20VC: The OpenAI Memo: Why Invest? Is it too Late to Catch OpenAI? Are OpenAI's Models Truly Defensible? Does the Value in AI Accrue to Incumbemts or Startups - Application Layer/Infrastructure? What Happens with Regulation? with Vince Hankes @ Thrive

23:10In terms of the ecosystem around it, you always highlight competitors or competitive threats when making until you've literally been down and bust another hair. It's great training for any, you want to be an investor. but like going down the competitive threats, do you identify as the competitive threats that you saw as having potential to be noticeable? Elephant in the room is big tech companies. This is not something where they're sitting flat footed, Facebook, Google, even Microsoft. I know they're great partners opening up here. I have Tom Tungers on the show recently, and he said that Google have been the most disappointing of all, and they were his former employer, and he's a terribly disappointing.

23:45We've seen AWS partner with Hugging Face. Who do you think is doing well? I think it's hard to be dismissive of these companies. If you think about where the best talent in AI is right now, I think it's open AI, and then I think everyone would tell you, it is Google and Facebook and Microsoft and Amazon, and maybe there are folks that have kind of dripped their way into the startup ecosystem, but by and large, the talent is so clustered in these big tech companies. And so I get it, that they're tripping over themselves, trying to figure out how to navigate these giant organizations they've created, but let's not.

24:16Also, kid ourselves, we've talked about this, maybe outside of the context of OpenEI. Up level it to AI, we work with lots of startups that compete on things like presentations or content creation. What's scary to me right now is if you're a startup, large companies are shipping product. The kind of canonical examples were that, oh, the big incumbent can't move and they're slow -footed and you got years to execute before they do something. Microsoft's 200 ,000 -person company, They've shipped AI and Bing, AI and PowerPoint, they're rolling out of the other products. Adobe's got the content creation in their product already, even the big startups like Notion.

24:52Those folks I've been so impressed with how much they've shipped in their product so quickly. And so if you're a startup, I get that you have the advantage of speed, but you need a multi -year execution window to be able to take advantage of all that product you can ship quickly. If these big companies are able to ship this quickly, they've got so much distribution, so much talent. I just think it's gonna be very hard to compete with them. So the reason I'm also so bullish on OpenAI is like, Anis Rampels says very wisely, the big question when investing in startups is will the incumbent acquire innovation before the startup acquires distribution?

25:25And I think the challenge for everyone with OpenAI is, it's still really a startup in terms of processes and a lot of its structure, but it's called the distribution of a large incumbent. So it can move us fast with the distribution. That is a very real and competitive threat that I would not want to come up against. My question to your point there, though, is actually in this next wave of AI, is the value captured predominantly by incumbents or is it captured by startups? I think it's too early to call. Maybe that's a cap -out answer, but to put it in context, if you go look back in time at these big technology cycles, they are great moments to create new categories.

26:06And so maybe that's a better lens to look at it through. Where will new categories get created? were being an incumbent or being a startup won't matter. And if you look back at the dot com, Google, PayPal came out of it, Google about finding information, PayPal about it, bank online, social came after, you know, Facebook was connecting all these people online and Twitter was the town square for broadcasting information. You know, mobile, the answer was in Salesforce was going to build mobile CRM. And that's where all the value was. The answer was you put a computer in everyone's pocket door to Ash and Uber came out of that because there's geolocation and the ability to have connectivity.

26:36In my view, what we're looking for, if I I always say answer that question is, yes, if you're going toe to toe right now with an incumbent on their home turf and their shipping, I think it's a hard bet to take the apps that's side of in our business. But if you're creating something that's totally a different user experience that no incumbent has today, I'm bet on startup 10 times out of 10 in that case. The reason the show is successful, because I just get to interview smaller people and me and just ask questions that I'm thinking, brilliant model I've built. But my question is, if it's a value of cruise, like incumbent versus startup, the other question is, value accrual at the infrastructure layer versus the application layer.

27:12How do you think about value accrual there? Because you quite rightly mentioned earlier, three companies, two trillion, and I think in the prior application layer, there's about similar market cap two trillion, but 50 companies, they're much more distributed, kind of enterprise value. Where does the value accrue infrastructure or application layer? I have to believe it's going to accrue mostly to the application layer. I think if you think about infrastructure companies as platforms. If you think about this software market as the relative's value of AWS and Microsoft and Google Cloud versus the software companies built on top are all of the internal software tools built on top.

27:46I think it's probably an order of magnitude to one. So I just have to believe where value gets created to end customers is where I will get captured. And the nice part about the infrastructure businesses is they're effectively toll roads on that whole ecosystem. And applications might compete more aggressively with each other, an open AI or Amazon or the infrastructure provider might be able to clip a coupon on it that's really valuable and we might capitalize it at a high multiple. But I have to believe that there's going to be a lot more value in the new experiences and applications than the infrastructure.

28:15How do you think about investing in the space when it moves so fast? For your investor in banjeling, air table, Atlantis, these markets are not changing on a daily basis. So how do you get comfortable with the rapidly changing market like we haven't seen before. It's hard. I think at the early stage, you know, we think about investing in founders first and foremost. You want extraordinary people in really great sandboxes and those folks will be able to figure out how to pivot and adjust and iterate to take advantage opportunity. In this environment, if you told me what I'd rather be in the sandbox with the great founder experimenting and iterating or sitting on the sidelines, I'd rather be iterating even if things changed a bunch from underneath you at the early stage.

28:59But that's how I think you can make every investment without knowing what's going to happen. So some things, there is an obvious evolution that makes your business less interesting than it was six months ago. If you think about where we were on infrastructure companies nine months ago, there were all kinds of companies branding themselves as MLOPS or these end -to -end solutions for AI. Now in this environment, we're in now, other specialized companies that are doing individual components of the infrastructure stack, whether it's lane chain on connecting all these tools and stitching them together, or these vector databases that are allowing you to store information.

29:30And so things specialize, you know, our reaction, it's not that hard to say, I have a friend and mentor of mine that I spent a lot of time with who says, there's only two questions that matter for a company. Who is the customer? And what is the product? And you'd be shocked at how many folks can't really answer that question with clarity. And if you can answer that question with clarity, everything else about the business stems from there. And so if you're really answering that question, you're struggling because you think in two weeks, from now there's a chance that the customers in care or the product won't have any value, that's hard to build a company around.

30:02And so in any of those environments, I think you rather just wait for that, there'd be more clarity than try to keep firing investments into that market. I made an investment and I lost money in it. I lost money because of an externality that was outside of our control, which is a very frustrating reason to lose. How do you think about the impact and coming year or so of regulation? Elon has been very close and we can't wait until it's in the hands of everyone because then it is too late. How do you think about regulation in the next six to 18 months? I don't want to speak for the company anything because I know this is a topic that's out there in the mainstream.

30:38I think regulation will come to AI and it will be necessary. I don't doubt that at all in my mind. I think it has to be done in partnership with the companies that are building because your regulation for the sake of regulation is not going to be what solves the problems people are concerned about. You've got to go understand the nuances, you have to understand the technology, and so I would hope that other companies building an AI are also working with regulators to understand what is the technology and help educate them to get to the right decision. I do think there's kind of some negative stigma going around open AI on regulation, security, and safety.

31:11And in my view, I think they're being pretty proactive. As an example on GPT -4, we saw the demo in the fall. They didn't just release the product then. They took I think four or five months to test and learn about safety and the edges of the model, and then ultimately released it to the world. And so they're not gonna get it perfect every time. But I do think trying to let people build with an understand it is important and poorly designed regulation on a technology this early is not gonna be effective for anybody. And we've gotta find the middle ground. My concern is the chasm of knowledge between private and regulator side has never been greater.

31:46How do we set a factor of regulation when the regulators do not understand so much of the infrastructure and the opportunity? This is a solvable problem. There's information out there, there's experts out there. Regulators I've been impressed with how up to speed they've gotten on crypto and they really take time to learn about it. And sure they're going to make mistakes, but ultimately that gap is solvable and it's got to start the dialogue between the people working closest on AI and these regulators and it might take years to get to a solution. People got to be patient, but this isn't an unknown.

32:17This is something that you guys can work together on. Final one on Open AI and then we are going to move to kind of your investing style before a quick fire. I have to ask, I would get in trouble if I didn't, and I'm, you know, very charming British guy otherwise. The price was high. I reported $29 billion. What was the discussion internally around price? because you still have to see real upside. What was the discussion and how did you project upside scenario planning? We certainly had a discussion, a heated discussion around it. We have a very team oriented firm, so we disagree and commit what's who make decisions and we make decisions to the team.

32:51We live by that. No one person makes a decision and the price here was high. It's on an absolute basis. It doesn't matter what company you're investing in. At the prices this round was done, you're talking about very upper echelon type outcomes to justify good returns. But I kind of come back to the intangible, it's really hard to understand the pace of adoption of these major technologies. And any numbers I would put on paper for you would look insane. You would look at them and a spreadsheet and tell me there's just no evidence to support this. But then you look at these iconic technologies and the great ones all follow that insane curve.

33:26And so the balance we try to hold. I think what makes Thrive a really special firm is we're able to kind of separate ourselves from the kind of quantitative rigor that we rely on for a lot of investments we do and hold the tension of what could go right, think creatively, understand how this could look like the most transformative things. And if that happens, again, we're talking about search potentially getting disrupted or something that enables workflow automation for hundreds of billions of dollars spent on different jobs and categories out there. And even now, we didn't know this at the time of the investment, but with ChatGPT Pro and the traction that's seeing, maybe that won't be the durable revenue engine for the company over time.

34:06But the velocity with which that's ramping, you know, Kareem and Parker Kareem has the way of saying this, the scalability properties of what they have built are so good that we'd rather bet on the compounding upside of that scalability than set on the sidelines because because once it's clear, it'll get priced up very quickly. And so we ultimately decided to lean into that. How do you determine when to throw the financial rigour that you do have in the team out of the window versus when it's needed to make a sound and wise investment? It's less about throwing out the window and it's more about putting it in context.

34:41A financial model is a tool to help you make a decision. You need many tools to make a decision. It's less about is that the only thing we use and we throw it out the window and it's more about what's the weight by which we put on the financial rigor and model as the tool to make the decision. I think for us there aren't that many iconic companies that could create it and so no iconic company, at least that we've been a part of, was it clear and obvious in the early days of that technology? They always get priced well ahead and they look cheap in hindsight because they defy the gravity of the model and so it's kind of the quintessential humans think linear and the best things happen exponential.

35:18We have to understand and going back to being level headed, when there are psyche or heuristics break down in an investment decision making process, and when they do, we need to compensate them with a different tool in our toolkit. Can I ask you a bit of a weird personal on -vents, but this is a big check for you. It's a really big check, and it's kind of, you needing, well, you know this about that. I think we have the same level of excitement that we have in most investments. We don't have a culture where there's this kind of sharp elbow mentality or people feel on edge for making investments because prices are high or checks are really large.

35:56We have a culture where we support each other and we have a growth mindset and learning. So if this ends up not working out, I don't think we're going to look back on this and put all the onus on one person or two people that made a decision. I think we're going to look back on this and say we got there as a team who is the right thing at the time. But here's the learnings from it and here's how we're going to adapt our lens and course correct in the future. It is intimidating and it's nerve -wracking sometimes to write large checks and investments, but in the right team and culture, this is how we enable ourselves to make these kinds of transformational investments.

36:25And frankly, I think there are a lot of firms that could not have done this because their organizations are not set up to make these kinds of big decisions. Your ability to make these big decisions is the one single fund. It's the one single team. So it helped me understand specifically with drive about the structure that enables you to make a decision that others maybe couldn't. I think that the thing that enables us to make this decision is we have this single small team that thinks extremely creative about how the world works and we are ultimately trying to concentrate our investments in the best products that are out there in the world.

37:01And so when you simplify it down to that and we allow this autonomy and focus to happen on a single team across the entire investment cycle from early stage all the way to growth, both we are enabled to go find these kind of iconic companies. And we're young in our career obviously, but we also, we can appreciate when these kind of transformational technologies come around. And certainly this was the most transformational thing I've seen in my career and being able to lean into that and not be afraid that if it goes wrong, we're gonna get fired. Or if it goes wrong, we're gonna be pushed down in the firm.

37:34I think having that psychological safety, that enables a firm to do it. And I think we have that at five. I think we change so much as investors over time in terms of what we value in the companies we invest in and the founders we invest in when it comes to what's changed and what you appreciate in an investment. What has changed about that mindset? It's actually very clear. The thing I've developed the most on in my investing mindset is this deep empathy for the customer, trying to really think deeply about not just what's the product and trying to write that down on paper, but really to understand how the business is going to get built.

38:10And mapping those nuances to who the person is, what the product does. How does that manifest itself in the business? Do you have a sales -intensive product that's going to require people to be constantly out there and un -edge and with their customers? Do you have a product that's more middleware and so you need somebody who's going to be willing to grind it out and not be in the live light? Do you have a product that requires a lot of creativity? That means you need to set up your org to be creative. There are certain org structures that promote that more. And when you think about where you can develop as an investor, I think where I have developed the most is continuing to understand the connectivity between this rigorous financial lens, very much of where I started a tiger to how do you build a company.

38:52And at that intersection, it's really hard to get to clarity on, but when you do, it is clear. And I think the best companies have very simple explanations. It trickles down on the company. The CEO can articulate in one sentence, but the manager for a wrong is down, also can articulate it. And that means that manager knows how to go left when they should go right, or they know how to make that decision and communicate it through a team. And so having appreciation for that, I think is where I've grown the most on these investment decisions. And again, it's hard to quantify, but I think it results in just like a deeper empathy for what a great company looks like.

39:24Final two questions. I think we learn a lot from wins and losses. and we don't often analyze the wins as well in the same detail. If he's not on the loss, then we'll move to the win. What's been the biggest investing mistake for you? And how has your mindset changed as a result? I've made lots of mistakes. The one that I think stands out the most to me, or at least comes back to me a bunch, you're my psyche, is when I was at Tiger, I flew out to Sydney and spent a bunch of time with the Canva team in person. And obviously now people know about it. It's a remarkable company. at the time, it was much smaller than it is now.

39:59And at the same time, we were so focused on investing in enterprise software as an emerging category at Tiger. And so, as we were spending time with Canva, I very much, and this is early in my career, but I very much let the pattern matching and the DNA of what I was thinking about, I would great enterprise software company creep into us looking at Canva. And the learning, I think, just to distill it down, something is every company is unique. even within the balance of enterprise software companies, they're unique. And we took this lens of what a great enterprise software company was. We retrofit it to Canva, and we said, okay, well, the churn looks a lot higher than what grade looks like.

40:36And the engagement looks very whimsical, relative to deep workflows and integrations. And so we shouldn't value this like a highly recurring software business. We should value it like a consumer subscription business. And there's merit to that. But ultimately, because we were so much in this one dimensional mindset of enterprise software, we missed what was so special about the company. The learning for me is just you can't walk in biased about what you're looking for out of the metrics of a company or what the product should result in metrics. You should walk in and try to have a very open mind and say do these metrics explain the qualitative of the business that I'm so excited about and reinforce why it's special.

41:16And if you think those things are true, I think then you should lean into it a lot more and try to really get to the guts of could it be a great investment And I see this a lot with investors when you get to pattern matchy and why companies should be the way they are I think it leads to a lot of mistakes flip side because I that could lead into another fucking hour You can see why I do this for living But on the flip side like when you think about kind of biggest investing win or success I get it site earlier and DPI takes time when you think about biggest investing win or success What was that and what did you learn from that process?

41:49You're only as good as your next investment, Harry. And I've still got a lot to prove. So it's hard to say one, but I do think an important part of winning and just understanding how to embrace kind of this culture of making great investments is you've got to figure out how to be authentic to yourself and map that to how you go win. You know, what a founder might be attracted to for me might be different than you, Harry. You might be different than the next investor that's listening to this podcast. And so you can't just apply someone else's style and say it's going to work for you and you're going to win.

42:23You got to try to figure out how to map what's really authentic to you and evoke that emotion in the entrepreneur and get them bought into why that could be a really fruitful partnership for them. And it's hard to do that. You can't do a lot of those things at once. You can't read a transactionally. You've got to invest the time. There's no substitute for the time. The things I look back on that were the most exciting and rewarding for us to be a part of. We've been able to establish that kind of ground with whoever is most important in that process or the team. And when you do that, I think those things will come obvious.

42:53And the decision is less about all these other variables in the process. And it's much more emotional because they want to work with you. Vince, that was bizarre. Like one, most people are like, Oh, I'm not going to give an answer to the mistake. But I'll give you the answer to the success. You did the opposite and then too when you were like being polisky at the beginning I was like ah come on man, but that was a really good answer Which was fantastic. I really like that. I want to move into a quick fire So I'm gonna say a short statement and you give me your immediate thoughts does that sound okay?

43:25Sounds great. Careem told me that you are basically the encyclopedia of business What does your content consumption look like? What are the favorites? The short answer is just reading anything. I think for me, I like to try to subscribe to lots of different angles of reading. So sometimes it's podcasts on topics, sometimes it's newsletter. Sometimes you go find the blog focused on the developer to go learn about the thing. Most importantly, like learning about the history of things is really important. All this AI stuff is happening right now. And so where I've been reading is trying to trace the key figures from all the way back to like 1980s in AI to today.

44:00And so for me, it's really just about variety. Simulate the personas, simulate different people that are in the ecosystem and go learn about them and wherever you can find content on that, I'm willing to read it. Then so you can invest in one multi -stage firm other than Thrive, which ones you invest in and why that? Harry I'm only investing in Thrive. It's no other internet. Actually, like you can do founders fun and nice website or you can do so quite. Are we going for a so quite? Give me one. We're concentrated. We only invest in ourselves. I can't give you one Harry. If you were to invest in one seed firm, can you give me a seed firm?

44:33I can. I don't know him personally, but Nat Friedman, who's now focused a lot on AI and I think has his own fund. I really respect his own stuff that I've seen him go do and I would be certainly interested in putting money in his fund. What have you changed your mind on in the last 12 months, Vince? This is not for the rapid fire, but one thing that's become clearer as we've gone into this more difficult environment to operate in is in the good times, we probably overattribute to teams and products, how good they are. And in the bad times, you can't just blame everything on macro, but I think it makes you reflect on the over -attribution you probably did in the good times.

45:10And one thing I've changed my mind on is, you gotta be more balanced about how much credit you give to the momentum of a company from the market environment versus the actual execution they're doing, and know that there's the balance there. And good execution doesn't always mean that it leads to great momentum. sometimes Grave a Mentum is also influenced by these market environments or variables that are harder to quantify. What do you think was the craziest thing we saw happen in the low interest rate environment of 2020, 2020? Crypto stands out. We talked about peak market cap and dot com. I think Crypto's peak market cap for tokens was like three trillion, somewhat similar.

45:50The most iconic company that people talked about was a fraud. I think like we're going to look back on that particularly from an investor lens and say, there's these hype cycles that lead to massive speculation and sometimes even the things people think are most real or is not. Okay, you're on incredible boards. You can choose one board member for your company. Who would you choose? The person that stands out that I've learned so much from is Eric Vissria. He's on the Benchling boroughs on the board of this company I work with called Airplane. Eric is, I think, just an incredible blend of has the operational instinct rigor, but also is fun to be around and he's able to land his messages in a really effective way with entrepreneurs.

46:27And he also just has a really great balanced perspective on being commercial and understanding how all of that works in a place as a strategy to the company and I found that perspective to be something that I'm continually learning from as I'm listening to him and when you find those kinds of people, I think you just want to surround yourself with them. What's your biggest lesson from working with Josh? There's so many lessons as hard. Josh is an amazing person. and this is not about investing, but I think with Josh, biggest lesson is really that, like to be successful, you don't have to compromise on all of the things that are important that are not your career.

47:00Your family, your friends, Josh, one of the most amazing parts of being around him is his warmth and empathy and his priority of his family over everything else is so obvious when you spend time with him. I've respected that so much about him and I think it's even changed the way that I prioritize ties how I run my life. Tell me, Vince, final one. What a nice five years old view. When we sit down in 2028, where do you want Vince to be then? Hopefully we'll be talking about some amazing AI companies we invested in that created lots of value for us both. But I think we have a lot of ambition at Thrive as a firm.

47:35And I hope to be a big part of us building it and ultimately going and backing some of the next transformational companies but also building our team and maintaining this amazing culture that I think we have and attracting some of the most talented people that want to go invest in these kinds of companies to come work with us. And so I hope if we talk again in five years, we're talking about those companies, we're talking about the people on our team and ultimately we're really excited about all that stuff. Vince, thank you so much for putting up with my prying questions and kind of not letting you get off on some of them.

48:04I really appreciate it, but this has been fantastic. Man, and I've won his丁 for a while because I've had so many good things, so thank you so much, man. Thank you, Harry. It's really fun to chat. I just love that discussion with Vince, and if you want to see more from us on video of course you can on YouTube by searching for 20VC, but before we leave you today, we need to talk about Sona. Sona is an AI -powered learning and knowledge -sharing platform, think of it like Chatchy PT, for all of your company's knowledge. Sona integrates with all your company's apps in under 5 minutes, and can search through every single file, bell, dock, pull requests video and more in under 100 milliseconds.

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