The AI Bubble WILL Burst | Should we be fearful of Chinese Open-Source | Jerry Murdock Transcript, AI Summary & Key Points

00:00 If there is a dislocation, no one is better prepared to survive it than hyperscalers. Let's take Neoclouds. I think at least half of them go away within 36 months. Jerry Murdoch joining me in the hot seat stage. He's the founder of Insight. They've managed over 90 billion. Jerry has seen pretty much every technology cycle of the last 25 years. He's invested in some of the biggest companies across those 25 years.

00:24 And today we debunk whether we are in a bubble or not. Whether China will beat the frontier models, whether we are about to have the greatest cyber security threats of our lifetime. This and so much more. >> Fireworks is making a lot more money than base 10. The more you customize the model, the more the token changes its value. >> Ready to go. Do you know what?

00:56 I love my I think I genuinely have the best job in the world because I get to sit down with people like you and I'm dumb as rocks, but I get to ask questions that normally I wouldn't be able to ask and I get to learn from the greatest minds. So, thank you so much for joining me for a second time, Jerry. >> I'm happy to be here. Now I want to touch first on something that you said to me before which was you said if the Iran war continues to fester then you expect to see a correction and depending on the depth of the

01:27 correction the AI bubble will burst between October the 26th and March 27. Um can you help me understand your thinking here? If you look at what happened 2001, the end of the dotcoms, the innovations stopped for a while and then new innovations came in the LAMP stack which led led to rolled out of of websites. Google started taking off. 2008 cloud computing very slow to take off and this is because there was you know this the financial disruptions slow things down.

02:01 The stream of commerce gets disrupted and right now with AI debt is a huge part of this. It's so unique compared to previous cycles. So much debt all the hyperscalers have taken on much more debt than they ever have before. And the challenge becomes can will these guys get disrupted if the credit markets have a disruption which would be certainly what would happen if we had a problem in the overall capital markets.

02:34 >> The concern for you here is that we'll have a credit market disruption caused by the global conflict which will then impact the ability for these hyperscalers to borrow cheaply. >> Well, that's one potential disruption. I see several that could occur. And I think if it's going to happen, it's going to happen if this Iran war, we can't have it just continue.

02:54 And I the reason I say this right now is of complacency. We've got tremendous red lights that have been going on for a year or more on the credit markets. And there's just complacency. It's like, ah, we're fine. And I don't think people are accounting for risk. I mean, if you think about it, um, those guys that are in the private debt market, the the spreads are too narrow between real risk and and and not so much risk, and they're not really accounting for that.

03:24 And so, I'm concerned about that as one sector. But there's multiple because this AI revolution is incredibly complex with massive amounts of dollars being spent on it globally. What are the signs to you that we're seeing a cracking in the credit markets? >> Well, complacency is the first thing you look at. When it happened in 2008, 2010, there was a handful of people, which there's always been documentaries about these guys that made money on shorting the housing market.

03:54 Um, but everybody else in the world had no idea what was really happening. It was complacency complete, you know, and what you had was, you know, really ugly situation where the people that were supposed to be keeping an eye on things which were the credit rating agencies and the credit risk departments of the big banks were asleep at the wheel and this terrible thing happened and there was enforcing this risk.

04:22 people didn't recognize because historically there had never been a huge default problem with mortgages and that was the kind of thinking that was there and they didn't realize that the underlying problems associated with credit. I see the same thing today in that in the credit markets there's many opportunities for there to be problems. In the late 90s you had long-term credit blow up.

04:46 We just had Liupole blow up because he wasn't accounting for, you know, uh the leverage that he put on his fund. Um I still see that there's these little warning signs that the complacency is is is is the biggest issue. Um in Japan, another problem, right? So this is the second time the US has bailed out the yen. Um and why are they bailing out Japan?

05:11 That's because Japan holds a trillion dollars in in treasuries. And if they have to unwind that, if they sell 100 billion worth of treasuries, the market could absorb it. But if they sold 300 billion worth of treasuries, a third in order to to be able to buy dollars to to support the yen, we would have a real problem on our hands immediately. Immediate global problem.

05:35 So you you just see like I I do a lot of backcountry skiing and you recognize the avalanche conditions when they're worse or they're better and you recognize things can be just easily tipped over. And so the war in Iran if it gets really ugly, which it hasn't yet if it if things collapse and inflation comes back, these are disruptors. all of multiple different opportunities for disruption all based on the war.

06:05 Can I ask you though when we look at prior credit market cycles like you mentioned there was the challenge not the underlying assets were were of poor quality when we look at the hyperscalers today yes Facebook is having a bond issuance that's priced higher than expected but but Meta's core business is throwing off hundreds of billions of cash flow they don't need to borrow really they could do it off balance sheet it's an optimization game the assets are good >> I think you just saw that the free cash flow is the

06:35 lowest it's ever been in the history of a company. Number one. Number two, you know, back in the dotcom bubble, there was a lot of fiber that got laid in the ground and that fiber was always valuable, but the companies that laid the fi fiber and stuff, they all went bankrupt. So, you know, when you're really heavily dependent on debt and there's a dislocation, the underlying value of the asset declines.

07:00 It may not decline forever, but it declines pretty sharply in a very short period of time and that's when you have margin calls. That's the way it goes. >> What should they do from here? They should not take out such levels of debt. Like how do you expect this to play out? >> I mean look I mean what people are making decisions on the risk that they see to their business if there is a dislocation no one is better prepared to survive it than hyperscalers.

07:28 I mean, all the hyperscalers have enough ongoing business and they've been very consistent. That's why they're worth what they're worth. The Magnificent 7 is there because they've been doing this for a long time. And so, they know that they could absorb this. And if it happens, it'll be good for them because everybody else gets wiped out and then assets are become cheaper for them to acquire and they're in still in good shape.

07:56 The demand for AI compute is not going to change. That's not going to go away. The issue is the ability to fund it in the short term. Let's take NeoClouds. Neoclouds right now, there's a whole bunch of them. I think at least half of them go away within 36 months, but that and if there's an an economic disruption, a lot of them go away right away. >> Can you help me understand that?

08:20 I I can't pass that over. What will separate the Neoclouds that go away and become valueless versus those that retain value and become even more valuable? >> That same a question around which which head funds are going to go away and which ones aren't. If you looked at at at Leopold's returns, you think he's never going to go and he's probably going to survive this because he still has a good return for the year, but but people are going to be a little wary about his risk-taking capabilities.

08:45 And so it's underlying it's the people running the company. What's going to separate one Neoclaw from another is who is running it. How are they organizing it? We don't see it. You and I and everybody else, we can't see under the covers how that company's being run. Um I I can tell you if look at inference providers, I think Fireworks is making a lot more money than B 10 and you look at the efficiency there and you think, "Oh, well base 10's raising money at the same valuation."

09:18 Well, it's not the same business. I'd bet on fireworks over base 10 times better business in my opinion because they're more capital efficient. >> That's purely based on a capital efficiency. >> Capital efficiency and their willingness to to make profits on business. I think Curser was pretty smart in the the base 10 contracts from last year with Curser.

09:44 I don't think there was much profit in it for uh base 10. They just got revenue and they got scale from it, but they didn't get a lot of earnings. And so if you're not making a lot of money and you're putting up a lot of money, you're at risk. You're absolutely at risk. >> You mentioned fireworks there. Um we had Lynn on the You had Lynn on the show.

10:02 Amazing found where she said that actually specialized intelligence would be the future and that the majority of companies would have their own models trained on their own data and that would be very important. Do you think we have a world of millions of specialized models in this way >> and a couple of frontier providers? How do you see that? >> Well, on two things in the big in the big overall view, if we say that models are there to provide intelligence and we look at the world and you got 7 billion people, how many

10:33 intelligent people do we have in the world? I mean, in some ways, you're going to see that models are going to replicate humans in this sense of being specialized and being able to do a specific task in a specific way. You know, someone who's cutting a gem has a certain intelligence about how to do that work that's pretty specialized. And I think I think you're going to see intelligence is in the early days of these models, it's all going to be about specialization and the ability to customize.

11:04 What's happening is is that you can't customize uh anthropic models or or open AI models right now. Not the not the not the big frontier models. You're not allowed to do that. Um so OBEST has given an opening I think for for um open- source models to be tuned. As I mentioned on our last call, I thought that that open source models and AS6 chips were going to kind of be part of a tsunami of their own.

11:30 And if you're looking at a frontier model with double dollar digit costs per token and you're looking at an open source model that's 10 11 cents per token while all tokens aren't created equal, it's still enough of a difference that there's going to be a massive adoption of and and by the way, it's not like AI is is only demands for enterprise customers or a few consumers.

11:58 It's a global demand by every business in the world today. Even though it's people haven't quite act, you know, haven't quite acted on that demand, the more it's like websites at first, right? In the '9s, only a certain amount of companies had had websites, but the building out of websites has not slowed down. It's massive. It's just the the the desire for that and the need for website building continues to this day.

12:26 It's it's it's endless. And I think it's the same thing you know when we look at intelligence the demand for it is going to be endless by endless numbers of people and this is helping creating the opportunity for open source and A6 chips >> totally get you on cost efficiency of open source compared to frontier models but what everyone says is you're seeing the token traffic go towards open models and you're seeing the dollar traffic the revenue go towards Frontier models is that how you expect it to continue and will

12:56 Frontier here just be paid a lot more for harder problems and open source take the majority of easy. >> That's a great question. Um I'm going to give you an answer, but I want to caveat it this way and that there's opportunity in the answer for short-term disruptions that last from 3 months to a year where economics appear to have leveled out. as long as the frontier model companies and I'm convinced they they have goals for continuous learning um and and and ultimately lifelong learning in these models and and so as

13:30 they if they can execute against those goals over the next decade the demand for those models will never cease and so they'll just continue to grow but because the global demand is so massive I mean I'd assume that we're probably in single single digit demand fulfillment today single digits low single digits and I suspect that open source has a long way to go to um fill in the need and of course it's going to be low cost and of course most of the dollars are going to go to the people that that uh can afford to pay for

14:08 them right I mean um Teslas were really expensive at the beginning uh and only wealthy people could afford a Tesla at the beginning and now that's changed and So I think that's the way it's going to work. Only the wealthiest companies and people can afford these models and and uh in the early days and open source is going to be suffering from a very uh a big catch-up game in terms of in terms of revenue.

14:34 Um but they're going to get a lot of money and a lot of thing very very soon. It's coming. A token is a token is actually what Gavin Baker said the other day and Jensen doesn't give a [ __ ] whether you put it on a frontier or an open source he wins at the end of the day. >> Right. >> Do you agree with that perspective? And how did you analyze his opensource evangelism with his letter?

15:02 >> I disagree with a token is a token. Um, that may be true at the moment with pretty much Frontier models, but I disagree with it because companies like Fireworks and others are helping companies to customize. The more you customize the model, the more the token changes its value, right? Because the more you customize what's being produced. And some models they talk a lot more than other models and so they produce a hell of a lot more tokens.

15:35 >> And so essentially you're saying the efficiency gains that can come when you work with a provider like fireworks means that one token goes a lot further than another token in a lot of cases. Well, it there's two things to each model h and it's as the more it's customized, the more it's going to have a particular I'll say style to it and whether it's a verbose style or a style of brevity that's going to matter a lot in the overall cost.

16:05 And I think that what we're going to see is as enterprises and people with money have more time to understand these more and more customization is going to occur to do things. I mean, when you talk about agentic systems, it's natural that you think, hey, you're going to use an open source model for coding because they have they've got that figured out.

16:25 But for customer service, for onboarding, you can see open- source models being really ideal because it's a highly specialized task. And I think that highly specialized tasks are going to be something that pays off a lot quicker, right? And a lot cheaper. You can take your if you only have a million dollars to spend, you can spend that million dollars on customization and getting specific tasks done a lot more efficiently than you can on a frontier model.

16:58 >> How does this not cannibalize frontier models business? I'm not one to wants to see the open AI and anthropic challenge. Their thriving is good for all of us, but I don't understand how that doesn't cannibalize their business making their town smaller. But don't forget, we're talking about intelligence. Intelligence is you want more of it all the time and you want different flavors of it, right?

17:22 I mean, humans have emotional intelligence. They have, you know, all different styles of intelligence. We know that learning, some people have more visual intelligence, if you will. And I think that we're going to see the same thing with models. We're going to absolutely see this thing that, you know, prohibits and the the the cannibalization of frontier models, at least in the short term.

17:45 What I've seen with every new wave of technology my career, the market initially expands and then the contraction comes when there's a contraction in global markets and then you see the fallout and then you start again with more innovation. It's this continuous cycle of sort of Cambrian explosion of innovation followed by these sort of glacial periods when ecosystems collapse and then they grow back again.

18:11 And so I think as long as frontier models can continue to innovate because they have the money and they have the ability to do more innovation, there's never been a time yet where the open- source model has has trumped a frontier model on innovation yet. They might be better at specialization, but they certainly don't compete yet in sort of complex in being able to do complex tasks.

18:38 >> When you think about that challenge of Frontier versus Open, Alex Co has said the biggest enterprise customers in the world don't want to work with Frontier model providers. They're scared that they're going to eat their lunch, move into that business. >> Is that true? Or is that Alex rather self- servingly then saying and Palanteer will help implement a full infrastructure that's not that?

19:02 >> Well, look, Alex has a bunch of customers that that have that of course are very worried about that. All the all the CIA and all the intelligence organization of course they they they they're paranoid about that. So he's he's one got a huge customer base that that's exactly the way those people think. But two, look there's two issues, right? one is the data, you know, and yes, they've been giving their I mean, Anthropic's been getting all this data and and open AI already for years.

19:28 So, in some ways, the cat's out of the bag, right? I mean, look, if you if you if you worry about from a security perspective, I mean, look, I mean, Apple could already rob my bank tomorrow. They have all my passwords. Apple has everything on me, right? If they wanted to. Uh, I think Amazon has a lot of data, too. Maybe not the prize data, but they have a lot of data.

19:49 Microsoft Satcha Nadella himself came out and said look we've got a a lot of the the data around the communication how communication works inside an organization. So look enterprises have already given up a lot of their secret sauce to the years and they should be cautious. I agree with Alex that open that that enterprises need to be smart about just continuously shoving their data up into uh anthropic and open AI.

20:20 They need to practice discernment and they need to think about what they want to keep behind the firewall and they need to continuously have an iterative conversation about that and be careful. And I think in part this is what's going to drive the open- source opportunity is that yeah, you know what, we don't want that stuff uh uh uploaded into the cloud.

20:43 We want it, you know, behind the firewall. So look, two things. One, recognize that enterprises have already given up a lot to uh third party companies. And B, yeah, they need to be careful going forward. >> They need to be careful going forward and security is front and center more than ever before. We're seeing hacks like we've never seen before. We're seeing Open AI and Hugging Face.

21:06 Anthropic came out saying, "Hey, Mayor Kulpa, our models actually hacked three companies." And it's almost like a brag now to have like a Do you know what I mean? Our models hacked companies. Thanks. >> Yeah. >> How do you think about the golden age of cyber that is to come? >> Uh well, there's no question that there's a heck of a lot of complacency around security overall.

21:30 Even people that think they're getting the job done, they're complacent. They haven't really thought through. I mean, um I don't know how many developers are running their their models in YOLO mode, but uh probably a lot. And so are they and and they're thinking, oh, I'll put it the model in the container. I'll put the tools in container. I'm okay. Well, containers aren't safe.

21:54 You need sandboxes. This is why the big container company Docker said, "Hey, themselves said containers aren't safe. You better put in a sandbox." And that's why they've had a huge success with Docker sandboxes. That's why E2B is successful with cloud sandboxes. People don't realize how important it is to really step up the game on security. It everybody in my opinion is underestimating it.

22:20 >> When you think about investing today personally, >> Yeah. >> do you want to do a lot more in security? Like what what can I take from that? I'm a venture investor. You know this, dude. You know I'm here to ruthlessly make money, Jerry. You know me. What what should I take from that? >> Well, look, if if you look at Fireworks, T, I'm lucky I invest in Fireworks versus B 10 or Core Weeave or any of the other inference providers.

22:46 Why? Because that team was the geniuses that understood Python the best. PyTorch in particular. I mean, so you've got this sort of team of people that have a different take and have a different set of aspirations in what they're doing. They're going to move up the stack, you know, they're going to move up and do a lot more fine-tuning and refinement and customization for people and they're going to be the best ones at it.

23:10 That's why they're going to succeed. I think you're going to see the same thing in security. And the most important thing that is underestimated is the need for sandboxes. The truth is there's going to be thousands of different forms of sandboxes and you're going to need a company that understands how models look at tools and what that behavior is and be able to take that behavior and optimize for it.

23:38 Because you know these agents we forget sometimes are probabilistic. It's not like a developer says okay I'm going to go build this little app over here and I going to pick two different libraries. I'm gonna see which one does best and I'm going to generate my app. No, an agent could say, I'm gonna open up a hundred different sandboxes with a hundred different libraries and then determine which is the best app, right?

24:01 And all these different tools. That knowledge is in a handful of companies today. And if you look at E2B and you look at Docker, they're probably the two best at understanding all that stuff. So, you start there because if you don't get the sandbox right, forget everything else. >> I have to ask you, you've mentioned FireWorks multiple times. Um, >> Lynn has margins in the 35% range, she said on the show publicly.

24:28 Um, >> many companies within the AI application layer in particular have very depressed margins, lower than that, 20%. >> Right? >> Should we just all get used to a lower margin generation of companies and that is AI sadly? or should we think differently about margin in this generation? >> Early in a cycle with new technology, it's always a real estate game, right?

24:52 I mean, when they wanted to populate Oklahoma with settlers, they just had this giant date, had all these people out there, pulled down the flag, and everyone ran and just put their put their stake in the ground, said, "This is mine." And it didn't matter if it belonged to to Native Americans or not. They just did it. And I think in the same way you've got people doing the exact same thing.

25:17 They're taking low margins or zero margins in some cases just to get the customers to get the relationship to get the real estate. And so it's a strategy. If you've got capital, you're going to own the real estate and then you're going to go back later and and get the margins built into the business. >> So you don't worry about that. You're like, it's a land grab.

25:38 It's more important to put your flag in the ground and we can expand margin later. >> Well, it's just a strategy. I would not invest in people that build a culture around that idea of low margin. Now, if that's why I probably lost out on investing in Amazon because I just didn't, you know, I didn't buy into Bezos's idea that your margin is my opportunity.

26:01 It turn in in groceries and books and things. Yeah, he's right. And in in compute, he was right. He was absolutely right. and he and he scaled it uh in a different way. But most people aren't thinking like Jeff Bezos in that regard. I believe that you need to build a culture that works and if you don't want to give all your company away to venture capitalists, you might think about monetizing and generating margin effective margin and you can be clever about it.

26:28 If I talk about the sandbox example, you know, the newest thing is, you know, most sandbox people make money on compute. Frankly, that's a dumb idea in my opinion. You want to you want to have a model that says bring your own compute and we'll make money because we we understand how to run sandboxes better. We know how to network them better. We know how to provide traces better.

26:48 We know how to do all these things that are going to give you visibility into what you're doing. And so again, innovation is what should be on your front of your mind. And that innovation better drive margin. So even if you don't have it right this minute, if you're not thinking about it, I won't invest in you. >> You said like, "Hey, we need to rebuild the entire stack."

27:09 When you think about that and the rebuilding of the entire stack, if you start with chips, we see more and more people coming in at the chips layer, whether it's etched or fractile in the UK. >> Yeah. >> How how do you see that? >> I I I've said it last February. I look A6 chips are really ideal if you're thinking about model customization if you're saying look we're at a new phase in in in this AI buildout where what we really want to do is is is do a lot of model specialization you don't need a GPU for that too

27:52 expensive you can absolutely take an A6 chip and so I think the number of people designing chips so A6 chip It's because they recognize that trend and they want to take advantage of it. >> Do you need to own the chip layer as a model company today? Do you think when you see Deep Seat building their own chips? You see Anthropic now building their own Jalapino from Open AI.

28:18 >> I'm not sure Jalapeno is the best name. It bothers me, you know, and I love Mexican food. I love spicy food, but I don't know. I I just not sure about that. >> The next iteration is called Padron Pepper. >> Look, look, actually owning the chip is going the wrong way long term. Short term, it makes sense for larger companies because they want to optimize chipsets for models and that's what they're thinking about.

28:50 But when I was uh at the Santa Fe Institute and I'm on the board there, we had a meeting with a bunch of chief scientists from all the major AI companies. And what we came back with out of that meeting, well, two points was one, we don't know how to measure AGI even if it shows up. But the second point that's useful to this conversation is that we should focus on this complexity between the model and the agent and therefore the human being to the degree that they're in the loop.

29:24 That's where the opportunity is. And sure enough, I think that's where the most compelling place I would focus on in investing is that level, which is, you know, from the loops to, you know, customization, uh, multiple things, security, all of that stuff from the model out is where I think it's far more interesting. Going back to the chips, eh, shortterm, I can see why people do it.

29:50 Long term, I think it's unnecessary. I'm an investor in Lagora and they obviously fight intensely with Harvey. When you look at the two of them, you think, "God, what a competitive landscape." What have been your lessons over the last few years, decade, two decades, when you have two very wellunded competitors like this? Fund the guy who is the small startup right now watching them to battle it out.

30:19 particularly in the legal market, the chances of being early and take when you're in that competitive situation, you're going to take risks and you might regret. And the first one of those guys that that has a security leak and security problem and it will happen is going to wreck their market opportunity. And you think, oh well, the other one's going to win.

30:40 Well, probably not, cuz they'll probably both be vulnerable because they're they're looking at each other and they're watching what each other's doing. So for me, I look at that situation like I want to go for the next innovative young company who's maybe not trying to do all things for all lawyers and be more highly specialized like Get Dynasty is in the trust world.

31:01 You know, do something very specific. And by the way, this has been a lot of advice. Uh Peter Theal's advice is start with a niche, dominate the niche, and then grow it out. And so when you're trying to take a whole ocean like the legal system, I just wonder if it's kind of contrary to Peter Theal's advice. >> Do you worry that we just throw price out of the window?

31:28 It it seems like we've never been less price sensitive. This is crazier than 2021, Jerry. I mean, like I'm investing every single day on the ground. I I consistently have founders say, "Oh, you know, we're raising 100." And I'm like, "Oh, wow. It's like, how much are you raising?" And they're like, "We're we're raising a hundred." I'm like, "That's the that's the friends and family round.

31:50 What the fuck?" And like when when I I said I said to a founder the other day, we write $25 million checks. And they were like, "Okay, good. So you're small and collaborative." Have we just lost price sensitivity and is that okay given all outcomes can be trillion dollar companies? >> It's an evidence that we're still in the hype cycle, right? We're in the hype cycle because expectations are beyond everyone's imagination, you know, I mean, and so if you're saying, I'm going to be a trillion dollar company.

32:17 My my opening round's 100 mill 100 million or something or even a billion, you know, whatever the valuation is are. You just you just recognize and you have to look in your head and look at the people that are going to take that money and you're going to recognize that has that number been well thought out and or are they or are they just doing it because the market's doing it?

32:41 And I would argue that it looks like anthropic and open AI those crazy mega rounds you know at 100 billion 150 billion might actually have been cheap. I mean, I think Gavin Baker probably believes that and others believe that. And so for a few companies, yeah, but how many trillion dollar companies we going to have? I think it I think discernment again is necessary here to decide, you know, what really can have the sort of hypers scale type growth associated with it and which ones are going to be also rans or a little

33:19 more of a slower growth opportunity. And we need to and we need to sort out those a little better. >> Is slower growth venture anymore, Jerry? If we look at fireworks, you know, it's 3 and a half years to a billion. It'll be 4 years to 2 billion if they hit end of year targets this year. 4 years to two billion. Jerry, do you remember when it was Slack 18 months to 10 million?

33:42 And we were like, "Wow, wow." I think in the case of fireworks look um they're benefiting because of open aanthropic they are the next level right and now with open source kicking off they're benefiting from that and so what what they ride on the shoulders of these model builders and they're the next layer that needs to get developed and so they can scale right behind that but if you're somebody else and like say in the app layer.

34:15 I'm just not buying that, you know. I'm not buying I'm not buying it for the legal and I'm not buying it for the app layers yet. Um, but for infrastructure, absolutely. >> But I get killed for this. I say publicly triple triple double double's dead. Do you remember this? Am I glib and my kid you are a product of a cycle or is this just a new expectation level for venture?

34:43 Uh you are glib at sometimes not all the time but right now you are. Yeah. Uh I would argue that general statements don't apply here. You have to be highly specific. Look if you look at anthropic and you look at what they've done anthropic and open a it's never been done in the history of the world. It shows the importance of the time. So we are definitely if we look through the history of venture in a completely different era and the frontier model companies have done something extraordinary in the history of the

35:16 world right I mean this is this is definitely on the level of inventing fire uh you know the electricity whatever you want to call it it's truly extraordinary what the frontier model companies have done they've they've lit the match to AI and the companies that can follow right on top of them and not get killed by them, but can grow and solve more infrastructure problems and help create an ecosystem around the model companies.

35:45 Those guys can they deserve those economics. Other categories, no way. Like for example, neoclouds, uh, no way. I don't buy it. I think some one or two of those Neoclouds are going to end up dominating and and and a lot of them at least half of them are going to go away and that and they're going to and they're going to go away with massive amounts of money being burned as part of it.

36:11 >> Does the model routting layer carry enough value to you to be independent? >> My opinion is open router has massive amounts of transactions because people are basically lazy, right? It was easy. Okay, I need to connect to this model. I'm just going to use open router and and and open router charges 5% on top of that, which is a crazy amount of money.

36:34 That's not going to last. You're going to see exchanges. There's a a blockchain company called Aki Naki that has just launched Dodex on their mainet. And this thing is an exchange to go out and buy inference. And as part of that, all the model routing is done for you. And so I think you're going to see multiple opportunities to an open router type product where people that are hosting the models themselves will provide, you know, through an exchange an easy way to to to to acquire the inference and the the need for an

37:11 open router type product is and and particularly paying the 5% markup for the inference will matter, right? So, because that's what that's what those things do and and my humble opinion is that they're not necessary long-term. >> So, if you're on the board of Open Router and the $10 billion acquisition comes through, what do you say? >> You say, "Fuck yeah, this is great."

37:35 You know, and and like a lot of people, you know, you take you take it you take the money when you can. And look, credit to Open Router, they're there early. developers didn't see another alternative. They could just go to there, go to the API, and they're willing to pay 5% markup to get their inference. And guess what? Shame on the enterprises for letting them burn all that money.

37:59 I mean, that's a huge amount of money, by the way. And so, I think that uh you're going to see a big disruption in that model in the next 3, four, five months. Actually, not just Aki Naki, but Venice, Venice IO is doing that. And there's two or three other guys that are now in the process of building exchanges that you can go directly get the inference you need without paying the 5% markup.

38:26 >> I think he very accurately said about kind of uh where we are today the potential um dislocation of excitement, dislocation due to external affairs and then the reblossoming of an ecosystem so to speak. >> Yeah. If you think about that >> and you advise me as a venture investor, >> yeah, >> deploying say your money today, what would you say to me?

38:47 Play the game on the field billy style. Be mindful. Don't spunk cash into Neols a billion dollars pre for one person out of open AI. What would you say to me? >> Well, I think Bill Bill's on the board of the Santa Fe Institute with me. I mean, his his guidance is pretty smart. He's pretty much on on point with a lot of things with venture capital. What I would suggest is you look for impact.

39:18 You you look for people that are going to be just they're just they're just way different than anyone else. And you look at them and you realize it's not that they want to build this business, it's that they have to build this business. And if you find that in a person and you and you recognize that that they have the commitment to it because the commitment to it is allin, there's no other option.

39:41 And look for that and look for the fact that what they're going to do has impact if they do it. When you review the founders you've worked with, where was that most obviously striking? >> It's rare, right? Because you could say all the founder-driven MAG7 companies would qualify, right? I mean, Elon, Jensen, Zuckerberg, they all qualify for that definition.

40:07 But you look at um you look at these other companies that you say, "Wow, fireworks looks to be like that." Um A2B is definitely like that. It's one of my companies. an A to B. Um the founder Vnan he's absolutely going to do it. There's no question in my mind. Aven who this guy came out of meta uh as well his name Saudi Khan but Kosha said this is one of the best CEOs ever seen and Venode was one of the best CEOs building Sun.

40:38 So when someone says that you take it seriously. >> Do you think we see a compression in like liquidity timelines? We have cursor scaling to 60 billion sale in four years. >> Yeah. Do we see actually venture cycles get shorter in this environment given companies grow faster? >> I think what cursor did cuz the team is really smart is they pivoted out of the IDE space and they pivoted and in that pivot they convinced Elon that they could build models.

41:09 They hadn't proved it yet but they convinced him that they knew enough to do it. And Elon was pretty desperate to to solve his problem with XAI. And so it was a great fit and they got the 60 billion. So you hit you hit the bid. If open router gets a $10 billion, you know, bid from Stripe, you take it. I think those are not the norm. Those are the a those are the abnormal those are events that are happening because the board and the and the management realizes, hey, maybe what we've built isn't uh isn't a isn't a isn't

41:46 a a decade company. maybe this is something that we need to move out of and we take take the win for what we had. And uh I I had a few companies back in the day that I wish had done that. Uh Flipboard was one of them that I wish Flipboard had taken the billion dollar exit. Uh um but they didn't. And you know >> what what happened there? They had a billion dollar exit on the table.

42:08 >> Well, they had an opportunity. Yeah. They had two biders going for them at the time uh um that was very very interested in them at at around I'll say within 20% of that number and uh one of them was Twitter and the other one um was Tik Tok the founder of bite dance and founder just you know he got advice from uh someone called the coach who was pretty famous at the time that said hey don't sell your company and the coach was was unfortunately passing way and I think the board bought into the coach's advice and they

42:43 stayed with it and now flipboard you don't care about it right you missed you missed the opportunity I think those opportunities uh happen with a lot of companies I have a lot of arrows in my back from this situation so you just have to know when it's a time to go and when it's not a time not to go >> the one I love is one of my dear friends once said to me you know Harry I've never regretted making millions of dollars and I say this for imagine G650.

43:13 >> I I always remember that. Um, can I ask you, we we mentioned that obviously C is selling to X. It seems like IPO markets are open for the rare few for anthropic and open AI when they want to for SpaceX. But I'm concerned that your Air Table of the world at 485 couldn't IPO. You can't IPO with less than a billion dollars in revenue today. Does that concern you?

43:42 >> No. I just think that we're at a moment in time um where, you know, if you want a proper IPO, you need to be on track for that. But I would think Curser, if they had gone out last summer, if they wanted to, they could have gone. I mean, they would have been taken despite the fact. I think the the management team was wise to realize that they weren't quite ready for that and didn't do it.

44:05 But they could have. Absolutely, they could have. the numbers were crazy and so you know there's always a banker willing to do it. The question is you know which bankers and is it the right thing to do? Do you worry that air table is the start of a much broader generational cohort that will be sold at a mega discount to last round? Uh, no. I I don't um first of all, there's not that many buyers like uh bending spoons, right?

44:35 And so, um, there's not that many buyers there. So, I don't I think I think the the companies if they're at 4 500 million and they have the kind of revenue, the question is, are they going to continue having the revenue if they haven't already integrated AI in a compelling way? Yeah. I'm not I'm not optimistic about their future at all. And if you don't have a a a really thoughtful AI strategy and a thoughtful AI product, uh I don't believe that you're going to have an opportunity uh to do much of anything with the

45:13 company in two years. >> I mean, are we not seeing most of the SAS generation put lipstick on the pig, so to speak? Ah, [ __ ] Let's sprinkle some pixie dust in this. And oh, now you've got an AI co-pilot. And >> there you go. >> Right. Right. >> Well, you know what? It's a good thing you mentioned that because we're in a new era now. we've gone uh to what I call the co-work era where it's really more agentic where we're I mentioned autonomous agents and I think to those few companies that have deployed autonomous

45:47 agents successfully uh co-work is becoming the new trend and as as co-work becomes you know more successful and more stable and more broadly used I would be really concerned about SAS companies that don't have some kind of system of record or some kind of AI strategy in place uh um to succeed um because the co-work era it begins the threat so the threat to the SAS world is just starting right now um but it's still early days so if you've got time to pivot if you SAS company you got time to to do AI and bolt on AI and

46:24 and figure out some other direction but if you're not doing that now good luck >> good luck if you're not doing that now. Dude, I I look at PE today and I >> I like the P model, but I'm I'm looking at your Toma Braavos of the world and I'm just like ouch. Like I'm I I really like Orlando and he was great on the show and I really I want them to succeed, >> but [ __ ] that's a hard job you've got with your Cooper and your Anna plans of the world.

46:59 >> Yeah. What do we just have a vintage which which sucks and we just get over it? >> Well, you know, it's amazing. I mean, in 2001, uh, TPG had a terrible fund and ventures, like everybody did. Uh, uh, they survived it cuz they had a whole lot of telecom investments that just evaporated. Forceman Little had a lot of telecom investments and that led to the end of the firm.

47:25 Firm ended, died, no more Forceman Little. Um, so look, I suppose these PE firms that have challenging portfolios, they have time to do something about it now, but when and if a financial dislocation comes, that's the problem because they're all levered up. The problem with the PE business is the leverage on the businesses and if IBIDA drops churn increases um and if it happens rapidly through a financial dislocation and there's you know um a margin call effectively on the debt.

48:01 Yeah, it's going to be tough. It's going to be really tough. >> Dude, a lot of these assets are like four to 6x levered. It I mean it's like it's high. >> Yeah, it's high. I mean look it uh Leopold was only 3 and 1/2x levered and he had to sell a lot of assets. Um I agree it doesn't look good. Um but look they have enough IBIDA today and they have PE firms that know their survival's at stake and the PE firms have time to come up with some strategies as long as the market stays up.

48:35 I mean, you know, this is the point I was making that, you know, the global markets are critically important to what's going to happen into the tech sector. Critically important. And if you have at this location, I think it was Tom Lee that called for a 10% decline uh or draw down in in the S&P this fall. If he's right, you know, and if it and if it's if it's any worse than that, I don't know how people handle when when assets deflate and you've got and you're levered up.

49:07 I don't know how you handle that. >> You said there like, you know, the 10% draw down and you said earlier about fire and embedding fire with the frontier models. Sam was like, "Hey, administration, take 5% of Frontier Models." Do you think the answer when you create fire is you have to be owned at least partly by the administration? >> Well, first of all, that's never happened in the history of the United States until this current administration.

49:31 So, that's never been necessary. I don't see why it's necessary now. >> If you look at utilities providers in, you know, the UK, you have like your British Gas and your British telecoms. I know they're not now but cuz they were sold and privatized but you know you had your Royal Mail like actually the majority of utilities were stateowned but look I mean you have a history of socialism in European countries they that post World War II socialism has existed and people have always supported that and I do think there was

50:04 a need for governments to get involved because there wasn't the capital markets available to them like they were in the United States and obviously in the United States there's always there's been public private you know collaboration right but Sam's already built the company to this size without needing five to give sell 5% to the government so why does he need to do it now right I mean it makes sense if like a Manhattan style project if we did that for AI 10 years ago well fine you know do it because it's

50:39 strategically important to the country but today given the size of them I think the only reason you do it is for political reasons >> talking about strategically important for the country do you think it's right that we have export controls on chips >> I think it's important that we think about how we're going to deal with our technology we need to really have a strategy I I'm not a believer in sort of regulation for regulation's sake you need put it in the context give us a strategy Let's publicize the strategy.

51:13 Let's debate the strategy. Let's have people responsible for it. You know, we don't need just some regulator to come out and say, "Let's just do this." >> Do you worry about the dominance of Chinese open-source models and the ability for back doors to be introduced into their models, or do you think this is grossly overestimated? >> The main thing about open source and Chinese models today is one, all these models are not going to exist in 10 years.

51:38 There's going to be completely different ones. So the exist if there's open if there's back doors today there ain't they better they better do what they're going to do now because they're not going to exist in 10 years. >> What do you mean by that? Like Kimmy won't be a dominant model in >> I mean all the all the open source models that we're doing right now we're using they won't be used they'll be replaced by something else.

52:01 First of all, within 10 years, I believe we and and I think some people are thinking two or three years, continuous learning models will come into existence. That means that every generation, every model we have today dies, goes away >> for two things. What is a continuous learning model and why does that mean every generation dies for this? Ah, because it's a goal like today one of the most important goals of of the model builders particularly frontier model builders is continuous learning so that it can do more

52:34 complicated tasks just like humans like we we we're in theory we're continuous learning but but robots so physical AI will need to have some ability that maintains its memory so it can continuously do complicated tasks and learn and deal with dynamic events that come into it. And so these models will be fundamentally different than the models that have been trained to date.

53:01 And so continuous learning models will come in and once they're sort of deployed, they'll be a whole new breed of open-source models based on this new capability um of continuous learning. And then those will evolve into what's called lifelong learning, which is truly more how human intelligence works. But those models, in my humble opinion, will replace every model that exists today.

53:29 >> Does continuous learning and potential lifelong learning not denigrate the value of frontier models? >> They're going to replace frontier models. I don't think you can bolt on continuous learning into an existing frontier model. I think they're going to try in the early stages will look like that, but I think ultimately it'll call for a new form of architecture and completely new training.

53:51 Right? If you when you train a model today, it's kind of static done. It's trained. Then you go out there in the world, right? And so continuous learning models I think will be architecturally different ultimately. >> Would you have done SSI at 30 billion Ilia's company which is supposedly coming out with the first version of their continuous learning model end of August?

54:14 >> Um I don't know him and I don't do model deals like that unless I know them or someone I trust knows them. So I can't say >> got you. You said there about training being kind of a shot and done. I'm an investor in Mccore. I think data itself is much harder than people give it credit for uh in terms of acquisition, cleaning and deployment. How do you feel about data providing companies as a commodity or as a valuable asset?

54:46 >> Well, data keeps changing. So the so the the thing about data is it's not static and so you know there's of course value to context right data gives you the context the memory right you so so and and I do think that if you're an enterprise business your data the way you do it right will be different than the way someone else take hamburger companies right I mean Jack's data is going to be utilized differently than say Burger King will do it or or McDonald's.

55:20 And so I do think that there's going to be highly um unique use cases for data that is really important, but you have to have a system where the data continues to evolve and change and the underlying utilization of it can change as the data changes. I think I buy Lynn's thesis that you'll have specialized models for companies and part of the training for those models will require additional surplus data and then you'll see the likes of Mccor go from purely selling to frontier models to selling to enterprises and even

55:59 mid-market who need specialized data that they might not have and that massively opens the TAM. >> That's the $200 billion opportunity. Right now models are essentially taskdriven to to a large degree. Would models you know and and frontier models are doing some levels of creativity but we really went into deep creativity like go solve climate change right you're going to need a diversity of intelligence.

56:26 You think about board levels and you think about management teams. You need diversity of intelligence to be able to to solve really difficult problems. And so the market is going to change from let's just solve tasks and do it a great way. Let's do minimal creativity with writing and visual arts to being oh we really need a lot of diversity of intelligence to be creative enough to solve the the problems that matter and the problems that we're going to get paid for.

57:02 I find everything that we talk about today so exciting and then I just have one pullback in my mind. Yeah. Which is just a lot of wise people say you always overestimate what you can do in a year and underestimate what you can do in 10. >> Right. >> Is that the case here? Am I massively getting ahead of myself when I think about a lot of what we've spoken about and actually calm down kiddo.

57:26 It takes longer than you think. My feeling is is that that continuous learning it it feels like it's two to three years away. Maybe it's 10 years away. We don't know. I mean, we've been thinking we're on the cusp of solving cancer for the past 15 years, right? And we got a little something. We got immune we got we got a little a little bump with with uh um the new sort of uh drugs like uh Katruda to do you know uh cancer solving problems with the immune system but we haven't solved cancer yet.

58:02 We're managing it better but it's but we thought we'd it'd be over by now and it hasn't happened. So I think I apply the same thinking to continuous learning models. Um we are getting a little bit of success with sample efficient models. Sample efficient models means when you just get a little bit of data, a small sample and you can extrapolate enough beyond that to come up to be useful and to learn you know from that small sample.

58:29 And so learning from small samples is starting to happen but when they actually become robust enough to be useful I don't know. And and my feeling is is that these things take a breakthrough from where we are. And just like with cancer, we need more of a breakthrough. And the complexity that they're trying to solve is huge. So, I'm not going to bet against them, but I would say what could send us into the valley of disillusionment is a combination of a global financial event and a failure for the models to continue to

59:05 grow and evolve. And we're going to get to a place that if we don't solve sample efficient models and we don't solve continuous learning, we're going to feel like, hey, our our inflated expectations are somehow not being met. >> Jerry, I'd love to do a quick fire with you because I could talk to you all day, literally. Um, who goes out first, OpenAI or Anthropic?

59:32 >> It appears like Anthropic. >> Over or under? Nvidia will be a $10 trillion company in 5 years >> over. >> Why is it so mispriced then right now? It's been flat for the last 12 months despite numbers going through the roof. I I don't get it. >> I think it's because the market doesn't go like a rocket ship forever. You're going to have these plateaus, right?

59:55 And I think, you know, that there are areas of of of things not really accelerating as fast as you think it is. Um, we don't know because right now there's these circular transactions that are obfuscating real growth in the market cuz that the the hyperscalers are sort of trying to get ahead of the game. But we don't know, you know, I mean, demand is going to have a lot to do with people having money in their pocket.

01:00:28 And if you have a a a 10% 15% dislocation in the markets, people are going to feel poor and that's going to affect the credit market, that's going to affect everything. That's going to affect demand. It always does, at least short term. >> I can't believe I'm about to say this to you, Jerry, but [ __ ] it. We've known each other a while. In the UK, we have a game called Shag, marry, kill.

01:00:53 Okay. And I'm going to apply it to three companies. And the application is kill is short. Shag is buy quick, but you'll probably flip it. And Mar is you're in it for the long term. Yeah. >> You've got Meta, you've got Google, and you've got Microsoft. Oh, >> because of the scale. I'm gonna say long term for all of them. No, >> here's why. Here's why.

01:01:24 >> When when when Meta's got two billion users with all their things, when Google's got two billion users with all their things, there's a kind of stability in that cuz consumers, they're really slow to to to accept new changes and things. So because of those two company having such a substantial consumer business and Microsoft's consumer business is good too.

01:01:50 It's kind of acts like a a buffer a stability a stabilizer that gives them time to catch up. I mean let's face it all three of them have failed on the coding agent side but I don't know if they're going to fail forever. I think I think you have to say these these this mass mass customer base gives them this incredible time to catch up with problems and that's why they're going to be trillions of dollar companies for at least a decade in my humble opinion.

01:02:23 They may not be as important as they are today. That's not the question you ask. But as an economic buyer, would I hold their stock for long term? Yeah, I would. >> Even Microsoft with a no model, relatively shitty AI products. >> Yeah, >> you'd still be a bummer. >> Yeah. Here's why. They control communication for the global enterprises. Microsoft email, as dumb as it is, I mean, exchange, whatever you want to call it, that's not going away.

01:02:55 That thing is a money machine that cannot change. It cannot just disappear. It it controls. By the way, you know what's really interesting? We talk about the speed of AI and stuff. They won't be able to control a Asian communication, but human communication that's not going away and they're going to be able to monetize that forever. You can't get rid of it.

01:03:19 It's not like it's, you know, your your cable system at home where you can say, "Fine, I can I don't need Infinity anymore. Get rid of it." You're not getting rid of Microsoft anytime soon. And these guys have built these kind of businesses because of the scale that supports their underlying business. And the consumer is in my humble opinion the thing that's keeping those companies afloat more than anything.

01:03:45 >> You got to short one of the Mag 7, which you would >> it would it would be meta. It would be meta. And it was and it would be meta because that's the one that may become boring. It may become like a telephone company, you know. I mean, it just it'll just be this malaise like like owning a AT&T or something, you know? That's what that's what you kind of think about it.

01:04:10 Um whereas I >> being the largest So, I push back. It's the largest ads business in the world. It's got WhatsApp and it's got Instagram. >> Yeah. WhatsApp. I mean, again, they control human communication on WhatsApp in a in a very meaningful way. They haven't monetized it yet. But those users, they're going to find ways to keep the users. You got 2 billion plus.

01:04:31 Maybe they'll be 3 billion in 5 years. I don't know. We got half the world using your application. I'm sorry. That's something that's stable. That's a stable thing. Like I say, it might be bor boring. It'll just generate dividends out to you. So, as an economic buyer, you don't necessarily always need growth. you can take big fat dividends and just, you know, punch the coupon.

01:04:52 At least for the next five years, it's going to be considered a safe haven, right? The the Mag 7 is the Mag 7 because people say, "Hey, I'll put my money there. I might be underwater for a year or two or less of a return than I had." But long term those things are going to be there and they're going to benefit you know with uh with with every you know positive cycle in the markets.

01:05:19 >> Is Apple's AI strategy unforgivable mistakes or is it genius patience waiting to see how a developing ecosystem plays out? >> The answer to that is something that it's going to be hard to know. We'd have to go sit down with Tim Cook now that he's retired. Maybe he'd tell us. Um, what is the culture around AI at at Apple? How are they thinking about it?

01:05:43 What are they doing in there? You know, I know they're using Claude Code, huge, massive Claude Code customer, but how are they thinking about it? Do they have anything innovative to say? Have they been intelligent, watchful observers, or are they just dumb consumers? If they're consuming, sorry, they're in big trouble. They they're going to suffer. But if they're watchful observers and they've got something up their sleeve, then we could be surprised by them.

01:06:15 >> Which PE firm will navigate the next 5 years best? >> That's not fair. That's a tough question. I mean, I'd have to look at the portfolios to see it. I wouldn't want to make that bet. >> Which will navigate them worst? Well, I don't know who's worse, but my company, Insight, they have a very small PE portfolio. Very, very small. It almost doesn't even matter.

01:06:45 So, I think I feel the best about them long term because they've been really intelligent about how they deploy the capital there. But the people that are all in on PE all the time, I just don't know about that. I I I think they're highly at risk to any kind of financial dislocation, anything. >> Which which venture investor do you think has fared most well in the transition to an AI world?

01:07:16 >> Oh, good question. Well, look, I mean, I I think there's five or six firms that have just done phenomenal. um you know um the the guys like Menllo that that did anthropic how do you say early but early enough you know they're going to they're going to do great I think um benchmark while they missed Anthropic and OpenAI they've done amazing with you know factory and and a bunch of other great ones that we've tal about so I think despite the fact they're missing um the big frontier models they have a great portfolio I

01:07:54 think Koshla is also phenomenal. I mean Venode with Ain and you know his companies they did amazing. So I think I think Koshla is in that group of I mean they're just going to crush it. Koshla, Menllo and Benchmark have all just done amazing. >> I have one final one for you and this is kind of the beauty of what we do I think which is seeing the future hopefully ahead.

01:08:18 What seems crazy today that you think will be quite obvious in five years time? >> Blockchain for agent payments. Blockchain I is is in the the valley of disillusion right now. It's it's it's like it's really in a bad spot. I mean IBM CEO came out and said Bitcoin's at risk of being hacked in 3 to four years. Tom Lee came out and said Bitcoin's at risk to being hacked in two years.

01:08:48 Google said that Bitcoin's being hacked in two years. And that greed element of blockchain, which is exactly what the Bitcoin thing is all about in my humble opinion, is about greed, bringing down the in the whole blockchain thing. Well, Salana and and and and Ethereum, they're they're looking like they have a long-term potential. And I do think that new things like Venice or AI Naki or what Robin Hood did with Robin Hood chain great they got a billion in revenue probably those innovations whether you're tokenizing

01:09:22 stocks or you're going to do payment rails or you're going to use C or you're going to use blockchain for buying inference like on Akinaki or Gonka those things are going to be real innovations People are going to be blown away that blockchain has found true utility other than some supposed form of utility. >> Jerry, I've absolutely loved having you on.

01:09:48 I I No, seriously, I learned so much from you. I love what I do because of shows like this. So, thank you so much for joining me and you've been amazing, dude. >> Cheers. Take care.