LIVE: How AI is Reinventing Software Business Models ft. Bret Taylor of Sierra

0:00Hi and welcome to Training Data. We are mixing it up for this week's episodes and dropping a conversation that was filmed live at Sequoia's annual AI conference, AI Assent in San Francisco, with Brett Taylor, the founder CEO of Sierra, the former co -seo of Salesforce and CTO of Meta, and the current board chair at OpenAI. Brett is interviewed by our partner, Ravi Gupta. We hope you enjoy this far -ranging conversation with Brett about the opportunity for vertical specific agents, with it means to charge on outcomes and for jobs rather than for productivity tools and more on how he sees the competitive landscape for foundation models evolving.

0:36Stay tuned for a few more special AI -assent drops on our podcast feed later this week. Next up we have Brett Taylor. He was part of the, I think, first APM program at Google where he famously rewrote all of Google Maps in a weekend. Then he founded a company, then he went ahead and was just CTO Facebook for a while. and then he found another company, which we're lucky enough to be in business with them on, which is redefining the front door for businesses. And Brett will be joined by our partner, Ravi, who used to deliver groceries and now gives people money. About the same. Please welcome Ravi and Brett.

1:20Yeah, but a lot of groceries, okay? I thought Pat was saying I was the legend, so I was pretty upset when it was apparently Brett. You're a legend to me, Rob. Thank you. I really appreciate you saying that. Having Jeff Dean and then Brett Taylor is like having like LeBron and Steph of Engineers. It's amazing. Or rule off two random rugby people that only you know, you know, maybe an analogy you'd get. All right, I want to ask you a question. There's very few people that have been described as 10 ,000 X engineers, probably in general, but also extremely, extremely few people who've done that and also been good at enterprise sales, okay?

2:00And I think one of the things that'll be fun today is we can like be like high -faluten and talk about where the world's going, but we can also talk about like how to sell things. And so the question I have before we get to tactical advice on that is like, what made you even think that you could do something other than just be an amazing engineer. Yeah, I actually think this is one of the greatest challenges to overcome as an entrepreneur. This is really reductive, but I think if you talk to an entrepreneur, they often have some unique insight on the business they're creating. So maybe it's a technical insight.

2:31If they come from a background and say business development, maybe they see an opportunity in the market that they can take advantage of as a partnership or business opportunity in the financial services industry, maybe you see an inefficiency in the market, you can take advantage of. The issue I see with a lot of entrepreneurs is you sort of become single issue voters. It's like every time there's a problem in your business, if you're a product person, you go change the product. There's always the famed redesign, like the dead cat bounce before your company gets destroyed. And it turns out that as you're growing your business at any given point, you may have a good market problem, you have a product problem, you have a competitive problem.

3:10And I think the hardest thing is when you come out of business with what you're comfortable with, you regress to sort of what makes you comfortable. For me, my most like vulnerable moment was when I was 29 I became the CTO Facebook. I was one of the older people at Facebook at the time. It's all actually the end of it. I'm good. Well, I didn't know what the, what I was talking about to Cass. I shouldn't Cass. I didn't know what I was doing. It's all about you. You told me it was recorded after like, you could probably have that. I think that you should not give away state secrets about opening up this.

3:39Yeah, you can first find. And I wouldn't have self describe that I was struggling in my job, but I think I was. I was sort of trying to do everything myself. And Cheryl Sandberg who is the chief operant officer at the time took me aside and kind of had a sort of come to Jesus conversation with me. Essentially saying, you need to hold your team to as high of a standards, you hold yourself. You need to stop trying to do the work yourself and you need to identify the people who aren't meeting your needs, replace them, but you need, you're not scaling the way you're operating effectively. And it was kind of the conversation I needed to have at that moment, I felt really shitty for about an hour and then woke up the next day with kind of a fire in my belly.

4:21And I realized upon reflection, she didn't sort of diagnose it this way, but upon my reflection, I was going into work every day and trying to say, how do I conform this job to me and my strengths? And instead of thinking like what's the most important thing to do in this job today, even if it's not something I find delightful or interesting. So I sort of came up the job and I always modeled as giving myself advice, like I was sort of my own board of directors. And sometimes it would be people, sometimes it would be business, sometimes it would be technology, I was a CTO, so hopefully it wasn't that some of the time.

4:58And interestingly enough, I got more joy from it. I realized at that point I actually just appreciated having an impact more than I appreciated any act of doing my job. And so I ended up with this really nice reinforcement of, wow, I'm better at my job than I was last month because I'm not just doing what I like or what I feel comfortable doing. And that ended up a really virtuous cycle. So I've had a little bit of a chameleon. It's interesting that I meet people from Facebook, they think of me as an engineer, if I meet people from Salesforce that think of me like a suit, you know, like, I don't know, generously, I have something in the boss.

5:35And I'm not any one of those things. I just sort of showed up every day to, you know, be, to have an impact. And as I said, I just, I gain a ton of joy from it. And the reason I bring it up for the entrepreneurs in the room is I think at every stage of your company, at the beginning, product probably is all that matters, you know, finding your first and happy customers. As you scale, what you need to be great at changes. And I I think having this self -awareness and self -reflection to actually change what you spend your time on is actually I think one of the greatest challenges of not having your company sort of get away from you and continuing to be effective leader at that company.

6:12I would tell you, I think it's something, just so you have it, it's something I have taken and shared with my kids, which is like, don't let something you're good at become who you are. And I think that that is something I've learned from you that I really appreciate, and I think you're doing in the day to day. So tell people about Sierra, why did you enclave started? What's the vision? What are you guys up to? At Sierra, we help companies build customer -facing AI agents. We started on the hypothesis that every company's main digital interface will be an AI agent. And maybe in 20 years ago, your main digital presence was your website, your .com.

6:51Remember listing on Yahoo directory was the bees knees back in the day. I do, I remember that. Yeah, thank you, old man. Yeah, thank you for noticing. Yeah, and then for a lot of brands, whether it was your social profile or your mobile app, companies have a lot of different digital touch points today. Our hypothesis, I don't know if you measured it, what percentage of digital interactions happen on a touchscreen now versus a keyboard? It never replaces, but it certainly sort of displaces. Our hypothesis is you fast forward five years. the vast majority of digital interactions will happen via an agent.

7:25And as a consequence, every company will need their singular agent, not plural, the one that has their brand at the top that represents the whole of their customer experience. And so we've worked with a lot of different companies from ADT Home Security to Sirius XM to help them build their primary customer facing AI agent. A lot of it is AI and it's an agent, but a lot of it is also business. You know, like what is the customer experience you're providing for ADT home security? Your alarm might be going off, your alarm might be broken for serious XM. Someone might want a better price on their plan because their promotional period expired.

8:02So it's actually really interesting because just like your website, I don't think most people think of websites as a piece of technology nowadays, right? It's almost just an expression of your brand and your business. That's actually kind of the agents that companies are building on our platform. But I hope we're successful if you run across and branded AI agent in the wild. I hope it's power -bar platform. That's what we're trying to do. And one of the things that comes up a lot is what are the foundation models going to do versus what are the application layers companies going to go do? And I think you have probably the most unique vantage point on this being the chair of open AI as well as building an application layer company.

8:35So can you help our founders here think about what is going to belong to them versus the foundation models? Yeah, I've, I'll say a strong opinion loosely held on this. So I think there's really three big markets that I see, and I'll end with the one I think is the most exciting. First you have the foundation models, and Jeff said something similar to this, but I think there's going to be a ton of consolidation in the foundation model market. It's fundamentally just a capital intensive business, just like building data centers. Effectively, it is building data centers, you know, at the core of the expense.

9:08And as a consequence, if you have large scale capex, you can generate more capex and it sort of benefits scale. And as a consequence, I think we'll end up a little bit like the cloud infrastructure market, a handful of players relatively low margin, but very, very high scale and collecting taxes from everyone in the AI ecosystem. I think the next market is really making tools, the proverbial pickaxes and the gold rush. And I think a lot of companies created prior to large language models like Databricks and Snowflake will sort of be in that category but a lot of new ones as well. There's a lot of nuance there.

9:47I think that will be a market that can really be threatened by the foundation model companies. I imagine every cloud infrastructure company has some, there's probably an AWS or Azure equivalent to what they do. and so you end up with a naturally more challenging, but it can be very high scale, but it's just you definitely are closer to the sun. The closer you are to the models themselves. And then there's the AI Applied AI market, and I actually think this will manifest its form as agents. So there's companies like Harvey that make an agent for the legal profession. There's companies like Sierra that make it for customer experience.

10:26There's companies that make it for marketing. there's companies that do for visual effects. My view is this is sort of the new software as a service. Companies will, the form factor of purchasing AI will be purchasing an agent that does a job. I think there's a, it's a really exciting time. I actually, I think I have assumed a lot of folks in this room are working on sort of applied applications in AI. The reason I think is exciting are sort of twofold. One is, I think it's the way software should be consumed. I think right now a lot of particularly large enterprises in the excitement after chat, GBT, licensed a lot of models.

11:04And as we all know, software is like a lawn. You have to tend to it. So I think there's a lot of buyers remorse right now from a lot of spend and a lot of prusive concept, but not a lot of value. The second thing is I think it changes the markets. You know, there's these markets where like selling enhanced productivity to attorneys is not like a huge tab. And so you sort of run up against just the natural thing like even if you get you know 80 % market share How big could this company be you know But if you're actually selling antitrust review or something I don't know much about the law so I just made this incredible really you are like Or

11:44You know that has a ton of value because you're essentially providing something that very high -cost labor produced before. And as a consequence, I think if you look at the total dressable market of all these vertical specific domain specific agents, the market is gigantic. And actually, it's interesting if you look at the public markets, if you look at the top five software companies that dominate the S &P 500, the dominant stock market, none of them are pure play, software is a service company. Microsoft has some enterprise software, Amazon has AWS, but their infrastructure companies are consumer.

12:27And if you look at the software as a service company, service now, Salesforce, SAP, Oracle, they're all serving that sort of $200 to $300 billion market cap range. You wonder in this new world of agents, will we see our first trillion dollar sort of applied enterprise software company? And I think the answer is yes. because you're going from selling productivity enhancement to selling outcomes, and outcomes are valuable. Some outcomes are extremely valuable. And so I think there's been a little, understandably, a little too much excitement around the models themselves. Not that I, I mean, obviously at Open I were very excited about it, but as an entrepreneur, I think that it's sort of the pickaxes are obvious, but actually the value is elsewhere in my mind.

13:12I think the value is taking these, this amazing next generation technology, solving a very valuable business problem that was high cost before, and selling something valuable for an order of magnitude less money than the current cost is really fucking easy. So I just think it's a great business, and I'm super excited about the future of the software industry as a consequence. What do you think is the right way to price those outcomes when you think about them? I think that there's all the former seat -based models. right? And now Sierra obviously does it differently. How maybe talk about Sierra's pricing model and then also talk about how applicable you think that is or isn't to other agent companies?

13:52Yeah, it's here. We do. We call it outcomes based pricing. So for a media and customer that typically means when the AI agent resolves the issue for the customer autonomously, there's a pre -negotiate rate for that. And if we do have to ask late to a person, it's free. We do that just to align with the business model of our customers. and I actually viewed a natural evolution of software. We went from box software with a perpetual license to once you delivered software in a browser, most everyone's on the same versions. So you needed to invent a new business model to sustain R &D, which led to software as a service, subscription -based business.

14:30And we just thought from first principles and said, hey, if you're selling software that completes a job, what is the secular business model for that? And it felt like let's pay for a job well done. salespeople get paid to sales commission. You know, why not the AI as well? It does really disrupt the way you build a software company in my mind though. If you look at particularly the enterprise software ecosystem, there tends to be sort of an arms -length relationship between software vendors and customers. Typically, you'll sell a piece of software and be done. Then you'll have systems integrators come in and spend for large -scale enterprise software appointment, sometimes six months or a year to implement that software.

15:12And that's well, I mean, by the time this offer is being used, you know, the vendor has been probably not gone, they're probably going to sell them more things, but effectively gone for six to 12 months. So as a consequence, there's almost like an active disassociation with the outcomes. And so you end up with a confluence of I think a lot of different factors that I think are interesting. There's a question just before I walked up here about agents that can code. What will that do to the professional services industry broadly? There's a question if the right thing for AI software is outcomes.

15:46How do you actually align your company with that kind of accountability? I think it sort of blows up a lot of the model. But that's why Steve Jobs said it's more fun to be a pirate than it is to be in the Navy. And I think it's a really good time to be a startup because most people in this room are not encumbered by a business model, which is a funny way to thinking about it. But if you look at the history of software, Salesforce beating Cable Systems, Service now beating the plethora of ITSM companies that came before, it's actually much closing a technology gap in your product is hard, but not impossible.

16:23Changing your business model is really hard. And you look at Microsoft transitioning from Windows to Azure and how incredibly awkward that transition was and such it deserves a bunch of credit. Shantanu did a great job at Adobe, going to Rattable Revenue, but there's like a graveyard of CEOs who've been fired because they couldn't make that transition. And in part because public company investors are horribly impatient in these things. And so I just think that what's exciting about AI is I think it's going to give rise to new delivery models, new technology models, but as importantly, new business models.

16:59And I think that if you think about what are the opportunities for startups relative to incumbents, don't lose sight of the business models. I actually think it's usually one of the greatest advantages that startups have relative to incumbents. Yeah, I think historically speed has been something, but I think on this point, it's like you also have this enormous benefit of you're not encumbered by the old business model. Well, you referenced the previous companies that you've been in and you started. One of the things we've talked about is like there are things that are similar about building a company now and there are things that are different.

17:28What are some of the things that are the same as the previous companies that you built that you're doing now and what are some of the things that are different? Well, at Friend Feed, my not so successful social network, we built our own servers. Can you tell the story about Facebook IPO real quick just about Friend Feed for everyone where you got recognized? Can you just... I'll do that, I'll do that. I'll do that. It's a good story. We stand between these people and things, man. You've got to make them laugh. Like, let's go. Hit them with something. You can pull it out the deep cuts. Okay. All right.

18:00You know, I think a lot has changed just in the infrastructure world. I think literally we built our own servers at FriendFeed and brought them into the We brought our site down once by tripping over a power wire in the color. That was so jeez, so jeez faults. We love him. It was like, so it's just a different era. You know, I do think it is as we've virtualized infrastructure and built, you know, just the software development lifecycle we have today from cloud infrastructure like Azure and Amazon Web Services to GitHub and GitHub actions and, you know, all the incredible open source libraries.

18:42And then you have sort of the virtual infrastructure to help support your companies like, ramp, and rippling. You end up where there's a certain, there's a very different level of focus now in starting a company. It used to be you just had to do all these things to build the scaffolding of your company and it was actually like a non -trivial amount of work. And the thing I find just so exciting about the future of entrepreneurship is, there's just so little overhead now in terms of just like intellectual overhead. And I remember actually just how hard it was to get like credit cards for employees.

19:20They'd like, I'll get a credit check. I'm like, are you kidding me? It's our bank account. Like, what are the, and now you can print a virtual credit card with things like, grab, it's so easy. So I think we've just seen every aspect of starting a company that was about sort of like the operational sort of scaffolding infrastructure do so. Many startups that you all have funded are now doing that. And so as a consequence, you can focus on just purely what defines your company and what makes it different. My color commentary on that is I actually think one of the mistakes a lot of smaller companies make is spending the resources on time on things that aren't core to their business.

20:03And it's more than a hidden cost. I think every ounce of time you're spending on something that fundamentally should be a commodity to your business is time you're not spending on selling your product to more customers or working on true differentiation. And it takes a lot of discipline because a lot of those things are like catnip. It's fun to work on that part of your business. And I always like to say Clay, who's somewhere in here, we always talk about what will make us happy a year from now. And that's always our metric. And then, Gemma, you could take it to 10 years if you want to be like, no one knows where the hell's gonna happen.

20:3610 years. Exactly the way it goes. If you don't know what's gonna happen 10 years, nobody knows what's gonna happen in 10 years. And I do think it's very clarifying. And I just think it's, it always surprises me how much I tend towards some of those things that are, you know, wholly undifferentiated at this point. Okay. Well, you mentioned some of the companies that Sierra works with, right? And some of those are companies that have been around for a long time, right? They are established companies. What is the T and ADT stand for? Telegraph. Telegraph. Okay. So, how do established companies...

21:05It's cool, by the way. Home security over telegraph. I actually imagine someone coming to like the Sequoia of that day. It's like home security over telegraph. Like YouTube for cats, you know? And they built that business and it really was. And now they're actually doing home security with AI agents. What a cool privilege. The biggest awesome. And you know, it's a better acronym than ADAI. You know? Okay, so what do they have to do? What are the ones that are just gonna succeed? What are they gonna do in a world of change technology? And what are the ones that are not gonna succeed? What is holding them back?

21:39So, and how can this group help all of those established companies succeed? Yeah, so I think it's a really interesting opportunity for companies in competitive markets like home security or a company like Sirius XM that's got incredible, unique, original content, but they have a lot of cord cutting and a lot of competition around them. You have this technology in AI that drives incredible amounts of productivity in departments that have previously been incredibly underserved by software. Everything from large -scale contact centers to we talked about things like legal departments, large operations departments, and as a consequence companies that lean into this can really change the cost structure of their business.

22:26If you think about, I mean, there's companies that have like 20 ,000 person contact centers and you know, this costs hundreds of millions of dollars every single year. And if you can take all of that op -ex and put it back into your business, you can lower prices, you can invest in growth. And so it's really interesting. I think it is one of those opportunities where the shovel ready applications of AI, even if it's interact because they can drive such structural changes to the essentially the unit economics of so many companies' businesses, I think it will change market share. And so I think that it's a little bit like the birth of the internet, you know, and Walmart did very well since the birth of the browser even in the face of Amazon.

23:12There were a lot of retailers like Blockbuster who did not. And so I think because most executives running these companies now lived through the web browser era, saw the birth of the smartphone and saw the growth of things like Instacard and DoorDash and others, they see this. They're modeling what is the future of our industry going to look like. And you know, you mentioned enterprise sales. I think the key thing about selling anything is speaking the language of your customer and having empathy. I think one of the things I see a lot with entrepreneurs is they'll go into a meeting and sell their product.

23:52If you ever see a really good salesperson, the first thing you'll see them do is ask a lot of questions. But then the next thing you need to do is actually listen and understand what they're saying and then reflect the value that your technology provides to the problems that they just described. And I actually think that actually a lot of the technologies in AI will immediately benefit a lot of these businesses, but they're being pitched by 20 AI vendors every single day and they all sound the same. They literally all sound the same. You could see the first call deck of starts to do completely different things and there's the same words on the slides.

24:29And so this is the, I think the really opportunity right now, is how do you actually stand out in such a saturated market? I actually, Clay and I talk a lot about this because we both started web design companies in high school, you know, like during the dot com bubble. I went door to door, flower shops. He did more like graphical things for - I think he made a little more money than you did in high school. He did, yeah. It's, he did. It's been a source successful. It's fine. He also got sued by the California raisins, but all that's a whole another story. So true story. His name's Clay. He named his company ClayMation Bad Look.