20VC: Sequoia's David Cahn on AI's $600BN Question | Why the Data Centre is the Most Important Asset | Servers, Steel and Power: The Core Pillars Powering the Future of AI

22:41How do you think about that? Am I wrong? No, I think you're right in its nuance, right? I think the nuance here would be in businesses with barriers to entry, you have pricing power, in businesses with low barriers to entry, you don't have pricing power. So I actually think that will be sector by sector. There will be some sectors where you're right. Things get commoditized and they just basically get bid down to 0 % gross margin. In industries with structural low -gross margins, it's very hard to raise the gross margins. So if cost goes up, you'll raise price a little bit to compensate for it, but you won't raise price that much.

23:09In industries with higher barrier to entry, for example, industries that have data modes, industries where if I put all my data on your platform then I can't really move. I think those people have pricing power. And if you had pricing power before AI, You'll have pricing power after AI. If you didn't have pricing power before AI, you probably won't have pricing power after AI. Going back to compute, I do just have to ask, we've seen more and more players talk about kind of the owning the vertical stack, talk about actually starting their own ships Apple were very open in terms of talking about how they plan to, they do now, but use and implement their own ships and move away from kind of the Nvidia monopoly.

23:44Do you think that will be an ongoing trend where we see the continuing avaticization of the stack from different players. And how should we think about that? Yes, and no. And I'll break it down into two pieces. One element, which I say yes, and one element, which I say no. The element, which I say no is, I have had this mantra for six years, and it served me well. It's like, don't bet against Jensen. I think it's really, really difficult to bet against Jensen in Nvidia. Jensen had friends joining Nvidia years ago, and I said to them, you're making a super smart decision. Jensen is the Steve Jobs of our era, and that seems increasingly true.

24:16right? Jensen's just a phenomenal CEO. I think it's really hard to bet against phenomenal CEOs. And a visionary CEO, right? Like this was not obvious when Jensen started doing this 30 years ago. I wouldn't bet against Nvidia. Now, is there going to be more verticalization? Yes. And I think that actually comes back to this like data center construction piece and running the data center. One opinion that my mind has changed on over the last few months and year. I mean, here Elon talking so much about data center construction and he's going to build his own data centers and vertical integration. Increasingly, I think that's a pretty smart approach.

24:44I think that vertical integration between the model layer and the data center matters. By the way, the other company that has vertical integration is Meta, Zuck controls his own data centers, right? He also is building the models. So I think that vertical integration piece is going to matter in the sense of, you can't have a separate team running the data center and a separate team building the model. That is just not going to work as these models get bigger and bigger. You need to deeply couple those things. I think you look at Elon, you look at Zuck, they are doing that. I think actually one of the big questions that Microsoft and OpenAI are going to face, and Amazon and Anthropical are going to face is, how do they unify those efforts?

25:19Anthropical and OpenAI are separate from the parent company. The parent company controls the data centers. That was going to be my question, which is like, do you think this is something that a startup can feasibly do, given the capex heavy nature of this and the verticalization that you spoke of there? Even though OpenAI or Anthropical can raise a billion, two billion, three billion, Microsoft throw off 330 million in three free cash flow per day. Is this a game that anyone but mag seven can play? I think the evidence of the last couple of years is in order to play in the big model game, you need a cash machine and that cash machine cannot be the AI business.

25:57Facebook has a cash machine called Instagram. Amazon has a cash machine called AWS. Microsoft has a cash machine called Azure. I think you need a cash machine in order to compete. How does Facebook being the only one not having cloud as their cash machine change how they behave do you think such another great question I think that you know the cloud guys are playing defense meta is playing offense, right? And I think that's like the easiest way to think about it the cloud guys are protecting their existing business I think meta can afford to be pretty creative and also I think meta has to play less defense because if they decide It's not worthwhile.

26:31They don't have to keep investing the cloud guys are stuck in more of a prisoner's dilemma They have to keep investing. If they do not invest, they risk losing market share in one of the greatest businesses of all time. Meta gets to sort of play for the future and Zuck is still young and he's doing a fantastic job And I could imagine Zuck playing a pretty important role in the future of AI. If he was up today, what would you be doing? I think exactly what he's doing. Creating an open source alternative. I think that is good for the world. I think that is good for Meta. I think Lama is fantastic.

27:00I think it's great for startups. Startups are gonna build on top of Lama. they're building a top of open source. The consumer killer use case hasn't emerged yet. Obviously Meta has fantastic distribution, and so if they can unlock that killer use case, they'll figure out how to do that and they'll make a lot of money off of that. The Meta approach really makes a lot of sense. Given the need to be so tight to one of these cash cow businesses, over the long term, for Anthropic, for OpenAI, for any of the smaller players, we have cohere on the show next week actually, will they be acquired and they will be a part of Amazon or of Google, is that the only pathway forward?

27:37I don't know. I mean, it does seem like a lot of what's going on in AI has to do with antitrust, right? Like Microsoft probably doesn't want to acquire open AI. Amazon probably doesn't want to acquire Anthropic. And so I think you have this setup, and this is unique, and as a student of business, I kind of love this stuff, I think it's cool. It's like this is kind of unique where you have these kind of like, they're not wholly owned, they're not controlled, they're kind of like 49 % owned, right? So you have some, is strong amount of ownership, a strong amount of incentive alignment, but separate businesses.

28:04I think that will probably sustain because it's not really possible to acquire these businesses. Now, you can acquire the smaller ones and we've seen that with inflection and adept. You can acquire some of the teams, but it's going to be much more difficult to acquire something like Anthropic. To what extent do you think about the ones that aren't investing so heavily in it? We mentioned Google, we haven't mentioned Matt and Microsoft. What about Salesforce? What about Netflix? What about the $100 billion plus, but who aren't in that core leading division? Are they in a vantage or a disadvantage?

28:36I mean, I do think the like, tier below those three big companies are scared right now. I think there's probably like, those boardroom conversations are probably tense, right? I think on the one hand, huge opportunity, huge opportunity, right? Make the product better. You already have existing distribution. Distribution is a huge advantage and a huge moat. On the one hand, you're like, this could be a huge opportunity. On the other hand, you need a lot of money to compete with those big companies and they're going to have a lot of power. I think the smaller companies are very concerned and I think that they are doing everything they can in order to compete.

29:07But again, there's a lot of game theory here in terms of the big three companies can afford to go to war with each other and do this arms race. The other guys can't or maybe they can and maybe they'll try. It's a less obvious to what is the strictly rational calculation. Zuck used this phrase this week in his quote. It's a strictly rational for the big companies to invest. It's less obvious what's strictly rational if you're Salesforce. It's less obvious what's strictly rational if you're Workday. I had Alex Wang on the show, not too long ago from scale. And he said, really there's like three things.

29:35There's compute, which we've discussed. There's algorithms, and then there's data. He said, I take the alternate view to a lot of people. I think data is the core bottleneck on model and AI progression today. So what extent do you agree with him? And when you look at compute algorithms and data, which one do you think is the core constraint? It's funny. I used to kind of agree with Alex, and I think that my mental model has actually shifted. I kind of think compute models and data have kind of converged like all the big guys know what they're doing. They're all doing the same thing. Everybody's using scale.

30:08Now I love Alex. Alex is fantastic CEO. He's doing a great job, right? Like he is kind of this arms dealer. Everybody has to buy from him. He's providing all these big model companies with data. But I think it's really hard to argue today that any of the big model companies is a data advantage. Compute, it's just a commodity that you pay for. So it's hard to argue that any of them has a compute advantage. And then models, they would all argue that they have some secret sauce. But again, if you believe the bitter lesson and you believe that scaling laws are the things that matter, then the secret sauce is not that material.

30:35And so I'll propose my own three things that I think are the three things that matter. And I would summarize it as servers, steel, and power. So I'm just much more interested in the industrial nature of AI and what is happening is this industrial revolution. And so servers, that's Nvidia, AMD, Broadcom. The chip innovation, Nvidia has an amazing gross margin. There's going to be ton of competition. The chip wars are just getting started. So there's a lot of interesting stuff happening there. Steel, we talked a little bit about this before. There's tons of construction that's going to happen. A lot of the big beneficiaries are literally construction firms and real estate firms basically.

31:07And then power, we haven't talked about as much. But I think the power element here is super interesting. We've been talking about this energy revolution for a few years. Maybe it's finally going to happen because of AI. I mean, dude, I mean, I love alliteration. One, I love threes. You know, I never worked in McKinsey, but I think I'm like a secret McKinsey consultant because I love things in threes and I love alliteration. So I wanna start on the chip pools that you mentioned. How do you expect the chip pools to play out? And when you say that we're at the start of Nvidia's unbelievable pro at Roadmap, can you just take me to that and how you see that playing out?

31:40Yeah, I think it's like one of the history of Silicon Valley is more is a lot. Chips get cheaper, chips get better. And I think that this is one of the things to look at values amazing at right is prices come down you make things better You look at the B100 the B100 is for the price the price that you're gonna get based on what they have announced publicly right the price that you're gonna Pay for more performance is amazing right so the price to performance ratio continues to improve and I don't see that stopping in videos a Fantastic company. They they've they've have a track record of innovating.

32:08They've a track record of new products You better believe Jensen's driving his team super hard on what the next chip is so I think in video is gonna and it's going to continue to surprise us to the positive. At the same time, AMD, Broadcom, these other companies, they see this huge business, right? And you know, you see a lot of startups now also wanted to compete. This is going to be a huge business and video earns a big gross margin. And when anyone sees a fat gross margin in a big market, people come chasing. To what extent do we think that import export policies imported by a potential Trump administration could impact the chip wars?

32:38Yeah, I mean, the politics of this stuff is crazy. But I think the political ramifications of all of these chips are coming from Taiwan. Obviously, everyone knows there's risk there. Does that mean that US invest in the US supply chain? I think the answer is probably yes. We're seeing that. How much of that gets on short? How do you do that? There's obviously a very heavy reliance on TSMC. I don't know how that plays out, but I think that will be an important political issue in the future. In terms of like steel, what are the core considerations that we must address with steel? If we have a shortage of steel, what happens then?

33:07If we have an oversupply of steel, what happens then? What are the core considerations that people aren't thinking about with steel that we should consider. Yeah, and I think I use steel as this catch -all for all the industrial stuff, so include generators there, batteries, right? There's all these industrial stuff, like you have to manufacture. When I talk to the big cloud companies, here's what I hear. We are calling our manufacturing partners, our factory guys, like the steel guy, the generator guy, et cetera. And we're saying to him, we have a humongous order coming. Here's our next five years.

33:35We're going to be ordering tons and tons of your product. Please increase your manufacturing capacity to support us. And what they're hearing back is, we don't believe you. We do not want to double, because your manufacturing partner, let's say you're the guy making the diesel generator, you have to build a new factory in order to produce more diesel generators. And if Microsoft stops buying your diesel generators, that factory is going to sit dormant, you've just put a lot of capital into the ground. The supply chain dynamics you are just fascinating where you need to convince your supply chain to increase their capacity.

34:03And you're telling them all these orders are coming. The supply chain guy is not like an AI person, right? The supply chain guy is like a manufacturing person who runs a factory who's really good at running factories. And so I think that how the supply chain gets managed is also really interesting. And the big tech company actually do a very good job of this. And I think it's another advantage they have that's underestimated is kind of convincing the supply chain to change their behavior is something that those guys have a lot of practice doing. How do they do it? Is it with upfront payments? I'm just trying to understand how they do that.

34:33Well, Microsoft can call you and say, I'm just going to buy all of your capacity for the next five years. Please build a new factory, right? And you're going to do that. if you're the factory guy. So I think this is another advantage that the big tech companies have. Wait, should we not be investing in the factory guys? A lot of people are trying. I'm not sure. You told me about the real estate developers in the beginning. I was like, why are we investing in AICRMs? That sounds like a bad business. I'll give away my secret here, which is that's where I'm spending time, right? I'm spending a lot of time in this supply chain area where I think there's a lot of interesting stuff in the supply chain happening.

35:05Again, it's less picked over. Okay, unpack that for me. Which parts of the supply chain, do you find most interesting and least picked over? Well, I think the real estate developers, KKR owned Cyrus one, Blackstone owns QTS, fantastic investments. Those are going to be huge money making investments for those firms. Those were great investments. There's other companies in this space that were really interesting. So I think that space will be interesting real estate developers in real estate. If you just look at real estate, it's a good business, right? And so being in that business is a good business.

35:33I think the power area is something that everyone is talking about. and I was in West Virginia two weeks ago or three weeks ago maybe, and I visited this company that's building long duration batteries that I had invested in at Cotu, and they literally built a billion -dollar factory in the last 12 months. There's a just tremendous industrial movement happening, and I think in 12 months, you'll see all these charts coming out of like, more factories are getting built than ever before and all this stuff. The industrial revolution is just getting started. Can you unpack that for me in terms of the industrial revolution just getting started?

36:03And also the power requirements. Do we have sufficient power supply to facilitate the industrial revolution, the compute requirements that we hear and we just discussed? We don't. There's an interesting phenomenon here, which is the Biden administration passed the IRA, the inflation reduction act. This was this huge stimulus bill that basically incentivized everyone to build solar and build batteries and all this stuff. I think one of the great ironies, and this is me as a capitalist speaking, right, is that the forces of capitalism, AI, will drive more energy revolution than any amount of political regulation could have.

36:37Right? And so I think that's just amazing. What, why is that? Because of the requirement first to reduce energy costs to facilitate the AI developments that we need. Exactly. And because the demand for power outstrips the amount of power we have. So for example, everybody pretty much agrees we need more generation capacity. So if you can build a new solar farm, you're going to do that because the economics makes sense. You have a buyer. There's a lot of demand on the other side. Now that takes time. But there's a lot of mature companies doing this. Next era is one of the biggest utility companies in the US.

37:05Fantastic company, $100 billion plus market cap company. Most buildings in Silicon Valley have not heard of this company. This company has been investing, by the way, for the last 10 years they've been doing this through their unregulated business. They've been investing in batteries, solar, new technologies. When I look at clean tech investments, I see them all the time around the table. And so I think that America, you know, this is a really positive on America, right? America has these great companies like Nextera that are doing a fantastic job. They're gonna keep innovating and they're gonna see that this the demand on the other side now and people will build against that So do you not think we're entering an energy crisis?

37:37Look, I think we need more energy. I think we've always needed more energy and I'm maybe a little bit more optimistic here We're 20 years ago. I've only saying solar's gonna be a big thing solar is a big thing now It's kind of happened right the thesis has played out no It's talked no talks about it happened quietly and it's sort of funny how sometimes the biggest changes happen silently There's solar is a huge portion of the US generation capacity today And so I don't know that it's going to be this like loud crisis that people anticipate. I think it's going to be a slow track for a more renewable energy, more power on the grid, and we're just going to plot our way there.

38:07There are two core elements. I really want your thoughts on. I'm so enjoying this. But the first is we mentioned earlier, Zach and his obviously open source to approach versus others, which obviously got more closed approaches. How do you think about actually societal ramifications, implications on whether we should have open or close models, Vinod and Mark Andreessen have taken two very opposing sides, saying that once is out of the box, you can't put it back. Alex Wang on the show said this is more dangerous than nuclear weapons, quite a showstopper there Alex, thank you for that title. How do you think about that and that core consideration of is this too dangerous to be open?

38:46Yeah, I think this comes like, this is sort of the EGI to be a little bit right? If you think that EGI is going to happen tomorrow, then you're very afraid and if you don't, then and you're not afraid, and that informs whether you believe in closer, serve, and so say, I, I sort of challenge the question a little bit of like, I don't really believe this, that I don't really worry too much about any of this stuff. It's like, we're probably gonna be fine. AI's probably gonna change our lives and make it better. It's gonna improve productivity. Maybe AGI is gonna happen when you and I are like 90, but I don't think AGI's happening like tomorrow.

39:15And so I feel pretty good. We have a close source options. We have open source options. Good to have both would definitely not want to live in a world where we only have one option. So I'm happy that we have both. but I'm not too worried about this stuff. And Mark and Dries has talked about this. I really like actually a lot of the stuff Mark and Dries says on this, where he says like, people don't have religion in Silicon Valley. So they like worry about AGI. And I think that it's sort of this unknown that people want to talk about. I had Ethan Mollick who's a professor of AI social implications on yesterday, and he was fascinating.

39:43He said that no VCs actually make sense today who believe in AGI and are still investing in SaaS. I love that. because if you believe in AGI, your tax accounting product for SMBs will not fucking exist if AGI is there. And so you can believe in AGI, but then only invest in AGI, or you cannot believe in it and keep investing in SaaS, but to hold too is not mutually compatible. I love that. Humans love consistency, right? So yes, that's inconsistent. I do have to ask you. We mentioned the potential dangers there. Another one that is just concerning a little bit for me is just how we think about China's development.

40:21Everyone says China is two years behind the US two years behind the US. Do you believe that? Or do you think actually we're underestimating that capabilities and why they actually are? I mean, I think that China is gonna catch up. I think that America is a fantastic country. We have a lot of advantages We have great immigration. We have a great capitalist economy a lot of freedom So there's a lot of reasons to believe that America will do well China's gonna do well also. I guess where do I stand on that? On net, I'm probably like America is gonna do great I actually think the AI revolution in America has a lot to do with the fact that America's a really good place to do business It's a really good place to move if you want to do something great.

40:56We have a great culture in Silicon Valley So I think that America has a good shot to stay ahead But don't underestimate your competitors I think you always got to assume your competitors gonna perform super well And hopefully that motivates us to do even better. I don't know that I see a scenario in which America Just completely falls behind if anything the last two years of evidence have demonstrated that America's doing pretty darn well Will we see a new piece from you in a couple of months called the $900 billion question? Or does it shrink? I mean, that genuinely. Is that what we should expect, do you think?

41:26Or do you think it will revert now with the realization that we mentioned earlier? I think it's first of all, I probably won't publish the piece because I only try to publish pieces when I have something to say. I'm not someone who, like, I don't really like to talk for the sake of talking, so it's like, I had something to say on this $600 billion dollar question. You won't be a very good VC if you only talk when you have some knowledge to say, David. that I promise you. Try and try my best. But I would say it's very possible we get to a trillion doll. I mean, it's just the math behind it, right?

41:53Just to remind folks about the math behind it is, you basically just take in videos run rate revenue, you multiply that by two to get the total cost of the data center, because about half the cost of the data center's GPUs has half as everything else. And then you multiply by two again to get the implied revenue from the company's consuming AI. And so can it get to a trillion? Absolutely. And if anything, I think what we heard this week from Zucker and Sundar is we have to keep building. We have no choice. We're stuck in this prisoner's dilemma, so I don't see an end in sight. I don't know what the catalyst is for people to stop building.

42:22One thing they are doing that I think is really interesting and that's changed in the last few months is they've shifted basically before everyone is doing these, this CapEx off their own balance sheets. So Microsoft builds their own data center, Amazon builds their own data center. They hire the construction firm. They hire all the people doing it and it comes straight off their balance sheet. It's CapEx. It's cash flow out the door. The numbers are getting pretty big now. And so I think one thing that we're going to see more of is off -balance sheet financing. What that means is somebody else builds the data center and then Microsoft agrees to lease it for 20 years.

42:53Somebody else builds the data center, Google agrees to lease it for 20 years. What that does is it changes the financial profile of what it looks like to investors before it looked like Microsoft has spent $2 billion. Now it's going to look like Microsoft committed to spend $200 million for the next 20 years. What is that? That's basically debt, right? That's a capitalized lease is a form of debt. I wonder if some of this stuff is to minimize the amount that people perceive is being spent because you can spend in this other way that is actually kind of overhang on your future business rather than cash out the door today.

43:24So do you think we will see the instruction of a new financial instrument to facilitate the movement of on -balance sheet to off -balance sheet? It's very possible. And I've spoken to a bunch of real estate investors. So, something that people don't know is a lot of the capital going to fund data centers comes from real estate developers, real estate investors. And these real estate investors, I talk to them and I say, hey, do you believe that the data center you're financing is going to get used? Is there going to be enough demand for this data center? And they say, I don't really care. For me, I'm giving Microsoft money.

43:54This is a loan to a big tech company. The deal that I'm doing is backed up by the credit of Microsoft or the credit of Amazon or the credit of Google. And I'm earning, you know, I could buy Microsoft's bonds that X % yield and I'm earning X plus 2 % yield. And so this is a good risk adjusted investment. To me, what that says is, you know, these big tech companies are basically issuing debt against their own balance sheets, but it's happening through these intermediaries so it's perceived as kind of off balance sheet financing. What are the rates on those debt prices? Average. I'm not a debt guy.

44:24The debt guys will basically tell you, hey, my unlevered return is 10%. My levered return is 15%. because the debt guys are taking their own debt. Debt is complicated, so I won't go too much into the debt stuff, but what I will say is these guys are basically earning a slightly higher yield and they think it's really good risk adjusted. And by the way, they might be right. You're basically getting Microsoft debt through this kind of financial engineering, you're getting a slightly better return on that Microsoft debt, and you can deploy a lot of capital against that because, hey, Harry, if I offered you, instead of buying treasury bonds, you can buy really safe debt in probably the biggest and safest company in the world today at a premium to what you can earn buying treasury, you might want to buy that.

44:58But how do you think we'll see that supply of capital for the financing of these facilities to change over the next few years? Because I'm a believer in, you know, Adam Smith's invisible hand and capital flow to the best opportunities, that is a great structured deal that no one would not take if you have available cash. How do you think that ecosystem changes with the realization that this is too good a deal? It's a pretty good deal. So I think prices will get bit, like the spread between the risk -free return and the sort of risk adjusted return will compress, which just means that it's going to be less of a good deal as more people do it.

45:33And I think there's effectively tons and tons of money that wants to do this deal. And so, you know, Blackstone did this Corrie deal. They were one of the first and Blackstone are generally very good at structuring these type of creative deals. And I think we'll see more of that type of deals going forward. Are you a strong believer in Adam Smith's invisible hand? I'm a student of social psychology. I find psychology to be very interesting. I actually spent a lot of time reading about psychology. I think psychology drives the economy more than people realize. I think Adam Smith just sort of deeply understood human psychology and that's what the invisible hand is about and you know I'm a big fan of Isaac Asamos Foundation right.

46:09He basically describes this it's one of the great all -time great sci -fi books and he basically says in the future there's going to be so many people and he invents this character Harry Selden and Harry Selden is a psycho historian and Harry Selden sort of says humans are so predictable. We have such clear behavior that when there's 100 billion humans, you can predict the future of history. And that's sort of the premise for this sci -fi book. And so I tie that back to Adam Smith in this sense of, I think Adam Smith is doing that on a less grand scale of saying, a human behavior is understandable.

46:36Capitalism sort of takes advantages of these components of human nature, and it's one of the greatest systems that we've been able to invent so far. I would love to take a little bit of a change of time, David. This has really been one of the best shows I've, I mean, the best show I've done on AI period. I was thinking, what I was thinking when I was doing this with you, God, I can't wait to tweet. Like, I've done Sam all, but I've done all the biggest and David's was the best. But I want to start actually in this new shift of the show. Just in terms of your investing, I was chatting to Pat before about Bluntney and the venture career that you've had so far.

47:10And he mentioned you're being 27 and then being the co -head of, you know, the venture division at Co2. And you worked with data bricks, UI pulse, Snowflake, some of the best businesses of our time. And the first thing I really thought was how did that and those companies impact on teach you about deal selection? I mean, first just to calibrate, I was the associate on those deals. So I built the models, I did the customer calls, but I was not the lead investor on those deals. What I will say, and just because you pick those companies, I'll give you a kind of a through line on those four, which is, I think the lesson from those companies is listen into what people do, not what people say, and I'll tell you why.

47:46When I called the customers on Marquetta, you called DoorDash Instacart Square. Those were kind of the big customers, and you asked them, do you guys like Marquetta? They would say, it's fantastic, but it's too expensive. We're going to rip it out. We're going to build this ourselves. That's what everyone said when you called them. Now fast forward five years later, Marquetta's a public company. None of those companies have churned. It continues to do super well. You wipe out the same thing. You call all the customers, they say, oh, it's a band -aid solution. We're just using it for now. Eventually, we're going to fully automate, again, fast -forward five, six years since that investment.

48:17Company went public, fantastic company. People continue to use it. Even snowflake and Databricks, same thing. You call customers in 2018, you ask them, what do you think about Databricks? They'd say, oh, well, Amazon has their own competitor. Google has their own competitor. Snowflake, oh, there's BigQuery, there's Redshift. They're all kind of the same. It's not that special. And then of course, fast -forward six years, these are two of the most valuable companies that came out of this cohort. So I think the lesson is you have to listen to what customers do. They continue to pay for the, especially expensive products.

48:48If people are paying for expensive products and telling you they're going to churn, you probably shouldn't listen to that. They're paying for it for a reason. And so the thing I focus on is how much value is this company delivering as opposed to our customers telling you they're going to stick with it forever because you just don't know if that's right. That's so funny. So many of the great investments have been missed because people say, ah, but they could build it themselves. And they so rarely do. Can I ask you, on those early days of co -2, what did you learn most significantly that you did not expect to learn?

49:16I think often when you're going from zero to one in a new environment, it can be some of the hardest learnings, just like the gym. The first week or month is the toughest. What were some of those learnings that you didn't expect to, but were most impactful? I mean, I was so naive when I started. I really didn't know what venture capital was. I didn't understand what the industry was. I didn't really know what the job was. The biggest thing that served me well over those years was, Because every time I meet someone, I just try to figure out like, what are they really good at and how can I learn from this?

49:43So there's one person who's really good at sourcing. Why are they really good at sourcing? What are the things they're doing to be really good at sourcing? And I would learn a bunch of that. Another person, this person's a really good leader. Why are they a good leader? Oh, it turns out people really like to follow them. People voluntarily choose to follow them. That probably means this person's a really good leader. What are the characteristics? What are the things that they do? Oh, they're really loyal. Loyalty is really important when you're a leader. Anyways, I think there's a bunch of these dimensions where a big part of the learning in the early years was drinking from the fire hose, and it was such a fantastic experience.

50:11See people who are really great at their craft, understand what their superpower is, understand what they're doing, what are the actual behaviors that lead to that superpower, and then my goal that I set for myself is, I'm probably not gonna be as 100 % as good as you if this is your superpower, but I'd like to be 80 % as good, a you at your superpower, and if I can be 80 % as good as 10 people on each of their 10 superpowers, I'll probably be pretty good. How do you think about that in the face of there's no one way to do venture. How do you think about the two opposing, everyone has their own way and trying to learn from other people?

50:44Yeah, I would, first of all, I totally agree on these kind of two opposing forces. I would almost describe one as like, there is a definition of success in this business. You're either a slugger or you are not. If you are generating billion dollar gains, you are a slugger. Doug Leoni is a slugger, Pat Grady is a slugger, and you're read as a slugger. You're either a slugging or you're not, and I think one of the delusions of this business is, oh, you can be good at this business without being a slugger. No, there is one definition of success in this business and that is generating billion dollar plus gains.

51:10On the other hand, and you can get a lot of advice and you can learn from those people and you can see what they're doing. And so, and I think, frankly, the reason I'm at Sequoia is like, sitting next to sluggish is pretty cool. You get to learn a lot from them. You see Rolof, you invest in YouTube and Instagram, right? What enabled him to do that? What enabled him to see that? Especially given my whole modus operandi is this like, let me study people and figure out what they're good at and get 80 % as good. Man, Sequoia is this like amazing place, right? Like, drinking from the fire hose, You have all these amazing people, and you get to kind of extract, okay, Pat is really disciplined.

51:38He's really good at waiting for a fat pitch. That's something to learn from Pat. Andrew is really good at connecting with founders, and he's deeply understands product. That's something to learn from Andrew. So there's an element where you take these sluggers, you kind of learn from them. But I think to your point, the other side of that is, ventures a game where you're on the field every day. No one's on the field for you. Nobody can do this job for you. You can get all the advice, you can get all the help, you can get all the learning, but at the end of the day, you gotta be on the field. you got to deliver a product to founders that they want.

52:05You have to be someone that they want to work with, and you have to develop your own style to do that. And the hardest part of this job, and that's the thing that, no, you can't outsource anybody is, push comes to shove, Monday morning, you're in that partner meeting, you have to put your neck on the line. Do I want to do this investment? And so, yeah, I like to say to people is, I don't think the hardest part of venture is figuring out what are the good companies. I think the hardest part of venture is figuring out when are you gonna put your neck on the line for this company, and all good partnerships force you to put your neck on the line.

52:33That's the whole system. That's why these partnerships work, is because they're testing your conviction in that way. And so conviction is the hard thing, and conviction is something no one else can give you. How does Sequoia force you to put your neck on the line? I agree with you totally. Look, I think the whole structure of the partnership is, we are here to support you. We are here to teach you. You're here, you're gonna learn from us. But at the end of the day, you gotta make these decisions. And at the end of the day, there's a clear definition of success, and that's being a slugger. And I think the constraint, By the way, we talk a lot about constraints at Sequoia.

53:01Companies need constraints, right? When you have too much capital, there's no constraints. Roll -Off talks all the time. I love this story. Roll -Off is always telling this story about how, at PayPal, the best moments of PayPal are when the company was running out of money. And the company just had to figure it out. And if you talk about the PayPal mafia, everyone was so great. Roll -Off says, hey, we weren't that great. We were great when we had to be great. And I think Sequoia creates the same constraint. Hey David, you get one to two investments this year. Is this one of the one to two? Are you sure about that?

53:27And that constraints. So I think the constraint is the thing that forces you to say this is a company I'm going to stand for for the rest of my life right and there's something that I really believe in to what extent is one very nervous entering the Sequoia partnership in terms of the discussion I asked this I think of both Pat and Doug Which is like it is a very challenging environment if someone used come into but you also want to enable someone to feel comfortable to share their thoughts their wisdom those experiences How do you think about how Sequoia creates the freedom for new entrance to say what they feel?

53:57I think Sequoia does a good job of saying the only thing that matters is the next investment and is equally likely to come from you as anybody else. Pat does a good job of this especially of like, this is the business model. The whole business model is we need to attract good people and then you need to make good investments and we need to set you up to do that. So, Sequoia does a good job of that. Now, at the same time, Sequoia is not a low pressure place to go work, right? You're sitting next to people who did these incredible investments, DoorDash, Instagram, Instacart, Zoom, Snowflake, right?

54:23So there's pressure, right? And I think it changes how you invest. It changes like, I think it kind of changes your brain. It rewires you. There's this great line that people at Sequoia say, which is Sequoia hires investors, breaks them down, and then rebuilds them in the Sequoia mold. I certainly feel like I've gone through that, right? Which is, are you going to build this company for the long term? Sequoia here's so much about company building. And so I think, and I think that thing that really reshapes you is not just the company building, but the bar for success is so, so, so high. Unless this company is one of the 50 most important companies in the world, you haven't done your job well.

54:58And so I think that is good pressure, right? I think that is good. A source of, hey, this is just demanding. You need to pursue excellence at a very, very high level. And I think Sukhoi does a good job of giving you the framework and tools and learnings to go do that. I did this with Pat and he gave me answers. And so I expect the same for me. Okay. Who is the best solser in Sukhoi? I think Sonia is very, very good. I would say Sonia. Sonia is really good in AI. She's super aggressive. She's out there. She's talking to founders. Sonia is phenomenal. Who is the best picker? Who's the best at selection?

55:30Pat is very, very good. Pat is just disciplined, right? I think he waits for the fat pitch. He's waiting for the right companies. I think that means his portfolio as a result is very strong. What I find astonishing is his movement earlier. He was a BC investor. And now he's moved earlier. It seems with more hobbies of the world and how he thinks about intercepting with companies, I'm just fascinated with how he's able to sustain that quality with the movement earlier. It's easy to, not easy, but to pick your pitch when you're at B or C is very different to pick it when you're at C and A. I think that comes down to adaptability and I think Pat is someone who's really adaptive.

56:04You look at the market landscape today, it's just different. And so I think the right strategy is this barbell approach where you're doing early companies and they're also doing late companies, pat investing in growth therapy this year. There's a leader stage company, there's a mature company generating cash. I think Pat is actually good at picking spots and he's picking spots because he's paying attention to the market dynamics and to have done both Harvey which is early and growth therapy which is late, that's pretty amazing. We mentioned the lessons from the amazing businesses that you worked with at COTE.

56:32When I did Pat on the show, he gave an incredible framework for how he thinks about founder assessment. I hate the question of what do you look for in founders, but my views actually changed a lot. How do you think about founder assessment frameworks and how yours has changed? Man, I think about this so much. One thing that occurred to me earlier this year as I've been thinking about this a lot was I was reading, went down the rabbit hole, I read the Elon Walter Isaacson bio, which was just fantastic. And so I thought, hey, this Walter Isaacson guy, he's a good writer. Let me just read everything else that he's read.

57:03He's written. So I read his Steve Jobs bio, I read his Einstein bio, I read his Benjamin Franklin bio. So he's written all these really great biographies. I was just thinking about, wow, these historic visionaries, these amazing figures. At the same time, obviously my day to day job is like, with a lot of founders. At the time, I was organizing this dinner. I called it the Hardo Dinner. It was for the most hardcore young founders who were like, we're going to go conquer the world. It was a great dinner. The day before the dinner, it's just these two ideas were just colliding in my mind. I was like, what do these amazing historic figures have in common with these people that I'm going to sit down with at dinner tomorrow who have the potential to become historic figures.

57:39right? And what occurred to me, I sort of came up with this framework, it is two dimensions and I'll just describe it. There's one axis is basically science and one axis is intuition and sort of two by two matrix. You have science and intuition and then you have human and technology. So science applied to technology is kind of the easiest one, which is that's just an engineer, right? You apply science and technology, you become a good engineer. You apply science to yourself to the human and I think what that becomes, that's what I call this kind of hardcore mindset. Elon obviously has sort of coined that term and sort of a hardcore person says, how do I maximize my own potential?

58:11They're thinking consciously about that. They're thinking tangibly about that. One thing they might do is work super hard because it turns out people who work hard generally do produce more than people who don't work super hard. But there's other things that you might figure out. Here's how I can maximize my efficiency, et cetera, et cetera. So I think that is sort of the science element. But the intuition element is almost more interesting and it's a thing that I've been trying to get better at and sort of try to improve on and think about. So you have intuition applied to technology. That's like Ivan at notion, right?

58:35It's like how is this supposed to look? How is this supposed to work? And you think about Einstein who is this intuitive person? Everything was a thought experiment for him. It wasn't science. It was intuition. You think of Ivan and you think of Brian Chesky at Airbnb, right? This crazy idea. We're gonna have people sleeping on everyone else's couches and running out their apartments. I mean, yes, they built great technology, but like that intuition was just so brilliant at that time. And then I think you have the final piece and I think this is one of the most underestimated pieces. is intuition applied to humans.

59:03And I think this is leadership. Leadership is, hey, I understand you. I understand what you need to understand, what motivates you. And I think that good founders, and I need all four of these dimensions. And so when I look at founders, I sort of ask myself, hey, I think if you have one of these, you can be very good. I think if you have two of these, you can be great. I think if you have three of these, you can build a billion dollar company. You need all four of these to build a $10 billion company, $100 billion company. I think that's a visionary founder, and I think one founder who I've worked with that really embodies that is Paul at SuperBees.

59:31I think he has all four of these qualities and it's so rare, it's something I look for and think about. And maybe one final point on this is, I don't think you start with all four of them, right? Like I believe I'm a big believer in growth mindset. Like you can decide I'm gonna become good at these things. And I think you can work on these things over time. Funny, you mentioned Paul at SuperBees there. I spoke to him before the show. And he mentioned continuous mornings where it was like 4 a .m. your time. I think he might have been in Singapore and you will on with Carrie from Cotu and him continuously.

1:00:01And what I actually thought before we get to like, actually how you organize time, is just like a young person's game. It's easier when you're younger to do 4am every morning and have less sleep. Do you think Ventura's a young person's game? Look, I think there's advantages to youth and those advantages to experience. And I think you have to make the most with the cards you've been dealt. And so I'm young. I need to play the best young person's game there is. I can't play the Doug Leoni game. Doug and I are not the same. Doug is way more experienced than I am, right? And so I think the value proposition that I offer to founders is quite different.

1:00:33The value proposition that I offer to founders is, I'm gonna grow with you. You're probably my age, right? Like we're the same age. So like over the next 20 years, we're gonna become great together. That's the value proposition that I have to offer to founders. Doug is gonna offer a different value proposition. And so for me, it's about delivering on what you have to offer and doing the best you can with what you have. You go found as you go market, you go product. Can you rank them one through three? Founder market product easy. I don't think it's a hard question for me. Sourcing, selecting, servicing the core pillars of venture.

1:01:03Rank them one through three on where you're great. Well, I was going to say an important selection is the most important. And then I think winning comes behind that. And sourcing probably is actually... Maybe it's tied, but I think it's probably third. I would say in terms of my strengths, I think sourcing is something that I've sort of just worked at. I've done a lot of founder meetings. I've hustled super hard. thinking the beginning of your career, you have to get phenomenal at that. I think actually winning the deal is something that was really important early in my career. It's a coil, I think winning the deal is actually slightly less important probably because you can leverage the Sequoia brand.

1:01:34Is it much easier when you have the Sequoia brand? I just think the value proposition to founders is different, right? Before the value proposition is, hey, you get to work with me, I'm gonna be great, I'm gonna work with you, we're gonna try to build this company together. Now the value proposition is, hey, I could be an idiot, okay? But like, you're gonna be able to tell engineers that you're working with Sequoia. and engineers are probably going to want to work with you. Now hopefully I'm fantastic also, but I think even if I'm not, then the Sequoia brand itself is pretty valuable. So I think it does change the game a lot in terms of winning the deal.

1:02:01I get you totally. Did your deal flow change immensely when moving to Sequoia? There's the idea that everyone just wants to, everyone will send their best company to Sequoia and you see everything, is that true? I think you would think that's true and it's not true basically. I think my deal flow basically didn't change at all. And I think what that tells you is I'm just an outbound hunter that too I am. I'm always the best founders don't want to meet with VCs. That's the reality of it. You have to convince them. I have this phrase I like to use. Like you have to earn the right to win. It's like a mantra that I had for many years, especially when I was coming up.

1:02:32I just think you have to do the work to earn the right to even spend 30 minutes with the founder. Founder's time is super valuable. And that doesn't change out to Koya. Founder's don't want to spend time with VCs for the sake of spending time with VCs. All of my sort of deal flow, if you will, is just me being out there hunting in the market. I agree. I found his own one is spent time with VCs which is why you should start a podcast because they're like, how are you? We're not meeting investors. I'm like, I agree. They're all twice. I'm just a podcaster. And then whenever it comes something else, I'm like, no, I'm an investor.

1:02:58It's amazing how you can switch hats. You mentioned kind of they didn't want to spend time with investors. What's the craziest thing you've done to win a deal, David? Look, I think you probably actually maybe can relate to this. Like in the beginning, it's super hard and nobody wants to give you the time of day. They ignore you. They don't respond to you. And so I think in the beginning, it was about, how do I just get people's attention? Once I get in front of people, then I think you can make your case, et cetera. But I think getting in front of people is really hard. And so one thing I used to do is, I went through this phase where every time I met a founder that I really liked, I would go through their Twitter, I'd figure out something they really liked, let's say some TV show.

1:03:32And then I'd go and cameo, and I would find the actress or actor that they liked really liked. And I would get that person to record a video for them, and I would send them that video. In hindsight, it's kind of ridiculous. It was kind of ridiculous thing to do. And yet, it was shockingly effective. Like, I would tell you that, I mean, I have really small strategies you can different. I came up with a bunch of these kind of creative things that I would do. Like, there was a phase that I went through for more than a year where I recorded a Loom video, one Loom video every single day. And I was just at 7 p .m., I would record a Loom video.

1:04:01That was what I needed to do. And I would find the coolest product I could find. I would record a Loom video and I'd send it to the founder. And then, actually, one founder came back to me He was like, I love this tactic so much that I told my sales team they need to do it. And I'm calling it the email loom, that's what he named it. And so yeah, you got to do what you can to get in front of people. What do you need to most improve in your venture armory of skills? I mean, look, I think I'm in inning to of my career. I think I've got a long way to go. At the end of the day, I haven't backed any company that's worth $100 billion, right?

1:04:30I'm not a slugger yet. I'd like to become a slugger. I think I'm hopefully doing the work to get there. But I don't think I'm a slugger yet. And I think I've got a long way to go to get there. I hope that I can learn that at Sequoia. I hope that I can imbibe a lot of information from people. And I'm gonna work hard every day, because every day I know every founder I meet, this could be the company that is my YouTube, my Instagram, my Airbnb, my door to action. So I take every single meeting super seriously, because I'm looking for that opportunity. You are in the office at what time? I'm in the office by 7am.

1:05:00You're an early morning riser. Pat always tells me like, I'm good in the morning. David beats me. Can you just tell me like the morning routine and how you organize yourself so efficiently to smash the date? I love the mornings I just probably like naturally just have biologically always like the mornings I wake up at 5 a .m I'm at the gym at 5 30 I bike to work every day and so I bike from the gym up through Stanford and then up Sand Hill Road and I'll tell you that's like such an inspiring experience like you bike through Stanford It's like this is the history this place is built around Stanford all those great technologies come out of here You kind of bike up Sand Hill Road, the mountains in the background.

1:05:38The sun is coming out and you just feel like, man, like, like this is gonna be awesome. There's so much history here. Sand Hill Road is so phenomenal. I'm gonna participate in this thing that's sort of been going for 50 years, hopefully we're going for many, many more years. And you get to the office and you're super fired up. And I try to meet a founder in the morning, you know, like I want to come in, fire up and meet with a great founder and talk to them about their business. And it's just wonderful. Here my Mugelfast deal. I would say the deal that is most memorable for me is the first one that I was like, you're the associate on a deal, it's a different thing.

1:06:07But like, you're the guy who kind of found the deal, you're the guy who kind of like help win it, right? That's the deal where you always remember that. For me, that's Starburst data, and I'll tell you the story. I met Justin Borgman on a customer diligence call on Databricks. That's why I met the founder. At the time, he was running a consulting shop around a technology called Presto, which is an open source technology. I just really like Justin. He's super smart. He was basically the smartest person that I'd talk to in all my diligence and SunSnow, like in Databricks. And so I flew out to Boston.

1:06:34I remember flying out to Boston in January, went to see him, talked to him about his business. At the time he was not raising capital, it was kind of a consulting firm anyways for a while. I got into him over 12 months. And then finally, he brought in the founders of the open source technology. They joined him from Facebook. He sort of turned this into kind of a venture style company. And in April of 2020, he had five term sheets. And I had just done all the work. I had sort of been around the table for long enough. I'd known him. And I was able to make it. I think a pretty easy decision. And that's just a story that I'm really proud of.

1:07:03And you know, you always remember that because someone's taking a chance on you. When you're doing your first investment, someone's taking a chance on you. How big was that first check? I was $30 million. David, I want to move into a quick fire because I could talk to you all day, but I'm going to say a short statement. You give me your immediate thoughts. Does that sound okay? Sounds great. Okay, so what do you believe that most around you disbelieve? I believe in God, most of you on Silicon Valley do not. Most memorable first found a meeting. We talk about politics, who it is, I mean, that meeting just punched me in the face.

1:07:29I grew up building databases. I love the database space. Paul was the second biggest launch on hacker news ever. And I just knew a media, I had been spending a lot of time around database. I just knew immediately, wow, this is really special. Most contrarian or unorthodox advice for founders this thing. I tell founders all the time, if you find someone who's gonna transform your business, give them 5 % of the company. Now, I say that it's an extreme statement, maybe it's 4%, maybe it's 3%, but I think we get very married to like, oh, an early engineer is worth 50 bits. and executive is worth 200 bits.

1:07:58And it's like, these are made up numbers. Like if someone is gonna double the value of business, and I strongly believe that a transferational hire can double the value of your business, pay them for it. It's gonna be worth it. What have you changed your mind on in the last 12 months? I've changed my mind a lot in the last 12 months. I changed my mind a lot. I'm having a baby in two months, so I think that is something that is big and that has changed a lot of my perspective on a lot of things. Whoa. Are you excited? Very excited. Which VC would you swap portfolios most with today? And why them?

1:08:25Mike Volpy. I think Mike Volpy is just a fantastic investor. I got to learn from him on the board of starbers that kind of watched him. When you're coming up, you see these kind of legends of industry and you get to watch them on the board. They're kind of the main point person anyways. I just think he's done a fantastic job. He's involved in companies like Click House, Starburst Data. He was one of the early investors in Confluent, Scale AI. I think Mike Volpy is just a fantastic investor. I was a fly on the wall studying him so I'm sure he didn't notice me as much, but he's just a really good investor.

1:08:52In 10 years time, which of the foundational model companies will still exist? Definitely opening eye. I mean, opening eye has a brand. It has consumer distribution. It has product market fit with Chad GBT, which is a $3 .4 billion revenue business now. So, I mean, Chad GBT will definitely be around. I think a bunch of the others will too for what it's worth, but the Chad GBT brand is just so valuable that it seems very improbable to me that it wouldn't be around. What do you know now that you wish you'd known when you joined Sequoia? It's hard. I mean, we talked about some of this. Like, you think, okay, winning is gonna be easier now because we have this great brand and I get to leverage kind of the history of this firm and yet selection is so hard because the bar just goes up a ton right the bar is like is this going to be YouTube is this going to be Instagram Is this going to be door to ash if you feel that it is like crazy?

1:09:37Obviously a good investment and I think that's part of what I've learned at Sequoia is yeah your hit rate is still not gonna be a hundred percent if you're doing things if you're if you're doing that but I think for an LP That's fantastic. Like, wouldn't you want to be an investor in a portfolio of companies, or the person doing it thought it was like incredibly obvious to do it? Final one for you, David. What question are you never asked that you should be asked more? When am I learning how to drive? I don't know how to drive. I grew up in New York City, and Rolloff has been giving me a lot of pressure on this, so I'm actually currently taking driving lessons and learning how to drive.

1:10:09I didn't know how to drive either. No way! No idea how to drive. Why was you learn? I live in London. and like I get Uber's, there's no need to drive. Man, this has been so much fun, thank you so much for doing it. Thanks Harry, this is awesome. I just love doing that show with David. I think that is one of the best shows that we've done in a long time. I think that was the best show we've ever done on AI. If you want to watch the episode in full, you can watch it on YouTube by searching for 2 .0 VC. That's 20 VC and I loved hear your thoughts there. But before we leave you today, when a promising start -up files for an IPO or a venture capital firm loses its marquee partner, being the first to know gives you an advantage and time to plan your strategic response.

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