeping the main thing, the main thing, right? Like knowing the thing to get really right. And it's very clear that for OpenAI, that is the progression of GPT for them, from 3 to 4 to 5 and beyond. And that means that the other types of models, you know, you can imagine audio, the image, video. So those are going to progress, but they're not going to progress with the same level of focus and ambition as the core foundation model that open the eyes working on. They might progress as beneficiaries of that core work, but it doesn't have the same level of focus as somebody like Matty and his team and 11 labs that's focused very specifically on a very specific use case.

31:06When we think about kind of attaining product power, people always think that, oh, actually, with that focus you're going to be so far ahead. I worry that actually it takes incumbents less time to reach product parity with startups than we think will give credit. Do you think that's right? Or do you think actually with the with the focus that they have they do present such a head start? Well this is back to kind of that thing I said before like what percentage of value comes from the foundation model? And I think you know we could talk about Deepel. So Deepel again it's just a tremendous company.

31:38So much of what they've built is the foundation model, their own model around language. But they've also built a tremendous amount of workflow to integrate for their customers, to enable a local vocabulary list to be part of whatever workflow or product that someone's creating and making sure that it's a seamless experience. So even though it started maybe where all it was was actually deepbell .com where you're going and you're just just like Google translate, copying and pasting, copy from one language to another, they have gradually built more and more value on top of that model, so that something coming out of an open AI, they're just not going to build that same level of workflow, the same level of integration.

32:25And so there's plenty of work to be done that's beyond the model itself. You mentioned that kind of them building out their own foundation model. I'm really interested if we move from the application layer to the infrastructure layer. How do you see, like, the, I asked this of Sam, so I'm just intrigued to hear different data points. How do you see the end state of the model landscape? Do you think we'll see the commoditization of these models? You just see the tremendous amount of investment that has to happen right now in order to draw to progress these models, because at this point, it's kind of compute constrained.

32:58And so that is going to be the frontier that, you know, you just see the progression where each successive model is going to be more and more expensive to train. That suggests a world where you're going to have an oligopoly. Why does it not get, sorry, I specialize in this cheap progression? Why does it not get cheaper to trade models? I thought the whole point was we got more efficient with time, not more expensive. The belief is that yes, some of the underlying costs are going to go down, the chip shall get cheaper, we'll get better, the research is going to improve. But it's just more and more hungry for more compute.

33:30I almost think of it as a highway where you keep on adding more lanes and just more cars want to go through. I think we just have a situation where it is a race and part of that race in order to be ahead of everybody else is going to be this very expensive process of more and more specialized shifts, more and more investment in that, more investment on the power side which is actually becoming a real constraint given how power -consumptive, not just the training but the inference itself is going to be to train is going to just get more expensive. I mean it's just going to be a bigger and bigger lift each time.

34:08We do the new step function. The cost to the end customer should continue to go down and that's what we're seeing is that it is just getting more and more competitive. The price continues to go down and so we're all big beneficiaries of that right now. How do you think about the open versus closed argument? Again I just think we see so many start open go to closed. Is that the natural evolution of the environment, how do you think about that? You know, it's funny. This is one of those questions where every month it feels like people are saying something different. Okay, people say that each next step function in these foundation models is like a 10X cost increase right now to do the actual training.

34:47And what happens when you do open source? You're making that tremendous investment and then you have to believe that if you're open source seeing the product, you're going to earn the value for that open source. That's very TBD right now. And so what it feels like, if you want a model that's on the frontier, that's going to be close source. Now, as I mentioned, every month it feels different with what Meta's doing with Lama. That may actually fundamentally change the game. If Meta is willing to make that huge investment in the Anoniline training and then open source that model, in a way that may seem economically not rational in the short term, but is right for them in the long term that changes the game.

35:31But right now it feels like if you need a model that's on the frontier, you're going to be a closed source. There may be some use cases that people have where they don't need to be on the frontier, that what is open source is powerful enough and then the ability to do what they want with it, you know, makes up for any difference. What worries you most about the space, Sarah? I think what we talked about earlier, which is just competition, there are obvious opportunities and they're huge and it feels like very large companies can be built over time and at the same time it also feels like there are more companies than I've ever seen pointed at every opportunity.

36:13And so what tends to happen back to this food delivery wars discussion that we had earlier is that it ends up requiring a tremendous amount of capital because you are fighting tooth and nail for every percentage of the market share. Someone emerges victorious and it may be that there's a lot of companies that end you know it's may not be that there's not a winner take most opportunity in some of these segments but those are the ones where they create the most value for all shareholders and I do wonder how that ends up shaking out. You mentioned the competition. It's also competitive to win those deals and get in front of those founders at those rounds and beat the other 10 term sheets.

36:52Maybe more broadly outside of AI. How does benchmark win so effectively? Is that like a swarming of partners? How do you think about what it takes to win as a group and a partnership? You know, you would be best served asking the founders that question. What I think about is that we just have a fundamentally different product that we're offering. The The idea of benchmark for us to make an investment in a company and partner with that founder is that we are not delegating any part of that core work of that partnership to an internal group of consultants. When I experienced when I was at Greylock and saw, as Greylock had, when I was there, the best internal recruiting team.

37:37I remember one of my company, Saunders, I was doing a CRO search, or a head of sales search, and I was like, oh great, you know what I threw over the search to our head of talent, Jeff Markowitz. And what I realized is that then Francis the CEO is forced to play this game of telephone where he is talking to Jeff about the recruiter or some different candidates. Jeff's talking to me, I'm talking to Francis and you realize that actually that model of partnership is more about scaling the GP that it is a founder. Like in that case, I didn't have to have the weekly recruiting call. I wasn't expected.

38:18I didn't think it was my job to have the weekly recruiting call in my calendar to be in Sanford, France, on every CROS candidate that he was speaking to. And so it saved me time and let me have meetings with other companies or do whatever I need to do. But it was worse for the CEO. Can I just kind of just house? Is it not just providing a better quality product? And I don't mean that rudely, but like Jeff Markowitz is obviously a specialist in recruiting as an expert in his field. He probably provides a better quality recruiting product than you do or the night do or than any GP in the world would do.

38:52Is it not about actually just providing a better quality product? I think that it's not something that is like you think about in a vacuum. It actually is how well do you know the CEO, how well do you know the exacts on the team, How much do you care about getting the right person, the best person possible in that role, then just having the seat be filled? How much do you know through the process so that you can really help close the best candidate? All those things, they're not possible with a specialist recruiter. Even if they're the best at their job, they just have so many other clients that they're responsible for.

39:30their orientation isn't like an owner and the way that I feel like an owner of any of the companies I invest in But it is just a consultant where they want to get the job done And so it's a very very different mindset and then I think part of what we do and what I've realized is that I have done So many reps of this now that why does an executive recruiter become so good at what they do? It's because they do it a lot and that's now what I have done I have helped recruit and close so many candidates on behalf of the companies that I work with that it has become a superpower for me and it's the same thing for all of my partners.

40:09What we aspire to is to collectively be the best recruiting firm out of any other place because that is what we do day in and day out for the founders that we work with. What's your favorite winning story, Sarah? When you review the many deals that Yvonne is a team... Oh gosh, I could give two sides of the spectrum. I could talk about the companies where it is just very clear that there isn't competition, that there's such a strong connection with the founder and they feel that and they feel the strength of the relationship and they feel the commitment that it comes with our model, even though there is competition, you don't feel the competition.

40:49Then there are those cases certainly where it is that benchmark group effort. And that's part of what's unique about our model is that we are an equal partnership. What that means is, you know, if my partner Eric makes an investment and the investment's successful, I benefit and the same level as he does. And same if I make an investment and it's successful then my partner Chethan is the same beneficiary of that economic reward. And so we actually really do orient then towards the team. When one person makes investment, all of us are making investment in that company. And in the same way then, if we find a company and we all feel like we should invest in it, it can be a group effort sometimes to make that interest felt strongly with the founder and realize that kind of collective effort that will be possible for the founder moving forward.

41:43Which company story do you most remember when you think of that team effort? Well, I'll tell cases where we have brought the partnership meeting to the founder, doing a dinner with the founder as a partnership meeting. Then the group walks away and this has happened to me with one of my companies shake hands on around after that moment. When you've made an investment and it hasn't worked out, what did you not see that you wish you had done? It's a couple things. It's often the why now that we talked about before. In the same way that you believed in authenticity, sometimes you get into those ideas and you believe there's a why now that may end up being ephemeral, or not quite as acute and real.

42:29That doesn't have quite the momentum that you believe it had. And I see that that scenario play out. Somebody has said that you say I'm not going to be a founder's cheerleader. How do you think about the VC being the cheerleader and if that's not the case what you should be? Yeah, you know what I always think about is like when we invest in a company What I feel most strongly is like I am there to help you Build the best company you possibly can't build the means to that end is helping you as a CEO Grow to be the best version of yourself and if you're just coming to the board meeting being a cheerleader saying, go, go, go, not asking critical questions, not being true seeking, not thinking about how do we pull that future into the present of like, what are the things not just to hit the quarter this year, but to be able to scale with velocity four quarters from now?

43:26How do we start sending our company up for that success and pulling that future into the present? If you're not asking those questions and you're not asking, oh, I think I see one of the executives starting to have challenges scaling. How do we support her? How do we make sure that she has mentorship? And if that doesn't work, we actually find somebody new. Those are the types of questions that if you're just a cheerleader, you don't push. And each time you do push, I hope that it leads to 5 % better decision here, a 5 % faster decision there are 5 % better candidate there and those small differences end up compounding.

44:08Do you feel the quality of board membership is high? Founders are always bluntly berated behind the scenes, often VCs berated behind the scenes. Do you feel that the boards you're on are good and the board membership is good? I think this is one of those very self -fulfilling prophecies which is that for both the ventures to the VCs side and the founders side. I mean founders all the time who either had a great seat investor and see how great it can be when they have a great partner or in a past company they either had a great partner or the opposite. Those founders have the wisdom to know that having a great partner really makes a difference and when if you believe that having a great partner can make a big difference you will have that bar high and you will find somebody who will do the things that we just talked about.

44:57If you go into the process and you think they can't add value. It's a self -fulfilling prophecy. And at the same time, like, for the work that we do at Bunch Work. If we believe board members don't do any work, I mean, they don't make a difference in the outcome of the company. And let's just be clear. At both 99 % of the work is for the founders and the team that they build. But there is that small difference that does come in at really important moments and can end up compounding. And we didn't believe that, then we would change the benchmark model entirely. Because our model is built not to scale.

45:36It's built to make a small number of very focused investments, very committed relationships with the founders. And then from there, have an impact on the eventual outcome. Final one, and then I promise we'll do a quick fight, but one can't always win. In the case of where one doesn't win, why is that? And has that been a change in how you approach the deal founders as a result of not winning a deal? What I think about is there are two broad cases when we don't win. There's a couple examples that I think about where there's actually a selection bias that happens. Where what we offer is we want a partner with ambitious founders who are willing to be vulnerable, will recognize the things that they don't know and help push them to be the best version of themselves, build the best company they can build.

46:27And there were some founders. I remember one company I spoke to at some point. The CEO told me he's like, I want to partner with you, but I really think I need the platform. And that was a great selection bias decision for me. Because that that's just not our model. The other example of that selection bias is a founder who didn't want a board member at that point of time. That's fine. Like that's a great decision for that founder, and it's not the, the, the, the, this is not what we offer. There are certainly other cases where we lose. We're not, you know, the valuation just gets ahead of us. The round size gets ahead of us.

47:05Maybe a founder feels like there's not quite the belief in what they do, although I find that very rare. But by and large, there's just a selection bias. I think that happens a lot that ends up meaning the difference between these outcomes. If you break the model, what do you break the model most often on price, board members, status, what would it be? It's certainly the round. In my seven years at Benchmark, I think I've seen one example where we broke the model on board and it was for a small crypto -related company. Without question, that is our product. So it's very hard for us to break the model there.

47:43But all the time, we do play the game on the field, and if there's a partner that we want to partner with, we will figure out a way to make that work. When you've lost on price, in hindsight, has it actually turned into a good company? You know, I can't actually think of a company where we've lost on price. I can think of situations where we haven't engaged because we knew that the situation was just going to be not really part of our model. So as an example, these large multi -hundred million dollar investments in some of these new models are companies that require a lot of training. For all those cases, it's just too early to know.

48:24Final one, how do you determine when to pay up versus not to? It comes down to do you believe that this is a company that can escape competition. It's a founder who's going to navigate through all the competitive dynamics to escape competition. There are dynamics in the product that they're building, whether it's a network effect, or some strong mode, or economies of scale, that let it, again, escape competition. In those cases, someone said this to me once, that it really hit me, is like, if you like everything but the price, you pay the price. One person said to me the other day, a really good one, which was, if you're ever happy to take less, don't do the deal at all.

49:02If you are going for 15 million but the founder says I really would need you to take 12 and a half. Don't do the deal. You should not be wanting to do last ever. Do you see what I mean? Yeah, I do see that. I think of it the other way which is that if you are trying to use price to get you comfortable with the deal, you probably shouldn't do it. I remember Peter Fanton said on the show, you use prices of litmus tests for your own conviction. Yes. Do you guys do the same for reserves? How do you think about reserves? We don't think about reserves. We're very oriented towards our initial investment and in that moment we are more ownership sensitive than probably most other firms.

49:43But then after we invest we are 100 % aligned with whatever objective the founder has. And so more often than not that has meant that we invest almost nothing after our initial investment. Of course we'd love to invest more after our initial investment, but I don't believe in the idea of Promethara. I have started to use a term with some of the companies that I work with, like Irr Promethara, which is that after we invest, like what I've seen happen is that the business model of the venture firm ends up creating a lot of challenges for a founder as they raise subsequent rounds. Because they're trying to bring on a new partner, the new partner has ownership requirements in order to take a board seat.

50:27You kind of optimize for that new partner, and then you have all these other people who aren't involved with the company anymore, who are demanding their pro -rata. And the challenge with that is that it just ends up meaning more and more dilution, really, for the founders, who can't invest in subsequent rounds. I just think that that is not the right level of accountability. If people are creating work, then yes, I would hope that the founder would take the dilution for that work. But more often than that creates conflict that's unnecessary and it's just very different than our Our model which is like okay now that we've invested we are 100 % on the side of your your side of the table And let's make every round as successful for you as possible So I'm the same and I had a call with the founder recently and they were saying hey We lost our head of sales numbers are not looking good It's hard.

51:17How I and then I went to the board and there are many multi -stage funds there And it was a completely different view and I called the founder of office and I said what is going on? And they said I need their reserve suit. They've got a lot coming in. I can't tell them the real story obviously It creates this imperfect relationship of information flow. Yeah, I feel for that founder because What is the foundation of the board member to founder relationship? It's trust and if you don't feel like you have that person on your board who's one of your investors? who you have that trusted relationship with and you can be vulnerable with them and use them to navigate those types of moments that sounds extremely lonely and very difficult.

52:01But listen I want to do a quick five because I could watch you all day. So we're talking about boards there. What's the best board you sit on and why that one? That's a very unfair question to ask somebody who has multiple boards. What I think about is probably just the relationship I've had the longest because it's like this cliche that if you aren't embarrassed by the CEO that you were six months ago then you're not growing. I think the same thing as a board member. I am growing and learning how to better partner with the founders that I work with every time, every board meeting, every interaction.

52:35And so my first investment at Benchmark was this company channel. I was the first board member for the company. We led the series A, I think of 2017. And it's just been such incredible journey because it's both getting to see the founders grow like tremendously over the arc of time. But then I also have benefited so much from as the company has scaled, seeing all the new challenges that come up and helping kind of navigate and learn from from their growth. I just feel very grateful for that journey. What's the biggest miss and did you change anything on the back of it? Without question of the theorem.

53:14You weren't expecting that I could see. No, it wasn't at all. I remember I was at Greylock and the ICO had just happened, I believe, or just closed. And I was reading more about what's possible with smart contracts and it just blew my mind how the world was going to be different in the future. And I didn't know what the time horizon was, but it was just this crazy moment of realizing the world was going to be different with this new technology that kind of blocked chains and smart contracts, and then I didn't act on it. There are so many times when you just take something that's ubiquitous for granted, and you don't act on it.

53:52When you have these moments of insight where you realize this is gonna be fundamentally disruptive, you have to find a way to act on it. What's the most memorable first found in meeting you've had Sarah? Without saying who the founder was, there's one founder I remember meeting, and how it's just like, wow. I have never felt this force more strongly that this founder was going to run through whatever walls that they had to run through. They were just like so deeply and intrinsically motivated that they were going to do whatever it took to make that company successful. Did it turn into a good company?

54:30A remarkable company. What have you changed your mind on in the last 12 months? Maybe I'll go off piece here and say anti -semitism. Honestly, like a year ago, I just didn't know how real and present it was. And there's so many crosswinds happening right now. There's so many, it's such a complicated topic, but to see it manifest right now, metastasized has been really shocking and surprising to me. Going off piece with the honest one, it's such an anathema to me because it's like such a strange concept respectfully. Do you think they've always been like anti -Semites who've just been quiet? And now they have the chance to be anti -Semitic in public?

55:11Or do you think it's like actually people who won, but it's just kind of just join in? I'm sure, and look, just if you're pro -Palestine, it doesn't mean that you're anti -Semitic, but there is definitely a compilance of these two things happening, which is that there are people, and this is a lot of what people talked about during Trump's presidency, where suddenly the things that didn't feel like you could say had cover and let the kind of the vocalization of these things happen more. And of course when some people feel safe to say something that was once regarded as not the right thing to say, then it makes it impossible for more people to say it in believe it.

55:52And so there's certainly a lot of that happening right now. But then also like we're all subject to osmosis and if If a lot of things get repeated, then we start to change people's belief systems. And I think that's part of what's happening right now too. Are you worried Trump will get realized it? Yeah, I am. I am. Not somebody falls the polls very closely, but certainly what it feels like is that it's almost an inevitability. And that's a very scary thing for me because I care about our democracy. It seems to be the direction that we're going in. Panaultimate one, how is being apparent changed how you think about investing and operating today?

56:32It doesn't change at all how I think about investing. The way it changes things is just your opportunity cost. I get so much energy out of meeting with founders. I wish I could spend 10 hours a day meeting with founders, whether or not there was an investment opportunity for benchmark, but the reality for me now is that there's an opportunity cost to my time that changes when you have kids. And so while the actual partnering with founders and then the investing doesn't change that kind of marginal opportunity cost does. Final one, what's the most recent publicly announced investment and why did you say yes and get so excited?

57:09I don't remember which one is the most public but I'll say the one that I think you're going to be partnering on that isn't announced but man there are sometimes you know there are meetings where you would feel so lucky to get to partner with a founder and you just feel at a very deep level and need to be in business with this person. I feel that honestly for all the founders that I invest in I don't know how to partner with a founder unless you feel that but it's very close to me right now just given that recent investment to feel that. Listen I can't thank you enough Sarah I always love our discussions this one has been incredibly varying in terms of topics.

57:53Honestly thank you so much. No, so good to see you. Honestly Sarah is one of my favorite guests have on the show. She's always such a great guest and brings such great energy. If you want to see the full video of the episode you can check it out on YouTube by searching for 20VC, that's 20VC. But before we leave you today, we're all trying to grow our businesses here. So let's be real for a second. We all know that your website shouldn't be this static asset. It should be a dynamic part of your strategy that really drives conversions. That's Marketing 101, but here's a number for you. 54 % of leaders say web updates take too long.

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