Building Enduring Value and Hitting Incremental Gains with Benchmark’s Sarah Tavel | E1983

28:57I know, because we use it here at launch and our sales team loves it. And you know what? Those phone numbers, those discussions, all those text messages, we need those to be on launch phone numbers. We don't want those on people's personal phones, where if they leave the company, it's distracting, it's annoying to your sales team, as but one example. And we love having a shared number for customer support as well. We do a little round robin where different people can pick up the one phone number. So customers have one number, but we can have that phone call go to multiple people on the team. So we, you know, can just have somebody pick up the phone quicker.

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30:07Everybody believes that what we do in Silicon Valley is like throw these Hail Mary passes or half court shots from the logo. The truth is you're grinding it out. You're trying to get 5 % better in 20 different places. And sometimes you get some big win and it's 20 % better. And sometimes, you know, you make it worse. You screw something up and it gets 5 % worse. but that actually that incrementalism that compounding interest it's just so powerful and it's hard like you're saying to yeah you know god we spend so much time this is our third vp of sales i'm on the board of one company man you know how this goes yeah the the white knight is coming this person has the resume and they come in with the cuff links and the four thousand dollar suit you're like oh god here we go again this person's oh they want a huge base and they want their comp you know so low in tied to like the milestones but oh and they really are concerned about their exit package i'm like why are we spending so much time on your exit package who cares about your exit package you're easily hireable why do you want 12 months severance 12 months severance at a startup yes i know and the whole i can just see it i see it man i i can see it happening right now in manhattan from yes here in california i see that conversation from 2 000 miles away it's nuts it's nuts and it's just hard for a first-time founder or a founder who's just you know trying to get so much done and when you're on the board and you see this for the fifth the sixth the seventh time just so obvious like this is not the person this person is coming in with those cufflinks they want to do the you know i i'll you know give me the six hundred thousand dollar base and the two percent commission i'm like how about 150 000 base and i'll give you seven percent when you hit a million and 15 when you hit two million like let's make something awesome so you can make twice that amount of money and they're like yeah no i gotta beat my base from the last time what are the other things you see inside these boards over and over and over again but that is just so critical in not flipping the car when you come around those turns i think there's maybe there's a couple things that come to mind for me one is is sometimes it's just very clear that an executive has reached their peter principle right like i'm a big believer that when you know you as a ceo you want your leadership team to like two-thirds of your leadership team to be pulling the company up with them you know not being pushed up by the company Yes, you want the culture carriers, the people who have been there for a long time, who have a lot of context and have the history of the company in their minds.

32:50You need some ratio of those people. And by the way, those people benefit through osmosis by seeing the way that the executives who have seen what great looks like, who have been at companies and scaled past the company that you're at right now, having those people. And so one of the things that I see is just, it's hard. Like when you're a CEO, there's a learned ruthlessness that ends up happening, which is that, you know, you have these relationships with the people on your leadership team. And by the way, your leadership team has the people on their leadership team that you develop relationships with that you want to be nice.

33:31It's, you know, five temptations of a CEO is like an incredible book. Every CEO should read it. the thing about wanting to be liked is like an Achilles heel that we all as humans have. It's a very difficult thing to have a lot of these hard conversations. And so you have these executives and they are not pulling the company up with them. They're being pushed up. When you have too many of those, it's one of those things that even one executive for too long who's being pushed up with whom we're not having a hard conversation really has these ripple effects that you always look back and wish that you had made a decision sooner and faster.

34:10And so that's like a huge one for me. And the second one is just any orientation towards vanity metrics. You know, like there are so many times when we can have metrics as our North Star that feel good. You know, the lowest common denominator one. It could be, you know, MAUs for a social product. It could be actually revenue or GMV for a marketplace. These metrics, I always say what you measure matters. Like, they can go up and to the right and still you are creating the true enduring value. And I always think of it as like, if you're climbing a mountain, you don't want to go around the circumference.

34:55You want to just find the most, you know, the most direct path. But if you get lulled, if your ego gets satisfied by a vanity metric or chasing the next round, you end up wasting a lot of energy versus like having the clarity you need of like that future path. What creates the most value for your customer working backwards from there. And you're avoiding. you're avoiding. This is like what people who are avoiding the hard work do. They find a metric that serves them. The great point. Yeah. And you know, like, I remember in the early days of apps, in the days of calm and Uber, and everybody's talking about app downloads.

35:36And then all of a sudden, these app companies come out, oh, venture firms care about app downloads. Great. Hey, give us, you know,$5 ,000 will get you to the number one rank in the app store. And everybody in the early days of apps would look at the top 100 apps and they'd download them and they'd sample them remember when you first got your phone you're like i have nothing to do i'm just going to sit here for an hour and download apps and play with them it was like the greatest thing ever now it's like oh god dealing with apps is like a chore right my having changed but i remember these folks and they would come to us and say hey give us five grand then they would hire people in the philippines that have banks of phones you can look at these phones online they would download them all they wouldn't tell you how they were doing it by the way all of a sudden you're number one you go to your board meeting oh yeah look at here's our cumulative downloads i'm like can i see that by day and can you show me what you paid for and what was organic you know give me the source and you start getting into the granular discussion you realize okay cumulative charts only go up into the right that's how cumulative works yes yes we don't need cumulative here and then where's the engagement how leaky is this goddamn bucket yes and you know it's it really is cowardice and avoidance and when i i went to a high school uh run by saverian brothers in brooklyn there was a sign above the door and i always say to founders the truth shall make you free and when the truth is people are uninstalling your app and just find out why find out why it's too expensive the design sucks whatever it is find out why right and that lancione book that you mentioned uh and he he did the five dysfunctions of a team.

37:04Yes, also excellent. Also, I always give that book, both of those books to a founder. I'll add something though, which is also true, which is that a lot of times I think founders make the mistake of playing to what they think the venture investor wants, right? And so - Performative. It's a lack of intellectual rigor. It's a lack of kind of really going to first principles of what am I building? And what is like the most important thing to measure? It's instead kind of just the surface thinking of, oh, I hear VCs care about downloads, as you talked about. Or, you know, in marketplaces, I wrote a piece about kind of chasing GMV that a lot of founders would come in and they thought they had to show a million dollars of GMV in order to raise their Series A.

37:56The challenge is that if you chase GMV back to my mountain, the fastest way to a million dollars of GMV actually pulls you away from building enduring value. Let's take a food delivery company. You could get a million dollars of GMV by having 10 cities with 100K of GMV, or you could have a million dollars of GMV by going deep in Cedar Rapids, Iowa, or deep in New York City. Those three buckets are very different companies. And the one that actually I think would be most interesting, a million dollars in Cedar Rapids, Iowa. Why? It's also the hardest. Because there you're building liquidity. In order to do a million dollars of GMV in Cedar Rapids, Iowa, you have to be really focused and have very strong product market fit.

38:51You're building liquidity. I always think of it as like boiling the thimble, not the ocean. And I wrote a whole series on this called Hierarchy of Marketplaces. But if you do a million dollars of GMV in New York City, you're just scratching the surface, right? They're picking off the cream of the, you know, the cream, but you're just like scratching the surface. You have so much further to go in order to have true penetration of New York. And then back to the 10 cities with 10, 100K, same thing. Like you're just scratching the city. Like you haven't really proven anything. And so, you need to have that first...

39:32And I think Tony at DoorDash did this fantastically of just like the first principles thinking, what are we really building? How do we build enduring value? And just trust that if you show that to a VC, they're going to get it versus playing the game that you think you have to play in order to get that next round. Yeah, it's, I have this, because, you know, we invest way before a benchmark typically, right? We're doing year zero companies, like they're working on the products, two or three people, sometimes they're not even incorporated. And I always tell them, hey, whatever the numbers are, just own them.

40:08The opportunity for benchmark is that you haven't figured everything out. The opportunity for Sequoia is you haven't figured everything out. So just own it. And they're going to look and, you know, when they see spiky revenue month over month, they're going to understand you're running experiments. That's okay. and if you lose customers they're going to understand you're trying to figure out your icp your ideal customer profile they know you're not going to know that yet so yes you know in and out burger kicked tony out tony was like doing the hack and stanley were putting in and out burger in and out burger doesn't allow delivery you know like perfect example of like hey you can really spike your revenue by putting in and out in your app you know illegally against their terms of service you know and just having somebody show up and buy it and deliver it because there's demand pent up there yes but you're going to get a legal letter the second you get to the thousandth order you know you're going to get to the thousandth order real fast i can tell you that and that legal letter is going to come smashing down and now you got to hire a lawyer and you got to deal with all this nonsense and so like there's no um there's no shortcuts here so just own the numbers it's okay it's okay and my lord the gamesmanship i see i don't know if you see it sometimes where there was uh i remember in the early but right in the middle of the y combinator days it got a little weird and tech stars too because people learned how the facebook ad network work and it was so magical i don't know if you remember this number i'm sure pinterest had this similar effect they'd be like huh i have this new product and they just gave me 125k i got 12 weeks and then i gotta meet sarah and i gotta meet pear and i gotta meet this firm and that firm okay great Here's what we're going to do.

41:44And somebody kind of shared this and it infected the whole ecosystem for five years. We're going to spend$1 ,000 in week one, $2 ,000 in week two, $4 ,000 in week three. You can see where this is going. And they're just magical, very beautiful 12-week chart. I love it. Doesn't need to be cumulative now, right? We got past the cumulative chart. Now we're on this. And I say, huh, that chart's so perfect. And page views and signups, everything's so, wow, how did you do that? and then they'd be like yeah you know just so we got we got figured out product market fit i'm like in 12 weeks you got product market while you're inside of tech stars and white combinator wow that's fascinating and he paid oh yeah we did a little pay oh yeah where'd you do the pay on facebook okay can you pull up the facebook ad manager let's take a look at it and talk about it and i would literally pick it up with them and they would pull it up and i was using it too i understand how it works i've used it to do promotion it was hilarious right so that enduring values i love it so key this is where game knows game game knows of course of course like all the tricks are there i appreciate a good hack yes do not get me wrong great hack is awesome but like you know the i just want to go over the lancy only five i pulled it up here while we're talking in chat gpt just to give myself a refresher let's do these let's do these real quick choosing status over results ceos may prioritize their personal status and you go over the success and results of the company oh yeah that's and that's the most dangerous one that's the most dangerous one why well it's the one if you're oriented towards status then the status founders who have their proclivity to status are the ones that are most vulnerable to the vanity metrics because they are you know focused on how do i look good how do i look good externally and internally in order to maintain my status as unicorn founder.

43:44And they're the ones that play for those accolades. And if you get oriented that way, if you're focused on the status, which means you're focused on the vanity metrics, the things that make you look good, you're just, it's incredibly difficult to build enduring value as a byproduct of those two things. It's so well said. and i remember we bring up this unicorn status that infected the industry shout out to aileen who's an awesome vc and i get her to come on the spot every three years the only problem with the unicorn status thing was it became like we didn't really have like a black belt in our world like there was there was like you know these these founders want to hit some goal which is virtuous right i want to hit the goal okay the industry told us being a unicorn is the goal okay how do right hack the unicorn status so you know we talked about the other two cumulative charts whatever facebook hack now here's the next hack okay i'm going to take this you know 50 million dollars at this crazy valuation and it's got a 7x liquidation whatever that whatever it's got just being preferred and then they're trying to do vanity metrics like you're saying to get the vanity and the status and they're playing stupid status games the only game that matters is are you building a great team that builds a kick-ass product that delights users and you've just basically eyes off the prize right yes yes absolutely you see it in basketball i don't know you found a basketball like i'm a fan of all sports and the abstract i don't watch anything i mean like there's this whole thing where like oh this this this guy in the nba is a 20 and 10 you know get 20 points 10 you know he's like so consistent like and he plays for a team that doesn't make the playoffs and like you you could be the the like you could be in the best player with the most incredible stats on a team that never makes it to the dense.

45:32They never make it to the top four teams, eight teams, 16 teams are always in the bottom. But man, this person's got 30 points. Oh, they had a 50 point game. They never got there. That's like the perfect example. Okay. Popularity over accountability. CEOs might avoid holding their team accountable, the team popularity and harmony. Man, I got over this one a long time ago, but I see this all the time. And this is, this is, you know, it's, it's very holding people accountable is, is really hard. You have to be, and actually it's, I think we're starting from top down, but really you should start bottom up because each one builds on each other, but it's related to this, the need to be liked.

46:10And when you need to be liked, that's the pop, you know, leads to popularity, then you aren't going to lean in on these hard conversations that create accountability for your team. And going down to the fifth one, choosing invulnerability over trust. CEOs may avoid showing vulnerability, which can prevent the building of genuine trust with leadership team. Yes. You know, I try to do this inside my own firm, Sarah. I'm like, we cannot ride on my past victories. It's great that we hit Uber. It's great we hit Robinhood. It does not matter to our LPs. They've already gotten those distributions. We need to find the next one.

46:45All of this history doesn't matter where the podcast rank. It doesn't matter if people want to take sales with me. We're only as good as that next deal. we have to take these founders and figure out how to get them from 250k in arr to 2.5 million or there's no fund we're a new firm we're on our fourth fund we have to fight to exist and man and they're like oh you don't have it all figured out i'm like have it all figure it out do you know how hard this industry is like we talk about how hard it is for a founder i mean you hit a hit and then everybody's like where's the next one jesus you know like this is one of the problems with hitting big hits like you guys have hit or you're hitting pinterest like what what was pinterest peak valuation and when did you invest in it it's it's probably now i think it's more than a 40 billion dollar company when did you invest what was the valuation i want to say something like 35 or 40 maybe so just just a thousand x you know maybe small small improvement yeah yeah thousand x i mean 500 x after dilution whatever i mean this is incredible like it doesn't happen and now you do you ever have this like wake up and like how do i top that yeah i mean i think the the people i most admire have that anxiety and i certainly do which is that you're only as good as your next deal and like there is nothing that hurts more in my heart and it's just you know specifically within the working world than somebody else making a better decision than me or seeing a company I didn't see and it being a great one.

48:19And that is the paranoia I think we all have here is the one or two companies every year that really matter. We have to make sure we find those companies and get to partner. I mean, you think about it, Pinterest might be one of the great non-consensus bets ever. Social shopping, the entire category of social shopping was considered stupid when you made that invested. That was the most idiotic investment you could have made that year in most VCs mind. Oh, a bunch of like women at home making a board of what they want to purchase in the face of Amazon and Walmart and Target and Facebook and Instagram.

49:02Are you dumb, Sarah? Like, why would you ever make that bet when they're up against all these things? How did you make that bet? How did you make the non-consensus bet? Take us through it. It's actually funny. I did a fireside chat with Ben recently, and he made a point, and I hadn't thought about it before. But I was an early user of Pinterest. The first time I used that product, it felt like there was something special here. And this was during a time when Twitter was ascendant, and Twitter was just text-based at the time. And so you had all these other companies that were aping Twitter, very text-based type UIs.

49:39And then all of a sudden, to use this product where it was all about images and actually essentially creating lists. When you pin something to a board, that's basically a list. It's just a visual list. It felt so different to me. And I remember we went to go meet the founders, Jeremy Levine and I, in the Palo Alto office. I just felt like this had to be the hottest deal in Silicon Valley because the product was so incredible. You meet the founders. They're so compelling. The engagement data was so compelling. I couldn't sleep that night. I wanted to invest so badly. It just seemed obvious to me that this would be the hottest company that everybody was going to be competing for.

50:25and I just you know I was just like please please let this let this happen it turned out there was no other term sheets and there were no other term sheets because I was in New York everybody here had shared this consensus view where you know all the gossip that goes around everybody just started they got once somebody incepts this idea that like is just going to be a small niche site it became hard for other people to unsee that. And I had actually just moved to San Francisco. I wasn't in the gossip networks. I wasn't part of, you know, the consensus view. And so I had an outsider, Jeremy and I had an outsider perspective on Pinterest.

51:08And I think that is what it took, you know, to see it. And so everybody else, and this was the point that Ben made to me, he's like, you guys, you were out of the consensus conversation. And because of that had the independence of thought when you met the company. And I think that's actually the greatest risk that we all have right now is that everybody talks about everything. We all develop these consensus ways of thinking. And it's the companies that are disruptive to those views that end up being the outliers. It's the great paradox. The consensus that I see in my own firm with just 12 investment professionals doing this like seed stage stuff, I had to create a tag in my database, I came up with 13 tags of why we invest in a company and 25 red flags.

51:58That can also be pink, like, I don't know the stupid stuff like the founders paying for their apartment or like they're, you know, giving themselves a draw but not doing proper accounting. Now, it could be a sign is unethical founder or just naive and just hasn't gotten their accounting together we can fix it if it's a pink flag if they're like going to vegas and buying chips you know like obviously you know you there's a there's a different thing going on here maybe it makes them more attractive if they're a lunatics but putting it all aside and non i had to create two different tags in our database and these are now my joker cards basically it's like the blank tile in i've never talked about this talk about it here because i want your feedback it's like the blank tile in um scrabble you know you get that blank tile you're going to probably win the game so one of them is uh an outlier founder and the other is this is a outlier idea and i just told anybody you okay one of the things we like is product velocity we like world-class design we like four business four specific business models that you like fintech marketplace consumer or whatever.

53:02It's all obvious stuff. But you can throw that trump card down, you throw that blank tile down and say outlier founder, outlier idea. And that is worth like, five tiles. I don't have a number. If we don't understand the idea, or we can't get consensus around it, it doesn't fit. It's not like SaaS. It's not like a marketplace. And the three companies that fit that a cap company, a meditation company, and a stock trading app for millennials who live in their mom's basement and it's free to trade you told me those were my three biggest wins i'm like this makes no sense social shopping you don't actually do the shopping here you just take a picture and put it on a board in your vision board wait wait but you don't actually ship the product no no no it's just just place where you put a bunch of stuff that you're interested in like it's such a great bed and isn't it so wonderful when you are the non-consensus it's so rewarding to be the non-consensus believer i mean this is part of the pleasure center i think so many of us have is to make I know when I invested in Chainalysis, which was my first investment here at Benchmark, this was a time when the ICO craze was happening.

54:12Yeah, I remember. Everybody who was interested in tokens or in crypto were investing in these ICOs, which were essentially white papers, nothing, no code written most of the time, had very big valuations. And then here we were investing. There's a quote that the founders of Chainalysis made fun of me for that. I said it was like a meat and potatoes SaaS company in crypto. And people said, Sarah, what are you doing investing in a SaaS company? It's all about tokens now. It's incredible founders who saw an opportunity in a market that no one else was seeing. with like a real network effect. Like there was a real dynamic to the company that they should dominate their vertical.

55:04When you see those types of opportunities, you meet those founders, you just feel so lucky. And there's nothing like I, I know for the last company that I mentioned, like I just remember thinking, we need to be in business with this person. You can announce it here, by the way, Sarah. It's totally okay. Not yet, not yet. Okay, don't chip your card. You can't blame me for trying. I'm always trying to get a little something here. I know. I don't know if you know my philosophy. I hate announcing companies. Oh, yeah. Tell me more. Why? I am the anti-hype person. I think I wrote a whole blog post on why hype kills companies, particularly in consumer.

55:43But I just think that hype, it creates an expectation from your customer ahead of where the product reality might be. it catalyzes your competitors to be aware and respond to you. And it may announce to a bunch of founders that are thinking about an idea to go after that, hey, here's something interesting. And so the biggest reason to do it in B2B is maybe the legitimacy is important for your customer. And so there's a reason to do it there. And potentially for recruiting. But I think you can get the benefits of benchmark as an investment, as an investor through the one-on-one emailing, have it on your website, do whatever you want to do.

56:30But the announcement more often than not is an ego thing as opposed to a building enduring value thing. And there are outliers. I heard the Mistral founder, Arthur, talk about the brand for Mistral being important because a developer isn't going to try 20 different foundation models. They're going to have a small number that they want to try. And so having the brand, having that legitimacy helps with the shelling point of making that decision. that is true you know that is also true but again case by case but by and large i try not to announce for as long as possible i think it's wise there's a time to promote you're talking to a hype man here on the program i'm kind of like the flavor of the industry you and i can be the yin yang on that exact well i mean i do think there's a time to hype but you're right you do not want to poke the tiger and have zuckerberg wake up one day and be like oh you want to take our business okay next door here we go yes yes oh you oh you you do want it okay great we're launching threads you know like you just don't want to wait the sleeping tiger you know it's like over here we found oil it's like oh you found oil in that little you own three acres great i'll buy the 300 around you i drink your milkshake game over yeah not not fun for a founder let's talk about a couple trends here as we wrap up and i try to keep this to 75 minutes with you because you agreed to come on every six months uh and i'm gonna hold you to it because you're one of my favorite guests and uh this is no it's good for me because i get to talk to somebody who i think is really smart i think like these are the conversations sharpen your blade a little bit right like i think you yeah i always think like smart people it's good to just hash out what you're thinking at the moment all right in person work you and i have talked about this we both think there's an advantage i was talking to somebody and they just said like if there's a venture firm i think i was talking to an lp there's like there's a venture firm and they only invest in people with fully in office companies can you let me know because i want to be an lp in that fund and i was like huh we're probably pretty close to that i think it wasn't yes talk about it talk about it because like i just saw pritzker media told everybody to come back michael dell told everybody to come back and a bunch of people resigned and he said resignation accepted you know and like i think now we're at i think it's i think we're kind of at four days a week you want to don't fuck off on Fridays, fuck off on Fridays, fuck off Fridays, go for it.

58:59But other than that, like, can we at least be here four days a week? What's the case here in terms of advantage for startups specifically, especially the ones we invest in early stage? Most of the time, the companies that we invest in, the founders are already, if it's a five-person company, they're already managing the biggest company they've ever managed, the biggest team they've ever managed. And I just believe, I wrote a post about this, that being remote is like trying to run a race with a parachute tied to your back you just you get slowed down on every interaction there's just so much more friction everything gets slowed down and you talk to experienced executives experience and you know people at other companies and they all feel this too that when you're in the same room the kind of the throughput of conversation is so much higher than being able to nip things in the bud.

59:51It's not a, oh, let's schedule 30 minutes on your calendar to do something. It's just everything is faster. The velocity is better. The culture is better. You get to know each other. The people that, you know, then retains people. There's just so many things. And so I think, you know, if you're starting a company, you've got to be all in. You know, this is... Why do it? Why do it? It's so many easier things to do than start a company and a venture-backed company specifically. Like if we're partnering, trying to partner with the most ambitious founders and those founders are going to want to be in the place with the most ambitious people and shoulder to shoulder with them in their office.

1:00:40and truly that happens you know if san francisco may have got had a dip during the covid years but like i think very clearly it is back and the best place to do that is here right now sure um at least in the united states yeah absolutely it's a lot of executives are using this as a um commitment test now i've heard this from a lot of them uh now they will make exceptions elon i talked to him about it like he's like if you are like world class and there's you're one of one and you live at lake tahoe and you do something like you know in assembly language on like some chip like okay fine everybody else like i'm in the office get in the office let's go yes i was talking to travis from uber about it he's in office for his new company and he said to me you know what you have to be there and it's just a momentum thing to get people out of this once you get the momentum switched he said it's really it really starts to work but if you don't have the momentum and the senior team doesn't come in then nobody else is going to come in it just starts going the other way and so you just have to have this like uh fortitude consistency i don't know what the word is and it's one of those things that the more senior you are the more likely it is that you want to work from home you know you have kids you know there's just a lot you have a nice house yeah exactly a couple of nice houses yes yes i mean zuckerberg's having a real problem with this because lake tahoe kawaii he's got all these incredible houses and i know people in his circle and he's zipping around with like a pot of people and he's got his own teachers and everything it's like public knowledge or whatever but you know it's like he he's not in the office so people are like wait a second we have to come back to the office you're not in the office it's like and then he's flying executives out to hang out with him at his ranches or whatever like more power to them but you know it does it is top down yeah and i think the the important thing then is like you're you know every great company has to have a way of getting young hungry people incorporated into the culture learning through osmosis from the more senior people who have seen it before and it's just so hard to do that in a remote world talk about this like sass pricing headwinds.

1:03:02I think you've invested in some SaaS companies. I got a bunch of SaaS companies. We've seen like two or three years of just, man, this has been brutal. Not only have the multiples come down, not only were they overfunded and burning too much money, then you get their customers are consolidating their SaaS vendors from 50 to 20. And some CFO somewhere is like, yep, you're in the 60 % that we're cutting. And then you have people saying, I'm going to build Rippling or whatever. It's like, oh, you don't need Expensify. You have rippling we're going to just knock that product off and put 70 of it into our product good enough you can cancel that so there's a lot of headwinds and then on a per seat basis i have a bunch of companies are like yeah we didn't lose the logo we just lost 30 of the logo what what happened oh they did a layoff they did a rip yeah i mean we can't sell the product to cut employees who aren't there anymore then you know there's this usage thing starting to pop up people selling guys on usage you and i talked about that last time with one of your bpo kind of companies and Maybe talk a little bit about that.

1:03:56The general pricing change, like we may not be calling the SaaS at maybe, I don't know. You know, so I wrote a piece. So there are a few things happening here to unbundle. Certainly, just on the multiple side, growth for these companies, as you allude, has come down a lot. And there's a number of reasons for that. Consolidation, saturation, and of course, AI, you know, starting to nip into the per seat model pricing, like, you know, it's kind of classic. If you're a Zendesk, you don't want to be vulnerable to an innovator's dilemma. But in an AI world where you're starting to have people automate the tickets, which means fewer seats are necessary, how do you adapt your model so that you can be consistent with the clear direction of momentum and of the technology, where the puck is going?

1:04:51I personally get excited by companies right now that aren't actually selling software in the way that we have always thought about it. And talk about kind of non-consensus view. I wrote a piece that you were alluding to maybe a year or so ago, just about how I believe that AI companies, AI native companies, should get out of the mindset of selling software where you're selling it to an existing employee for their existing workflow. And you should be thinking about like, what does it look like to sell the work instead, the finished product, where you are, you know, taking all the friction really of working with a person in that particular instance, having somebody adapt to a new technology.

1:05:38And instead, you're able to automate those work products in a way that it's just a very different kind of consumption-based way of charging for the product that actually is relative to the cost of the human who would have otherwise done the work as opposed to increasing productivity of that headcount. And so it's a very different mindset. Instead of selling a 10 % productivity improvement, where you have to get everybody to adopt to the software, you're selling a 95 % productivity improvement. And yes, there's going to be some on the edges improvements that happen at the company. But by and large, you are taking that work off of their plate and selling it as a service, almost to the company.

1:06:23That model, I believe, is the future for these kind of AI companies building B2B products. It's not to say that that's going to be the exclusive future. There's certainly going to be so many other companies that get built that look more like software or are more like infrastructure where then internal teams in these enterprises are building their own applications or leveraging the technology themselves in different ways. But it just feels like it is a paradigm change that's happened. And we're going to see a lot more consumption-based pricing in these companies moving forward. I kind of like it better.

1:07:06The per seat model, it felt fair and it felt much more competitive than the client server model where you had this like buy a couple of servers you can buy licenses it's just all too complicated got simpler and then consumption is even simpler and i think you know if there's any trend it's you know this trend of better cheaper faster simpler yes right like some some combination of that maelstrom you know and that is like actually the area that i get most excited about now which is like if you think you know we we have a few investments, companies like DeepL and HeyGen and some others, where what they did is they built a product that removes all the friction of working with a human to do something.

1:07:56And by doing that, very much unlock the market opportunity for that. So let's take DeepL as an example. DeepL is an investment we made several years ago, maybe six or so years ago. and it is you can think of it most simply as ai translation it's the best ai translation in that's available right now and you know head-to-head tests again again their translations come out ahead they you know i was at pinterest i remember one of the first jobs i had to do was to translate pinterest into all these different languages and then all of our materials exactly localization And I hired a bunch of translators through Upwork and had to find them, manage them, pay them, figure out ways to get the streams for them.

1:08:47Thousands of hours of work. It's just such an annoyance. And also, it was like, okay, in two weeks, we'll get the translations back type thing. Now, with something like DeepL, you have an API. and you're able to, you know, there's a custom library. So you can have, you know, the things that are specific to your company and it is instant. And when you do that, then all of a sudden the things that you would have otherwise not bothered to translate because it wasn't worth the cost or it wasn't worth the effort, you just do it instantly. Yeah. This is a super interesting trend. It's like, uh, this wasn't worth it before.

1:09:27exactly because we were pricing it at translating something for two dollars per minute so 128 an hour to translate a podcast made no sense then descript probably using yes this product all of a sudden it's just like yeah well when you upload your video we do a transcript and youtube has a transcript and this does a transcript and it's just like transcripts are now table stakes and so we invested in a company called podcast ai and they were kind of automating podcasts i said can you just make this a website because i i'm on wordpress right now shout out to my guys over there matt mullen with brian alvey and i was like and i i was gonna hire all these people to do translation and to do transcripts and they're like yeah we can set up your website here it is and literally in two days they sent me and i said oh okay how many episodes are you and they said all of them i said well this at the time 1400 episodes of this weekend's furlough it's like yeah yeah we just pointed at the rsf feedball and we did them all how much that cost it's like i think it was like 400 so what it's like yeah you know it's like 50 cents per episode or something so we just did it for you i was like this is the greatest product ever and so now they sell this product for 500 bucks a month and you can just in pocket state i does everything for your podcast including the timestamp so this when we publish this episode you'll have the timestamps it'll summarize it you'll say the major themes we talked about and then the next step will be linking to things and then it's going to take your two other episodes and link them together so here and it's doing it all automatically that's amazing whoa and then the next piece is anybody can go in and highlight a section so they can highlight us talking about lancione's book and say make a clip and then it makes a clip ready for tiktok with the text over it yeah that process was 30 hours of work that i just described and it's now zero hours of work whoa and this is like very strange is so fun about this another company that we invested in hey gen my partner victor's on the board, Joshua, incredible founder.

1:11:21Like if you went to the website for Haygen, oh, you would think, man, how big of an opportunity can this company be? It's like they create these avatars for you where it looks like a huge, it looks like you record yourself or you use one of their available models and you write text and then it, it act, it like lifelike makes it look like you're saying those words. And the bias in our brains, and this reminds me a little bit of Uber, Airbnb, so many of these companies initially get very, very underestimated because the opportunity they're going after initially is small, but the value proposition is so compelling that it blows open what that use case could be and the creativity that happens once something like that is possible.

1:12:13And so, you know, at HN, it started out with these avatars and used to be like, who would have a video of themselves on a website? No one. It just was never worth the time to film yourself, do all the production. It's a one-off. You have to go through all that effort all over again to do another video. But instead, you can have something like HN, where all you have to do is write some new script and it automatically gets updated. So great for training. You think about like the HR department does some training or like, I don't want to say an MLM, but let's say you got a sales team at scale. You got a thousand people working at Toyota dealerships and you got this great training person who trains them on how to sell the new Prius.

1:12:56Now you just, you don't have to hire a video crew to go do that all over again for the new Prius and the 17 new features? Or what about the 1600, you know, little things for the mechanics? Now you got some mechanic who's been in there and it just, the mechanic will teach you stuff. And that is like mind blowing. It's just amazing. Are you more enthused than ever about AI and as an investor, are you in the trowel of despair? Where are you at? Are you giddy? Where are you at? You know, giddy is close. Like I, you know, we're just deeply optimistic. I love it. And giddy up. I think this is one of those things where you could imagine that this is like the internet that came and then the window opens.

1:13:45And if you're not there at the very beginning of that window, then like you missed your chance or the app store happens. And then all of a sudden it's a gold rush, land grab, whatever you want to say. and then good luck if you come later. I think what we're going to see in AI is just a rolling thunder of opportunities that get opened up. Each time any of these foundation model companies makes an improvement to their model, new things that weren't yet possible become possible. There are things like latency for voice. I meet so many companies and you speak to them in the voice models And there's still just a little bit too much latency for it to feel like a human.

1:14:33Or some of the reasoning or memory. There's a bunch of things where you still feel the constraint of where the technology is in terms of what use cases become possible. But as we progress from four to five, as new research comes out that makes these things on the edges better, I think new use cases are going to continue to be opened up. And so there is just like this thing of like, we are still in the early inning. We're still meeting companies that have completely orthogonal approaches to building foundation models. And so you're just reminded that this is still wide open and keeping optimistic and almost naive in believing that every company still has an opportunity to disrupt the incumbents is a really fun, fun place to be.

1:15:33It's definitely you talk about the game on the field. I think you described it pretty accurately, which is it's anybody's game. You know, you start looking at these foundational models and it's like, oh, my God, chat GPT, open AI has run away with it. And you're like, actually, nope. i'm using this quad minstrel or whatever it is like their last version i'm like oh that's actually better you know and then i go to this other one and i'm like oh that's actually better and yes and i do like i just cut and paste the same prompts into three of them and i'm like wait no that one is better for this oh wait this one does better citations oh this one does better tables oh this one does better visualizations and i'm to keep up with it reminds me of the 80s when i was first you know uh like a young adult in like in 1983 84 85 i was 13 14 15 years old yeah i was 13 14 to 15 years old, I was obsessed with PCs and I was a PC sports specialist.

1:16:17I used to get PC magazine in a magazine called bite and they became so thick and you would just go page by page. It was like my Vogue. It would be 300 page magazines, 200 page magazines, PC magazine got so big. The US postal service said we can no longer let you send this as a magazine. So they're like, Oh, okay, I guess we'll go from monthly to weekly so that we could lower the number of ads. But you would go Falcon computer, you know, Eagle computer, Oak computer, and it would be like a different page with them selling a pc there were a thousand people selling pcs and you know it wasn't like today where it's like oh i can get a mac or you can get a dell and you're not or surface and you're kind of done but we were in that phase it reminds me of exactly that like just people in garages just figuring stuff out and then one of them's going to be dell and look at dell today or look at apple today right like where you start is not where you finish what michael and i i text with michael dell all the time i talked to him all the time and he's invigorated he's still at it We're talking about 40 years later.

1:17:13Yeah. And that company's doing better than ever. AI has been the greatest gift to the incumbents, that's for sure. Yeah. But I absolutely agree. I mean, the half-life on any opinion on AI is very, very short. Because it is the type of thing where I was joking with a friend of mine who isn't at Anthropoc. When they came out with plot three, I was like, man, I thought you guys were gone, you know? What a friend. A friend like Sarah. I thought your company was toast, man. I can send your resume around for you. You're back in the game. They're back in the game. And then Gemini comes out and they have a million token context window.

1:17:56And you're just like, it was just every... And then, of course, then OpenAI comes back and they have 4.0. And so, you know, there is no resting on laurels here. We are also at a time when you just think about the tremendous amount of investment that's going into these companies, going to NVIDIA's balance sheet. Crazy. And consumers are the big beneficiaries. It reminds me a little bit of the food delivery wars early on. So great. You remember how it was like they were fighting for each incremental point of market share. And so if your order was 10 minutes late and you let them know, they'd refund the whole order, right?

1:18:39Yeah, dang it. It's all good. Consumers were huge beneficiaries. We're going through something similar now. Yeah. Where, you know, OpenAI is pricing these things below cost, is my understanding, at least on the consumer side of the business. For sure. For sure. We are, as consumers in a golden age, where these products are unbelievably expensive to get to where they are, still very expensive to run, and so powerful at our fingertips. That is a really fun time. I change when I open a new window in my browser. I hit this little tip for folks. You have to become AI native. Yes. Which means you just have to be using it every day, multiple times a day.

1:19:25I open a new tab or open my browser, it opens up to the chat GPT window for, and I just do everything there first. And then when I was talking to you on the show, I just typed in Lancey only, you know, five, whatever, and five dysfunctions, and I said in five sentences. So I get now what, like I have producers of the show, they spend two hours on the notes. I got the notes here. But in real time, you'll say something, type it in there. And I'm like, oh, yeah, that was the one. I forgot that. or i put in tell me about the i just put social shopping 2010 to 2015 and it was like oh winolo the wish yes fine yes i remember all those companies like oh wow yeah fancy like all this great stuff i'm like yeah and who who won right like and i didn't think it was like fait accompli that you know your your jockey was going to win that race like it was not clear at that time uh listen you're amazing thanks for coming on again you got it again folks 75 great minutes sarah tavill uh you can subscribe and you will to her sub stack right now just sarah t-a-v-e-l sub stack you'll find it there and she doesn't do a lot of interviews so we'll see her back here january 10th and we'll do our we'll do our this is what i do with my great guests i just lock them in for you chasing anything there you go i love it january 10th she'll be back with her 2025 25 preview.

1:20:46Let's let's make it fun for the next one. Let's talk about what we expect in 2025. We'll kick off the year with our predictions and ideas. All right, we'll see everybody next time. Bye bye.