SPEAKER_01: The best line ever heard the hardest thing about being a VC is figure out their founder is delusional or visionary. It's very fine line. If they're right, they're visionary. If they're wrong, they're probably delusional.
SPEAKER_02: I'm willing to bet on the delusional ones for sure. Because if you're delusional, and you say, Yeah, you know, I think there's something out there and you leave Spain on a ship with some provisions. Yeah, you got to be pretty delusional to think you're going to hit land because you might not. I like the delusional ones. Because if they hit land, now they're visionary, like you're saying,
SPEAKER_01: well, I'd say I'd put them to visionary camera delusional are the ones that just refuse to listen.
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SPEAKER_02: program. Our guest today is Kevin O'Connor. I met him 28 years ago. In 1995. I was running a little magazine called Silicon Alley reporter. And Kevin had just started an internet advertising company called DoubleClick. You remember DoubleClick bought by Google eventually, it was founded. I remember going to Poppy Tyson on 23rd Street, we talked about it the last time you were on the show, Kevin, which was Episode 234. So here we are a decade since your last appearance on this week in startups. And I guess we're getting close to 30 years since you and I met in New York at the dawn of the internet. So welcome back to the program. Kevin O'Connor.
SPEAKER_01: Good to see you again. It's been a long time.
SPEAKER_02: It's a we see each other every 10 years we do an episode. Yeah. You know, an interesting place to start would be when you look back on what's transpired since 1995 when we were on those dial up connections, and then we started getting T ones and ISDN lines and the browser started supporting rich media. And you put some of the first ads on the internet. When you look back at what happened the internet, what is the theme as an entrepreneur and now an investor that sticks with you the most?
SPEAKER_01: I think our original hypothesis and you know, when I first saw the internet, probably early 90s, I wasn't impressed. You know, 2400 bond modem, the browser hadn't come out. And I was not impressed. It really wasn't until the T one lines came out of the in the web browser, I said, they have a system where anyone in the world can access the world's knowledge for free. That's a big idea. It's gonna be huge. I remember our original our original business plan. I forget we had I thought I thought we forecasted something like 10,000 servers, and maybe 100 million people would be on it, you know, in 10 years, people thought that was crazy. And it was crazy. We were way off, like 100 million, 109 servers and websites and you know, a billion users online. So I think the theme is, you know, back in the old days, people talked about the new economy. And I always, I always thought that was kind of BS, there is no new economy, it was just about reducing friction. And that's what I think then that's been, that's been a promise. And that's what's happened just made things more efficient, more timely, cheaper.
SPEAKER_02: And when you look at that efficiency, now, AI has emerged and all this information that was put online three decades of people just pouring their hearts out and scanning every piece of information, every piece of art, you know, mapping every nook and cranny, and scanning every book and writing every comment under every video. And every blog post now has resulted in what feels like some form of intelligence, or knowledge processing, that could be very transformative. So what's your expectation here as we just wrap up the first year of chat GPT being a public phenomenon, obviously, you know, 3.5 of opening eyes chat GPT kind of was the starters pistol last November, and here we are taping this November of 2023. We're just going to be a similar story or a bigger story than the internet. So
SPEAKER_01: what you remember back in 9500 companies are pitching AI, even back then, right, they're going to predict everything that you're going to do and an AI faded away because it just never delivered on his promise. And I don't think chat GPT the 3.5 version, it was interesting, you know, like it was the best chat bot out there for a blew my mind away. And defecated realization that this is a fundamental shift. I mean, usually once every 10 years, there's some cosmic shift, you know, whether it's EC, so network to internet, the mobile to SAS, and we were due for another seismic shift. And there seems to be two camps forming and AI, as they're all with this is with technology. You know, it's the hand ringers, like it's the end of the world, you know, everything is over out my god, chicken little to the, you know, optimists, like I am, which is technology is great. Like, what Yeah, what could possibly be wrong with something that can actually earn information and the knowledge and make people smarter, you know, more intelligent, make better decisions. It's, it's phenomenal.
SPEAKER_02: And when you look at the impact you think it's going to have, we can parallel it with the the internet. And I'm with you. I mean, it seems like there's a ton of upside here, there's going to be some downsides, obviously. We used to have typing pools, we used to have messengers, we used to have people sending postal mail, FedEx is a lot of those things got hit pretty hard when people got email. But, you know, when you look at the first year, and then think, hey, in year two, because in the first year, it feels like people are playing with it, and starting to implement it. But in year two, I think it's gonna get more serious. So where do you think we're going to see this land in 2024? What industries will have the most impact on?
SPEAKER_01: Well, I think the surprising thing, at least in my mind, we always thought I was a I was a developer for the last 10 years. And yet, computer science has exploded over over, over many, many years. And everyone went into it, think that job will never be at risk. And now, the safe job. And now it's like, I remember being on a call with the company, they're telling us do venture capital. Now they're telling us how complicated and sophisticated the technology was. And I was kind of calling bullshit on them. And I asked chat GPT to write the code of their product that I posted in our chat. I said, there's your product right there. So you know, jobs like that, where, where I think legal is going to be dramatically affected. I think accounting, it's hard, it's so hard to predict technology, you know, the internet, I mean, right back in the days, they're trying to figure out what was going to be hit the hardest. And when you look back, I'm not sure any of us predicted, like, none of us predicted Amazon, Amazon was a bookseller. Yeah. So you know, it has a strange new technology has a strange way of affecting, it's gonna affect every industry to some point, I think large language models have its place as a foundational model. I think large language models are probably more like the internet, it's going to be the stuff that's built on top of it, or for the verticalization to highly specialized language models that are going to probably have the biggest impact.
SPEAKER_02: Yeah, it's quite paradoxical, if you narrow the scope of the language model to code, it does a better job. And if you point it at a code base, well, it's going to educate the new developer as to that code base. So starting day one at slack or Salesforce, it's you're gonna get up and running so much faster, you're going to be, you know, it's going to complete half of the of the code snippets, you're right. And it does make sense to me that accounting and legal also fall into that there's a corpus of work that is finite, that is rule based. And that is repetitive, right? I mean, and there is some thread here, we could pull if it's repetitive, and there's a finite rule set, and it's, there's a corpus of work, it could be, you know, automated and AI could could do it pretty quickly, huh?
SPEAKER_01: Well, Hollywood's going to be greatly affected, right? Yeah, you do think that? Yeah, this is a big debate. Oh, it's going to
SPEAKER_01: be I mean, think about it. I mean, how many? It's a finite number of stories. It's the same story that, you know, came out of Greece. Yeah, 3000 years ago, you know, it's just being retold with different characters, the fact that any of us would be able to put that we'll be able to build a build our own movie, I think then it becomes a little bit like YouTube, which is our Instagram where where the the amount of content is, is exponentially increased. Most of it is just total garbage. But there's going to be that phenomenal one side sort of rise to the topic of viral. Same thing with music. I mean, music is pretty, you know, you can imagine, I mean, my prediction is that definitely the next five years, the number one song will be written by a mix total sense. We've had many
SPEAKER_02: number one songs that were using samples, right and rehash is of old songs. So if AI can interpret all of that base of knowledge, yeah, it's going to hit one for sure. There's no doubt about that. And yeah, there's only a finite number of movie tropes, you know, quest, comedies, rags to riches, beat the Munster tragedies. It's a it's a certain hero's journey. It's a it's a certain corpus that Yeah, I think writers are going to become bionic when they when they start using this. Starting a business used to be such a painful process, you needed to get a lawyer, there were tons of fees, it was a mess, but not anymore. Just check out Northwest registered agent, they're going to help you form your company fast, remember, speed matters. And then they're going to get you the docs you need to open a business bank account instantly. Then they're going to provide you with mail scanning and a business address. And they're going to do all that keeping your personal privacy intact. Northwest can form LLCs, corporations and nonprofits. And here's why founders love Northwest, there's no hidden fees, there's no upselling, you can call them or cancel at any time. And Northwest has the best of both worlds solution. It's simple and self served, but they can be hands on if you need help with their amazing registered agent service. Northwest provides everything you need to start and maintain your business and they're giving twist listeners a 60% discount for just $39 plus state fees, they'll form your LLC corporation or nonprofit. So visit Northwest registered agent comm slash twist today, Northwest registered agent comm slash twist. So you've recently become a venture capitalist, I understand congratulations. This is 1995. By the way, well, just
SPEAKER_02: company builder than a venture capitalist, but
SPEAKER_01: I was both I did the VC in my sort of spare time or in between jobs, but you are right, the last three years first time I actually did a fund. Got it with other other people's will mind a lot of my money, but a lot of other people's money, too.
SPEAKER_02: So why start a fund? And why do that here? You know, at this point in time, what stage you're trying to invest in? And what's the thesis of the fund?
SPEAKER_01: I do think that doing a startup, which I love doing the three of them. It's, let's say it's a young person's person's game, you know, takes 100 hour weeks, it takes a lot of focus. As you get older, you get more wise. And I think that's sort of, I've been doing venture for since 95. I've done really well at it. I love technology. So our thesis has really been on by the summit up it'd be SAS slash AI companies with about a million dollars in revenue. So let's call let's call it seed. So the early a, and our specialties, we're all operators, and we help these companies get to the next the next level, which would be sort of growth, growth equity.
SPEAKER_02: So if they have a million in revenue, that's when you want to meet them, or you want to put a million dollars into them.
SPEAKER_01: When they have a million in revenue. So we feel like the pre seed is about I've always said ideas are cheap. There's a billion, really bad ideas out there. For someone to actually get to that million dollar level, that means they have approved product market fit, which is a big risk. They've been able to track people some capital. So they really de risk that in our eyes. What they don't know is how did they take it to the next level? There's a lot of unanswered questions. A lot of his founder led sales, a lot of it is how do I scale? How do I how do we deploy capital efficient, efficiently? And so you know, by by being operators, having sort of been in their shoes, that's attractive to founders. They like it, you know, VCs, a lot of VCs come from sort of the opposite extreme.
SPEAKER_02: Yeah, I mean, there's an argument for people who understand finance, and who haven't been in the trenches, in some ways, they can really have a good analysis, like Bill Gurley, of, you know, the marketplace dynamics, they can be thoughtful about making the share price go up. And then there's no substitute for people who actually have run a business right and been an operator, and know exactly how hard that is.
SPEAKER_01: And I think at our level, by the way, I think Bill Gurley has always been one of my heroes. I met him when he was a he was an analyst, he was covering us double click back in the back in the mid 90s. He like, tell me when you met him, he was still
SPEAKER_01: he was very tall, even back then. Still, yeah, he's
SPEAKER_02: consistently remained tall. That is one thing I will say about Bill Gurley's career, you made a lot of research analysts. And
SPEAKER_01: most of them are good. Bill Gurley was just he was a new level. He was he was the one guy that really, really understood. It's just our business. But he just he just had a great sort of macro view of what was going on. And we always enjoyed conversations with with with Bill, where she wasn't retired. Is retired. I guess he's, I guess that's a really interesting question. Because I he's theoretically not at
SPEAKER_02: benchmark. He's not a benchmark. He's not in the new fund. He's still on the boards he was on. And he's still frisky and likes to hang out with founders and meet founder. So I don't know that he's exactly retired. And there was something about the venture community where they wanted to kind of set people out to pasture at a certain age, maybe it's 60 years old, etc. And like hand over the firms to younger folks. I think that was a key component of benchmarks philosophy is kind of forcing people out and letting young people take over. But I think that for really great investors, maybe sticking around would be pretty great for the founders. And people live longer now. And they're healthier and sharper in their 50s and 60s and 70s. Like no coastal there. He's like, Yeah, you can basically drag me out of here. I'm not going anywhere. But no cost is as active as ever. So I don't know what Bill's deal is. I think he should just do seed investments. Yeah, do million dollar seed investments. When you look at how being a founder has changed when you and I were starting in the 90s. The idea of building an internet company was, well, you're gonna have to spend a million bucks, a half million bucks on setting up your servers and hardware. You're gonna need to put a half million dollars down on an office space and get a lease put a letter of credit down. I mean, you were blowing a couple of million dollars just firing up a startup now, two or three people go to an accelerator, they get some free credits from Azure, whoever. And they're up and running. And they build something on the weekend and get 10 customers. So feels like many more startups are being built at a much lower pace. So how is that going to change things as we go forward here? And then it's quite possible AI makes things even faster for founders in terms of finding product market.
SPEAKER_01: I think you have two things going on. One is there was a long drought of entrepreneurs after the dot com crash, right? Everyone kind of fled to safety. And then things came back and I came back roaring with free money. And I think the venture market was oversaturated. There was just too much money. It was kind of back at like the calm days where people are just chasing any deal at any price. I actually think downturns like this are being are going to be good, because there's just a lot of junk out there. And I'm amazed and sort of amazed at what what people are investing in. So I think raising money is much more difficult now. We've shifted, I think more from, you know, grow at any any cost, which I never understood. I think that's just where people take a large sum of money for a model that's not quite perfected, and you just lose more money. And I think those days are over, and it shouldn't be over. Just a bad way of doing business, you know, but a year and a half ago, when it back to the age thing, one of the things you do get with ages, I've lived through like four of these cycles, like, you know, you know, what's in the basement, you know, you know, when things go bad, they're way worse than you ever expect. You remember those days? Yeah. So getting people to cut back early, you know, and convincing them that, look, you got to you got to conserve money, we got to trade off growth with burn. And that's okay. You know, if we if you get through the cycle, it's better. I do think with the AI, the fact that any person can describe a business model at some point, not today, but could describe what they want to do, and not go to it, not go to expensive, often overpriced engineers to get it done. And like you said, it's all the groundwork is is there, you know, putting up data centers. I don't know if you remember the data center, you had one Yeah, and then you had the building on 32nd on the
SPEAKER_02: west side, with the basketball court on the roof was at 32nd Street or something. There was Western Yeah, 33rd 33rd and west
SPEAKER_02: of Madison Square Garden, you had a basketball I remember we played hoops on the roof one time where we shot some hoops we did double click you brought your team. Yeah, you brought your
SPEAKER_01: stack West West Fourth Street. Yeah, we had well, you know, we
SPEAKER_02: used to play Chelsea piers a bit and pretty good team. They did.
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SPEAKER_01: always like I tell CEOs, and everyone, never your number one job is not run out of money. So the three main reasons companies go to business, the first one is they solve no known problem, which I think gets back to the the.com as well as today, there are people are investing in cool technology. Let's say crypto and a piece exhibit, you know, our current examples, they'd solve no known problem, blockchain. Okay, great. Another another ledger been around, nothing new. So a lot of money goes towards that. So yeah, I think people are focused more on you solve a problem. The next reason they run, they go to businesses, they don't raise enough money. And then the third reason is they raise too much money. Look at all the we were calling death of corns. I don't know if that's a word we made up or that's a word. Give me that one up. Yeah, death of course. Okay, death of
SPEAKER_01: corn. So all these, these companies that raised $100 million last year, they're going out of business. It's like, what the hell kind of governance is that? I don't I don't understand. Yeah, that's just not responsible. So let's just as those are just bad. You know, again, business doesn't change. I can economics doesn't change. And, and we really push that on our on the founders, you've got to build. This is really simple. You solve, you find a big problem, you solve it better than anyone else. And good things happen. You know, people give you money. And if you do a really good job, they give you a lot of money. And then you get this thing called profit. And then once you get profitable, then you don't have to depend on anyone. But on the flip side, if you do get into a, as we tell founders, you get into the growth phase where you have a playbook is relatable, and you have a high degree of conviction, then you got to you got to use capital. A lot of people are like, well, I can borrow money. That's a lot harder these days. But yeah, the whole debt financing, like debt financing of a tech company is just I'm sorry, it's absurd. It's some debt, get some debt as a sort of insurance policy. But if you got to use debt to grow an unprofitable business, you're screwed. Everyone's screwed.
SPEAKER_02: It was incredible. I guess in the zerp environment, I had series a companies that didn't really have product market fit. They were truly seed companies figuring out product market fit. But they were getting serious evaluations. And then yeah, different banks were like, well, we have this money sitting here. So we'll give you you raise 20, we'll give you 5 million, you raise 30, we'll give you 10 million. And then the founders just tack that on to their runway. Okay, I have 18 months to runway. I'll just you know, I'm spending a million a month. So I raised this 10. I raised 20. So I got 20 months, and then I got 10 million in venture debt or seven, that's seven more months. And I say, No, you're not supposed to use it for that rainy day fund, but don't use it as runway because then a VC has to look at your deal and say, Okay, I'm paying down 7 million in debt. I'm putting another 20 million in and 7 million goes out the door to pay a bank. And that doesn't make any sense. And in a down market, with this globalization happening, how do you think about work moving around the planet? Because there's something unique that happened with remote work, you and I were in the in office culture for two thirds of our career. And here we are, you know, a lot of people want to work from home. So do you believe in work from home? Or do you think people should be in offices? We'll start there.
SPEAKER_01: Yeah, I was talking to the I'm gonna forget his name. Now. He's at the Hoover Institution. But he's, he's like the expert in in sort of this whole work from home. And I was like, What's the answer? We just ended up binary answer. There is no answer. I'm really torn. You know, I think for certain jobs, and for certain types of people working at home is great. I think that it's really bad socially. And I think you get more done when you're in the office. Yeah. For our work. I can do board meetings now, you know, with a, you know, five minute notice, you know, I'm in a board call, as opposed to traveling three days and wasting time. That's great. But most people aren't that discipline. You know, a lot of people are disciplined. They need mentorship. They need, they need help. They need socialization. Yeah, there's a socialization part where people
SPEAKER_02: get weird working from home, staying at home all the time. They need mentorship. That's a lost part of this. And I'd say the top 20% of performers are more effective at home. It's probably about another 30% that are equally effective in the bottom half are not nearly as effective as if they were in an office being mentored and part of the Yeah, I'm trying to reverse this at my companies. And it's just incredibly hard because you have such a great talent pool of people at my venture firm with 22 people. And then we can hire people faster than in Silicon Valley. And people don't want to be here anymore. And it's too expensive to be here. So I would get a lower quality person who wanted to be here versus this incredibly high quality person at a lower price will stay longer. It's incredibly frustrating in some ways, but it does seem to be reverse curious.
SPEAKER_01: I'm curious for you. I mean, you're you're a you're an opposite side of the spectrum as I am. You're extroverted, very extroverted. Yeah, it's got to drive you crazy not to be socializing.
SPEAKER_02: It's maddening and I am now reversing it. So I'm going to get like a space just so I could have like a co working type space for my founders in my portfolio. Because I do need to be out and about I host events, I do jam sessions, one of the things that I learned from Travis from Uber, he'd have these like jam sessions, Chris Sacco would do them too. We're just five or six founders, we'd around just hang out, have dinner or just hang out at somebody's house and talk about their businesses for a couple of hours and try to help each other think through problems and strategies and blind spots. And so I'm sort of codifying that where I do these jam sessions every couple of weeks, bring together 20 founders, you know, go to our law firm, Wilson, since senior friend, Wicks office, get a big conference room and just talk for four hours. And it's really, really energizing for me. And then doing the pod, you know, I get to talk to you and other, you know, investors, founders from around the world. And that does fill my bucket and give me that energy. But I think this has been great for introverts who, you know, they get to focus more and getting rid of commutes. If we didn't have the community issue. I think this would be like people would be much more open to coming back to work here in the valley. Apple, I think is four days a week now, or four days a week in the year, there might be three or four right now. Zuckerberg's kind of forcing people back. And then Roblox said either come back to the office or res, you know, resignation accepted. So I think they did it like a gentleman's riff, basically, you know, we're going to reduce the force by the number of people who don't want to come back to the office. So I think it'll start changing. I also notice that people looking for work from home jobs are saying that they're having a hard time finding them, you know, as 1000, you know, 1000 applications, because anyone
SPEAKER_01: could be exactly that job. Right. So now and then if you
SPEAKER_02: are a Silicon Valley person who wants to work from home, you've got the expensive Silicon Valley, but you want to work from home, you don't want to get on the bus, I understand it. But now you're competing against somebody in Portugal, Argentina, Manila, Canada, whatever it is, and those folks are going to have a cost of living that's one fifth one 10 of the cost of living you have so they can accept a salary as much lower. And all the management Kevin have learned how to manage remote workers. And that's actually the thing that is really mind blowing to me once you learn how to manage a remote worker in South America, Canada, Portugal, Manila, whatever, it's no different. It's all the same. You're in a slack room, you're on zoom, you're doing huddles, using notion or coda whole, it's all the same. So I think it also increases efficiency, you could have somebody in the job in the role within two weeks. Whereas what would a job spec take getting somebody in New York, you double click, you paid people to move to New York, you paid them to come out for an interview. Like think about those days of reload, the concept of a $30,000 relocation package. That was a thing, right? Yeah. Danny Siegel, a guy used to work with, he had a
SPEAKER_01: great observation when COVID first started hitting, he's called it the great reshuffling of America. And his theory was that people are gonna move to server where they wanted. But but once that pendulum swing back, what you're going to see is that people in the office can promote it, because they're there, it's FaceTime, people who are remote, you send them an email, and they're gone. Like you have no personal relationship with them. Yeah. So I think you're gonna probably see a bit of a pendulum. I think a lot of it comes from the top down. You have executives who have second homes that don't want to go back, they want that. We all thought community would be easier now that everyone works at home, but turns out, no one's actually working. They're all driving, driving around to go to go golf and do stuff. We have plenty of examples in our companies that where people have multiple jobs. It's the crazy part. They're not doing doing a job. You know,
SPEAKER_01: it's just it's, we'll see. I think it's gonna swing back.
SPEAKER_02: There's a Reddit either overworked or over employed. And it's over employed, over employed. And if you read this
SPEAKER_02: Reddit, it is awesome. Because it's people trading strategies on how to fool their bosses, and have two, three or four simultaneous jobs. There's a lot of times as developers or, you know, marketers, and they're like, here's all the techniques to be on two conference calls at the same time, but have the line of sight on your two laptops. And I had this happen where somebody said, Hey, we have this great Google executive who wants to come work for us. Is that's great. Yeah, he's willing to take a pay cut. I'm like, Oh, that's amazing. Right. It's entrepreneurial. So don't he wants to keep his job at Google. And they'll says he has 40 hours a week for us, but he'll do it at like a third of his salary from Google. He said, uh, said ethical. Well, it's his problem, not ours. And I said, Is it because when Google finds out, and he's writing code for
SPEAKER_02: you during work hours, do they own that code? Well, there's a
SPEAKER_01: word for it. Yeah, it's called fraud. fraud. Are you looking to
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SPEAKER_01: In fact, I'm in Berkeley, which one of our partners just wrote an article on the over over employment problem. And we're getting a lot of pushback of people saying, well, that's just the employee employee relationship is transactional now. So there's no meaning to it. So like, so it's okay to commit fraud, like what's the limiting factor here? You know, you stealing the reason is, you see the transaction because you're a negative pessimistic person, right? And that it just becomes self appealing prophecy, how can you possibly compete with a full time employee and an equivalent full time employee, you can't Yeah, so you'll be the first one to go, as it should be and they'll end up I used to say, when you have two girlfriends, you have zero girlfriends, you know, it's like, it's, we have two jobs, you'll end up with none. Yeah,
SPEAKER_02: very, very weird moment in time that, yeah, the the relationship between employers and employees is quite transactional. And it this is one of the things that loss is loss is the culture, right? We the culture of companies really mattered, people would stay with a company. And now switching is taking one laptop, putting it in a box, sending it back to your old company, opening up the new laptop, logging into a new slack, logging into a new notion, coda, Salesforce, whatever it is HubSpot, and then just starting over. And you do it in like the same day. There's no culture to I guess in some ways that is efficient, but in other ways, something's lost. Yeah. Yeah, I've been looking at the tech market. It's tech
SPEAKER_01: employment, like you see these number of jobs filled every month going up. Those are people with part time jobs, everyone's trying to avoid the full time. So they're taking another part time service oriented job. I mean, the tech industry is in a full on recession right now. Depression, you know, I think a lot of people moved when when the moving was hot. You know, that became very transactional, I'm gonna take who's paying me the most. And the best advice I had in college, you guys says whoever never take the job that pays you the most, because there's a reason they have to pay you the most. Because it's a crappy job. So find a company, like, I don't think it should be transactional. I think it's easier when when you're remote, you have no personal connection to the person. So yeah,
SPEAKER_02: when you look at AI companies, there's this derogatory term, AI wrappers, hey, they're just wrapping chat, GPT, or Claude, or, you know, whatever language model with some accrue, Tremont, but they're going to be displaced by the primary model opening, I wins it all destroys all competition. What's your take on that?
SPEAKER_01: So we have probably five AI companies now that were doing it before, you know, my last company, we ended up being bought by Amazon, Alexa, doing natural language process, large language models can answer some of those questions, but they can't answer all of them because you have to actually have data, you have to have real time data. A lot of the the AI companies were were invested in now are using the large language models, realistic for classification purposes, like they have their own models, but they're using it for sort of the long tail. That's it is quite good at that. But it doesn't build the application. So yes, people are seeing it as again as a as a technology to be used. And it's a very good technology, but it's not it's not the app made. It's not the total solution to the problem they're trying to solve. So one of the companies called rogo, what they're doing is they're taking the give it a survey, investor analyst, junior investor analyst, they're taking all the proprietary research from investment bank, all the decks, all the 1000s of decks they've done for clients, and they're adjusting all this private data. People forget a large, large language models are all public data that they're all all the LLMs are going to look pretty similar. It's gonna be that private stuff, the stuff that no one else has, that's going to be the differentiator, I think, AI, whether it's medical, legal, less so because most legal stuff is public, I think legals can be dramatically changed. But again, I don't think large language about I don't maybe they'll shift event, maybe they'll they'll get a vertical component, something that's more real time. I don't know. Do you think the language
SPEAKER_02: models become commodified? And, you know, it seems like open source models on hugging face are getting better and better. And Falcon out of the UAE is, you know, available in an open source way. And it just feels to me like all these language models are going to for 90% of tasks be good enough. And they're going to be indistinguishable in the same way. You open up any laptop and you fire up a browser. It's all the same, right? The browser doesn't matter. It's the content on the other side, the service on the other time. So it feels to me like it's all going to get commodified. And, you know, like bandwidth, it feels like bandwidth in some ways. Remember, they built out all that bandwidth, worldcom and everybody, and then they overbuilt it, they all went out of business. And then people bought the bandwidth on pennies on the dollar. It feels like that's what's going to happen to me. I could be wrong. I don't know.
SPEAKER_01: No, I think you're right. I think it's gonna be it's gonna be very someone trying to get us to invest, they want to do an LLM. And they needed $100 million. Like, why are you kidding me? So it's gonna be me two or three players at the most, they're gonna have the LLM, it's gonna be like, text to speech API's, or speech to text API's, you know, it's kind of magical in the beginning. And it just becomes a, you know, single API call or translation services or something.
SPEAKER_02: It's such a good analogy, Kevin, because I bought dragon dictate three times in my life, just you know, as a writer and communicator, I was like, you know what, when my when I'm talking, my hands are tired, I just like to be able to talk into it, spent hours training it when I was running the magazine and the blogging company. And it you know, worked well for me. And then now you open up your iPhone, I don't know if you saw like the latest version. My Lord, when you hit the microphone key, it works flawlessly. And Apple's not good at this stuff. They, they tend to be like the worst at it. And the the Apple's latest version of speech to text is better than any dragon dictator, anything I've used over the years, and it's free is built into your phone. And so it does, I think it's a very good analogy. That's something that used to cost 599 399 is just essentially free now. So if you remember find
SPEAKER_01: the best turn to the graphic we had, we were building unbeknownst to us until till Google talked about the knowledge graph. It turns out we're like, well, wait a sec, we got the we got a way bigger knowledge graph than than Google does. And we are basically collecting all this sort of real time information from everywhere from, you know, stocks to colleges to you name it, we had it and trying to convince people we were talking to Apple at the time and Amazon and Google. And Apple is about to buy us for Siri because Siri had a problem. It couldn't answer a lot of stuff. We always approach the problem as it's more like Jeopardy. Yeah, that you have to know the answer first and then figured out the questions easy. Everyone in the AI area was focused on understanding the question. And that's a it was a it was a fast backwards way of approaching it. And we got in this big political issue. Apple was going to extend an offer for us. And then they pulled it the last second. And it was because their head of engineering at the time, was convinced that AI would solve all problems. And he ended up in the fire or losing his job not that long after because AI does not solve all the problems, especially at that time, you start answers,
SPEAKER_02: find the best. And you were organizing, hey, these are the best headphones, these are the best laptops is the best ski mountains. And by putting all of that into tables, that's when you kind of had the aha moment of, hey, this semantic data is going to lead us somewhere. No, we thought we could connect the
SPEAKER_01: two together. And it would be it'd be interesting. We're trying to convince those companies that we had, they could use our data to power their voice services. They didn't believe it. Somebody, it was actually out of a bricker bitch. And Dylan was like, did a hackathon. And he ripped out Alexis brain, and they put our brain into it. It literally just took an afternoon to be able to tap into our knowledge graph. And they took a video of it, and they sent it to Jeff Bezos. And I guess Jeff sent an email to somebody saying who the hell are these guys? Why are they better than we are without anyone knowing about them. So it really came down to the data understanding wasn't a problem that was trivial. It was the massing the data turned out to be a pain in the ass, you have to get to tap into I think we had some like 600 different databases, data sets that we were pulling in from all over everything from health data to, you know, real time BLS data, stock data,
SPEAKER_02: how do you think about entrepreneurs today, not to be curmudgeonly old men here, but the traits that are timeless across the decades across the generations that you find are lead to just incredible outcomes and incredible, the incredible founders who have incredible outcomes? What are the traits that you see?
SPEAKER_01: What I typically look for all employees, I call it Sega, which smart athlete, great attitude. So you can't teach IQ. So you got to have, you got to be smart, you got to be competitive as hell, not, you got to hate losing. I love that question. Did you value winning more or you hate losing? It's the hate losing. It's like you can't fail. I think just a great attitude. I think what entrepreneurs I have this sort of test I give people to colleges, and there's 10 questions and how they score it whittles down to just a couple of people. And the final question is, are you delusional? Because no one's sort of like a perfect 10. But a lot of it is just this sense of urgency. It's not many data. It's today I got to I got to get I got to get on this now. This is an opportunity. It's somebody who's willing to sort of look at data that has a high conviction in what they believe, but are also open enough to realize everything in life is hypothesis. Data shows you wrong, then you change it. And being able to know that you can switch. I look for charisma. You know, Christmas is a bit of a pejorative term, but charismatic people are, you know, they're visionaries, people believe in them, they, the best line ever heard the hardest thing about a VC is figure out their founder is delusional or visionary. It's very fine line. If they're right, they're visionary, they're wrong, they're probably delusional.
SPEAKER_02: I'm willing to bet on the delusional ones for sure. Because if you're delusional, and you say, Yeah, you know, I think there's something out there and you leave Spain on a ship with some provisions. Yeah, you got to be pretty delusional to think you're gonna hit land because you might not. I like the delusional ones. Because if they hit land, now they're visionary, like you're saying,
SPEAKER_01: well, I'd say I'd put them to visionary camera delusional are the ones that just refuse to listen. They just they're just hell bent on. I am right. Everyone else is wrong. I don't care how much information is coming. No, you're biased. You know, they just won't listen at all. I see. Yeah, that's a
SPEAKER_02: yeah, I thought delusional as in like, I could do something that nobody's ever done before. But yeah, I get your point. If you define delusional as they're pig headed, and they will not change their mind in the face of new data. You know, that is what's wrong with American politics today, you could have new information and people will just not change their position in the face of new information.
SPEAKER_01: You look at what happened to science and COVID. What happened to media? Yeah, what happened to politicians? The data was so obvious. I'm having an argument right now with a COVID. You health expert, how they completely screwed up our, our country based on by just simply not looking at the data. The data was so obvious from day one, why they didn't listen to it, it just became so political, it became political. And then once you give advice, you can't
SPEAKER_02: say, Well, you know what, now based on the statistics we have, hey, we're six months into this, we're nine months into this. You know, if you're surfing at the beach, and you're outside, and you're healthy, and you don't have comorbidities, you're gonna get COVID at some point, but you're gonna be fine. And if you're old, and you've got comorbidities, you really don't want to get this thing. So stay home and limit your interactions. And yeah, if you get a cold, make sure you come to the hospital so we can give you one of these drugs. But yeah, it was pretty crazy how nobody could think sensibly for two years. Well, a lot of people could think sensibly, but they
SPEAKER_01: were shot down. You know, if you remember the great Barrington Declaration, you know, Jay Bacardi of Stanford, I mean, he was great. He was he was just seen as ridiculed as, you know, crazy, xy dust. And it was completely right. You know, we all knew remember, and I would have a crime that's talking about COVID. Yeah, no, it's okay. They said, they said, Oh, the vaccine will stop you from getting getting COVID. And we all had amikra like everyone we do had, like, literally, it happened to me three weeks after I got the vaccine. I got the
SPEAKER_02: vaccine. I went to Sax's Christmas party, his super spreader spectacular, as I called it. I got amikra. And I didn't know I had it. My wife, I sneeze twice. We were skiing. And she said, you got COVID. And I said, I don't feel anything. I went to bed, I had a little bit of hot sweats. I went skiing two days later, I felt fine. I tested positive for COVID for 19 days. I felt it was the meekest cold for 12 hours I've had in my life probably.
SPEAKER_01: Oh, I'd rather I'd rather have COVID than a cold. We were in we were in the Caribbean, we couldn't couldn't get back to the country because we kept testing. The nurse made so much
SPEAKER_01: money. You're just every day $300 test $300 test trying to
SPEAKER_02: get back to the states. I mean, it really is like, I'm now moved to the point where I'm very resentful of, I don't resent the first year, because I think people were trying to do the right thing. And it was unprecedented, it was spreading. But I'm really resentful of like, year two, and how they position the vaccine. Like, it's absolutely you have to take it because you're going to become a blocker. And I was like, you know what, that makes sense to me. If I don't spread it, I'm a blocker. Great. We go to a party. There's eight blockers, there's two people could spread it. Hey, chances are spreading get go way down. And even that wasn't true.
SPEAKER_01: Yeah, look, we got it. We ended up traveling all over the world. By the way, it's the best time ever to travel. Every place we went, there was no lines, we went to airports with to be no people. It was great. We were when I looked at the data, I'm going, okay, not all not morbidly obese, no comativities. My probability of dying is zero. Yeah, like, it's just not gonna happen. So we just went all over. It was fun. But you know, I can miss my kids to get it just because they were in their 20s. I was like, you don't need it. Like, there's no way you need it. But your life is going to be painful. Like you won't be able to do it. You won't be able to travel. Yeah, whole thing. All right. No more about COVID. Yeah, no, I mean,
SPEAKER_02: some lessons there too, from like, the censoring on YouTube and stuff like that is very interesting having a podcast. And then having your podcast flagged. I'm like, but we're having an intellectual discussion about this. You don't need to flag my podcast. It's just like, Oh, my God, we have to you. Here's what you have to believe. And I'm like, really, I have to believe that. And that's put this warning on your content. Like on this weekend startups, really? Okay.
SPEAKER_01: I wrote an editorial, the Wall Street Journal defending big tech by about three years ago. And my argument is like, very libertarian argument, you don't want to go to the site, don't go to their site is their property, they can do whatever they want. I didn't realize that the government was actually interfering, you know, basically doing censorship. Yeah, using them on their behalf. To me, I was I was like, I want to retract that editorial. It was unbelievable that they were doing censorship. And I think that's why people have have lost trust, trust in so many, many of our institutions. I think what you learn about us, you know, for freedom of speech, you know, he's, he can be a bit crazy, often. But you know, you got to love the freedom of speech. There's downsides to it.
SPEAKER_02: Yeah, I mean, it was, it's a very hard thing to champion freedom of speech, because that means you have to champion some things that are pretty gnarly. And you have to tolerate some things that maybe are ugly and that you don't agree with. But our generation, I think it was like a core tenant. And it's just very weird to watch generations feel like they're going to be like, absolutely disturbed because somebody said something they don't agree with. Yes, are they need you don't need to be protected from words. Like, just words that we're in the dictionary. Yeah, it's weak,
SPEAKER_01: very weak. Like there's real truth. There are no trigger warnings in life. You know, bad, bad stuff happens to you very suddenly.
SPEAKER_02: It's the thing I look for an entrepreneur. So we're back to the entrepreneurial question is some amount of resiliency, and some core beliefs that you believe in that, you know, you're not going to just be shaken from like, if you believe that this thing should exist in the world, and you're resilient, and you're going to fight the fight for that thing, and you have that belief in the thing. Now, of course, you have to have some amount of smarts and some amount of, you know, hatred of losing, and you'll get there. But man, I do like principled people. And then you know, they can be hard to get along with, but the world absolutely needs them. What do you think about valuations now, just to go on to another tangent? You know, things have gotten crushed in the public market starting to come back, we had a pretty good year here, it feels like things are stable. But private market comps public market comps is pretty gnarly for SAS, and you've chosen SAS. Where do you think this all winds up? You said you wanted to invest in companies with a million dollars in ARR? Let's say, what should they be valued at today? And what will they ultimately be valued at?
SPEAKER_01: So we invest in companies outside Silicon Valley, primarily for that reason. I just don't, you know, we're down in Santa Barbara, if a company comes to us, you know, they can throw a rock and kill 10 vcs. You know, why are they coming to us? Why would they take money? Clearly, most, you know, huge percentage of great companies come out of Silicon Valley, but it's also even a greater percentage of money is in Silicon Valley. So the competition is extremely, extremely fierce. I look at some of the valuations where people have given like 250 times revenue, I just I don't get it. I don't know how you grow up going to it. Maybe I'm maybe I'm missing something. But you know, we tend to look at, you know, obviously growth rate retention, churn, we just and then we do, you know, we think is a reasonable number based on growth rate. Yeah, it's above, you know, most public, no public company growing at 200% 300% anymore, but we just don't go crazy valuations. And then we lose some deals. Yeah. That's, that's our part of dentures, you lose deals, and those deals, some of those deals, go off and do great things.
SPEAKER_02: And founders have kind of figured out too, they know how to in today's day and age back in our day, it wasn't a lot of information or insights into how the whole system worked, even understand how a convertible note worked or how rounds were priced, it was all kind of in a black box, you had to really go discover that information. Now it's all out there, and how to run a process is all out there. So founders know how to run a process and get the valuation they want if they're trying to optimize for valuation, but not sure optimizing for valuation is a great idea. Like you said before, about optimizing for your salary is not a great idea.
SPEAKER_01: Why have a lot of sort of canned speeches I give to to entrepreneurs. You know, I think some of the biggest mistake, you mistakes you'll see, like on these, that the Corin's, they've piled on so much preferred, they'll never see a penny, right? They could build a great company, you know, hundred million dollar company, not bad, right? I'd take one of those. And they'll receive, they'll receive nothing. So taking out too much money is just as bad as not having enough money. It causes bad habits, you know, we can usually get around the valuation. I mean, what is the tough, it's a tough market to raise money, you know, if you got a great company, pretty easy, you know, there's a lot of VC funds that are not able to raise raise another fund, there's gonna be I'd say 50% of VC funds will be gone within a year,
SPEAKER_02: I'm raising my current fund, and we're halfway to our target, we hit our first target, and now we're going for the stretch goal. And it has been 10 times as much work as when I raised the previous funds. And a lot of other fund managers I'm talking to have given up, they're just out of the market. And you're starting to see the layoffs happen quietly adventure firms, you wouldn't see it because people stay as you know, their partners, but they're not getting paid anymore, they're getting a small draw, whatever that they're kind of winding down, I would call them zombie funds. And then they're maybe hoping next year, they can go raise a fund or the year after. But for those of us who have money to deploy, this feels like the greatest time ever, because you get to see a lot of companies, people are running their companies in an intelligent fashion. And they're focused on what matters product, market fit, customers revenue. So it feels to me like this is the best possible time to be an investor.
SPEAKER_01: I mean, that's always Aaron, right? When when the market our fund was a 2021 vintage, and it's doing great. Yeah, yeah, on a relative basis. But you know, when valuations are high, people will only give you money when they're when they're low, you know, there at once. And what service we're about halfway through our, our fundraise as well. I've never understood why one of the models I think that's broken adventure. I don't know what your GP commit is. But most of these VCs, there's not a big GP commit. No, why not? Why not? Yeah, it's to me, it's the best place. Best place I can put my money is a couple of million
SPEAKER_02: dollars into my fund. Yeah. So it's, yeah, it's not it's I've got a lot of skin in the game. And if you believe in yourself, yeah, there, there. I think there were a lot of folks who were putting in like, well below 1% of their fund, like the entire partnership. Five people might be like 1% of the fund. It's like, really, you have a quarter million dollars in your fund. Wow, that's incredibly risk taking of you. Like, yeah. How much is your second home?
SPEAKER_01: It'll be like 20. The first one, it was probably Yeah, about 30%. Yeah, 20% 30%. I don't take salary because I want to use it to invest in other people. I mean, I just I don't have any income. I'd rather cap capital gains carry. Yeah, carries way
SPEAKER_02: to go. Absolutely. Are you Have you moved to the institution
SPEAKER_01: raising money from institutions yet? Yeah, we're just starting
SPEAKER_02: that process. So I'm meeting with sovereign wealth funds, family offices, you know, like larger family offices. So I guess those aren't institutions fund to funds. But yeah, you know, we're not going to add $100 million fund size ever be a fit for CalPERS or Harvard, you really need to get to like, you need to put in $50 million checks is my understanding. And yeah, they're reducing the number. So those institutions are pretty hard. I think family offices, fund to funds it to the extent they exist and sovereigns are you know, the the likely route for any sub $500 million fund. We haven't done we're
SPEAKER_01: about trying to raise about roughly the same. We just started first time going to going to our fund to funds institutions. I haven't done sovereign. I haven't done anything offshore. Yeah. Are you having any success there? Yeah,
SPEAKER_02: I think it Well, not yet. But I've been meeting a ton of people. And I think that they are very interested in having a seat at the table. And the people who have a seat at the table are on pause. So then you have this interesting market dynamic. Okay, the people who in the US are over committed, they have the denominator problem. Stock market came down, their venture portfolios didn't get marked down. So they went from 10% allocation and venture to 25%. They haven't liquidated their tick tock or their stripe or other companies that need to go public. And so they need to get their venture commit down to 10% again, or 15% from 20 or 25. And that's going to take equities going back up or returns coming in and clearing some of that venture position. So I think they're largely on pause for 2223 and 24. So you know, Harvard, if you're Yale, if you're Stanford, it's just going to be a big long pause while you and then you've already committed to great firm. So you don't there's no rush here, right? They're thinking in decades. So for fund managers who need to raise during these two or three years, it's going to be very hard. It's going to be very hard. And I have a track record. So I think I'm, you know, in a good position, but I would say takes 10 times as many meetings to raise half as much.
SPEAKER_01: Yeah, the first one was a bunch of emails. Say, do you trust it? Oh, yes. That's okay. We're finding there's like, the smaller funded funds or the smaller, smaller institutions that they don't have it much venture exposure. So but you are right, the larger ones. Yeah, massive checks.
SPEAKER_02: As people are saying pencils down right now. Yeah, people are pencils down right now. And that's okay. It'll come back. And as long as you have some money to invest, you and I have our own money. So you keep investing, and you're going to get the pick of the litter right now. It's not like deals are taking, you know, five days, two weeks to close, they're taking two months, six months to close a deal. So on the on the buy side, when you're investing, you have plenty of time to get to know a founder again and due diligence, which is good for everybody. It's great for the ecosystem. All right, I got to jump. Kevin O'Connor, great to spend time with you. And let's catch up next time you're in the Bay Area.
