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That's right, we're back. Did anything happen over the weekend in tech, or was it kind of mellow?
Uh, it was a crazy weekend. There was a lot of news, a lot of back and forth about pacing the AI debate. I was in the hospital because I got rabdo. It's brutal, but I am recovering fortunately.
Explain rabdo because it sounds... it's bad. Really scary and it is bad.
It can be very bad. Fortunately, I did okay. I got an IV, got some medicine, broke a fever, got through it, and I'm healing up. But it happens, and it's the dumbest, dumbest illness you can possibly get. It comes from working out too much and not being hydrated. Very avoidable.
Hopefully AI can find a cure. If there's even a 1% chance that AI can find a prevention for rabdo, I think it's worth any amount of risk.
Pushing forward. Yeah, we must push forward. Uh, no, lots of debate about how fast we should push forward.
We have never missed an episode for being sick. Yeah. And I realized that because someone was asking me the other day, what do you guys do when you're sick? We just keep going.
I mean, I did talk to the doctor. They said, do you want a doctor's note for work? And I was like, no. I kind of laughed. But I do think that this job can be done while sick because you're just sitting in a chair having a conversation. But I might be a little bit slow today. So bear with me if I'm not the sharpest on any of the questions.
I will be sharp on the ad reads though. I'll tell you about Shopify. Shopify is the commerce platform that powers your business. Let you sell in seconds online, in store, on mobile, on social, and on marketplaces, and now with AI agents.
We got a great show today. Hey, take us through it. We have Nico Wittenborn from Adjacent. Really incredible episode of Invest Like the Best. I believe it was last year or the year before.
Uh, one of the first investors in Aura and a bunch of other great companies. Uh, we got Scott, the CEO of Scout Motors, uh, which we're very excited to talk to.
Uh, Mitchell Green, our dear friend from Lead Edge, coming in for some hot takes. We got... uh, and then we have our friends David and Ben from Acquired rounding it out with Farage from Cognitive. Yeah, we're excited for this. So, great show.
Before we get into the pacing AI debate, uh, what happened with the US Open? Give me a little tennis update. What happened?
Um, it's on the cover of the Wall Street Journal, so you know it's important news. Tennis's US Open climaxes in a back-and-forth duel. But there was something interesting twist. Ben Shelton, the American, lost.
Okay. Uh, and uh, what was notable is, uh, hopefully I'm pronouncing his name right... Alexander. It's just pronounced Alexander, I think. Zverev, Zverev. Um, but anyways, the most notable thing, uh, was that when he actually hit the winning shot and won.
Uh, he went back and was getting ready for the next point. Yeah. And uh, he starts looking around and everyone is standing... you can see people in the crowd are standing up and cheering, and he slowly realizes that he won by finally looking at the scoreboard. And yeah, it just became very obvious that he was so focused on the next point. He was not actually looking at the scoreboard at all. It was just like flow state, just playing.
That's awesome. Um, and I'm sure a lot of venture capitalists out there were seeing that and they're like, 'Yeah, all that matters is your next investment.' If you're... you shouldn't even know when one of your seed companies are going to IPO. You should be so focused on... I think a lot of people that don't like VC Victory Labs would appreciate that too. It's like, we get it. There was an acquisition. Uh, let's focus on what you're doing right now.
Um, I also like the cameraman work. I saw a clip of the scoreboard was counting down. There was 07 seconds left. What... who do they cut to? Pierce Brosnan, 007 himself. I thought it was nice camera work. Shows you that there's levels to the game of live production.
Yeah. You know, you got those little touches. Clearly that was just spur of the moment. That's not something that's scripted. That's just someone being creative in the moment with the tools that they have. The switcher, basically.
Uh, anyway, the pacing AI debate. I wanted to start with some history here and then we can go through the timeline of what actually happened, uh, since we got off stream Friday, then all the news breaks of course. But, um, uh, the pacing the frontier goes back to July 28th of this year. So there was a pacing the frontier statement, an open letter that was signed by employees and leaders from OpenAI, Anthropic, DeepMind, Meta, and a bunch of other places talking about this idea of pacing the frontier.
Uh, then, uh, the same day Sam Altman publicly said we may have to pace the rate of AI development. Two days later, OpenAI, uh, tells Axios that OpenAI helped shape the petition's language and Altman had discussed pacing with White House officials. So stuff was happening in DC. This was back in basically the very beginning of August, very end of July.
Then August 18th, OpenAI, uh, publishes something called 'Pacing Model Development in an Era of Cyber-Critical Capabilities.' OpenAI said it actually slowed scaling and paused a major RL run. There was that two-week training pause that happened. Uh, on August 31st, an official Anthropic post explicitly discusses pacing the frontier. So the idea is spreading and calls for coordinating pacing mechanisms.
And then on September 12th, which was actually Saturday morning, that Dario dropped the essay, 'We Must Pace the Frontier,' turning the concept into a much bigger public Anthropic campaign, uh, that everyone's talking about today. So, uh, the rollout of this was pretty quick. And there's a few key things from Dario's essay.
It hit the timeline at 7 a.m. Pacific. He was up early posting. Perfect time to get a lot of likes on a banger. You got to feel something. No, everyone else, there's no fundraising news happening. Drop your essay early Saturday morning. Let people digest it with their morning coffee.
Elon was clearly engaging. By 8 a.m., Elon endorses it. 9:30 a.m., Sam endorses it. Uh, Saturday, uh, 4 p.m., Demis generally agrees with Dario's point, uh, and argues that it needs some work. Remember, Dario put out something pretty similar talking about, uh, pacing and AI development and the need for oversight generally, uh, months ago before transitioning out of his role as CEO of DeepMind and stepping up to, I think, chairman.
Um, then later, David Sacks on Saturday, but at 8:15, has had time to process everything. Uh, he asks some questions about Dario's post, goes back and forth. Sunday morning, the Financial Times reports that Donald Trump has rejected calls from tech bosses for an AI slowdown. Um, later that day, Sunday morning, Gavin Baker rounds up the weekend.
So, we can kind of go through some of this and go through those posts. Uh, but what actually happened in, uh, Dario's essay, 'We Must Pace the Frontier,' he has the three-step plan on how he proposes to... number three will shock you.
Uh, number one, give independent third-party evaluators access to AI companies so they can verify safety practices. Uh, he calls out METR, which drew a lot of attention because people were debating how independent METR is. There's some METR employees who have worked at OpenAI, have worked at Anthropic. There's people that work at Anthropic who worked at METR. Like, it's very much a revolving door with these AI safety groups and then the AI labs. You go back and forth depending on what you're interested in.
So, uh, not as independent as like, oh yeah, we're going with an accounting firm who, you know, doesn't really have an opinion about, uh, the AI future. These are all people who are deeply embedded in the discourse, which could be a huge benefit because they take this stuff really seriously. Uh, could also lead to some, um, what people flagged as like conflicts potentially, but, uh, still some optimism from the community around what that would look like.
Two is frontier labs and democratic companies should work together with the government's help to establish AI safety standards. And this was the one that people were going back and forth on. Do the labs actually need government approval from this? Uh, Dean Ball was talking a little bit about the Sherman Antitrust Act. There are very clear rules about companies agreeing to do really anything in concert with each other.
Um, this is the number one reason that you don't want monopolies and cartels forming. Uh, is that if all of a sudden, you know, uh, you know, American Airlines and Delta and United all say, 'Yeah, we, you know, for safety reasons, we should have fewer flights.' It's like, okay, well, what would that do to the market? Probably drive up their margins because there's less flights, charge more for them, they have fixed costs. So, you could very clearly see that collusion in that market would lead to more profits for them and more harm for the consumer.
That's where the Sherman Antitrust Act came from. We flagged this a week or two ago that, um, this might, like, even though it seems like, oh well, if Demis and Dario and Sam and Elon all agree, like, this should just happen, that's not a problem. There are actual legal and federal regulatory rules that might need to be adjusted or waived for something like this to happen.
Um, so that's, I think that's why he's calling for that specifically. He's saying we need an exception to the rules so that we can actually do this. Um, because it's great to all write blog posts that we loosely agree on, but to have anything formal, we need government approval.
And then third, this is the one that will shock you apparently. Uh, the US and other democratic countries should try and coordinate with authoritarian governments. So he wants the US and China to coordinate on AI pacing. Of course, China still wants to catch up and there's some tricks there. It's like, what will happen in equilibrium if both countries have the exact same capabilities? Is that the best outcome or do you always want to be in the lead?
If you always want to be in the lead, it's very hard to negotiate with someone and say, 'Oh, well, you know, why don't you just have half as many nuclear weapons as we have and, like, that'll be great. Like, we'll pace you.' And so you go back to nuclear non-proliferation and all the difficult debates there. We obviously wound up with a multipolar world with everyone wanting at least some capabilities there.
So, uh, Elon chimed in agreeing with Dario. Then Sam and Demis also agreed. Uh, the timeline on the other hand had some questions and concerns about Dario's post. Who will these third-party evaluators be? Why wait for Washington to regulate the frontier? If Anthropic believes AI is advancing too quickly, why not simply slow down on its own? David Sacks raised some questions on X.
And we can go to David Sacks' post, which I believe here is in the timeline. He said, um, 'Dario has written that we need to quote pace the frontier and Sam has agreed. People may be surprised by my response. Go ahead. Uh, you guys are the frontier by any reasonable metric. Market share, revenue growth, model capability. The two of you have a duopoly on frontier intelligence.'
'You've also claimed the lead is widening because of recursive self-improvement. I don't see what you see in the lab. If the unreleased models are scary enough that you think you should slow down, I support your decision to be responsible. But stop pretending you need anyone else's permission. Stop pretending antitrust law has to be suspended so you can form a cartel. Stop pretending you need a regulatory approval process that supersedes product liability. Stop pretending METR is independent when it is intertwined with Anthropic's investors and staff. Stop pretending that you need those same evaluators to police competitors who aren't even at the frontier.'
And so yeah, maybe that's a little bit of an issue. Although yeah, I mean, the regulatory capture angle is always like, if the safety rules become super cumbersome such that you can't start a product, right? It's like Instinct is a small team. They're not building a frontier model. They're not training their own models, at least not yet. But they're like doing stuff with AI.
If all of a sudden they have to spend a year negotiating with a bunch of third-party evaluators, have a bunch of people embedded, and then go through some sort of review process, and the government's not getting back to them, like, you can't have a breakout consumer product. Uh, and that doesn't feel like there's been any type of effort from anywhere to try to control or regulate, like, application-layer companies.
And Greg was on Odd Lots. Uh, this episode came out this morning talking about not trying to... doesn't believe there should be any sort of limits to, um, application-layer stuff. Yeah. Basically like if you just want to train a model at home, uh, for your own use cases, you know, there shouldn't be limits on that. Yeah.
Uh, Trump came out yesterday. He was pretty active over the weekend. He said the only controller, quote-unquote, guardrails that AI needs is a strong and smart high-IQ president. And the USA has that in spades. The Trump... wild post.
'The Trump administration has stopped AI people from doing bad or potentially bad things like Dario, who is now pretending to be a perfect little angel, and we will continue to do so. We already have tremendous criminal and regulatory power over these companies. There is a sick conspiracy going on against AI and data centers, and the only one that is happy about it is China. Whoever wins AI wins. We are leading China and all others and will continue to do so. Conspiracy theorists, treasonous traitors and leakers beware. Thank you for your attention to this matter.'
Um, it is funny to accuse, uh, to accuse, like, the labs of being in a conspiracy against AI. Yeah. And that really, really doesn't follow. I don't... Yeah, it does not make... but, uh, he also followed up just 40 minutes ago, said, 'Concerning AI, when in the history of business, capital H, capital B, history of business, did anyone see the leaders of an industry call for regulation that if strongly implemented would drive them into oblivion and bankruptcy?'
'AI is taking over the world, destroying humanity and all other things bad is a hoax. No different from Russia, Russia, Russia, Ukraine, Ukraine, Ukraine, impeachment hoax one, impeachment hoax two, and all the other hoaxes and scams that America was forced to endure. Uh, President Xi of China just announced that China will be doing absolutely nothing to stand in the way of AI or its future.'
'Google has recently stated that they want to build a massive plant in Finland, all because they are finding permitting too difficult in the United States. I'm not happy about this and want them to change their thinking. AI and data centers will be the greatest economic development engine in history. Bigger than oil, gold, diamonds, or even the internet. Bigger... diamond... bigger than diamonds... like, of all the technology, the internet, the internet, the transistor, the wheel, diamonds. These are equivalent things.'
'It will not be stopped by brilliantly run destructive forces during the term of President Donald Trump.' Okay. Um, well, anyways, I'm wondering what the... So a bunch of hedge funds are paying, you know, they paid to get access to this, let's assume like a minute early, something like that. How did they trade this? Because it's very... long to be? Yeah, long, long diamonds. Yeah, maybe diamonds are underappreciated.
I think diamonds are actually in a really rough spot. I think people are moving to lab-grown stuff really aggressively. So it's actually a tough, tough period of time for the diamonds, and I'm sure the diamond industry is calling for regulation for sure. Um, okay. Oh, where were we? Um, interesting. I don't know. Um, we were talking about David Sacks. We were talking...
Oh, we got to keep going because the president was on a roll this weekend. Uh, let's pull up this video. Okay. Oh, yeah. They asked him how he used AI. While we pull up the video, let me tell you about the New York Stock Exchange. Want to change the world? Raise capital at the New York Stock Exchange. The IPO window is still wide open. AI market a little bit down, but overall handling things pretty well, and we're taking a lot of their car tariffs.
'President Trump, this week again, there's been so much concern about AI. Have you heard directly from any of these AI tech leaders? And you seem to downplay some of the concerns that we've heard.' 'But it's, you know, it's going to be more good than bad, but by a lot. Whoever wins AI, and we're leading by a lot. Whoever wins AI wins.' 'Have you ever used it yourself or have you been... AI?' 'Yeah, I do.' 'How do you use AI?' 'But, uh, I would say, you know, for the most part, you can use AI for a lot of things.' 'What do you use it for?' 'Right away.' 'Speaking of AI...'
The funny thing is that, like, there's AI-generated slop on his social account, like, constantly. Like, the slop videos are obviously AI. Like, both sides of that debate or that discussion should have known that, I guess. But I guess it's like people on his team are creating, like, the AI slop videos because, like, there will be, like, a new vibe-coded, like, uh, you know, some sort of simulator that they put up on White House stuff all the time. So, but I guess that's not him. It's probably people on his team that are like, 'I made this AI video.'
Yeah. But I don't know. Uh, Gavin Baker had a roundup of what happened. Let's go through what's going on. And lots of people just sort of, like, processing this, going back and forth. People were expecting Elon to be sort of against this, maybe anti-Dario. He, of course, came out in favor and has been talking about how, like, he was working with Nick Bostrom in 2014 on AI safety. Has been very concerned about this the whole time.
Um, although at various points in time, Elon has been less of a doomer and more like, 'We got to build, we got to go, we got to, you know, actually compete here,' uh, working both alongside labs, co-founding OpenAI, founding, uh, xAI, growing the model capabilities there. But, uh, he's firmly in favor of this. So, let's see what Gavin Baker had to say.
He said, 'Wow, 24 hours for AI and lots of different proposals have been made. TLDR: The only tangible new fact is that OpenAI and Anthropic are going to have embedded third-party evaluators from unknown organizations, with Dario floating METR as a possibility. Having third-party evaluators is smart as there's no Section 230-style liability shield for model outputs, and showing a duty of care will be important in future litigation.'
'Several internet companies might have gone bankrupt without Section 230. So, limiting liability really matters. I think there are minimal investment implications from this single new fact. But I do think that anyone who wants, quote, a smoother-for-longer cycle than most, constraints are good: wafers, watts, rail rates and spreads.'
I was thinking about how a lot of the safety folks are worried about just the capability buildout from the semiconductor supply chain, like they would like to restrict the amount of chips that are created. And I'm wondering if, um, should we not be pacing electricity generation? Does everyone agree that we should be building more solar, thermal, wind power right now? Is that uncontroversial? Is there anyone who says, like, no, we shouldn't be doing that?
Is if we wind up in a world where you're pacing frontier AI development, current models are sort of diffusing and there's some economic impact there, but you're not, you know, blitzscaling the data centers and the frontier intelligence. Can you apply some of that capital, some of that human talent to just getting nuclear power online, getting solar power online, re-industrializing the American energy supply chain, battery, relieving grid tension? Because everyone who complains about higher energy prices would be happy with that.
I don't think the AI safety folks would be upset about that because you could use it for a lot of things. Worst case, it's like, okay, you wound up with, like, okay, we can never build, you know, AGI or ASI because it's too dangerous. At least we have a lot of cheap energy. Is there any reason why you wouldn't, why you would want to pace the buildout of the American electrical grid?
I can't see why. What do you think? I mean, at some level, like, yeah, it makes sense because it is, like, an input, but it seems like way too diffuse. And also because, like, yeah, it's like if you build a lot of chips, like, sure you can, like, you know, make more data centers that run YouTube or whatever, but, like, there's kind of a narrow use case for chips. Yeah. Where power, you can kind of do whatever.
I wonder if you, uh, yeah. Yeah. At what point is there some sort of, like, AI safety, um, valve that's like, we need to regulate that company in South Korea that makes toilets that also makes films for semiconductors? Because if we can restrict them, then we can slow down the pace of AI progress, uh, going really, really deep in the supply chain for safety reasons potentially.
Um, to summarize the events, Gavin Baker says, 'Dario made the most maximalist proposal of the weekend. Embedded third-party evaluators, national regulatory regime for models beyond a certain capability ingredient threshold, a broad international regulatory pact between democracies, stricter limits on compute distillation for China, and then a different international regulatory regime that encompasses China before there is ever a national regulatory regime.'
'He wants a Sherman Act waiver so that Anthropic can safely coordinate with OpenAI and other frontier labs without antitrust fears. To be frank, this latest proposal is much less maximalist than some of his prior proposals, like Policy on the AI Exponential, where he advocated for an FAA for AI. Now people are talking about FINRA for AI, which is more non-governmental regulation but industry-focused. I believe he is sincere in his beliefs, and despite all the protestations, all of this would also probably be good for his business over the long term.'
Yeah, there's a lot of tricks here where, uh, if there are multiple quadrants of, like, actions you can take and it's either good or bad for your business or it's good or bad for safety, you can land in the good-for-your-business and good-for-safety quadrant, and everyone will accuse you of being cynical and doing it only because it's good for your business. And so, yeah, it gets really difficult to say, okay, yes, like, the thing that I'm advocating for is good for my business.
Now, Rune had another take, which is like, no, if you're pacing the frontier, that's going to compress margins because everyone else is just going to catch up and it's going to become more oligopolistic. So if you hold, you know, like, yeah, there's this duopoly right now for the true frontier amongst OpenAI and Anthropic. But if you hold that constant, like, Mistral from, uh, MSL is going to catch up, DeepMind's going to catch up, like, you're going to have three or four, Grok is going to train to that level, and so you're going to have four, five, six, seven really capable competitors.
Uh, what was interesting is, like, Aravind Srinivas was saying that AI spend declined a little bit in August, and that was mostly because of price cutting. It wasn't actually people using less AI. So it's not like people are pulling back on their use of AI, but there's more price competition. So OpenAI is discounting and people are being... we saw, like, the Fable adoption was a little weak, and a lot of it's like, hey, are we sure we want to use the million-dollar model for checking the weather? Like, let's be a little bit more judicious about this.
And so if you wind up with a world where there's much more price competition, um, that could compress the frontier's margins, which is not good for business. So it doesn't really put you in that top quadrant that you have to be so cynical about. Um, the interesting thing is that he said that he doesn't think that it's open-source Chinese models that are actually putting pricing pressure on the frontier. It's more of the duopoly dynamic.
And he, and I think that's because, I think he sort of alluded to this, that, uh, there's just a lot of companies that are like, I am comfortable doing business with an OpenAI, Anthropic, uh, a Google, of course, something that's on AWS, something that's on Azure. Uh, yes, I could just download the weights for DeepSeek, but, uh, I'm not really comfortable with that. I don't really want to deal with that. I don't want to deal with the scaling and uptime of that.
And so, yes, there are APIs out there that are reasonable, but none of them are as mature as the frontier labs, not in terms of the intelligence, but in terms of the actual, if I implement this in my business, will it reliably give me the right results? Is there high-quality SLA? Will the service stay up? Will uptime be good, etc. So, um, there is a world where you could get to a place where this is bad for the frontier companies' business-wise.
And Sam has talked about that in an interview with Fortune, saying, like, if it's bad for our business, like, we have said to our investors at every step for, like, a decade that, like, this is kind of a nonprofit. This is a, you know, uh, there are a whole bunch of different ways in which this is not purely aligned to, uh, shareholder interests like other companies. I forget the actual term for, uh, the structure that both Anthropic and OpenAI use. PBCs. Yeah. Public benefit corporations.
So I think both Sam and Dario feel very confident about being able to go to their investors and say, 'Hey, we're doing something that's going to slow down revenue growth or tank margins or, you know, just reduce the market cap of the company, but we think it's the right thing to do. So deal with it.' And you can't really sue us because you invested in a PBC. And, uh, but no one's really giving them credit for that.
Everyone thinks like, 'No, this is cynically what gets them to 10 trillion. This is what gets them to 10 trillion.' And I don't know, maybe it is, but, uh, but it definitely seems like, uh, like, if we're on the midcurve, you know, bell curve meme, like, the dumb guy thing is like slowing down is bad for business, right? Like, the midcurve is like slowing down is actually good for business in the 4D chess, and like, you don't want to be the best and have 100% market share. You want 20% market share because you let everyone catch up to you.
Like, I'm not super convinced of that, but, you know, there's plenty of people that are making that case online. Uh, anyway, let me tell you about Cisco and then we'll bring in our next guest. Cisco, critical infrastructure for the AI era. Unlock seamless real-time experiences and new value with Cisco. Nico, welcome to the show. Thank you so much for taking the time. Come on down to the TBPN Ultradome.
Hello. What's happening? I thought it almost looked like some merch we would make. I know. I was trying to match the colors right in the background. Yeah. Um, introduce yourself. Give us a... Let's begin at the beginning. I want to hear the story of how you wound up, uh, in your current role, your mission, and then there's a million things we can talk about, the market and your strategy. But, uh, take us back to the beginning. Where'd you grow up?
The beginning. My beginning. Yeah. Uh, I grew up in Germany. Okay. Yeah. South of Germany. Small town. Tubingen. Mhm. Beautiful. It was not destroyed in the war. In Germany is in Europe, right? It is. Uh, yeah. Just, uh, a bit east of the US. Yeah. Okay. Got it. Yeah. Um, my geography outside of the United States is rough. I can help you. Thank you. And when did you come to the US?
So I ended up doing an exchange here in upstate New York. So my junior year of high school, I ended up, um, in a super small town. Okay. Three and a half hours north of, um, New York. Cool. And so that's when I first got to New York and I was like, I want to live here, you know. Um, and so I started looking for...
That's got to be like going from small town in Germany, passing through New York City and going three hours north has got to be such a trip because obviously, you know, entirely you're like, I'm going to New York, and then you have this idea of New York in your mind and then you end up again back in a tiny town.
So I opened the letter from the organization that places you. Yeah. And it's like, you're going to New York, Candor, New York. Like, where's Candor, New York? You look it up. Never heard of that borough. It's small, but it was a great experience. And so the interesting part to that though is that, so I was in the middle of nowhere in the US and then I also got to go to the middle of everything in the US. And so I had a really good exposure to both sides of the US, the kind of elitist coastal urban life and also the, you know, small town living.
Um, so that was the first time I came here. And I went back, I did an internship here after school in New York, um, and then studied in Germany, Singapore. And during my studies, I started, um, selling refurbished iPhones. So the iPhones first came out in like 2007, 2008, and they were locked into a contract in Germany. It was super expensive. So I bought a refurbished one and I started reselling them.
Okay. Was that like jailbreaking them or unlocking them? Yeah. There was a tool called Redsn0w. Okay. Yeah. And they could use on any carrier. Yes. Got it. Because it was locked in the beginning and locked into like a two-year contract, was very expensive. Um, so that's... all I remember all the names of like software like that, like Redsn0w. It sounds so sketchy, but it was like the names of all that kind of like unlocking, jailbreaking, all those names were... Yeah. That was a pineapple one. Yeah. Yeah.
So that was my first foray into business, but like, you know, small internet entrepreneurship. And then I read about a group in Berlin that was, um, really the pioneers of the German internet scene at the time. So everything happened a bit later in Europe, right? And so in like 2010, came across this firm in Berlin. I just reached out to them cold. It was an incubator. So back in the day, they were building companies. Um, and then they had a small six-million-euro fund on the side.
And so they were like, why don't you come during your studies and work with us on this, like, small investment fund. Must have been a good cold email. I mean, it was, I don't even remember. It was actually, I had... So this, it was important though because I had an offer from a consulting firm that would have paid twice as much. Yeah. But I opted for the, you know, opportunity to go into startups because that's where my interest was.
And that led to this, you know, so it was really an important decision back then. Um, and they gave me a shot. Um, I learned about venture. I then finished my studies and when I came back from Singapore, which was also kind of an exchange, um, I ended up doing a... again sending an email to the same group, this guy Pavle, um, who was working there, and he offered me to come back because they decided to spin out the fund.
And it became Point Nine, which was the first institutional venture fund in Germany. No, not in Berlin, there was another one in Munich. Um, and so I started working there straight out of school. So I just got lucky that, like, at the time venture was not what it was. It was just the start of the European venture ecosystem. Yeah. And so I kind of fell into that and then it was a super small firm. Um, it's also historically the best-performing early-stage firm in Europe. So they did super well early on.
And, um, I got a lot of responsibility. I was there for five years and, um, they were originally focused on enterprise software, so SaaS tools. They were early in Zendesk and, um, Loom later on here in the US. Really. So it wasn't just limited to Europe, you were investing all over. So we called it remote VC. So it was kind of, we were based there, but we were trying to look for the best things across the globe that had, you know, that were fitting our thesis.
And then I was recruited by Insight Partners. Um, in 2016, I left to join Insight. Um, that's when I moved to New York. That's a grinder. Ten years ago. It was very different than the small, humble... It's like a hardcore culture, right, for venture. It's like you got to be... Well, it is. It's just, you know, the way it works is that they built, they innovated this. So the founder of Insight, Jeff Horing, started the firm when he was 26.
Yeah. Twenty-million-dollar fund. It's now a hundred billion and he's still running it, right? And so, founder... no, he's a legend. Um, and he ended up innovating on this outbound sourcing model. So they have analysts that are just cold calling. It was literally the phone in the beginning. Now it's emails and everything. Sort of a price for every company in mind. Yeah. And discover every company. Yeah. Yeah. They want to know everything. Exactly. Exactly. Discover every company. Very interesting model.
Yeah. It makes sense and it still works. So they scaled that and they bet on the same, on the right trend. So I was there and so I had learned that at, um, Point Nine, I had done some SaaS and I did that too. But I was always, because of this iPhone story, interested in consumer software. I was there when the App Store launched and so some of my investments at both, um, Point Nine and at Insight were consumer mobile investments. Yeah. And so I decided to leave Insight. I signed the separation. It was like 2018 that we agreed on everything. Early 2019 I left and then I started, um, working on Adjacent.
And I guess what's somewhat unique at the time is that back then it was not normal to do it by yourself. You know, like, that solo GP was not a thing. Yeah. And I didn't opt into... Two years later it was like the main thing that people were talking about. Yeah. And today, um, I think last year the majority of new funds were solo GP funds. Yeah. Right. So it became a real thing and in fact that's also one of the things that I try to support now by... I have invested in a lot of those funds, like two dozen or so, um, and also anchored a first solo GP fund now with Adjacent. So I kind of like accidentally fell into this, started Adjacent, but then also trying to build this kind of rebel alliance.
Uh, what was the infrastructure like when you started as a solo GP in, is it 2018, 2019? Because there were some people that were using AngelList for certain SPVs and there were rolling funds and there was, like, there were some tools that you could use, but did fractional back offices exist or did you sort of have to roll your own solutions to certain things? Like, uh, yeah, what was actually required?
So it just started that AngelList were offering services, Carta starting as well. Yeah. Um, the big difference there was that I was actually, you know, looking at what makes sense for the structure. I knew I wanted to be in New York but I also was looking at European structures and the infrastructure in Europe was way behind the US. So I opted of doing it in the US and I, um, didn't go for the services and the reason for that was mostly that I didn't feel like they were institutional grade yet.
Because I wanted to have institutional investors and there was like limited flexibility. I think that all changed now which makes it much easier to start. But at the time, um, it just started. Yeah. So basically just like, yeah, just hiring law firms and accounting firms like your bigger... you have a fund admin which is easy. Um, then you have, um, you have audit as a firm, separate firm. Um, and then you now, I mean now really what supercharges is AI now because you can do so much more. You can automate things, you have agents, but also research, like diligence and like sourcing everything.
Yeah, I was going to ask how, at what point does, uh, does like Insight's initial strategy just become fully democratized where, like, there's out of the box? Obviously, if you're doing this yourself, you're always going to be able to find different edges and things like that, but it feels like you might have access to, like, a comparable level of understanding of the market with, like, one person.
Yeah, I'm not sure. I think that certainly it gets easier, but what they're really good at is discovering things when it's still relatively unknown, right? So, like, from the outside, you don't know what a stealth or a new company is doing. Once there's signal and press and more data, then the AI picks it up. Yeah. But I think this, like, this broad sourcing still makes sense. And then the other important aspect to it, which actually works for me too, but is that the analysts are not just sourcing, they're also relationship building, right? So they're reaching out to someone and you still want a human-to-human interaction with a founder because they don't want to work with a computer, not yet, um, at least.
And so you have this relationship and you stay in touch with them over two, three years and then you invest and I think that will still work for them. Mhm. What was the LP strategy for actually raising the initial fund? So yeah, straight shots on endowments, funds, high-net-worth individuals. What were you thinking? What worked? So my, the first close was hard. The whole fundraiser was hard. It was 18 months to get the first fund off.
And what made it harder was, um, COVID started at the same time. Yeah. And my now-wife got pregnant with our first kid. So it was just like a, it was an intense 18 months. Um, but what I did is essentially, the first close, I started going back to the founders that I had invested in that had already proven and made money. So the founder of Revolut, Nik, was one of my first LPs. Um, the founders of Column, which we had invested in with Insight, and then a bunch of GPs.
The founders of Point Nine, where I started working, Jeff Horing later invested as well. Um, and then I had friendly funds like Thrive and Founders Fund that actually helped me with the first fund. That's great. And so that was the first close. And then the first family office came in, which, um, was Sequoia, to give them credit. They were also very early in both Thrive and Founders Fund. That's how the relationship started. And based on the first $10 million first close, I just started investing. And the second investment I did was Speechify, which ended up doing very well.
I love Speechify. Cliff is a character. He's amazing. Yeah. Um, and so with some proof that I could also function by myself, I then went to the institutions and then was able to get a $40 million first fund together. Sure. And then since then, I've been pretty consistently increasing it. So I just started investing out of fund four now with, um, in this year, but I've been like kind of pacing it in some ways. Before it was cool and in the growth from like one, two, three, four, adding roughly one LP per fund. Sure. Nice. And that has, I mean, gotten somewhat easier because there's more proof. We just had Bending Spoons go public. Um, was the first...
Talk about that. Uh, how did that initial investment come together and was that always... did that always feel like on... you're more thesis-driven than most VCs, I would say in general. Like a lot of VCs will say they're thesis-driven but they have like eight active, you know, thesis... thesis was buy low, sell high. That's that one always works. Old reliable. Well, I don't know if you're in San Francisco today, that's not what they... high sell. Bending Spoons buys for 10% of the peak market cap, right? So, who knows where we'll end up here. That's true. Um, but yeah, how did that initially come together and like what did you see?
Yeah, so the, um, so when I started Adjacent and the thesis has also evolved since then. We can talk about that more, what led to other investments. Um, but initially, so in 2019, 2020, then the COVID time, if you remember, there was this crazy SaaS explosion, right? Multiples went up, everybody went crazy going back to the... no, it's all cloud, right? Um, and crypto actually. So those were the two things. So all the new funds were doing the same. Yeah. And because I had success in consumer, I ended up deciding to start a fund initially focused on consumer and especially consumer subscription companies.
And that was just essentially a transfer from the SaaS, um, and then seeing the App Store and subscription launch on the App Store and like being close to some of the first investments that did well there. Yeah. So I was quite differentiated in that. So the first fund and the second fund to the most degree were very focused on consumer subscription. There's one problem though with these consumer subscription companies. I mean, there's advantages, disadvantages, but one of the problems as opposed to SaaS is that they're much more churny.
Right. So at one point, depending on how deep the market is, you hit a ceiling. Yeah. Right. Right? And this can be at millions, tens of millions, hundreds of millions. But if you still want to, if you want to go for big outcomes, you still need to grow at a really high clip at hundreds or billions of revenue, right? And ChatGPT to some extent has done that, right? In the beginning, 75% of their revenue was prosumer consumer. So the thesis was good, but I'm not an OpenAI, which sucks. Um, but it was just a different game. And, um, I ended up picking the right trend, but also wanting to have a little bit of, um, like a hedge against it in some ways.
Because you could see that these companies kind of get to revenue relatively quickly, pretty cash-efficient. They need much less people and opex and distribution costs than a SaaS company in terms of headcount. And so they were like tens of millions or hundreds of millions, but very profitable. So we already had this thesis of like, there's actually a really big play here to aggregate companies. Um, because if you can... synergies. Yeah. And then I was actually, I had an investment in a company called Blinkist, which back in the day, I don't know if you remember. Yeah. Short book. Exactly. Which was very innovative at the time and subscription-based. Yeah. Subscription-based. This was one of our Insight investments and I knew these guys from Berlin since Point Nine times. And so one of the founders, Niklas, actually, um, came as an entrepreneur-in-residence to Adjacent for a while and we were thinking about incubating a company that did this. And then I was on a webinar with Luca in 2020. And I was like, I think we should just do that, you know, like he's amazing and he was already like doing it.
And this was pre-HatBT, and then I think AI also helped them a lot in actually building the synergies and the transformation engine that actually then makes...
Well, it also helps them by, you know, knocking 90% off of the market caps of these other companies.
Always some luck involved.
In that. Yeah. So that led to Bending Spoons.
And then when did you actually, when did you do Aura?
So I want to, I heard you say this in the beginning and I just want to make sure that I, I did invest in Aura, but this was around the time of the first close.
So I couldn't, I didn't have a fund yet. And it was around, that was like, I don't know if I should even do that with the first $10 million first close. Yeah. And so I ended up investing personally with a group of friends in an SPV. It was actually, and the friends of mine that I did this with was the team that I was leading at Insight, and they left, also started a fund called Left Lane.
Yeah. So we did it together back then.
Yeah. What was the initial portfolio construction thesis for that $10 million fund?
Well, one last thing on Aura is just interesting, I think also that, so the reason we understood Aura back then, even though it was a hardware device then with no subscription, was that we had done Calm, and Calm had exploded by launching sleep stories. So a lot of the growth actually came from people not wanting to meditate but needing to calm down before sleeping, because sleeping was such a big problem. It still is to a large extent, right, in the Western world. It's like the foundation of your health and psyche and everything. And so we did Aura, and then we were pitching also the move to subscription and hardware, and subscription worked, and that led then also to this hardware subscription thesis, which led to Bending Spoons.
Tractive, a company we sold also this year. So how was that?
What is that company? Tractive.
Yeah. Tractive was, it was probably the biggest exit in Austria ever. So it's a small town in Austria, and they built a tracking device for pets.
So you put it on the collar. So Aura for pets in some way, location. So if you're in a remote area, you know where your dog is. You can like call them back and you see them on the map. You see how they move, how they sleep, and things like that.
Yeah. And actually, who bought it?
Yeah. But it's great you're monetizing both sides on the way up because your pet doesn't come to you and say, 'Hey, I want a churn from this dog food.' You know?
No, this is, but this is like, this is where literally...
What Blue Apron, you know, Blue Apron was like a subscription food company and eventually people would just be like, ah, I want to try something different, like I'm just sick of this.
That's why Farmer's Dog works.
Yeah. Yeah. Yeah. Exactly.
Right. In fact, the same, because actually the average subscription was years.
Yeah. Whereas people might even take off a Fitbit or something, be like, I'm out of this, I'm on the Whoop, I'm out of it, and move around a little bit. So it's hard to get sticky. The thesis has expanded, but I want to get your updated point of view on consumer right now. I feel like a year ago, people were really pounding the table being like, now is the time for consumer AI. And yet, if you look at the iPhone charts, it's been still like the time of language models, right? So like most of the new apps that maybe weren't in there five years ago are various chat apps. And then the other sort of popular apps that you're seeing are like short AI drama slop stories, which is consumer, but maybe not the explosion of different types of applications that I think a lot of people expected.
Yeah. And I think part of that, my point of view is like the chat apps can just do so much. Like there's so much you can maybe, the example I use that's not super relatable for most people is like checking the surf. Like if I want to get an update understanding of like swell and tide and all these things, like I actually don't need a net new app for that. I don't need like the AI for checking the surf app. I just need like ChatGPT or whatever someone's preferred LLM.
So how are you thinking about the overall landscape, especially right now because you have a new horse race with Instinct and Muse? So it feels like we didn't have the end of history with consumer.
Yeah. Yeah. But yeah, I mean, it is definitely true that the world changed after ChatGPT, right? So like 21 Lounge and then the coding help. It's actually, so one interesting trend is that the number of new apps, so one of the other proxy investments I did with Fund One is a company called RevenueCat, which is powering 60% of the new launched apps with the subscriptions today. And through that we can see it's just like an immense increase in new apps that are being launched. So for venture, for me, I actually had to move on somewhat from consumer at the time. I think there will be new applications in consumer plus AI, and I'll talk to that, but it definitely decreased the barrier for new things significantly, right? So the ceiling, if you think it just like theoretically, the competition increases significantly because so many more new apps, so getting to a venture scale outcome is even harder, right? So even though we have more niches served, the venture outcomes are more difficult, right? So I think that if it's very simple, it doesn't make sense. And there is consumer things like I invested in Popcorn, which is an XG telco. So they're building their own core infrastructure for telco. They have an eSIM. You download an app, you get the international number, but also they have AI features integrated. So you can use a call assistant and stuff like that. So I think if the technology goes deeper, more differentiated.
Never put a phone call through to me ever.
Yeah. Jenny calls like instead of voicemail, she picks up and said, 'What is this about? What is this about?'
Yeah. And then if it makes sense, good reason because I'm not putting you through. So many spam calls. My phone's always do not disturb. I don't have...
Oh, and that's so, so, so the most annoying thing to me is someone calls you, but they don't leave a voicemail. Like I don't really want a voicemail, but if I get a call that I'm not expecting, and then there's nothing, I'm just kind of wondering there, but I don't want to pick up the phone. I don't want to take a random scam call that you'd get where it would play the Chinese music in the background and then you'd hear Chinese like pitch for something. It was like a scam call, but they specifically put like Chinese music in the background. You ever got those?
I don't know. My phone number goes everywhere because I've like started businesses and my phone numbers leaked all the time through like customer service and stuff. So I always have gotten like the weirdest spam calls ever. But that was a fun one.
Yeah. So I have now one number that's my spam number that I use on the internet for two-factor. And I have my Popcorn number, which nobody has except real people.
That's good. Need that for sure.
Anyways, I do think there's a new era coming. Which Instinct, I mean, there's just like a lot of, to Instinct, Pulse, like there's companies that are now doing things that are prosumer consumer that are personal agents. And I think I do expect that there will be a lot of things that work there, but also it's very difficult today to understand what if that will be eaten by the labs, right? So how vertical can it be? And then also you have Meta playing for it, right? Like the problem. So essentially it's just, it's so crowded and so many big companies are playing for that, that for me that wants to go in early and not at $500 million or a billion dollar valuation, it's very difficult for me to play there right now, you know.
And there's also like plenty of scaled unicorn decacorn companies with founders who are live players, maybe re-engaged, and they are monitoring the model releases on a daily basis and saying, I'm going to implement this on day one, have a team that's sprinting to implement this feature so that there's not an opportunity for my SaaS company plus AI getting funded because I'm doing it, you know, on day one.
Yeah. And I think like Muse is a great example of that, right? Like I think the speed at which Meta moved on this personal agent trend and launched Muse is really...
It's still unclear to me when they actually started working on Muse because it feels like, I mean, I'm sure they tried to buy Instinct, but that doesn't necessarily mean they weren't working on some months. Like Nat Freeman's been there for almost a year, maybe more. And the, but the level to which Alex has just been like taking direct shots at Instinct all the time on the timeline.
Does he have a nickname for it?
He called it. Yeah. Yeah. I wasn't sure if that was a typo or intentional. But it's rare to see a trillion dollar company like heckling and while cloning a startup that's 11 months old.
Yeah. They didn't really do that with TikTok or Snapchat. Like they're pretty quiet. They were just like, 'We're excited to launch Stories. We're not going to say anything about...'
Well, yeah. No, no. In that case, it was like Evan would be kind of like taking little shots. Yeah. And that's what you'd expect, right? You're like the dog under the dog takes a shot. But this time, you trillion dollar company.
But that's the reason why the stock market has been driven by a lot of these companies that are just still compounding. Same with Alphabet, right? It's like it's just, it's been hard for VC to actually like benchmark themselves because the market's done so great because all the tech companies are just doing amazing things.
How are you thinking of investing in Europe considering that there was some proposal I just saw that was saying like Europe basically needs to spend hundreds of billions of euros to try to sort of quote unquote catch up in AI?
Yeah. I have a buddy from Austria and he's working for an American company right now, but I was like, 'What are you doing? Not just like starting a neocloud right now.' I was like, 'I know people in the US that are dumb as rocks and they're going to be billionaires because like they just picked a hard problem with an exceptional amount of demand and have just been working on it for years. And I feel like Europe's lagging a little bit. If you just roll up your sleeves, you're dumb rocks. You can do this.'
No, no. The point was like you seem like very, very smart and capable. And like if you just focus on figuring out how to get, you know, a powered shell and some chips, you're probably going to be able to figure out some demand. But how are you thinking about it?
Well, look, in my career, Europe has been super important. Revolut, Bending Spoons, Aura, right? Like those are companies that are really important, but also they oftentimes were in the category that was not yet very hot in the US, you know. So it's not easy. I mean, it is true that Europe, we have not done enough to support innovation, and this is everything from regulation to the bureaucracy and like labor laws. Like there's a lot of problems that like startups are tied into the same regimes as big established companies, so that doesn't allow us to move as fast, right? And that's a problem, and I hope that changes. But I do think Europe has amazing talent, and Europe has also the ability to build new things. AI completely missed it, probably as a consequence of having already not done as well in software and the infrastructure build out that's required to actually do this.
Well, I mean, just pattern matching on the last cycle, it seems important that Europe never got European Facebook, but Europe did get Spotify, which was built on top of Facebook and benefited from the Facebook network and algorithm, but it wasn't a direct clone. Because when I see these things where it's like Europe needs its own LLM, I'm not entirely sure about that. I'm not entirely sure. Like if you're going to do China and you're going to do firewall, then you get the Chinese Google, the Chinese Facebook. Europe hasn't gone far enough to actually, you know, truly create an area where you could have a European Google and make it so hard for Google that they get kicked out and then European Google wins. But you can go and do a Spotify, which is an actually new idea, wins and is not directly competitive, actually very compatible with Facebook. They were, you know, obviously a lot of investors in common and stuff.
Yeah, I think it's very hard to catch up in AI. Hopefully will to some extent, but there's also like energy, defense, like we had dependencies for too long.
Yeah, for some of those like Helsing and stuff, you can see that being a clear line. But when it comes to just like global innovation, like running your own race seems to make a ton of sense.
You should, it should be differentiated into their own strengths.
And I think that will keep going. And we started later, right? Like there's still like we have the Spotify soon, we have a Revolut, we have, but like those companies, it takes some time to trickle down.
But like we acquire companies in the US, but like we're an Italian company, right? And like I think those, that ecosystem, the same with Daniel Ek is doing a lot now with Materia to like support companies, Helsing and Niko and stuff in Europe. And I think that is just like hopefully with time that also works.
And you spend time in Estonia?
Well, yeah. So I don't, I have one company that is actually a Ukrainian defense company. They're based there, so there's become a bit of a defense hub in Estonia for that. But I think the original founder of Kazah has built up, he was one of the first investors in Atrium back then and stuff. So there's like also, there is a lot going on there. It's just like not one of my core geographies so far.
Sure. What do you think about the disconnect between what Bending Spoons will currently pay for a software business and what VCs will pay to invest in a potentially future Bending Spoons portfolio company?
I mean, I would not be surprised if Bending Spoons buys a lot of the high companies. Yeah. I've just been... Yeah. No, I feel very, very strongly that that will happen. Even though the companies have great teams, they're growing revenue super quickly, but it's just extremely notable that when you look at some of these software businesses and you look at, I see, you know, in some of these acquisitions, you can imagine that Bending Spoons was like the real only serious bidder for some of these companies. And so they get to set their price.
So two things need to happen. One, Bending Spoons' thesis plays out and people sort of globally realize, hey, we should have been like more comfortable with the risk associated with this. Buying a software company at like three times revenue is like kind of could be stealing it. So if their thesis plays out, there becomes more buyers like Bending Spoons, right? Because there's plenty of capital that could help prices come up. But the alter, you know, that it feels like the most likely scenario is like we get these companies today where I look at them and you'll have a company, you know, $100 million of revenue trading at in the billions and you just see like this company is, you know, how many more of these sort of like hype?
Yeah. I mean, like since VC works in a way that it's very FOMO driven, consensus driven, everybody thinks everything is going to be very big, and then we have these hype cycles where I'm not saying AI is a hype, obviously the technology is super powerful and it will change the world, is changing the world, and but with that always comes a lot of money chasing things that do not turn out right. Most of the venture bets do not turn out and they are orphaned at one point, right? The founders move on, the VC moves on, people just want to have some money back to invest into the next hot thing.
Right. And that's what the core insight is that's driving a success of a company like Bending Spoons.
But it's notable that like it's not like there were the wave of Bending Spoons big high-profile acquisitions was like five years ago and now we're doing it again. It's like all these things are getting priced now while we're doing it all again in the same present moment.
And it's like repeats, the cycles repeat.
It's repeating in real time.
Why? What brought you to LA?
Sure. Well, okay. Last question here. No, I'm happy to keep going. No, I wish we had more time. No, I am here. So one of the first like breaking away from the thesis was a company called Inversion Space that is here in LA and they're doing a hypersonic delivery from space. So they partnered with Anduril on the Golden Dome. They just did a contract with NASA also. So I'm here to see them.
And then one of the funds that I like a lot in San Francisco, KTOS. Ian, you had Ian on? Yeah. So I'm a small LP there and he's hosting an event on Wednesday, so I'm there for that.
Well, thank you so much for coming by.
Thank you so much for coming on.
Let me tell you about Railway. Railway is the all-in-one intelligent cloud provider. Use your favorite agents to deploy web app servers, databases, and more. Well, Railway automatically takes care of scaling, monitoring, and security. Scott, thank you so much for taking the time to come on down to the TVP Ultradome. I would love to start with an introduction on yourself, but also just the story of Scout Motors. It's a fascinating company, goes back decades if I'm not misinformed. Tell me the story of both the company and how you got involved and where you're going next.
Wonderful. I mean, I'll start with myself. I think where it starts with me, of course, is New York, the automotive business obviously with my last name of an Irish background. My family is a classic American tale. They came here with a suitcase. They came to Ellis Island and my dad was in Brooklyn, my mom was in Rockaway, and they wanted to make their way in the world. And of course, it brings me here to today.
I think if you look at Scout Motors, how it all came about, I think first and foremost, as you know, it's an iconic American brand. Basically invented the SUV segment, invented a lot of these things back in the 1960s. I think what happened to Scout is exactly what happened to America in the 1970s: high inflation, stopped making things, outsourced a lot of things, had troublesome labor relations, high inflation on that, and this American dream, this American icon went away. And how it came back to life, I think it's sort of three things came together. I think first and foremost was, let's say, the business necessity. The Volkswagen Group at the time said, 'How can we get more successful in America?' And the way to be successful in America is to go after these profit pools where the trucks and rugged SUVs are. And of course, they had purchased a company called Navistar. Navistar had the heavy truck business of International. Of course, they had the rights to Scout. And there came the genesis of this idea: could we bring back this magical icon with the backing of a company that knows exactly how to make things and get good cost and bring it back to life with a clean sheet? And that was the premise.
And that was four years ago. We had one employee and a couple of PowerPoint slides. And now fast forward, we have 1,600 employees. We're industrializing a factory in Blythewood, South Carolina. We're going to show you a pretty cool prototype car behind me in a little bit. And here we are. I think the other thing that's important to look at is sort of the softer side of the thing. And for me personally, I think a lot of us during COVID, I drove across the country with my family. When you drive across the country, right, you go to Ohio, you go through Pennsylvania, you go through Indiana, you see some of these manufacturing towns, and you do have to ask yourself, what happened? Why is this? I think at the same time we saw a lot of the geopolitical environment with tariffs and the resurgency of saying let's build things again, let's do things again. And then the other final sort of piece of the puzzle is Scout was a super cool, glorious icon. It's like why do we let these things go out of business? Why do we let these things fade away? Why don't we do it right? And you put it all together and we're here at this magical moment doing something difficult for sure, but doing something really cool. So that's the background in a nutshell.
Yeah. Yeah. I mean, the idea of re-industrialization, making cars in America today feels like there's a ton of tailwinds, but 2022 is a different era. Is that a lot of luck just being in the right place in the right time? Because when I think about all the tariffs and everything, I'm just like, oh, this is a win for Scout. This is another win for Scout. And I mean, we were watching the president talk about AI. Literally the question right before was about making cars in America. And so there's a lot of positive economic forces that are working. Was the plan that this was coming and that there would be more re-industrialization movement in the future regardless of who was in the Oval Office, or was this just like a lucky break that happened down the road?
Look, we're profound geniuses. We looked into the crystal ball and we knew absolutely everything was going to happen. No, I think there was a, let's say, movement, sort of gentle drumbeat if you were listening. You saw the transition, let's say, from NAFTA to USMCA, and clearly you can see where that was heading. That was of course back in 2016. You also knew from COVID that supply chains were becoming, let's say, tenuous for lack of a better term. It was difficult. And then you knew in this segment, if you look at this segment, majority of the segment says, I want to buy things that are American. I want to buy things that are made in America. So Scout's whole premise was always going to be that. But based on that, of course, a lot of other things came their way from tariffs to geopolitics, everything I know. So I think it was a good core idea. It's a phenomenal core idea that's gotten more tailwinds as it's come, which has been great.
Yeah. I recently heard that the life of a new car has basically doubled since I believe the 70s, and new cars will often last until 250,000 miles whereas it used to be 100,000 miles it's time to get a new car. Is that a secular pressure that you think will be overcomeable with new technology, or do you think that's something that we're going to settle into, or maybe there's a world where people wind up with more cars? Just I'm thinking of like what are the general pressures that you're worried about around new car purchasing?
Yeah, look, I think you raised a key point. I think a lot of what's driving that, of course, is a high cost environment where people want their cars to stay with them a long time. I think that's particularly true of this segment. This is a segment that's not what I'd call a flip and purchase for a vehicle that's just going to get you down mainstream. It needs to do real work, real play, take you somewhere, do something. So we've fundamentally engineered the car to be super robust. The second thing we've engineered the car for is to bring a lot of do-it-yourself type of business back into it. I think a lot of people where they've engineered these cars, they're complete spaceships. Just look at them. Don't touch them. Don't touch them. And I think we've intentionally brought a lot of mechanical physical characteristics back so you can do the actual work. I think the other thing that's breaking down, and I remember this back in my Mercedes-Benz days was, you know, electronics can't update them. 100,000 miles, it's going to be gone. Or batteries. That was the one on batteries, right? They're going to last. And I think that myth is being broken all the time where these batteries are holding their power. They're holding their charge and they're holding their robustness. I think the right way to look...
You saw someone put like 300,000 miles on a Model S or something like people thought that was impossible. And the depreciation curves are still really rough for electric vehicles. We can go into that, but I mean, it does feel like the fear of like this battery will be impossible to repair and the car will be totaled because of the battery, that has been pretty... How much does your segment care about autonomous driving and how much, and do you think they'll care more about it in a couple years?
I don't think it's core to the segment. I think we've engineered the vehicle where this is a vehicle that you want to have control of the narrative and control of the vehicle. So we've intentionally made a vehicle where, yeah, I want to put a real door handle on the thing. When I get into the vehicle, I want to use real switches and get that mechanical connectivity, if you will. And driving, I think it's the same exact thing. This is a vehicle that has to work, wants to play. They want control of the vehicle. Now, to that end, the Scout will have level two plus because I think where you can offer that highway convenience, if you will, where driving is more tedious. But I think this segment and what it stands for in terms of, let's say, freedom and control has much more to do. And honestly, if I look at autonomous, you wouldn't build this type of vehicle. You'd build a much more A to B type of vehicle. Take me from here, take me there. You wouldn't have solid body on frame. You wouldn't have solid rear axle. You wouldn't have 1,000 pound-feet of torque, 800 horsepower, all of these capabilities. I think you'd build a much more, let's say, cybercab, not to give sort of simplistic vehicle. So I don't think it drives this segment. I think level two plus for sure is where we'll be and what we see they want, but we want to be a little bit more, let's say, old school where we can put the driver and the customer back in charge that we see as a mega trend, like I want to be in charge, screens aren't taking over.
Yeah. So you said, what was it, 2021, 2022, there's one employee. There's hundreds now, thousands now. What is the scale?
1,600 employees with first customer deliveries in 2028.
In 28. Exactly. 28. So when do you actually start building out the plan to hire all those people? What will the company look like in 2028 when you're doing deliveries?
So the plan is a ramp up. When we look at 28 at the factory itself, we'll be roughly 3,000 employees. If I look across the total workforce, we'll be roughly in the zone of 3,800 to 4,000 somewhere in there. The preponderance of the workforce is going to be basically doing two things. You're either making a car or you're selling a car. I think one of the things we've done very smart is get all of the overheads out. SG&A extremely tight, overheads extremely tight because we want people doing active things which is buying a car and of course manufacturing a car at the plant itself. If I look at this, 1,600, more than half of that are down in the factory right now as we speak. And that's because we're building the very first early prototypes. And I think this is a pretty cool thing that we're doing. What most companies would do would outsource that to a third party. They would then hand you the car and you'd integrate into your plant. Since it's a new factory, we're training new workers. They've never made cars before. We want to get that muscle memory now. So we're building these prototypes. It'll make us much more stable for ramp up, which as you know is critical.
What is the state of dealerships in the automotive world? How is it changing? Tesla's taken a different approach, but there's still shops where you can go see a Tesla. What will your strategy be? How has it evolved over the last couple years?
Our approach is clear. We are going to go direct to consumer. So we will be selling the vehicles directly to the consumer. And in my mind, I look upon it as three fronts. One, there's no debate that we can handle the transaction far smoother and far straight with a lot more transparency. We're going to build the ecosystem to do that. I think if you look at a brand such as Carvana, they've without a doubt proven, yeah, there is a good digital path to sell a car and make it happen. I think the second thing today, I think there's no world where if you don't control the relationship to the customer, have all the data that comes of that relationship, you can't be successful. And the third one without a doubt is we are going to do a lot of work to build the infrastructure. I think where a lot of the brands you mentioned fell short a little bit is you have to have the service infrastructure built ahead of the wave, not behind the wave. And those are the big things we're focused on. We're executing that and it's critical.
What is it? What does that actually look like? I mean, it seems like one of the biggest challenges because you need to have service. Are you going to have a central service hub? Or I imagine that that's tough if you're having to, you know, ship cars around all over the US. Is there specific key regions that you need to be set up in? I'm just curious.
You got exactly right. I mean, the good news is it all starts at the factory. From the factory, we've laid out nine distribution networks that we will have. We can put these in very smart locations where you can have lots of space, relatively inexpensive, and let's say line up the cars there. Then from there, they'll move into the retail stores. We will build 100 stores over time. But this allows us to do, we can be way smarter on inventory, way smarter on cost front. And then what you have now is a lot of these dealerships, you have extremely expensive inventory, extremely expensive parking, and we can put this in much less expensive real estate. I think the other thing, speaking of real estate, where we see the action being is we can build in sort of class A fronts where we can get off of Main Street, get off of the expensive stuff, and build it in smart locations. 85% of the investment will go into service since that's where the most critical function is. And that's what we're building pretty much as we speak. But again, if we have the data from the customer, the data into our factory, and the data into our suppliers, we can sort of get out of this world of let's build a couple of thousand cars and send them across America and hope they sell. Then they sit in a parking lot, they sit there for 120 days, you throw incentives on them, the RVs collapse. We can avoid that. We can be way smarter using data, using intelligence, using AI to get the right car into the place and basically hold pricing power.
Yeah. How important is the test drive to conversion in a direct to consumer relationship? Is it unnecessarily high? Like, should more consumers be buying cars without ever test driving them? I feel like I'm a psycho. I've bought like probably six cars without ever test driving them. That feels uncommon. I'm sure that's... But is that the future or is Jordi actually a psycho? Look, I think this... But yeah, part of that is like I grew up buying things online. I'm very comfortable looking at a picture and a video and maybe a review and saying, 'Cool, looks good.' And there's so many trusted car reviewers, Doug DeMuro, Forest Auto Reviews, that if there's a consensus across three or four people that I trust, I'm probably just going to be happy buying the car. But what does it look like now? What do you think the future looks like?
Look, I think what we're planning for, we're a startup brand that people don't know that well. And in order to get to know well, you're going to have to establish trust. It's the number one word. I think we'll have phenomenal reviews. We'll have phenomenal reservations, which we have already. But when you come to these service centers, we want to have an environment where you can take a test drive. Beyond that, we're going to set up test drives obviously in the big markets and get this done. I think there will be a huge group that's going to say, 'I love this car. Send it to my driveway. Done.' We'll take care of that. On the flip side, there will be a group that wants verification. So I think at this early phase, I would say 85% is going to want to get in this vehicle, drive it, test it out. We have new technology with the -V. We have a new vehicle. And I think the more we establish trust, the more units in operation, the more all of that happens, then that's going to...
It just looks, I can't wait to see it outside, but it just looks incredible. Exactly. This is exactly what consumers want. I mean, you look at some of the new Toyota and Lexus models are solid and have been... Yeah. A lot of these longer, newer projects, by the time they make it to market, they look outdated because, oh, like clearly the designs were from five years ago. This feels perfectly where the consumer is. What happens with, it feels like the legacy manufacturers and brands, they get very stuck on certain like interior styles and materials, and the updates go from, you know, everything I've seen from the interior with the Scout, it feels like you guys really considered materials and patterns and the touch and feel and all these things and have thought about it from the ground up. You would think that other manufacturers would just say, 'Hey, why don't we just redo, why don't we when we refresh this car, why don't we fully redo the interior?' And what I typically see is he's more like, 'Hey, it's like 5% different, but fundamentally it still looks exactly the same.' Why is it so hard to do a full basically cosmetic interior refresh for these brands?
Look, you nailed it. One of the things we loved is the power of a clean sheet is one you have to take maximum advantage on it. What unfortunately happens in giant OEMs and giant companies is to make any change, there's a big giant machine. There's an existing factory. You don't want to alter tooling. You don't want to have new supply bases. So every little thing gets so expensive and so challenging and so difficult. Which is why you see a world of, yeah, these white tweaks and they say all new and all this and basically it's a tweaked fabric or whatever it is. I think what you see here, and I'm glad you appreciate it, this is a grueling labor of love, love, love. We have fought every last thread on this vehicle. And I think it started with, boy, we're bringing back this icon. We do it wrong, we're going to get mocked. And we couldn't just throw a Scout label on a vehicle and say, 'Hey, here's this motivation.' Because the OGs will honestly reject you. We knew if they rejected us, we're dead. It's over. Once we got them on board, well, then away we go. And that's why we're off to the races. But the reason it's so hard is you just get stuck in this big company world.
Yeah. With the way that the car market moves, it oftentimes feels like manufacturers don't listen to customers. But I have to imagine they do look at social media comments and they are well aware of the feedback. But is it because of the planning cycle? Right. So I'll pick an example. Right. So like the Ferrari, there's Ferrari community, I'll say nice mainstream example. I like, you know, no, and when I say Ferrari community, I mean the group of people that care about the brand and then the group of people that care about the brand and are actual buyers. But both of the groups are oftentimes like confused with a lot of the actions of the brand. And I just have to imagine it's like, is it the kind of thing where like the actual response from the manufacturer is like somewhat delayed where it's more like a this sort of like, yeah, we've been aware of this issue for five to six years and now these sort of newer iterations, they'll be responding to that. Is that just because of the supply chain or they...
It's, look, the simplest thing is look at the end of the day, let's say you want to make a change. So the two big drivers of that change is, okay, what's going to cost capex wise to make that change because you're going to have to retool at the supplier depending on how big it is and that's a few million dollars just for one slight little change. Then you may have a material cost change on the bottom of the bill of the car and then you multiply that by ten changes and all of a sudden you're talking $100 million of capex and I don't know, a couple hundred dollars of material cost on the vehicle. So every change is just brutal. I think the other thing is they work in big cycles, right? You have your classic launch of the car, then your product improvement three, four years later, and then the thing. I think the other holy grail for us, and certainly Tesla has done this quite well, is can you get changes that don't impact the physical hardware of the vehicle, which is all of the OTAs and all the thing that we'll have capable on this vehicle as well. But why you don't see that is cost and cycle tooling and thing. It's not like these people are asleep at the switch and aren't aware of it. They're certainly aware of it, but it's the cost, the time to go get that done. Period.
