20VC: Perplexity's Aravind Srinivas on Will Foundation Models Commoditise, Diminishing Returns in Model Performance, OpenAI vs Anthropic: Who Wins & Why the Next Breakthrough in Model Performance will be in Reasoning

26:01And the thing is not just the output. The thing is also the machine that gave you that output. When you say models are getting commoditized to open air and probably going out that valuable, I disagree because these are the same guys who will produce the next model. Are those guys getting commoditized? Like the talent? No. In fact, it's getting the opposite of commodity. Like they're all being paid a lot of money to stay in these companies. And so the knowledge only stays with them because people don't publish anymore. There was even a joke I recently got a hangout with one of a very great researcher even made a joke that the best research is the one That's not being published today and like so there's nothing to read on archive anymore So even the guys that stand for to wrote all these reasoning papers Yeah, now like Musk paid them a lot of money to work for him So he's not gonna publish anymore.

26:47That's what's happening. It's the commodity is not the model the commodities and the people who produce a models and that's not a commodity yet. So that's why I feel like these companies are valued a lot and they have so much leverage that they won't get acquired. Like if these people don't want to go work at a big company and the big company needs the output to keep doing their business, like Microsoft needs GPDs to sell and make Azure the number one cloud AWS needs cloud to sell to make continue to retain the lead in the cloud market. So they have no need or like desperation to get acquired.

27:20opening an anthropic, I don't think are gonna get acquired. Now, the flip side is that models, they don't produce any breakthrough. Scientifically, it's not possible to keep cramming one more token set this in, keep seeing the juice. That's when what you said is like, it happened. If like, say, after even one year, opening a doesn't have a better model, yeah, then the leverage goes away because it's over this, you've got to actually produce a new thing, and the people are unable to produce it, so their value goes down. And we have to play it out. I think both of these things could be true. I think these guys are still produced breakthroughs.

27:55So that's why I have a different prediction. But time will tell us honestly who's right. We mentioned kind of access to capital that, obviously, opening eye slightly more than anthropic. The thing that struck me was when I heard that, you know, Mr. Olesney funding round in terms of size was about 30 hours of Microsoft's free cash flow. In Microsoft's $330 million in free cash flow per day. in a world where that is the case. Not cynically, but just genuinely. How does anyone compete? Like, you know, your room would be raising and it's room you don't need to comment at all. Like the amount that you raise relatively, it's just insignificant compared to Microsoft's free cash flow.

28:34How does one compete in that world? That's why you got to build a business. First of all, let's separate the two things. Why, if Microsoft is generating the art much cash flow, why are they not able to poach all the open AI scientists is a mis -raw scientists to come work for Microsoft. Like they could take that money and ask one of those people to, like ask like 10 of those people to come work here and I'll pay you a lot of money. No longer need to work at OpenAI. It's just directly build the AI is here. Whatever GPUs I'm giving for OpenAI, I'll give it to you directly. It's not happening, right?

29:05For the reason, people want to work with other best people. So it's not enough to get one person, you have to get the whole thing. That's why there were all jokes, you know, when the whole board drama was happening that Satya acquired OpenAI at a small price because he got the whole team out. I think that's the difficulty here. It's cash flow doesn't change the dependence issue. And if they can get these models from people other than these two companies, yes, that changes the equation a lot. They can just get it from open source and sell the same models and make a lot, same amount of money with less spend.

29:41Then that is bad news for the foundation models. As for like what is the way out of your I think like you got to build a business yourself It's fundamentally every company that raises capital has to eventually build a business or Hope that like their algorithmic promise keeps staying forever I would bet on like those who are serious about building a business like opening a business for what it's worth I think they they have like whatever two billion in revenue annually Which is like higher than snowflake or at least like as good as snowflake In not as capital efficient as Snowflake, but in the same league in terms of recurring revenue and growing faster.

30:17So that shows you that, like, you know, if you are serious about not just training these models, but also like getting it to the market through products and making revenue out of it, there is a potential for you to, like, be independent and self -sustaining. Are you focused on building a business today? Yeah. We're going to move away from the 20 pounds per user. It's exactly what you are, 20 pounds per month. And I don't think that business is actually that good. it's not high margins enough. It's okay. If you can get to like a YouTube level thing, sure Netflix, YouTube user base, 50 to 100 million people paying for you, definitely that's a great business.

30:52I don't think we are at a point where these AI's are so fundamental to people's lives that like 100 million people are subscribing to it. If they can get there, if you can build a product that's not just AI but has a lot more things to it and people pay a lot of the monthly fee for it and the retention is like close to 100%. Yes, that's a phenomenal business. And I think we will try to do that too. But all these great subscription businesses are also doing ads for a reason. Margins, right? Whatever we criticize Google for, the greatest business model, like in the last 50 years is that click -based advertising.

31:28It's just insanely good business model. 80 % margins. What was the internal discussion with you and the team when you were talking about adding and advertising and as the monetization engine. Just take me inside that conversation. How did it go and how did it net out? You know this is whole Larry and Sergey beach rank paper that say I said like advertising is fundamentally incompatible with like serving good resource to user in a search engine. I mean they truly believed that and like have read books that said like they push back on introducing ads as much as possible until they gave up your investor pressure.

32:03We were like, look, let's be practical. This is the most highest margin business model ever invented. But let's do it in a way where we don't have to be as high margins as Google. You don't have to aim for that 80 % margin, like as long as you can get a reasonably good high margin business without failing on your duties to user, be happy, like don't be greedy. What is the way to do ads without corrupting the answer As in you make sure that the answer is not like influenced by the ads and if you can ensure that I think it's a great I think it's a great idea to explore. That's why we have other other surface areas to add to like even the discover Feature and complexity which has like you know a bunch of threads interesting threads every single data like read That's just gonna be like an endless scroll at some point Instagram does ads in that format to take to talk this ads in the format So add this a great business model and when it's relevant, it's amazing.

33:00Like I've literally not met one single person who came and told me Instagram and suck. It's actually pretty good. It's all about cracking the relevance code. Like if you crack the personalization and relevance code, add this like pretty amazing. Do you think you've cracked the relevance code? No, not yet. If you're cracked it, I think we should be worth way more. It's like a chicken and egg problem. It can only be cracked when you have a lot of users. So advertising is one of those funny things where there is no way it can work well when you don't have a lot of users. And then when you have a lot of users, it can work really well if you get all the details right.

33:32I was talking to Mark in recent ones and he told me how like in advertising it's like three to years, but like the top tier is like Google. And then like one and a half, one is Google, one and a half is meta because even between Google and meta, Google benefits from every other advertising other people do because at the end once you discover the brand, you go to Google and click on the link they have. It's amazing like how they benefit from everyone else's hard work all the time. Then there is like companies like Twitter and like Reddit and Snap and he said the gap between these two is so high.

34:03This is like almost climbing the peak of the mountain and this is just like somewhere in the bottom. That is the extent to which ads have been dominated by like Google and meta at this point today. My point is that if we can get the fundamental mistake that Google made right in our journey very early on where we are overly greedy on one source of revenue and are diversified enough through subscriptions, advertisements, APIs, enterprise. I think we have a chance to build something that achieves the alignment between shareholders and users a lot more. Jeff Bezos has scored red that asymptotically, the shareholder and the user should be aligned.

34:42If not, then you don't have a customer -focused business. This is where Google got it wrong, because asymptotically, they couldn't achieve that alignment between the user that is you using Google and the shareholder. Wall Street allows it when Google puts more ads. You hate it. You mentioned OpenAI eyes, two billion in revenue. A lot of that is the enterprise, and they built the enterprise incredibly well. You kindly mentioned my show with Brad where we actually kind of touched on it. How do you think about when's the right time to build our Pupplicities Enterprise Division? The number one insight that motivated us to build this was, what is the most used enterprise tool today?

35:16Google. You search every single day at work. All the data is something internal to your company as in the specific queries, but nobody cares because you need it You cannot live without it. You pay for it through your time and you pay for a three -year data This thing changes in the AI native search world where they're always worried about data leaking to AI They don't care if data leaked to a traditional search engine But if the search engine now has a lot of AI and they're worried so we said okay if you want to use for flexibility at work And your employer doesn't let you use it We'll solve that problem for you.

35:45You'll offer an enterprise probe with compliance and security and data governance and literally offer you the same product with all these security features. And that became our enterprise probe. Now, that's just the start. You need features too that are more catered to the enterprise than just the consumer. And that's what we will build. And we want to build in a pretty differentiated way, rethink what even internal search means. Like not just compute pipes to every single enterprise tool like Slack or Notion, But really think about like like what what is like the ranking problem? Why is it hard for the enterprise compared to consumer and like if we can be like one UI Where all the proprietary data external data internal data all the different models open source close source Live in like one single platform.

36:27You know, you can take your output convert good readable pages Organize it by book like as a knowledge base indexed yourself That can be a good enterprise offering. I think we'll work on that I'm not saying we'll succeed at it, but we'll try to do something. With total respect, are you nervous about building an enterprise product? When you look at the GTMs, it is a very different motion. Enterprise is a big beast to get your head around. It's a challenge. You said that about the scale of OpenAI sales team. How do you think about getting your head around the GTM building exercise of an enterprise division?

37:01Did people buy complexity enterprise and OpenAI enterprise? Or either all? My sense is that like AI is still so early today that nobody's locked in a loyal to any any particular An appress to in AI and none of them even have a lock -in effect to like make your data live on like one single To I'm not even talking about things like why is it hard to migrate from snowflake to data bricks because of the sequel format It's so different and once you wrote all the sequel varies in one format so hard to change It's not even things like that in the eye like your custom prompts that you wrote for chat you can be taken over easily to Proplexity.

37:39It's very easy. I think enterprises are still willing to tinker and experiment and try different tools That said if there is no differentiation they will win in the beginning the one with the bigger brand and Bigger team as an advantage, but is it game over? No, it's just game begins today. That's how I see it I think like this is exactly the whole wrapper thing and I if the value you add is like a very little on top of the model or if the model is the one that's adding most of the value and all the stuff you built around it don't matter Yes, but if you build enough value around the model that is very difficult to do without coordinating a bunch of other Hard to achieve engineering feeds that are not just LLM spaced or like how a lot of human element involved in it It is difficult to see a world where like like that is not valuable and people don't want that you know the specific search thing Why is it that like Google AI overviews was bad.

38:31They have the worst grades index, they have the worst best models too, but it wasn't good enough. Or why is it that people still think chantivity browsing is not as good as perplexity, despite them making so many updates over the last one year? Why is perplexity browsing better than chant -gbc? I think it's just a lot of small details. I'm a big believer in those who can orchestrate models and data sources and build great UX and and keep innovating here all the time. We'll survive this whole wrapper argument. I think it's just like gonna be difficult until you build a business where everyone's always afraid you're gonna die.

39:10But as you are accumulating the users and as you are figuring out the business, it feels to me more like the biggest beneficiaries of the commoditization of foundation models or the application layer companies. Why is that? Yeah. If models could commoditize, then the price of the models goes down. And then those would directly reach the user using those models harnessing the power of those models, but packaging it into like great product experience and utility value directly own the relationship with the customers, the users have a lot more advantage because they are able to like take something that's a commodity and sell it at a premium, which is a great business.

39:46If models get commodity as I'm happy, if models don't get commodity as I still want to figure out a way to benefit from that. That's why this is a great difficult company to build. It's not something where you just hire an SVP of product from Twitter or meta Ask them to figure out product for you. It's not easy. They don't have the mental models of like what happens When the next AI model is so much better. How do we think the whole product strategy? Similarly, it's not something where you hire a great AI person and ask them to like build product because they're always gonna Think the models and most important thing and keep trying to do everything through the model You need the right sweet spot of design and product and AI and search all together and that assembly is not easy And that's why we are able to do things as a rapper that other people are not able to do have you been surprised by the fundraising process Fundraising processes are brutal.

40:39I think most people think like you just go to like there's always these memes about like if it's an AI people are just like willing to write your determinate without even doing any diligence. Well, like, welcome, like, why don't you try to raise it's pretty difficult actually. Everyone's asking all the questions that people on Twitter roast the rappers with. What happens with opening at us is what happens with Google does this? What, what, what, you know, why would they not stop giving you models? Like, how will you build your own models? Like, how are you going to have a build a search index?

41:08That's like really good. You know, what, how do you compete on the enterprise sales? All these are questions that everybody already asked and like, and you don't have a good model the future yet. You have to give them good arguments, but at the end of the day, it's all like arguments, nothing is there. And one thing that we do have in our favor is like a good track report of execution. We've been around for like less than two years and amount of things you ship. This quite a lot compared to the team size and funding we have of the cash rates. How much goes to compute? Most of it, like 50 % like 75 % just first of all, of money.

41:44Most of cash we raise has already gone away to compute. No, whatever money we spent, majority of it has gone to compute. And the compute is either us buying GPUs and serving models or post training models or money we pay for APIs like Anthropical Open AI. That's fine. As long as that's why it's very advantageous to us to not train our own foundation models. Because if we were doing that to most of the funding would have run out because the way it works is you have to pay three years in advance to get a big cluster. Like you have to commit to that. It's not like all the money goes away immediately, but you have to commit to three year to get like thousands of GPUs at once if you want to compete in that game.

42:24On the other hand, we're not doing that and we benefit from any commoditization of the models. We have all the money to go and get users and getting users not simply through like marketing but actually more in the Amazon Prime sort of way. giving a lot of great features at like amazing prices, getting to retain you through superior product execution and then like you know buildings of like a sufficiently large user base and brand loyalty. That is the model that we're going for in such a world like advertising can be pretty powerful at that scale. Every business has a core monetization engine. They have ancillaries but there tends to be one which is dominant.

43:01When you look at you know a plasticity in five years time what is your dominant engine is it consumer misubscription? Is it advertising? Is it enterprise? I would predict it'll be advertising. If we crack it, yes, it'll be advertising. If we don't crack it, if we are not, if we don't, if we haven't grown to that level, in use a basin or if we grew and didn't figure out how to advertise really well, it'll be the other two. Either way, we can be profitable. I think with advertising, we can be really, really profitable. And then you can ask Hey, why do you care about profits? Like Sam Alman doesn't care.

43:33But he doesn't care because he's not interested in actually just focusing on product as a business like he's trying to build AGI. And like he already told publicly in an interview that even if we spend $50 billion on AGI, it doesn't matter. So that's a different company. That's why like I'm saying, we're not, we shouldn't be seen as an opening I compared it at all. We're not in AGI lab. You can say a perplexity and charge EPT are products in the similar space and there's like some competition for mind -sharing users. But even that will like be pretty clear. And like two years from now, you're not gonna keep asking How is for black city different from chat to be deep today?

44:05You are but two years from now I don't think so if that's still the case one of us is just copying the other What do you think is the best question you are never asked? I think someone asked me like why are you doing this? This is our question where you don't actually know yourself. I think a lot of people give these Made -up answers like oh, I had an existential crisis. I needed to save humanity reality is like you just look up to some people you want to be like them and you try to carve your career path according to what they have done but then you end up like figuring out there are things that you really like and you shape it to the style you want and at least that's how it's been for me I have been a big fan of Larry Page and I always wanted to do some things on that scale of ambition that was not the reason we did search engine though like we started with something else completely.

44:54That's a question that I actually don't have their answer to but I really liked the question because it's a question worth asking yourself constantly like why are you even working on this? Steve Jobs has this thing right? Like if you if you internalize death, if you're normalized death and every day morning you stood in front of the mirror and asked if today was my last day would I still be doing this? And if the answer to that question is yes go and give you a best a day. If the answer to that question is consistently no on a you know a regular basis you really have to rethink your life priorities.

45:25And for me, like, proglesis, yes, like, hell, yeah, like, even though it's painful, takes a toll on mind and body, I think it's worth it. You're still looking incredibly young, so don't mind. It hasn't aged you, Arvin. So, all good there. Thank you. I'm hiding my gray hair very clearly. Listen, I do want to do a quick fire on. So I say a short statement, you give me your immediate thoughts. And I'd love to start on, what if you changed your mind on most in the last 12 months? Long term view on people, seen some people like not immediately hit the ground running, but give them sufficient time, they are able to like, truly transform themselves.

46:01It's something that I didn't have the right attitude towards in the beginning where I always thought like those who hit the ground running immediately are the best, but you know different people have different styles of showing their true dance. What's the biggest misconception in AI today, do you think? short -term thinking. Like, anytime somebody comes up with an update, everyone's like, the other company is done. This is over. The usual Twitter mob, but I would say the biggest misconception among even the more bell -in -fom people is that because majority of the people in the world are not using chatbots, they just think this is a bubble.

46:36They are going to get really surprised that it's not a bubble, it's not over -hyped, it's actually underhyped. These things when taking in the right workflows and form factors that you're already familiar with, will have a lot of impact. Chat UI is a new UI. We're not used to using it. We're all used to using WhatsApp and Signal and all that, but that's different. It's not exactly a chat. It's more like a texting service. On the other hand, word, docs, Gmail, Google search. I'm not even talking about the specific products, but more like the form factors or usage, the UI is, you're very familiar with it.

47:08And when the AI is presented to you in that sort of a format where it feels so obvious and natural as a workflow, it'll have a tremendous amount of impact and it's not really happened yet. Have you seen WhatsApp's integration? It's not the right way to do it. Why? I'm not going to WhatsApp to search for anything. I'm going to WhatsApp to text people or reply to, my WhatsApp most of the times is just having like 20, 30 notifications and by the time I'm done with them, I just want to get away from the app. I'm not going there. I'm not pressing on WhatsApp icon to like search for something. Same thing with Instagram, I'm just going there for pretty pictures.

47:42I'm not going there for searching about like who's one the NBA. It's just the user intent behind opening the app matters a lot This is the same reason why they failed multiple times at doing stories and reels Story started off as a way to copy snapchat as a separate app first that didn't work Then they tried so many different variants What really ended up working is the top bubbles and that only works because you you're starting with the existing user flow So you're already going there to check out other people. So you have to really think about like not just like why this feature is added, but what is the existing user intent in your app?

48:18And how can you make sure the new feature you're adding ties into the existing intent? That's very important. What's your vision for the future of browsers? I think you can reimagine the browser when agents start working. There's a reason why we never did a browser. I don't think browsers gonna be disrupted because you get answers instead of links People still want to browse and get to a new website get to a specific website Enter details fill up forms all those kind of things that's not really getting disrupted with the traditional chat UI It's just because you can type in like on perplexity on a search bar.

48:53Let's say that integration is done I don't think you will allow the browser more or something. It's gonna be more productive But you need the traditional browser functionality a lot What will change though is you go to a browser, you just say start the podcast at Arvind and already knows exactly, Riverside, it has to go like, fill up your logins. After that, it's just over. That would be amazing. That would change everything. Like, buy me this thing on Amazon. Like, it's sort of like completely, then you can go a step further and say, like, what is the future of the OS? Like, what's the future of Mac?

49:27What's the future of Windows? So browser is just an OS too right? What do you think is the future of OS then? I mean something like the horror movie can't work. Like, you know, not talking about the voice, but the OS itself being an AI. Completely AI, I need a OS like, you know, start organizing a traditional way. And you just talk to it and it just work for you. That's amazing and vision to have. And that's the sort of thing that doesn't work today. GPT -4 cannot do it yet. What is the hardest element of your old stay that people don't think about? that people don't consider. Dealing with contradictions all the time.

50:02I believe the brain is not very good at dealing with contradictions. It actually tires us out when we can arrive at a convergence point on something. And startup CEOs all about contradictions. Should you take a risk or should you like double down on what you have? Should you move faster or should you set up the company in a way that it can scale? Is it time to like try out this feature just because it's not something your competitors would do or continue doing what you're doing well, but your competitors are doing the same thing. You have to constantly deal with these contradictions in so many different dimensions.

50:36That's tiring. Penultimate one. If we were to write ENO, we write pre -mortems as investors. A reason why a company doesn't work when we write an investment. If you were to write a pre -mortem on a plasticity today, what is the reason why you don't achieve your goals? Access to compute, Google innovating and killing you. What is that reason? Didn't execute well. Comparison killed startup startup skill themselves. It's not that Google drive a kill draw box. People say that as an example, but there was like a great enterprise business to build a draw box that they didn't move really fast and compared to like other companies like box.

51:12Comparison are to start a startup skill themselves. So if there was a pre -mortem to be written about us, it's like CEO not making being decisive execution of the company not being good. lack of focus in efficient use of capital. Larger comes to whatever decisions have made, correctness of them, the speed of them, and execution of them, and whether we are focused or not. If these things are not true on a consistent basis, yeah I think we would die and that would be the pre -mortem. Final one for you. It's 2034. Why would you most like the complexity to be then? If we do a show then, where is the business then?

51:47It's a good question. I think I would just wanted to be the assistant for facts and knowledge you just can only without. You can ask me with ten years later do people even want facts? You know there's a thing where you have to always ask this question like what is going to be true even ten years so now? And if you work on that you're working on the right thing. I feel like even even in a world with a lot of AI agency and less of human agency people would still want to know what's true and what's not true. So we are working on that. So if we are the go to assistant for facts and accurate information and knowledge, I think we'll be fine even Daniels will know.

52:21Arvind listen, I've loved doing this. Thank you so much for putting up with my my straying questions, but you've been a fantastic guest and I so appreciate the time. Thank you Harry, it was great. I have to say I do just feel so lucky to do what I do. That was such a fantastic conversation. If you want to watch the full episode you can watch it on YouTube of course by searching for 20VC. that's 2 -0 VC, I always love to hear thoughts and feedback there. But before we leave you today, I want to talk about Koolie, the global law firm built around startups and venture capital. Since forming the first venture fund in Silicon Valley, Koolie has formed more venture capital funds than any other law firm in the world, with 60 plus years working with VCs.

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