20VC: Why Great Companies are Defined by How Many Things They Say No To, Why Being First Does Not Matter & Why Market Over Traction or Team is the Most Important Thing with Guillermo Rauch, Founder & CEO @ Vercel

26:31I think more and more, UI will matter less and less with the increasing prominence of AI. Creating this kind of chasm between consumer and UI. Doesn't remove the forms of UX, but UI for sure. Do you agree? I think UI will change if we can go to a chatbot. In that chatbot is acting as a simplification of what used to be a very complex dashboard of lots of menus and sub menus and like you're like where did they go to find this and that. But at the end of the day, the information has to be surfaced to you. So I think it might just be that I'll give you an example. I just saw this incredible approach to surfacing data that you just interface with this in with natural language.

27:18And then the system is basically guiding you to where the data is, right? Like it's surfacing what otherwise would have been maybe like 20, 30 different and clicks. Now, the AI is just like serving on the man. With some of our products, we're basically going in that direction, right? Like, what used to be dragging and dropping and like spending like hours or going into a text editor and like going through like all these autocompletions and like errors and now it's just you going to UI that expects that you type in English. But our point of view is that now people will be creating a lot more of those UIs is a new tool in your toolbox.

27:55Do you worry about the commoditization of UI? When you guys, you said that I have the explosion on the supply side of new user interfaces created, which means that you lose the creativity, you create a discovery problem of sorts, and actually the explosion of supply means a reduction in price to speak. I think it will be the opposite because my hypothesis of how I look at the entire AI space right now is very simple. There are a lot of jobs to be done that people will have to perform no matter what. Decisions that need to be made, there is data that needs to get visualized, there is communication that needs to be made, like I need to send you an email, I need to make a phone call, like a lot of those things won't go away, but how we do them is going to be profoundly transformed.

28:39Let's say that I want to create a new email client. Basically what superhuman did, I want to do again. What's really fascinating about what's happening today is that when we were creating software over the past 10 years, part of our input into the design space, meaning part of what I thought was possible when conceiving a piece of software didn't involve AI in the past, didn't involve the fact that we can have this reasoning machines that we can invoke on the man, call them the large language models or the AI as a service. Now that I have those, how profoundly different will my design be. So if I have to create the next notion, the next superhuman.

29:19My bad is that it's going to look completely different because before I would reach for what I would call like software 1 .0 solutions. And over what makes someone really good at product design, frankly, is that they looked a lot of designs over the lifetime. They looked at a lot of data. They have a good instinct. It's almost like a good go player. What made Lisa Dull a formidable Aversaire to AlphaGo is that there was this instant, this pattern matching. But now it's almost like the board has shifted. What made you a good software 1 .0 designer? It needs to be actualized. It's not that you're not going to be good at a software 2 .0 design.

29:56But you need to say, okay, now when I sit down with my conceptually empty canvas, now I have this other set of tools that I can use to solve the problem. And it's exciting because startups don't have any priors. because they don't have any legacy software in which they have to retrofit AI onto. It's a great opportunity for incumbents, potentially, because they can now say, I added AI, ship it, and they can increase their tam, they can say, I'm AI ready, but it's also a really scary situation to be in when someone can come in and produce a completely different design if that makes sense. Can I push back on you and say, I think that's like a transitory phase.

30:36It's like, Miles Grimshaw said it on the show from Brent Martreau, well, he said, copilot's an incumbent strategy. The things that you think we will need to do, but that new marketing copy, that new accounts, that phone call that needs to be made, actually won't need to be made. You'll say, I want this cat to LTV across Facebook, Instagram and Twitter, his $1 ,000 go do it. And there will be no divisions on where it's been, which micro influencer, and it'll just do it. and actually selling the work and not the tools is what the true transition will be. And incumbents will win in the intermediary.

31:15I think I agree over a long enough timeline, but that doesn't actually result in practical advice for what to do over the next three quarters or even a couple years. I think the most successful innovations tend to meet the world where the world is. So when I think about the iPhone, famously there were two concurrent experiments for what would become the operating system of the iPhone. iPodOS evolves and it was a fresh new code base. It was already on mobile devices in the sense of like, it was already being deployed to like smaller, miniaturized hardware that was portable. And concurrently was the strategy of let's retrofit macOS to fit it into the iPhone.

31:54And obviously, macOS being forked into iOS is a strategy that won. And it meant the world where it was. The first killer app was being able to downsize websites and put them into a smaller screen and then find new Evolutions within that which became responsive design and so on and so forth and then new native things happened within the Contest of that platform namely new applications that weren't possible by just retrofitting new applications that took advantage of the medium and New capabilities that were unique to the medium but even fast -ordered today like 20 years later We're still in that world of there is this hybrid of the DNA of what already existed with all of this new DNA of what's now possible because you're in a mobile device and they continue to Co evolve.

32:38I think this will be the co evolution of AI and traditional software as well. But again going to like what makes practical advice possible. I think a lot of those chat type interfaces will have to meet the customer or they are. If you say to the AI, please help me make an advertising that's going to be deployed onto X in meta or Facebook and Instagram, it'll have to give you some UIS feedback of what's proposing back to you. And then you'll have to interface with the system further. So I think it's still all UIs all the way down. Now the key magical part of this is that they're UIs that are unique to the AI problem space.

33:16And those UIs will definitely be different. How do we think about great UI in AI first world versus not in AI first world? It sells the work, it completes the project and it's really bad to you. Is that a world of visual first, chart first, aesthetic beauty by data and data relay versus simplicity and beauty? Does it change the way we think about great UI? One of my high -baths is that we actually in some ways have to give people more UI. Let's actually look at what's succeeding in the AI world today. We have mid -journey. Mid -journey gives you this text interface, but as a result of your text prompt, gives you four choices of what you could possibly like.

34:00That's what I mean by it's actually giving you more UI, not less. It's uncertain about what it is that you actually want, so it needs to give you more choices. This is very different from Software 1 .0, which is the world of determinism, the world of rule following, the world of predictable algorithms. If you give me a form and I put A, B, and C, I give you a result D, 100 % of the time. And if it's not D, someone gets paged because we monitor it, right? Now, software 1 .2 .0 AI, I don't know if I'm, what's keeping you, you're actually going to like, I don't even know if it's offensive. Because like, there is all this like craziness that happens when like, you give this AI that is like not supervised and you gave it a lot of data and you can't even comprehend the amount of data that it has.

34:49So you actually have to create UIs that tame the craziness of the machine. You have to create UIs and give the creator feedback. So another easy to dismiss thing about the brilliance of some of those products is that because they're giving you choices, they're now feeding data back into the system to make it better in the next iteration. by once again relying on new kind of capabilities that are more in this realm of probability rather than certainty. So I think that's a very important departure is that now we're entering the realm of I can assist you in the creative process. And again, that means that you have to think about software differently.

35:27I love the power of the choice. I believe that too many options make an enemy of us all. How do we think about actually simple and telling users what they need? versus this kind of explosion of options that any consumer can choose between one of eight. Is that really a better user experience? It depends on what stage of the problem solving workflow you're in. If it's in a very creative side of the process, I do think having more options is better. They like to give the rich rubin' reference of like his contribution to the world is telling the artists if they like something or not. He says in that interview, like, I'm not an expert in the specific music techniques.

36:07I don't know how to play an instrument. The feedback that I give to the artist is what's valuable. What I like and what I don't like is what's valuable. So if the tool is very much in the creative stage, I do think having options to go through is really good because I was mentioning in my experience what's made a designer of a certain piece of software or UI really good is just how much they've rejected over time. What makes a company good is how much they reject over time. how many things they say no to, how many seemingly attractive on the surface ideas, they rule out before they decide, yes, that's the one that goes to market.

36:45Yes, that's the one that earns the position being in our product lineup. So it's really going through lots of iterations of yes and no, that it gets you to the point where you can say confidently, this is what I like. So I do think that accelerating the iteration loop and turning down things could be really healthy, provided that the trajectory is good. What really matters in these AI systems is that the system is learning when you're turning things down. Because to your point, I like the pushback because the best assistant in the world will have rich context about what you already like and will over time propose better variations of the solution that tailored to your preferences and tailored to the cons that you're in.

37:26But we can't be too absolutist in that process because otherwise we're just going to give you garbage. And notice that a lot of the successful AI systems so far have been in the realm of being suggestive rather an authoritative. Copilot suggests a completion to your text. Gmail Smart Compose suggested what to reply to the email. Notion AI is saying I can go ahead and like complete or give you ideas or finish the bullet points for you. When it gets into the realm of authoritative agents, like I'm just going to let an agent go into the world and act on my behalf without supervision. We haven't seen a lot of products that are successful in that space.

38:07What do you think it takes to make that transition to agent and do you think we will? I think we absolutely will, but it requires the close feedback loop with the person that that agent is acting on behalf of. It requires the person is still in charge. The metaphor that I like to use is being the editor in the newsroom. You're having the agents bring you the ideas. And you're saying, nope, go back to your drawing board. This is a feedback. Nope, this doesn't make the cut. And you're the one that's also setting the creative direction. This week, we have to go after AI safety. That's a hot topic that people are interested in.

38:44Next week, we have to go into this. We have to go into that. So you're still in charge, and this is why, ultimately, this is the healthiest version of an AI future after all, because we don't want an AI feature that inverts us and puts us in the AI. We are the agent. The AI is calling shots. That's what people actually get scared about. So I very much like this idea of AI in the assistance of the creative process and AI just making process more efficient. I don't. I don't because it plays into incumbents I feel. You have the distribution, you have the existing products week, and can serve as that incredibly well.

39:19and as a venture investor looking for value creation, it may start up with limited pools, limited mose, fucking impossible to fund. That has my problem. I'll give you a good example. I like incumbents are in a very problematic position when, as I mentioned earlier, the new AI alternative, it's just really disruptive to their historical approach to solving the problem. The best example would be Microsoft Word, The infamous bad designer, a word shipped with a really thick tool bar and exposed every option that used to be nested within menus. They made it visual. 30 % of the screen real estate was tools.

39:59I remember a lot of the reactions that I was like, holy crap, like I even know you had all these options word. The way that a company like that was looking at the problem of making the best puzzle word processor was very additive. It was a more, it's more approach to the world. What does this mean that adding more utilities gets supermoted adding another way of changing the color of the text or even adding more colors now Look at notion for example It doesn't actually even give you every color on the spectrum the designers of notion said there is eight or sixteen colors that Mostly work well for the purpose of writing this weeky style documents and whatnot So they actually said we're gonna do less We're gonna have a lot fewer text editing and text formatting options And that's going to give people agility.

40:43That's going to make them more focused. Now, there's an extreme version of this, which is that can I actually not implement any of that? Because AI exists now. And my software 1 .0 simplification strategy, which was creating fewer options or creating options that are more general, pales in comparison to an AI that can actually just do exactly what you want, even without having the options. I actually didn't software engineer any of those utilities and icons and blogs and whatever. The entry players can win because they do a lot less and because it's so disruptive than the incumbent has to say, holy crap, we have to delete everything.

41:23Like, I feel so invested. I crafted every icon, I crafted every menu, I crafted every piece of documentation for how to use this. I recorded all the videos that taught you how to use those. So I think that's the generational disruption that happens in software that is extremely problematic for incumbents. I agree normally, but I feel this set of incumbents are better than ever, stronger than ever, and faster than ever, and we look at your, I think, notion would be considered an incumbent now, let's put them in that category. But your notions of the world, that your adobies of the world have moved faster than ever on integrating AI very well.

41:55And actually, disregard it a lot of, I'm sure, existing product strategy, I'm sure, existing roadmap in favor of moving fast, getting shit done, and have killed a generation of companies in between. I'm like, shit, we don't, we don't, everyone's like, comparing to mobile. Well, we had Apple, BlackBerry, which was an accidental page of the word, and Nokia, which is the sale division of the Swedish Scandinavian company and a division in corporate. This is fucking fang, right? They're going to come and kill you. Well, I do think that a lot of these companies can be underestimated. One thing I'll give some kudos to Microsoft for is that they told the company they had to work and focus and have a look toward AI much earlier than a lot of other people.

42:35So they have years of strategically thinking in the direction of AI. Now, a lot of these companies have the right strategy, the right foresight, the right internal talking points, the right investments, and they still get disrupted because the new way of doing things is so radically different that initially they don't even look at the alternatives as a competitor. The best example would be potentially majority to Photoshop or to something like that. Like, I'm actually very impressed with Adobe's incremental addition of AI. It was swift, it seems high quality, well considered, it gets it job done, like it's strictly in a measurable basis, like better, but there's a chance at like, again, there's such a platform shift towards now the interface is going to mid -journey, where all of the other tools just don't exist.

43:23They literally don't exist, like all of the dragon drop and magic wand and selection tool and color switcher, so people just go and spend their time elsewhere. I think this is how desktop software sort of became less important than mobile apps when that transition happened. It's not that the right tactical determination was stop improving the desktop software. Delete the desktop software. And this is what meta ended up doing well. It was that the user minutes and the attention and the growth was going to go to a different way of expressing their mission. In the case of Maddo, which was like connect the world, they needed to go and almost to start over.

44:03You need to go to mobile and start over because everything that you've built for desktop, again, it still exists to this day, very much like AM and FM radio still exist, but the growth is elsewhere. The growth isn't this new approach. So you can have an incumbent that does that really well, but historically, most don't, which is when the platform shifts and they need to do things very, very differently. I think you're about needing to do things very, very differently. And then we will move into a quick fact because I could talk to you all day. But business models have not changed at all in many, many years largely on a per seat basis.

44:36Does AI like to solidify the shift away from per seat pricing and entirely change the business model of software? I think it's an acceleration of what was already happening with cloud. If you look at Versel, Versel offers you two very powerful things for your organization. Number one, the most obvious and the most visceral to a lot of developers, which is that you give us your front end project and we host it, we give you infrastructure to scale it autonomously. And that's traditionally a consumption you pay for what you use business model, like snowflake. But what Versel also gives you is the iteration of velocity and agility, very much like what Google Docs or Figma give you, which is like now I can collaborate really fast with hyperlinks and it can share around my entire organization what everybody's working on.

45:23It's almost like a Gira. My narrative violation is that businesses that only do one half of the equation are going to become less and less popular over time because when I buy software, I expect to buy a comprehensive platform that solves business problems. And solving business problems is never about just procuring a very specific material at Cog. I want this to do more for I wanted to be like an operating system for my organization, especially as you hit scale. You're like, oh, I'm using Versel for this little thing here to like host this, but I'm using Azure here and Google here and give me the foundation to level up my product development organization.

46:00That's what most of my customers actually want. So the way that we've built against that is that we've done a combination of like SaaS that is by seat and purchasing platform capabilities with infrastructure that grows when your visitors use a software. I think AI from the outset is doing this because AI is about getting some workflow or some tool, but it's also spending GPU cycles on very expensive outsourced intelligence, so to speak. And the more I use it, the more it costs. If I use a lot of GPD4, it doesn't matter that you're charging me like 20, 30 bucks a month, you have to somehow model piggybacking on your infrastructure for intelligence a lot.

46:42So I think we're going to see a lot more of these hybrid models where you give me a baseline of utility, but it can also burst to utilize more of what you can automate for me if that makes sense. Dude, you said about open that and you're the master of open source. You have been for years and years and years. The question is, if you just say they're about buying that platform, that kind of validated product set. Who wins in the next 10 years in terms of AI development? Is it open or closed systems? Because closed systems are the ones that can deliver that packaged Microsoft tick bundle with a ribbon and closed and opens like, it's great in many ways, but we both know it's not the package product that Microsoft is.

47:24Who wins? Right now, Lama is not as good as GPT -4, not even close, but with the ecosystem saying, This is what we're going to bet on. This is what we're going to throw all of our AI researchers. This is what we're going to throw all our hardware, AI chip accelerator budgets. This is what we're going to throw in all our software acceleration budgets. This is what we're going to throw all our documentation. This is what we're going to throw all the user space frameworks like Lama index and Lenschen and this and that. Like, now I have this entire community that's saying we're going to bet on this thing becoming better.

47:56The counter thesis to that is that famous Jeff Bezos quote and why AWS got so far ahead of the competition. Even though the competition knew full well that cloud was a strategic place to go, is that even a two -year advantage in technology can be lethal. Two years in tech is very hard to overcome. Five years in tech, it's just exponential. Ten years, good luck catching up to that company. If for whatever reason you ignore their advantage for 10 years, this has certainly been into our space when we were betting on dynamic front end rendering technology a lot of folks were betting on static and I feel like a lot of folks have now said like oh like Vercel you're growing so fast you did this and that Like they think like it's some magic but going back Which is we're willing to like bet on what was a little less popular especially among VCs in the valley at a few crucial points So yeah, I can tell you like Lama will win or GPT for will win because I have evidence in the in favor of both but I can tell you that every day we're getting more data and it's one of the most fascinating open questions to me right now.

49:00I totally agree. I also love that in terms of going against the popular narrative. I always ask companies like you know with the problem that you're solving, what do you believe that no one else believes? Correct, most important thing. Listen, I want to move into a quick fire out. So I say a short statement and you give me your immediate thoughts. Does that sound okay? Okay, fun. So is 99 % of the cash going into AI companies today going to go to zero? False. My prediction is just like what happened with Web 2 .0 where because of the platform shift toward mobile and social You have countless successful IPOs from that generation.

49:31You have the uverse. You have the Airbnb's you have the Facebook's We're gonna see the exact same thing happening with AI now I can tell you exactly like what the ratio would be but I would be willing to bet that 20 % of investments will be productive ones Now productive means companies that then get merged and acquired like we might buy an AI company that doesn't mean 20 % will be unicorns, but I think we will be see a lot of positive ROI. What's your biggest lessons from angel investing? You'll see currently one of the most successful angel investors at England and the Valley. What's your biggest lessons from doing so?

50:03People underestimate just how much their own time goes into thinking about important problems that need to be solved, but you just don't have the bandwidth to solve them. What do I mean by this? If I look back on some of the most interesting investments that I've ever made, There are things that I would have loved to do myself. I just didn't have the time and it was in the right place. Maybe I was working on another project, maybe I was working on a different company to actually execute on those. Just to give you some examples, I invested in this company called ScalaeI. I really badly wanted to work on a product like ScalaeI.

50:36I don't know if I would have been the person to build it and I think I got really lucky by I chose the right horse in that particular space. But I do think your own experiences are very validating, especially I think this was making a lot of founder CEOs successful in angel investing is that the things that you see, the things that you perceive and this is also why I'm so bullish on AI as well like there's so many AI products I want are company to buy. There's so many AI products that I want the world to benefit from. There's so many inefficiencies. There's so much repetition that's happening.

51:08There's this mismatch between supply and demand and that's how a lot of great investments happen. So I worry when I think I could do that. Like, you know, I saw a company the other day and I was like, I'm better positioned to do this than the founder is. Do you not feel that it's a requirement when investing in a company that the founder's uniquely positioned to understand that no one else is? I think the founder needs to be uniquely positioned in a number of dimensions, uniquely willing to go through the grind. That's a very important side of it, uniquely positioned to either have the background or learn really fast what it takes to solve the problem.

51:45That's one that's kind of messed up about angel investing. Like you can lose a lot of deals if you just look for expertise. Sometimes, and this is also true for my higher end philosophy, it's about the slope, it's about how fast people can learn. Here's a universal truth. Ultimately, it's all about the market. It's all about people's willingness to buy a certain thing that they turf his wares and losers. That's why I wouldn't underestimate your own ability to judge what it is that you want to buy, what it is that you ultimately need. Now, you might be actually really bad at judging the solution.

52:18So you have to be extremely open -minded. I made a quick comment earlier that the thing where I got lucky with Otsero is that I just didn't feel like 100 % confident about their solution, frankly. And if the founders were listening, they're gonna hate me. Like, I felt at the time, holy shit, outsourcing off to a startup. How does that make sense from a chicken and egg point of view? How does it make sense that your homes and your companies door and they lock you outsource to the lowest bidder? Like a startup that has three people. So I was like, okay, it's kind of crazy that you want to turn off into a micro service.

52:54At the same time, I do know that implementing on it's freaking hell. So this is the other advice I would give people is that there are a lot of things that people overestimate their own capacity to solve in an excellent way. What do I mean by this? Every company would advise and restart it. I would start. I used to set up a chat server in IRC I would set up an IRC server so that people could collaborate. I knew of the right problem to be sold I knew that in order for software engineers to be more productive and collaborate with the rest of the company They needed a chat medium to collaborate with others.

53:26I had the wrong solution. The solution was not a set up an IRC server Very few people know this, but when Slack was coming up, a few competitors to Slack were actually giving you IRC as a service with some UI. So the market knew that there was a great opportunity around collaboration with Chad for organizations. But the special of solutions was incredibly bizarre. Some involved IRC hosting, some involved the hybrid of Slack with IRC. Slack even for a minute had an IRC proxy to help people move from the old world to the new world and then they discontinue that. It's the solution that becomes kind of like the tricky thing to where do you place your bet.

54:06I remember when Matt from WordPress, I saw my company to WordPress, said we have to install Slack and deprecate IRC and at the time I was like, whoa, are we really going to trust this company with all of our communication? Same visceral reaction that I had with my own investment. Are we going to trust this company with all of our X? So you can almost see pattern there. When you know that the problem is so painful but your only hesitation is whether you can offload it to somebody, there might be a huge opportunity there. I love mullinwike. Listen, final on Giema, why are we in ten years time? The way we talk about this is we still live in a world where there are a lot of bad products, there are a lot of bad experiences that you have on it on a given day.

54:48Our dream and our vision is that Versel has raised the bar of every experience that people have with software, with applications, with products. It has to permeate all the way down to the average person, doesn't have applications they hate, processes that bog them down. Why? Because we empowered every creator, every developer to fulfill their creative dreams and we gave them the tools to turn those dreams into the best products that they can. And I think I will play a I think part of what we're doing now is creating a bigger funnel, bringing this acknowledged into more and more people and putting the creative process in charge.

55:28Yeah, listen, I've loved it. The breadth of this conversation from you know, infrastructure and Argentina to the future business model of artificial intelligence. I've credit to both of us on this one. This was real breadth. I've loved it. Thank you so much for joining me and you've been fantastic. It was fun. Thank you so much. I mean, what an incredible discussion. If you want to see more from behind the scenes, you can check us out on YouTube by searching for 20VC, that's 2 -0 VC, but before we leave you today, we have to talk about Canva. Canva is on a mission to empower the world to design.

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