20VC: In AI Who Wins? Startups or Incumbents? What Happens to Wealth Inequality? Why Will $10BN+ Companies Only Have 10 People | Why Defensibility in Startups is BS & Speed is Everything? Why Large Groups Worsen Decision-Making with Sarah Guo

0:00AI is the biggest value creation opportunity in our lifetimes. Like I'm quite confident that we're going to have 10 and 20 percent teams building billion dollar businesses. The only real advantage startups have is speed. And speed actually might matter more than ever when the environment seems to be moving at warp speed. This is 20 VC with me Harry Stubbings. And last time we had this guest on the show, it was an incredible seven years ago, so much has changed since then. And given everything in AI, this episode could not come at a more important time, and so I'm thrilled to welcome back Sarah Gwo, Founding Partner at Conviction Capital.

0:33$100 million dollar first fund, Purpose built to serve software 3 .0 companies. Prior to Founding Conviction, Sarah was a general partner at Greylock, where she made investments in the likes of Figma, Coda, Neva and more, but before we move into the show today, you've heard me talk about Coda. Coda is the doc that brings it all together and it helps you and your team run smoother and be more efficient. I know this because Coda is central's 20 TVC and our research. The amount of research we do for every show is insane and done by many different people on the team. They all use Coda and it allows them to work seamlessly all in one place.

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3:38So thank you so much for joining me, Sarah, after an incredible six years. Yeah, thanks for having me, Harry. You were 20, which is amazing, And the episode was why conversational will be the next big thing which is I think like a shade early It's slightly a shade early the importers of market timing has never been more pressient But the most exciting thing is you've started a new fund recently with conviction and so I want to start on this I obviously spoke to many friends and mutual friends before and many of them said that I had to start on this So why did you decide to leave Greylock first?

4:09Yeah, Greylock is like this I mean we have many mutual friends there some of my dearest It's a seven year old platform with extraordinary history and people. I played for the team for 10 years. Amazing place, super grateful for the opportunity like lots of mentors there. I love the people. I really wanted to focus on early stage investing. Zero to one is just magic and I wanted to be an entrepreneur. Again, you can't rationalize that, right? It's a great job being a GP at a big VC firm. It's crazy to leave. But I wanted to operate differently. I had a few ideas for how a small team could do venture, how you could change the founder experience, and the biggest thing was believing that AI is a breaking change.

4:43It is a great fucking job being a GP. This is what I've learned might starting a fund. You don't have to do any of the shit behind the scenes, like being a fund manager and being like a GP. A very different thing. Is there bit any thing surprising for you? Making the switch from GP at the hailed fund to being fund manager and founder? Yeah, like I have a lot more existential dread than I used to. So that's one thing. But as you said, also, a fund is a business like any other, right? Like, I run Ripling Payroll. Now, like, we have an office, like the sort of administration, and we have two sets of customers, entrepreneurs and LPs.

5:21You think about strategy for your business. You do recruiting. We were just talking about that. I did recruiting at Greylock too, but it's not a job, right? Yeah, I always used to look at GPs at big funds. And I was like, oh, why didn't you start your own? And now I have my own own. Like, I get it. I get it. Yeah. They told me that running a media company and the fund at the same time would be a good idea. They lied, but... I want to tell you that, Harry. You're the only person who's, yeah, that's fine. I have 40 ,000 hours in the week. Yeah, no, you're right, actually, that was me. Okay, so we mentioned conviction now.

5:47We mentioned kind of the AI focus. What's the thesis with conviction? And why did you decide to bat the farm on this single thesis? So AI is the biggest value creation opportunity in our lifetimes. Like, I'm quite confident that we're gonna have 10 and 20 % teams building billion dollar businesses. And if we at conviction can be central in this community, and it's not like a blip on the radar, it's decades of change and we deeply understand it and become best in the world at identifying great companies and partnering with the founders building those companies. Like I think it's an important opportunity.

6:20I think that's a very compelling stance. You said how's the style changed? It's changed because I used to like state to schedule. Now I don't. I'm really worried about wealth inequality. And when we think about like teams of 10 and 20 building these billion dollar companies, I agree with you totally. I'm just worried that we're going to see the centralization of wealth with the evolution of AI and become more and more prominent in technology and society. Do you agree and am I right to be right? I do agree with you. Maybe people don't want to say that out loud, but I would agree with you and then also say technology it drives abundance.

6:51If that's anything from agricultural revolution, industrial revolution, computing, I think we will produce more. And the question is, do we want more if it is going to begin by being distributed very unequally? My answer is yes, like you give people these technologies and rarely do they say take it away. I'm gonna stop using it. I think the productivity benefit is incredible, that's possible, and that doesn't mean like we as a society and on the policy side and in a very democratic way need to address that distribution, but I think it doesn't mean to me don't make progress. I think that worries me though is like regulatory bodies.

7:27Again, you've never seen such a big chasm between regulatory body knowledge and like the actual technology itself. This worries me that they're not in a position to actually regulate with the main knowledge. Do you share my concern? I think it is a concern. I don't think it is structurally different than other areas of technology, right? So if you have the internet, you have cybersecurity issues. And so I've been a long time cybersecurity investor. I've engaged with national security bodies on policymaking in this area, and I'm spending time in DC two weeks from now on thinking about AI risk as well.

8:04So I think the thing that is different today may be the speed of change. Like I don't think we have decades to adjust to these capabilities in society, and so I think it's in comment on anybody producing the technology enabling the technology to go partner, with policymakers and the rest of society and do that education, as you said, and we got to build a new muscle here. I think it's important. In terms of the kind of the fun thesis, I think back to when we had the iPhone come out or when Cliner did the climate change fund, I think it was with a green energy fund or whatever that fund was with you.

8:38Oh my gosh, yeah. But my point is I view this as like an enabling technology which everything will be built on top of. I have Navan founder Ariel on a night trip actually, Navan is now using everyone is like sitting on top of it. Why have a verdict -piece -centric AI fund? You're asking me to give away the kind of hidden secret of the fund, right? So here it is though. If we, uh, conviction are right in the long term, and this is the most important technology change of the decade, and we're good at selection and execution, and we invest in this outsized number of important tech companies, again, it just means that they will be the most important companies, period.

9:12And so, yes, you're right. Like, I think it's eventually just a horizontal software fund. But right now, I think it's also useful for us to be specialists. Like the AI community is actually quite limited in size. And so if we are focused on that, we can invest in the community because applied research matters in a way that has never before. I think your average venture capitalist does not spend a lot of time in computer science research. And then you do a lot of community building. Like we can be a matchmaker for team. It's a sorting hat for people who want to get into AI startups. They're strategic relationships that are very specific to AI, right?

9:45people need model access data, GPUs, design partners. And then I think there's like a new set of understanding and tribal knowledge because it's very technical and dynamic field. Like we're rethinking a lot of user experience in a way that hasn't been true in two decades. And I think founders in this field in particular, they want, I think they should want investors who know something about these strategic issues for them. And we're talking about like safety and alignment even. and I think in the near term it's more specialized. Do you think most species actually get it or is it BS? So I think there's a lot of genuine and justified enthusiasm as well as a lot of like a phomo and pretension.

10:26But broadly no, there's not a lot of deep understanding yet. This is a technical and dynamic field and the research is intersecting with a real world at a pace like I've never before encountered in more than a decade of investing. And then you could ask the question like is that a good idea? If you're choosing people and founder quality, maybe you could still do really well even against this type of investment, buying access to investments without some level of understanding sounds perilous. We've seen so many of these investors and so much of the VC cross go absolutely freaking nuts for obviously AI, I really just - We never learn.

11:01No, we never learn. But time is not over, baby. My question to you is actually knowing the space. What do you make of the current craziness within AI funding circles? Yeah, so I think the craziness in a small number of instances gets like very amplified by the media. Yes, there is enthusiasm and less sensitivity to pricing in a certain style of AI company than others in this macro But like maybe five companies have come out of the gate raising a huge amount of money That's not what most founders understand, but it's those five companies that the story gets repeatedly told But like character AI.

11:37Is that crazy or is that justified? So I just had Noam Shazir on like my podcast with a lot and it's called No Priors and Noam is brilliant and The engagement data on character is really special pricing is determined by market participants the broader response would be I think that a vanishingly small number of AI companies can spend a hundred million dollars upfront well and Constraint is the name of the game in startups where it like breeds discipline and creativity The other side of it is there are AI companies with like really extraordinary traction right now And so I think we should recognize that I've met quite a few families You say blood need to build what we want to build we need to raise much larger sums and traditionally were raised at precede or seed rounds And so we're raising 50 or 75 or even a hundred Is that true that AI companies are much more capital intensive in the early days if so what is the spending on?

12:30Can you help me understand that Sarah genuinely? Yeah, so we're meeting some of the same people that have this point of view, right? So the thing that is really expensive, I mean there are many things that can be expensive, but one of the things that is really expensive is I want to train a model from scratch that is very large and it's gonna take me low tens of people, probably 20 or 30 people, that know how to do this type of research and 10 ,000 plus GPUs and X number of months. That is very expensive. My personal point of view is there's less than 10 instances I can think of where that is going to make sense for companies and the vast majority of companies are going to figure out how to apply these models that other people have built that are offered by APIs or in the open source or fine tune them.

13:15It builds some other part of the stack and so I've honestly seen a lot of smart founders like begin with this premise, especially people who come from a research background and then think through it and adjust course dramatically on how to sequence into understanding whether or not they even need that. Because I think a much bigger question than can you train a large model? Does anybody want it? Is it going to be useful? And you could answer some of those questions up front. Can I ask, is your fun size big enough? If you have a $200 million fund and you're doing a seed in AI, for diversification levels you want 30 at seed, that's $5 million checks done with fees you're done, and that's $5 million check.

13:55And you don't have $200 check. Yeah, no, it's a hundred million dollar fund. Okay, so I have lots of very smart investor friends ask this question on the time and without arrogance, like I could have raised half a billion dollars. And if I believe constraints breed discipline and creativity for founders, like they also do for investors. And so a hundred million dollar fund size is very focusing like we do early stage, we don't do growth. We are not gonna do things that structurally don't make sense for the fund. And we're working with really extraordinary people and the first handful of messments in the fund and their seed investments.

14:33They're seed and series A and messments and we're putting a million to eight or ten million dollars to work. We're going to be more concentrated than most seed funds, but I just think the bulk of the opportunity is in companies that can be much more capital efficient. But I think the pressure to like raise bigger funds and collect larger fees and do more things is real. It's just like, doesn't matter, right? Well, that generate returns, I don't think so. You said they're well I structurally not right for the fund. What is structurally not right for the fund in your eyes? I think it is unlikely that if somebody wants to raise $100 or $200 million at a billion dollars out of the gate.

15:10It's hard for me to imagine that making an impact on the fund. So I do brand checks. It's actually impactful and important that you're in the biggest and the best names, especially as you establish the conviction brand. Do you not think there would be worth it to put in the 100K check into that round? so you could bluntly get the brand, which does resonate with community. Yeah, I think we make investments in companies that we want to be a part of the journey for, but it's a very small set of companies. And I think the real thing that drives brand in the long term is a returns, be companies that matter and see reputation with founders.

15:48And I think we can do that generally by just playing our game and being good at this. I'm willing to take that risk. We've spoken about concerns within the fundraising market. In terms of opportunities, I love to show you did with a lot on no prize. And you said that one of the most exciting opportunities is in kind of tooling where the error rate doesn't lead to catastrophic effects. In whatever that is, workflow automation, whatever we want to choose. Where are the most obvious, nice and low -hanging fruit you think in terms of use cases that you're like, yes, perfect. This is great. Yeah, so one of my favorite investments so far has been a company called Harvey .ai and the legal profession is a text -in, text -out, profession.

16:28We can do a lot of the work that a first -year legal associate does and to end with these large models, and that's very valuable. But there are so many opportunities that are very attractive. Co -generations obviously powerful. Copilot is not the end of it. We're just beginning to exploit that in democratites. Copilot is just local context autocomplete, which is incredible on its own, right? RPA, big category of software is gonna be obviously reborn. We are actively interested in finding founders to back in tooling for LLM's retrieval feedback. It's a very crowded space now, but we're excited about multimodal models for creative and marketing use cases.

17:05This is really expensive today and people are gonna get much better content. I'm sure you guys will start to use this stuff soon if you don't already. Do these co -founders when they come from today accounting, when they come from legal? Are they like steeped AI technologists or are they former lawyers? they form a accountant who is steeped in the domain knowledge. Was more important by the technical deep knowledge that or the domain knowledge of knowing accounting back to front, legal back to front? How do you think about that? Ideally, you have some combination of customer back domain knowledge and understanding of product and research.

17:36And so that is something that I think we can try to do, like help people pair up. We spend a lot of time with the research community, but I think the vast majority of companies, software is going to end up being built by run of the mill product -oriented engineers. Like special founders, but people who come from software engineering. And that's because this is going to become tooling like any other part of software. And the number of people who know how to leverage these models is growing. Right, which is great for you and me. Like we're going to see more interesting companies from people who are really customer -oriented.

18:10I think there was a stat, like only 41 % of co -creation is done by artificial intelligence. of some sort. Where do you think I'll be in five years, Sarah? I think we'll look at a different metric, so that's the like auto -complete stat of, I know what's happening next, I'm typing, and GitHubCopilot helps me finish the sentence, the function. I think like you're going to get human -doz planning, like I Harry want a system that does X, and then it's going to be more iterative. I want a website for 20bc with this set of features. No change it this way, like I think we're going to get much more into un -stuff soon.

18:44And so, like, I think we're going to have a AI system that can do these things, and you'll just communicate your preferences. Maybe more naturally, than to a more generalist model than your average engineer today. But that doesn't mean I think engineering is a profession, goes away. I think they just, like, leverage these tools much better. How do you think about the start -up versus incumbent? I love how it's round -pels, quote, which is, you know, the question is, will the incumbent or quite innovation fall start -up -acquired distribution? But it's the question of who's best placed and more challenges to each face.

19:12How do you think about that when tomorrow start up versus incumbent? Yeah, this is maybe a very discouraging answer, but I believe in intellectual honesty. Like, classically, the only real advantage startups have is speed. And speed actually might matter more than ever when the environment seems to be moving at warp speed, right? What's the quote? Some decades, nothing happens, and some years, a decade happens, right? I feel like that is happening right now. It's hard to make a large organization move at that speed. on the incumbent advantage side, much ado has been made about this idea of a data moat.

19:44But honestly, there's a lot of data out there, and entrepreneurs are incredibly creative about collecting it, and increasingly about generating it. And I don't think it's, oh, the incumbents are going to warn this one or the startups are going to win this one. When we look at the incumbent set, Microsoft are often hailed as the one who's embraced it most tactically, strategically, and efficiently with their partnership with OpenAI and the investment that. Do you agree that they're the one who's navigated the transition best first. How could you not? I think Sautya and Kevin Scott have done an amazing job championing really believing in this set of technologies, taking a bunch of bets, open AI, and otherwise.

20:18And using it as an opportunity to try to leverage themselves into other markets that really matter, like search. We'll see what happens, but I think you'd be hard pressed to say that Google or Amazon or Apple is leading the field here. Who do you think is in the worst place from their adoption stance? I think that Amazon and Apple will have to make more investments over time in these technologies. They don't have labs doing cutting -edge work when they have the skill to support them. You said I couldn't speed up execution that. I totally agree with you in terms of the importance of it. The thing that I also think is like grossly misunderstood is the importance of the pick.

20:58I see great founders work on just shit ideas. And I don't mean that disparagingly. How do you advise startup founders on choosing ideas when the world is moving as you said at warp speed faster than ever before? I get a lot of people ask me like, what ideas do you have? And I'm like, I'm happy to go on a tangent of like all the things that we think are really good markets to go after. But if you're generically cast about for ideas, you're gonna get a generic idea. And so I believe in this idea of having high resolution, customer conversations. And so if it's solving a problem for yourself or just like really going and looking for problems instead, or even open research questions that you like think are attached to an interesting market.

21:39I'll give you an example. The world is built on 3D models, from everything from entertainment to the physical world around us. It is an open research question, as to whether or not you can generate 3D models that are usable in these use cases. But it's like, oh, there's no market risk. It's highly valuable. Just can we do it? So I think there's a bunch of different ways you can look for problems that become less generic where you could come out of MP like, I understand something as a founder. I have a hunch that like, it's unlikely that every other person that wants to be an entrepreneur is gonna have.

22:07And I think getting to that level of like depth of understanding and confidence, more founders would be better served by, as you said, spending more time picking and feeling confidence in their depth of understanding before they like start going down the path preemptively. But it's uncomfortable. It's very scary to be in this exploratory phase. The real trigger for Ford Progress is actual contact with customer, right? Not at all. Like, oh, I have this high level idea. Is that interesting? That's very different from having a conversation. Like, do you have this problem? How do you rank this problem?

22:38This is my proposal. Can we follow up next week? And they're going to be like, I have shit to do next week. This is actually not that important to me. I was just being nice to you, Harry. And you need that resolution of feedback to have confidence. My question to you is like, we all say it's all about the founder. It's all about the founder. Sarah Honecy, I have turned down companies before because there is an amazing founder, but it's in Edtech, which just how low high water the churn is a complete bitch. And Juelinggo is the leader, but it's still not a hugely valuable company. Or whatever, you're selling to the NHS in the UK, which is a horrible market.

23:11For you, is it about founder or is it market? Or like, I'm asking the hard one there. Yeah, I'm a founder first investor and I think you live. You live as a really horrible market. One of the great VC firms has this phrase, actually an individual obviously, but it's a great founder meets bad market market wins. And I think that's a very common point of view. The slight nuance I put on it is, is there anything they could navigate to and do they understand something that I don't that makes the market better? Because these things are not static. They have their structural problems. If distribution is really hard and it's a slow moving industry and it's got low margins, that has customers hard to sell to.