The bad feelings last for a day and the five billion lasts forever, right? So, you'll get over it, boys.
It has been a big week of news. Anthropic's inference costs skyrocket. Gra's $5 billion deal and a $12 billion Open Evidence round. At some point, Nvidia puts will be a great buy because every semiconductor cycle for the last 40 years has ended up in a massive downswing. I ain't buying them today.
When we talk about is SaaS dead or what's going on, I worry this is the next final act. I think it's the final nail.
Is there a way out? Then most of the time we sit around here waiting, reading, and thinking. And I thought that's a real investor understands that activity is not everything. SaaS is not dead. And now SaaS has an army.
I love it. Ready to go.
Boys, it has been a big week of news. Now, I was super, super happy when this news came out because I got tagged on so many being like, 'Can you do an emergency pod?' And I was like, 'Well, that is a great sign of product-market fit for what we do.' And so, we're going to start on Brex's acquisition by Capital One, $5.15 billion, 50% cash, 50% shares. Diving right into it. How did we analyze the announcement of this, which did come as quite a surprise to many of us?
I thought it was a great outcome for the company. By the way, no one and I've, you know, obviously everyone who's on this pod has probably heard all the thread. You have the first of all, you have the great outcome people. Then you have the people sneering saying, 'Oh, that's a disappointment from where they were.' Then you have the counterparts saying, 'Grow up kids. Anyone who builds something from nothing to $5 billion. It's a great outcome. Shut the up.' And which by the way, I think is the right outcome. So let's assume everyone's already caught up on that. So we can kind of engage from there, right? Um going back to the first thing, I think it was a great outcome and I think you know you built something from nothing to a $5 billion outcome before your 30 heroic result. Absolutely be praised. I think it's a smart acquisition for for Cap 1 too by the way and we can come back to that later but that's kind of the first big picture comment here.
Right. And then on the second thing and I really I think there's three different sets of comments. There's the is it a great outcome in the abstract? Of course it is. Second big picture question. Is it a great outcome relative to the $12 billion raise in 2021? And there actually my co-podcaster Jason I thought did an awesome piece on that and we should talk about that next. You know um hubristic financings. And then by the way the last thing we'll circle back to is is it a great outcome relative to ramp and the competitive dynamics. So, I'd like to throw it to Jason and say, 'I thought your post on hubristic financing and you know the the pros and cons of raising at 12 and selling at five was actually really good.' So, over to you to get your thoughts.
Look, I don't know everybody like Harry does, but someone that was a smaller investor in the company, I asked what what what what she thought and the outcome was, well, given where we are in the world in 2026, it's a good outcome. And that qualified answer kind of uh was interesting. And so, that was my thought. It's like there's so much. I mean, listen, some folks are taking pot shots on the on X. That's that's the way it is. But why do we have these these weird feelings? Why are we not sure if this is a good exit at 5.1 billion in 8 years? I mean, I would have loved to have led the seed round, right? Maybe it's not good enough for Harry, but Rory and I would have been happy to have led led the round, right? So, why do we do we have this feeling? And um look, this is nothing new. I just this is the era I called it um you know, hubristic financing. You've got to keep doing these Harveys and Loras and what Open Evidence from 1 to 12 to keep up and and uh if you don't um it you put yourself at a competitive disadvantage but then you set yourself up for disappointment when you cuz these companies that are fundraising to the nth degree the thinking machines today the Brexes back then they are promising as Rory says this.1% growth at infinity, not just a couple years of of of sustained growth Brex was basically promising it would own all of business finance at some point and that was the bet at 12. And so it leaves us with with with a with a with a weird feeling when um put put the latest stage investors aside on paper all the stakeholders have a great outcome. Even even the liquidation preference, it's not like it ruined the deal, right? They raised like a billion something equity and debt. This wasn't one of the grouchy deals where 7 billion went into the company, right? This was a a a great outcome for everyone on paper except a late stage. But but it it it's it the versus the promise the commitment made to everybody customers late employees for four years. It's you have but you have to make these promises to win today. Do you have to make them to win today?
When you take money at a high price, you run this risk of subsequently exiting at a lower price and having this weird odd feeling for a day. But I think the wider level comment is step away from the weird feeling, right? Why I told the thing you why did you raise money at 12? I going back to 2021. Who's going to say you investors are offering you money at 12? No, I'd prefer to take it at six. Thank you very much. I'm an idiot, right? No, you raised the money cuz you needed the capital. If they had I mean, let's run through the logic here. If they haven't raised the money, they would have run out of money. That would be dumb. Once you need the money, you're going to raise it at a market price. So I thought what you said is look there's pros and cons to that. Get the buzz, you get the momentum, you get the employees, you get to compete in a world where other people are doing it, right? And in return, you pay this weird one day tax the day you exit, which is you've just had a heroic world changing, you know, life-changing event and then you just feel weird. But given what's on the field, there's no way to avoid that because you had to raise the money in 21. Therefore, you did market price at the time. The bad feelings last for a day and the 5 billion lasts forever. Right. So, you'll get over it.
No, we're gonna we're we're actually because I'm going to get a Capital One card in the mail as soon as this deal closes. We're going to forget about Brex in 24 months. We're going to even forget whether it was two X's or how to spell it. This is this is our world. We'll we'll forget, right? Um I will say just one thing on the topic. Look, great outcome for the founders, right? On many levels. Great outcome for early employees. Not what they thought they'd make in 2021, but a great out great outcome for Ribbit. Um the one thing in addition to my post I I um I saw that not too long ago but a while back Ali from Databricks said which is one of the most successful companies at this strategy hubristics. He said I never wanted to raise more than two years ahead of the valuation I was confident I could hit. I never wanted to raise not just two years a not just the classic the VC side is hey listen two years one year ahead for a hot company two years ahead for a great company maybe thinking machines 28 years ahead I I don't know but um that's a thoughtful response like if you believe it um did did BS believe they'd be worth 100 billion probably I don't know I don't know but but things were loopy in 2021 and maybe they're loopy in 2026 but um
They probably did because look it's a sin of extrapolation the growth rate was probably two 300%. You extrapolate. I mean it's it's the age-old truth. Most of these quote unquote insane valuations can be explained actually by the Ali comment. Provided I keep the growth rate up for 2 years then I will have grown into this valuation on a revenue multiple basis. It's a perfectly innocuous sentence. But buried in it is a whole debt trap because the minute 22 came on the growth rate faded, right? Then your capital gets more scarce. So you have to try and converge on profitability. The growth rate goes down even more and you know what was a totally legitimate belief in 2021 which is three more years of 300% growth and I'm worth 12 billion becomes utterly insane in 2024 it's just the cost of doing business in this crazy game that everyone plays right because I suppose what I'm trying to do is I'm trying to avoid this kind of moral oh it was good our was bad all these emotion laden things is if you play the game of to to something for example for the latest stage investors if you play the game of paying up massively for hyper for growth and it doesn't work, you get a 1x right now. As long as maybe 30 40% of them on the 1x and you don't do any major whoopsies where you actually get a loss and you get a 3, four, 5, 6x on your goodens, then overall the math works and even in a mediocre year like 21, you end up with a sub 2x but still perfectly fine fund. In other words, it's I I go back to my comment, it's just the nature of the business, you know, things. It's one of my things that I said a lot in this part. Things prove up in the end for what they really are, not what you delusionally think they are at one point in time. In in the end, a financial services company was always going to trade at a financial services multiple adjusted for growth. And that's what happened here. So growth came down to still very impressive but normalized levels. Cap 1 leaned in and said, you know, 700 million in grow plus or minus seven times revenues. That's a good deal for me. Done.
How does this change the game for Ramp? Ramp obviously raised at 32. Does this help or hurt them?
I think this is a great question because remember I said there's three things that there's the there's the is it standalone a great outcome and then of course is it a great outcome for the investors versus 2021. You're raising the third one which to me is the interesting one cuz ramp you know and some of actually I got to say the CEO of Ramp did a fairly classy post. It's like hey congratulations he had sold a company to cap one. It wasn't awful, right? The founders fund guy did a dance on your grave.
Dude, I I love Eric and I I do. Yeah, I like the team. It It was a dig. I know some good London.
It was a dig, but it wasn't a perhaps as is so often the case in America today. I'm I'm judging I'm judging quality by the opposition. The founders fund did a straight dance on your grave. If I'm ramp, you know, from an opera I mean, the two things are true here, guys. From an operational perspective, this is further validation that quote unquote I've won. I started later and I'm doing a billion. They started earlier, they're doing 700 million. Good news, you've won, right? But the bad news that you just can't ignore with a tweet is when real money decided not to buy 2% of this thing in a in a secondary sale, but to actually write a check for the asset, they said, 'We're going to multiply by seven.' Right? And if you multiply RAM's billion dollar run rate by seven, you get 7 billion. Now, they're growing faster than RAMP, maybe double it, 15. What it points to is, you know, we live in this crazy land of VC valuations where they're made once a year when only one person buys, no one can substantly sell. They're very thin markets and, you know, we hope they're roughly right and sometimes we're surprised to the upside when they go public, and then sometimes we're surprised to the downside. If I was a I mean hard comment here, if you're doing your mark to market on ramp right now, how do you factor in a recent transaction at seven times uh to your multiple of 30 times? You know, it it does at least I mean I'm not saying it's dispositive because you're faster growing and you did as you put it win, but it does make you think maybe when you go public in two years and you want to monetize a let's say at that stage $2 billion revenue company, maybe you're still growing a little faster, maybe you get 10 times, I don't know. But it does it if if I was the investor in ramp or if I was the investor who just wrote the $32 billion check, I'd at least pause and go, hm, let me check my assumptions one last time here, right? Maybe it can still work, but I got to be a big company. I mean, you ain't going to get the M&A outcome anymore. You've just got to be the big company and trade in the public markets at a significantly higher multiple than the other financial services companies. The only way you can do it is if you keep the growth up, if you keep the growth up. So, it's not like it's impossible, but it's just a significant data point that weighs the other way as you think about value.
If I'm the the the Brex founders, right? If if I'm if I'm Pedro, especially rampant, we talk about Ramp, but we also look at Non Public and I have another comp going to Rory's Point and I'd be like, let's say the three of us were the founders. I'd be like, Jesus, we have a comp that's basically worth the same as us. Basically the same revenue. Now, it's got debt. It's got other issues, but I'm like, my god, guys, we could work for three more years to an IPO, suffer lots of dilution in the IPO, stress, and basically economically be the same place in 3 years. Now, that's cool if the three of us want to build something much bigger than this, right? But I don't even know if 10 billion's worth it. If we don't want to do it, if we don't want to build this as a generational company on our own for a decade because the non-com's a tough one. It sort of says to me we're going to grind it out for two to three years and be worth the same. So, we better want it. And all my public company CEOs on on they're pretty grouchy today. I always say 80% of the public companies B2B CEOs are now they may be thrilled when they when the next generation IPOs, but this isn't the happiest cast of characters, is it? The public company CEOs they're not happy today but it's a super good out I think cap one has played a very shrewd hand here because remember all these businesses ramp you know divvy which my former company I was formerly involved with billboards they all monetize on interchange right and most interchange is visa and mastercard which is you know third party network you have visa the issuer bank and the accepting bank capital one bought discover card discover card has a closed network where they get all the money in the interchange Right. So that's a really powerful asset for them. Now with you know now that they have Brex, they will probably be directing as much of that money flow onto their own rails as the bankers call it as they can. And what that means is they'll be able to extract a lot more of the value from it. So this could be an example where the asset is worth more to cap 1 than it was on a standalone basis. I think it's a very shrewd acquisition for Cap 1. In the last, you know, we forget in the last five or 6 months, they bought Discover less than 6 months ago. I think it closed just recently like for 35 billion at announcement, 50 billion at close. And now they bought Brex, which they can fold on to discover. So, they're making a real push into this space, which is another thing you think about as the independence. You're sitting there going, hm, I'm going to be playing against the A team now with a structural cost advantage. You had three pieces of news today, investors and ramp. You clearly won and the other guy said you won. That's good news. Take put that in the positive comment. Second piece of information, people think a company going a little bit slower than you and roughly the same business is worth seven times and you think is yours is worth 30x. Hm. Put that in the negative. And then last, a well-funded public company competitor is directly entering your space with a structural cost advantage. Now, you can hit total on that and decide my my impulse at the end of that is to tweet and say, 'Well done.' But deep in your soul, you kind of go, hm, not sure that was the best day in out there for my stock.
At least stay private longer.
You're going to have to at least believe in the dream world of p of private. Let's let's do let's do another secondary, boys. Lads.
Okay, moving on, boys. Another very, very significant bit of news. So, we've all been waiting for for a long period. Is Tik Tok deal finally done? US investors will own 80% of the company. Algorithm retains in control of Chinese owners which is interesting. Um how do we analyze this deal getting done now and how do we think about it?
I think you can't I mean you can't approach this deal economically in in the main you have to it's it's a political/geopolitical decision to force Tik Tok to divest and when you have that and then have a very directed purchaser program. So let's do the economics first of all. It looks like a very attractive deal. I think the company's doing 15 or 16 billion dollars in the US revenue and they bought it for four like one one times revenue plus or minus. That's a wildly cheap deal compared to anything else. Now there's a term that says some portion of the of the opex is a license fee or some payment back to the Chinese parent. So um you don't know the full economics but my sense is that it's a wildly accretive deal for the lucky chosen investors in the new oligopolistic capitalism that we now practice and it is worth pointing out how wonderfully I mean it's good to know that we fundament so so that's from an economics persp so fundamentally ignoring any questions ignoring any other questions I wish I had some of that in my 401k you know right um the the most addictive popular um application in the United States social media marketplace at one time's revenue. Put me down for some.
At first when I saw this deal, I thought um and and Rory can can play historian here. It hearkened back to me to when Andre got off the ground doing Skype. Yes. And the reason it it was a structurally weird deal where they got a good deal. Now they took risks. Skype was a aging platform, but they bought it from eBay, right? Is that eBay needed eBay needed to devest it. They had enough of it. Deal.
There was no synergy and and Andre went all in. They didn't have that money bad. They went all in and 3x net their money in like 12 or 14 months. This felt like another moment in time where you could get a great deal. Uh the only thing I don't get is why didn't those guys show up? Why isn't Andre and Sequoia and Lightseed in this deal? And you have weird ones. Oracle, which is also has infrastructure. You have UAE sovereign wealth funds. Where are Sequoia Andre? That's the only thing that made me pause and like maybe it's not such a great deal because those guys are just in the business of minting money now. Why didn't they each at least throw in a billion or two into this deal? They put it into everything else.
I don't know. I don't know. Maybe maybe it was a bit of a Yeah. I don't have a Yes, cuz at one point they were in it and then they were not.
There's a reason they're not in that deal. It's free money otherwise, right? We're missing something.
And they're not averse to structurally challenging deals like Axe with Elon taking over which they all engaged in.
No, totally. And I and I think you exactly I remember them doing the um Skype deal very was a very shrewd deal and I I want to say that the PE firm brought them in because they had kind of venture expertise which was again I don't quote me I think this PE firm was in fact Silver Lake again but I'm going from memory there but I remember as you say Andre came in on the deal it was spun out from eBay there was some issues around licenses and IP and it was a little bit risky. They cleaned it up for 12 to 24 months and then sold it to Microsoft and made three times the money on a ton of money in the first fund. So super shrewd that was. And if someone does the same thing here, it'll be interesting.
Let let's move on. Let's discuss let's discuss anthropic anthropic inference costs 23% higher than expected. Are there economies of scale in AI after all? And how did we read this?
You know, look, there's a lot here, but I think this is so important for for for B2B companies. Um, I just like I mean literally I was at a board meeting of a of a B2B company with a powerful AI agent costing 100 million and just seeing some of the dumb points in this board meeting of saying hey guys in 2026 we've really got to drive down inference costs now and I'm like do you realize you have six megapunded competitors and a huge amount of your like the only differentiation is who has the best agent now you're going to cut back your inference it doesn't make sense right and this is the point Amjad was making so many times. I'm sure Anton from Lovable's made his own version, but OmJod's always been like, 'No, you're it's going to everything's going to get more expensive because as soon as we figure out how to do this stuff, we're going to burn even more tokens. We will actually burn an infinite amount of tokens if we can.' It even happened to anthropic, right? It happened to everybody. And I think for a lot of a lot of folks, especially folks that aren't quite growing it at the open evidence levels today, um or ramp are thinking, 'God, I got to what am I going to do with these inference costs?' And I got to tell you, the idea that you can use uh cheap models and cut back on your inference and still be competitive. That's the thing. Still be competitive with the hot Andre funded company, like no chance you can be competitive without that inference.
But I do think it's important not to lose sight of the fact that for even though I mean you asked the question, oh my god, the the the anthropic inference costs were higher than expected. Is there any leverage with your rhetorical economies of scale, Harry? Right. The truth is remember last year they had a negative 94% gross margin and this year they have a 40% plus or minus gross margin. Now it's not 50. So clearly the gross margins are improving substantially. So I think the real kind of in the middle boring comment is there is significant leverage in inference costs and the the P&L is getting a lot better but it may not go all the way to the you know it may take longer. We thought we'd be at 50 now you're at 40. It may take two years to get to 70 or you may never get there. You may ask them taught out at 60. Right? So I I think it's just the nature of the beast in NEO. You're dealing with this totally new business product, totally new market. You don't have a you have a hypothetically. However, I don't doubt the fact that a profitable and defined by that as free cash flow operating income business will emerge from something like I mean a tropic is not going to not have a profitable business model because this clearly is converging. It's just a question of you know what scale does it converge at and what operating model does it converge at. Is it a 10% operating margin business or a 30%. Right? So it's getting better. That's but it's getting it's getting there. It's getting there a little more slowly than you might like if you're but it's still massive. I mean from negative 94% margins last year to positive 40 this year. That's a big move.
Can I ask Jason specifically to you? You know you said at the end of the year when we did our kind of quiz show um on like roundup you said that 2026 would be the year where we would see inference running for 24 hours a day for a small portion of the knowledge economy. And I thought that was a really interesting takeaway. When you think about that
I actually tried to build it over the weekend.
When you think when you think about that combined with these increased inference costs and being more than expected, how do you think about those two together?
It's easy to say we're going to use three orders of magnitude more inference in 24 months. It's easy to say it, you know, it it's more than an order of magnitude by the end of the year potentially. You know, the the cost decline that we're also seeing despite the anthropic thing there it's hard the the token consumption is increasing the deflation in the per token cost. So I we haven't seen we've seen that improvement I think at Enthropic to Rory's point and I might be getting it wrong but we haven't seen this break point where we're going to we're getting a we're catching a break. We maybe the margins are getting better but we're going to keep burning more. So I'm waiting for the moment but um I'm not seeing like for I built over the like I was you know we've talked about memory but chatbt and claw don't have that much memory if you try it don't remember much does it? It remembers this little bit. So, I built a version of of Claude over the weekend called REN. You can try it at ren chat.ai. And it remembers everything. It compacts everything. So, it never forgets anything. And I learned a lot of things, but one of them is it's going to burn a lot of tokens. If you want to save every chat you've ever had, every discussion over all time and reference it for years. And what if that runs 24/7? Maybe I'm rambling and not answering your question, but I don't see I I just see it ex accelerating. Um, and again, my my maybe I'm not sure. My my biggest concern for founders out there, especially for folks that are not quite in the top 0.01%. Right, is just that they're not especially folks in ops on their team or folks that aren't close to AI that they're mismodeling this. You need to model in your inference costs are going up this year, not down. There's no if you walked into your board meeting and said, 'Hey, good news guys. inference costs are are going down 30% this year because our our IT team's really good at managing costs. I would I would throw my mouse at the monitor.'
You are right. But can at the risk of zoom I have two zoom out comments on that. First of all, when you look at the problems you'd like to be wrestling with as a business, an individual business or an industry, the problem of I have infinite demand for this digital good, which is still quite expensive to produce. So we're going to have to figure out how much to charge for it and how to ration it is a wonderful problem compared to no one wants to buy this digital good I don't know what to do right so the big you're right I mean what you're saying Jason is correct the demand for inference the demand for tokens can be almost unlimited in some cases because the more you can deliver the more you can do so metering that demand relative to the cost to produce is as it were the business challenge and you're seeing that across the board I mean in a tropic you're seeing all these They have their $200 plan, the $20 plan, and then they have those few people who are doing $1,000 of tokens on their $200 plan. And what do you do about that? So, but again, so that's what's happening out here, which is everyone's trying and that's if you're the model producers. If you're a SAS vendor like you and I are investing in, an AI apps vendor and tok and you know, inference is one of your biggest costs. Now, it used to be 5 years ago, you know, AWS would be one of your biggest costs. It would hit 10% and everyone would lose their [__] in the board meeting and you'd say let's get it down and you know you'd manage the process and get it down to eight or nine with efficiencies. Now you're right it's inferences the big cost. If you're a high priced app maybe it's 10 or 15%. If you're a coding type app maybe it's 50 60 70% of your revenue and if you don't manage that correctly you don't have a business. So but again I think so
But I do think I do want to get your thoughts where I do what I worry and maybe it's a at a practical level I worry there's this middle category these are mature company not hyper mature 50 100 200 million AR okay B2B companies and they finally got a decent agent built okay it's taken them for a while they didn't they didn't but but they have they have 10,000 happy customers and they're pushing this agent out and they got to break break even last year because scale and 20 VC aren't going to put any more money in even though they're supportive because the growth's not there, right? They they got 30 million left in the bank. They're break even at 40 50 million R. Now I'm competing with DecaGon or Lora or whoever and I need 20 more million of inference this year or it just it's game over because I can't compete because their agent is bet like my my my my the way the way I've deployed it is great, but it's $2 per interaction, Rory. It's $2.50 per interaction. I need 50 million interactions this year. That means I need a h 100red million. Now I'm bringing in 50. What do I do, Rory? I can be competitive. You told me to. You told me to get break even. I did that. Thank you guys. Then you told me I got to be more AI. Thank you guys. Now I built it. How am I going to fund the 50 million inference, right? Open open evidence has the money.
You you have the irritating habit of exa asking exactly the right question. No, I totally like I'm mentally thinking of some companies that have gone through that. You're exactly right. It's like, hey, your SAS com product isn't enough. Let's get profitable. Okay, you got profitable, but nobody cares. You need an AI product. Oh my god, you've delivered an AI product. Your customers love it. And now you're at the next shoe to drop is how are you going to finance this thing cuz you're up against people who can raise $200 million on a dream. And I I I acknowledge that. And rather than telling I have the answer, it's an issue I'm wrestling with. I can think of two boardrooms in the next two months, right? Maybe one month as we do annual planning, right? How aggressive can you be um in this market because if you play def I mean if you try and meter it to to your cash constraints you're going to get left behind so you better be I mean so the really the so the gut level comes and this is how capitalism I suppose is meant to work the gut level test comes if your customers are getting value from your AI agent that they can't get anywhere else and you can make that value clear then you can charge enough to pay for your tokens and yay you right if you're not getting if you're not giving value or if you're locked in a war with someone else who has infinite capital and is willing to give it away longer than you, then you're probably going to lose and you should figure out how to exit now. And to some extent, you the midyear kind of coding wars where oh my gosh, wins looked to exit. There was a little bit of that dynamic going on. Is this war escalating with a level of token intensity that you just can't keep up at? And I I I acknowledge that that at the app level as I say a couple of my companies are wrestling with those issues right now.
Yeah. I'm just I'm honestly worried. We talk about is SAS dead or what's going on. I worry this is the next final act is that you you checked you did all the right things, right?
I did everything you told me to do.
You did it. You did you're not growing 0%. Your customers don't hate you. You built an agent and the final nail in the coffin is we just can't afford the inference. We just can't build a competitive product. We can't. And even, you know, earlier on this podcast, in essence, even uh Canva, which will be one of the great IPOs and great even Cliff teased that I I could build Gamma, but I can't I can't burn the way Gamma burns those tokens. Now, maybe he'd say something different today, but it was the same point that echoed in my head that now we're seeing across boardrooms, across B2B companies. I think it's the final nail.
Is there a way out though? If you can't raise the money to compete, but you can't not spend.
Well, Rory hit the way out. The way out. There is a simple way out, uh, which is you build an epically good agent. Typically, one maybe that's, let's say your product's $5,000 a year, $10,000 a year, and you're able to charge $20,000 a month for your agent, $10,000 a month because it replaces 20 people. It's that good. It's not pretend that good. It's not that good on a sales pitch. It's literally so good that the ROI is measured in weeks, right? That's your way out. But the problem is it like you a lot of B2B companies they're a they're just struggling to get par. The bar is so high and so but that's the answer but it's exhausting because it was so much work just to get here to get to profitability to get to agent. Now you have to beat the agent that open evidence Lora Harvey who whoever we're going to talk about rep you have to have a better agent than them to earn the 20 grand a month. Like you your team better be the best.
To take another example that probably applies to even a large public company like Salesforce who yes has infinite money but also doesn't want to you dip in the red or you make sure that a combination of you you have the advantage of the data that you possess to make it a better agent to make it a more efficient agent maybe you have to do less processing maybe another thing is so I've seen so many companies using the open source models for a lot of it so you can leverage that and get cheaper processing yeah you you got to do all those things but more than anything I think Jason you're right you've got to deliver value such that you can charge for. But in the end, I mean, look, the dirty little secret is in the end, everyone's going to have to deliver value greater than the amount of money they are. You going to have to be able to charge more than the amount of money it costs to make the thing. I mean, OpenAI may get to do that for longer than anyone else, but in the end, the wheels of capitalism do grind fine, and we're all going to have to pony up and cash flow positive.
But the thing is, for listen, I don't have everybody's numbers for sure. That the other advantage that the new entrance have is that if you have the best agent and you have the kind of market demand we see, right? Then you're you're um for you your inference costs are a marketing cost.
The established players don't have that luxury. They're already spending massive amounts on traditional sales and marketing. I know I hear you
Versus I you know, you know, if if if I mean Harry's had Harvey and Lagor on if Harvey went to 200 million last year, Open Evidence 100 million a year. They they're often there they have no sales in mark very little sales maybe Harvey does but I can think of plenty of AI leaders that have four people in sales and I can think of some that just hired a marketer at 200 million in revenue so they're the the inference is your marketing sales and marketing team in in essence right because you just throw all the money into the making the agent great and I don't see how even Salesforce is one of the few that can do it with its resources and even there it's stressful if you talk to folks at Salesforce today they'll tell you this is the most stressful time they've ever worked at Salesforce in the history of the company.
One of the ahas from this is just the demand for inference and just by extension the demand for compute and what does this say about it, right? And I always think this is going to sound cool. I always discard a not discard I always apply you know a certain discount factor to what you know people running the large AI model companies say about demand because they're talking their book and even the poor fools like Oracle who are investing to chase that demand and sell them compute services. I'm like, maybe you're getting fooled by these other guys. But I always think the guys running in TSMC are sharp, right? And they've been around a long time. And you know, they're cynical, which I I mean, you know, you I'm sure you all saw that piece about 12 months ago. They were fairly skeptical when Alman's talking about we're going to need to raise a trillion dollars. They're like, 'Yeah, yeah, yeah, go go go away AI boy.' Right? They just did their earnings call and the comment was you know basically demand for compute is in effectively infinite right now and they're raising their capex and remember these the these are not kind of these are folks who say I'm going to spend $50 billion you know peak before was 40 so low was 22 billion two years ago they're raising their capex budget for next year and they're basically saying we think the demand is real right now and to me that's the you know because there's been a lot of We've all been wrestling with it. Is there going to be a day when everyone says we're not going to invest as much anymore. We're going to slow down just a little because you're so far out there on the going back to the Brex Common in 21. We're so underwriting hypergrowth that even the slightest slowdown would be kind of pretty brutal for the markets. And this was the biggest tell of all because these are the guys who spend the capex with a two or three year lead cycle that you know services Nvidia that services the hyperscalers that service open AI that service the AI company. The very bottom bottom the the very the first step in the AI pyramid and the guys running that are saying we're going to need a whole bunch more compute here we're going to need a whole bunch more capex right and it was just interesting because I think keeping an eye on TSMC as the the people who would own the problem if they overinvest you know you can cut employees you can turn off your GPU but if you dig a big deep hole in the ground in Phoenix and a big deep hole in the ground in Japan and put a fab in there and no one uses it you you're out 20 billion bucks and they're leaning in right now. So that inference demand is pretty clearly there according to all the tells.
For those that think about the AI bubble, does that not completely denigrate those risks of an AI bubble bursting? When you look at them, when you look at the improvements, when you look at Dario coming out today saying, 'Hey, when you look at the improvements, we'll be replacing everyone's job in in under five years.'
Not every statement that says it's going to go on now has to be equally correct. A bunch of people who have the money starting with the um the foundaries going to the chip companies and going to the hypers are all said we're going to spend this money this year. So I think it's highly unlikely that you this is not going to be the year where people get terrified and say I'm not going to do it. At some point I think they will because I think we probably are overinvesting at some level but right now people are saying I can see logic to this thing for the next 12 24 months you know despite the massive gap between the you know the huge the capex is now 600 billion the app's revenue you know squinting is 100 billion so you're still you know 500 billion a year in the whole but right now people are saying the return is there that's all that's all you can conclude right now if you knew when it was going to happen to the day you'd be trading Nvidia puts and you wouldn't be talking to
Sorry I'm I'm the least intelligent on this call which is why I love doing it. Um when you look at the cost of inference maintaining its high price and when you look at Jason I think quite rightly saying that inference will be running 24/7 for more and more of the knowledge worker population why is that not just continuing evidence that Nvidia has so much more room to run and is actually underpriced today.
Take for example that statement the you know the cost of infra the cost per token is goes down enormously quickly and it's just that that demand expands and just people use more and more tokens to get to the same dollar amount right just to be precise so I think the only argument against what you're saying is some version of as the numbers get bigger and bigger you start encountering oh GDP type limits so your total US capex is X and you're now 30% of the total capex can can we really stop building tractors, buildings, and can we put all our money into great big data centers? And you have some people who articulate that vision. There people who articulate um on the Dwarkish podcast, you articulate the trillion dollar data center. Well, maybe. Um I'm not sure that happens. I don't think you have to believe in the trillion dollar data center or the all human beings are going to be unemployed by AI to believe in the at the margin for the next 12 months. It looks more likely than not that people will continue on roughly the same investment trajectory. Those are both statements that have the same conclusion for the next 12 months, but are very different in terms of their grandiosity. Do you understand me? And I'm not making the grandio statement. I'm just saying I I mean, let me make it really tangible. At some point, Nvidia puts will be a great buy cuz every semiconductor cycle for the last 40 years has ended up in a massive downswing. I ain't buying them today. That's when the rubber hits the road. When people are done talking and do they want to say they believe and I don't have that conviction yet cuz people who have money and conviction are saying they're going to spend we all know that some version of the bubble will pop even if it's well after SpaceX IPOs and we have a thousand data centers in space which is Elon's dream and there's so much interesting things coming 24/7 inference um it will pop someday if we can't see it reasonably popping in the next 24 months I don't know that as investor ers, as employees, as management team members, uh we can have dinner conversations, but I'm not sure there's much we should change. And um and I guess we all got caught around December 2021 where 90% of tech thought this was going to last longer and then bam, we got it. It just bit us, right? And like the Hashi Corp went public and then it just stopped for 2 years. But um this is different and if you know there's just there's there's no upside in in in in betting this is going to slow in the next 24 months. There's literally at least for 99.9% of us there's no upside
To ground it in practicalities. The only
thing you can advise people is, you know, think about a scenario plan. Think about would you have a plan if it were to change. Think about your funding strategy, especially if money is cheap, to make sure going back to the Brexit, you're really glad you raised that money in 2021. Right? All you can do is play to the current scenario, but have a plan that if the, you know, if the world changes, you'll know how to change, and then you've raised money to be able to survive that.
Speaking of playing the game on the field, we mentioned them a couple of times. Open Evidence raises at $12 billion led by Thrive and DST. It's a 12x valuation step up to where they raised at a billion dollars from Sequoia at the start of the year. Revenue growth has been amazing. Pharmaceuticals ad spend in the US on media is 22 billion a year. If you think about the transition of that to their business model and assuming a reasonable take, you can see them being a 4 to 5 billion revenue business in that alone. Doesn't feel crazy, but then in other aspects it does. How did you guys read this one?
I think it's a great company. It's a perfect use case for AI, and it's one of the use cases where, yeah, the general models are good, but the combination of specific relationships with the New England Journal of Medicine and all that, plus restricting access only to medical professionals, plus HIPAA compliance, means you've got this really nice product to allow doctors to do decision support, which is you go and check online, what's the recommended treatments for some obscure disease I haven't seen, right? And then the obvious thing you do with that is you sell them ads, right? And the obvious people to advertise to those doctors are the drug companies because they want to sell to the doctors, right? So it's a perfect business, and they've escalated to, I believe, 150 million in revenue. Right? So I was actually impressed that you led with the market size because the things that are clear here is they're the winner in the space, right? Doximity is the old pre-AI competitor. But in terms of think about doctor media mind share for doctor-like things, Doximity helps you a lot with, you know, thinking about salary, thinking about job. But I have a medical question to which I want a highly technical medical answer. They appear to have commanding market share. So you've won that business. So the only question is how big is the market. And you're right. You can say total drug company spend on quote-unquote drug advertising is 20 to 30 billion. But Harry, a good half of that is TV ads to consumers, right? So for a lot of these drugs, especially the long-term conditions, the advertising is not going to the doctors, it's actually going to the individuals who are wrestling with the disease so they can build consumer preference. So that has the market, right? And on top of that, if you look at pharma companies' spend on trying to reach medical professionals, actual direct-to-doctor advertising is a two or three billion dollar marketplace, which is now getting a little bit smaller, right? And you then have a whole bunch of these, you know, infamous pharmaceutical reps. So a lot of this marketing is done in person. So, you know, you have the, you know, folks just calling on doctors bringing donuts saying, 'Hey, here's a sample pack of my nice new arthritic drug. Give it to your consumers.' So the only way this market... So for Open Evidence to get to that valuation, what they have to do is one of two things. Either A, they have to blow open some of that budget away from pharma reps calling on doctors and move more of that budget online, which by the way is a totally credible thing to do, right? But that's what they have to do. Or they have to expand into other services to doctors. And just like I think Doximity added some SKUs, for example, Doximity, a product they added that was a really clever product is a scheduling app with a kind of phone number that doctors could use that wasn't their personal cell because doctors want to give out their cell so people can reach them but they don't want to give out their personal cell. So some nice little doctor products. So to get 3x from 12 billion, you probably have to do some significant time expansion. It's credible they do it, but they got to do it.
You got to have $5 billion in revenue, don't you? On the seven multiple.
To get to 35. Yeah, that's where it's open.
I'm not a total expert, but based on what I do know about Open Evidence, if the deal was priced right, anyone would want to do it. It's got the market share. It's very valued by physicians. It's one of the largest. They haven't figured out the true TAM, but the notional TAM is about as big as it gets. Of course, you'd want to do this deal at the right price, right? Anyone would do it.
If you were a growth investor, would you do it at 12, Jason?
Well, that's the question going. This is back to hubristic fundraising in the Brex round. Who at Open Evidence is going to do the Brex round at 12 billion at Open Evidence and ElevenLabs and Lora and Harvey? When is that round? Is this that round or is it the round in March at 30? Because this is hubristic fundraising. Open Evidence will probably do a round at 30 or 40 next year. I'm actually going to suggest that Thrive is very smart and they've probably done the math and this is the right insertion point for them and they believe in it and someone else is going to do it at 30 to 40 next year as it goes to 400 next year or 500. Someone's going to do that. So who does the 12 billion dollar Brex round here where nothing but greatness but gets caught with the tail end of hubristic fundraising?
The first line really resonates with me. This is such an obviously good deal in such an obviously good market with a wildly quality founder who's had a win before. He sold Kenshu to S&P, big brain PhD, AI native from his first deal which was a financial AI company. This impeccable background here, great connectors, there's nothing not to like here. And so you're right. Let me give you a clue. You're not going to find the discount here, people. But you don't think this will be the 12 billion price round that Brex where the music stopped and it's that last high price.
It's always a tricky question because you go, if you played back, remember they had a round at three and I think a round at six. So this is the fourth time in and every one of those rounds you'd have said maybe this is the one that's going too far, right? But they, I mean, and when you step back, they 10x'd revenue this year when they 10x'd their valuation plus or minus and so the revenue multiple is the same, right? I mean, I think that's the market we're in now and at some point someone's going to be left with the tide. It's, you're right, Jason, it's the Brex risk, which is the tide goes out, it's still an amazing company but maybe you're doomed to a 1x and is this the round that happens? I might have said the six billion round was just given the core of town market eyes. Yeah, that's the bet, right?
What's so hard is in the moment it never feels that hubristic and like we just said that it's a no-brainer deal. Great market, great market share, great founders. Likewise, I remember with Brett, I had Henry K and Pedro on the show back in 2020, 2021 and they were talking about AMX and the fragility and how they could build a hundred billion dollar business and 12 billion did not seem that crazy, does it?
Hubris is like that. I mean, and even more these latest stage deals of great companies, they're very easy to talk yourself into when times are good.
When times are tough, they're still hard to talk yourself into, but when everything's, I mean, times are mixed today. But the good stuff is so good, it's so easy to walk into the partners meeting and advocate for Open Evidence, isn't it? It's just so easy. Guys, it's a yes, it's a little expensive at 50,000 times revenue or whatever it is, but I mean, you can't argue that this is a generational company and Mark Andre says we do generational companies at any price. We just buy as much as we can. They only go up overall. Not all of them, but they only go up overall. This is a generational company. I know it was 12 billion last week, but I proposed 1 billion at 35 billion, guys, this week. It's a generational company.
