Let's go off the record. I know we don't do these as often as we probably like, but when we have the opportunity to bring someone in that can really change the trajectory of the conversation here, Pat, just someone that's got really interesting ideas and things to talk about. I know we love to do that. And we got one today that you met when you were doing your professional modeling and hosting. That was fun. It was really fun for me to sit there and watch you because I saw you working and sweating at GTC for like two days. Let's have you introduce our guest, which I'm super excited to have here today on the pod.
Yeah, it's great. So I'm proud to introduce here Martin Casado, general partner at A16Z, joining us today. Martin, it's great to see you.
Great to be here. Thanks so much for the invite.
Yeah, the lights aren't as hot, but the audience is actually bigger than the in-person audience that we had in Washington DC for GTC. I really appreciated it. But hey, why don't we start off just to make sure we know who we're talking to. We know you're famous, but for those who don't know who you are, what do you do and what does your portfolio — what do you focus on?
Yeah. So I'm a general partner in Horowitz. I run the infrastructure fund. So the infrastructure fund — so our definition of infrastructure, this is computer science infrastructure. This is anything with a technical buyer. So think compute, network, storage, databases, of course, any of the low-level AI stuff, dev tools, that sort of thing, security. And so I run the team. I've been here for 10 years, and then prior to that, I was actually a portfolio founder for A16Z.
No, that's wonderful. And isn't it funny how infrastructure was pretty much left for dead about five years ago and, you know, the meme of hardware was, you know, hardware is an undifferentiated commodity. And look at us now. And I know infrastructure spans not just hardware but also software.
Yeah, for sure. So listen, it's been an evolving tale. I mean, hardware has historically actually been pretty boring, like networking silicon. Now software infrastructure, especially in data, has been pretty exciting — things like Snowflake or Databricks, and so like there has been a lot of excitement, you know, GitHub. But AI has blown everything up. Like I don't remember the last time you had a lot of excitement around, you know, a silicon chip. And, you know, NVIDIA just bought Groq for — or doesn't buy Groq, they hire the Groq team.
You know, we're seeing networking companies get funded again because AI requires new networking fabrics, and so times are very exciting again, you know, kind of early internet days.
And Martin —
By the way, just a little props to Pat and maybe myself, but, you know, both Pat and I actually advised Groq, and we decided when we did this back in '21, Pat, '21, '22, we decided to take stock from them instead of cash. So we're not like VCs and cool quite like, you know, we're not the cool kids, but we actually saw what was going on because Pat and I laughed like in 2019, we would make this joke: silicon will eat the world in the next decade. We kept saying silicon will lead the world, semiconductor the world, and we had journalists that would say, don't write any more op-eds about chips or we aren't going to cover chips at all. Just five years ago they were like, we don't even want to hear about it.
Yeah. I mean, it just turns out every technical epoch requires you to redo the entire stack. We actually saw this even with like 5G — a lot of the Intel processors, like the Xeon, was actually used for 5G. We saw this with the data center. This is when you saw network revolution. So I, you know, I worked in software-defined networking. That was kind of my focus. We redid the network. You saw this, of course, with the internet, which gave rise to Cisco and Juniper. So every time you have a technical epoch, you have to redo everything, and we forget that every time. So when you get to the end of the last epoch, we're like, 'Oh, hardware's dead' or whatever. And then the next wave comes and we've got to kind of get back to building the stack.
So I have to ask you just because, I mean, everything you're saying here, I think I've seen you speak about this a bit, but are we in this AI bubble here, Martin?
Well, bubble's a tough — yeah, I don't think people even have a common definition of a bubble. Here's what I will say from a productivity standpoint: demand is real. You have real users paying real money getting real value, and that's incredibly clear. The data couldn't be more clear.
So is there a demand bubble, meaning like we're assuming demand will come? Do we have a supply overhang where we're building out hoping it'll come?
No. The answer is absolutely not. We do not have a supply overhang. We have a supply underhang. The demand is very real. Now, speculatively, if you look on a deal-by-deal basis, sure, some deals are overvalued, but some deals are undervalued. So what I've learned in this 10 years of investing, 30 years in tech, is that markets are actually very rational in the long term and broadly, but it's uneven, right? So depending on how you look at it and how you squint, you're going to see things that seem overvalued and things that seem undervalued. But I would say if you take it all in, my true belief is it's all undervalued in the long term. This stuff is so, so disruptive. Demand is so real. It's monetizing so well. It's driving so much buildout that we should all be incredibly excited for the future.
I'm just going to give this guy a high five.
Yeah, I mean, Daniel and I are absolutely in there, and Daniel and I do a lot of broadcast. That's literally the only question we got for months. Daniel, what are your thoughts on that? I know they're very much aligned. I think I did my 50th TV segment this week where I got asked the question: are we in an AI bubble? And so I think, you know, I'm so tired of answering it. You know, my comms guy said to me, you can't laugh at them when they ask you this because you make it look like they're asking a stupid question.
I know. But like I just keep saying, like, look, we're constrained in every part of the supply chain right now. Like we have so much more demand than supply. Now, there's a monetization question that hasn't been answered yet about the size of the TAM beyond subscriptions to LLMs. Like, you know, we'll get into enterprise right now because maybe there's a perfect segue here for you, Martin, like the AI disruption of software. So right now, every SaaS company's adding agents, but at the same time, like I've got five terminals of Claude Code open on my desk, and I can't program for crap. I am not a programmer, but I am building stuff and playing inside of, you know, IDEs now and actually seeing what can be done. We're building our own applications that can do things that our CRM used to do and our ERP did, and that enables project management. I mean, is software maybe the actual biggest risk here? Is that where the real disruption is happening, is now that enterprises can sort of build anything really quickly with a few smart people? Is that maybe where we're going to see the bubble pop?
Yeah. So it's a very timely conversation. So we actually, as a firm and my team in particular, did a deep dive on this in the last week. So we actually have a lot of data. Let me just predicate this entire thing by saying it's very early.
And so a lot of what I'm going to say is purely speculative, but I do think that, you know, we are a couple years in, and so you can say a few things. So let me just say a few things on this. So the first one is it's very clear that coding is pretty much dead, but engineering is very much not. And so you can clearly say the floor has been lowered, so everybody becomes a developer. There's almost no indication that the ceiling has also been lowered. In fact, the companies that are the most aggressively using AI are also hiring the most. And so the question is, how do you reconcile these things? Right, there are many things that even like the best, you know, version of AI coding can't solve, right? It's not very good at solving large, complex, stable software code bases. It doesn't do anything with operations. Like let's say, you know, these days actually writing software is running software because it's all SaaS. Like the operations is not — it's not a solved problem because we haven't closed that control loop, like watching what it does and then refining based on what it does. And if you actually look dollar-weighted, the majority of dollars that are coming in on AI coding are professional coders, not casual coders.
And so my belief is this is widening the aperture of the people that can code, which is going to require more code, which means more operations. And so the tent gets a lot bigger. I think the ceiling actually goes up. It doesn't come down because now the problems become much harder. You're going to have professional developers and engineers, and they're going to be, you know, put to work. And then you're going to have a bunch of new coders that are coming in. There's a separate question, which is what does this do for SaaS? I just want to submit something before the next question, which is I've been investing in infrastructure and enterprise for 10 years. I will tell you SaaS has never been a technology problem, ever. It's just not hard. Like if you build a SaaS app, it's not hard. It's never been hard, right? And so the question is, why do people buy SaaS? And the answer is, you're buying a business process, right? It's a business process that's been understood by another company that tells you how to run your business. It's never been about the technology or the software. So I don't think it changes that dynamic much either.
Yeah, it's really interesting you brought that up. I was sitting in Google Cloud Next probably two and a half years ago, and they put up a slide: agents for marketing, agents for finance, and I was aligning enterprise SaaS companies with these down the line — marketing, right, human resources — and you could see the leaders in these businesses. And what's interesting is we have seen, at least from a markets perspective — I know you deal with a different market, but the public markets — the valuations are not doing well, probably with the exception of folks like ServiceNow. You know, you've seen folks like Salesforce and Workday and folks like that decline here. But talk me through your thesis on — again, you'll never have the perfect data, right? You have to have your data management in place, but I do think AI will help with that. So you have a data fabric that's accessible by the enterprise, and these agents can hit that data fabric with the right security, the right access. Talk to me about your thesis of how this rolls out. We've seen some public battles between, you know, Mark Benioff and Satya Nadella, right, that seem to go on for a year. So there is tension in the system for sure. And I do a lot of CIO roundtables, and they are literally telling me we are finding a way to get off of this software vendor. You know, we are —
Yeah. So listen, let me just provide kind of maybe the historical sober view of this, right? So why are valuations and growth lower for traditional companies? It's because we're seeing the largest movement in budget we've seen since the internet. And when budget moves, it goes to new places. You know, are we seeing mass replacements of traditional software? No, we're not, right? And so like historically, software tends to get — it's not zero-sum. It tends to get layered, or, you know, budget will move, or it tends to slow down, but, you know, it doesn't tend to get replaced. Now, why would you start replacing something like a system of record? Well, the answer is it doesn't evolve with the new technology. Meaning there were a number of companies that didn't make the internet transition, and they could have, they just decided not to. So like we as consumers are going to evolve our opinion on what it means to interact with software. Like when I interact with Salesforce, for example, I'm going to want to call it up and talk to it. I'm going to want to have an LLM. But this is a consumption layer change. It's not a fundamental change. The business process is still there. The guarantees are still there. So Salesforce 100% has the opportunity to evolve the consumption layer to be what the expectations of the user are. So I don't think there's something fundamental end-to-end that's going to disrupt all of SaaS. That said, it's up to the SaaS providers to evolve to meet these moving expectations and this moving budget. So again, I use the internet as my kind of anchor example when thinking through what's going to happen.
Yeah, I think that's really interesting, though, too. I think what you said is the most prescient, which is the experience has to change. And the reason that I think a lot of people — and I can say this as business owners, Pat, you share this probably sentiment with me — is these systems of record are supposed to help you run your business, but they're actually not that easy to use. How many people you have to hire to be like, oh, I want to report on last year's business versus this year's business with this cut and this slice and this angle, and you need like a special person to like come sit at your desk with you, or they can — thanks SaaS — they can do it in another desk. But the point is, and drum up a report when in reality what we can do with ChatGPT or with Anthropic now is we just ask it a question the same way I'd ask you a question, and if it can actually go through the APIs and through the traps and find the data, it will spit out, and you can say I want it in a —
in a pie chart. Yeah. And you tell it I want it in a bar chart, or I want it in a narrative that sounds like Eric Clapton singing Tears in Heaven, and it can do that for you and —
Right, but let me just provide the other side of — so I agree with everything you're saying, but let's look at the internet, right? So what did the internet provide? It provided me the ability to like connect to software from my house, for example. So, you know, it provided this fluidity with consumption, with access. What does AI do? It does the same thing. Like I can talk to it. I can use natural language. But you still have all of the compliance. You still have all of the integrations. There's formal reporting things. There's also the business process on top. I still need to do pipeline reviews. I still need to do rollups. Like structured data is not going away. And we structure it to limit complexity. And the complexity is driven by the operations. It's not driven by the software. So I think the right way to view this is there's a reason that there is this complexity in the software. It's because we have complex business processes. They've got complex environments that they sit in. They've got a complex regulatory framework. And so you're going to always have that structured data, but it frees the individual from having a new consumption layer to work with. And so the right thing in my opinion for these SaaS vendors to do is to evolve with the evolving expectations of the users, but that doesn't mean it obviates all of this work of having to integrate into a complex operational world.
Yeah. I just keep saying that when you have less total human users and you have more agents, they all probably need to refactor their business models to some type of consumption based on tokens and actions and not so much based on seats.
That's a huge topic. And so, I mean, you both probably remember the move from perpetual license on-prem to recurring. I mean, that gave rise to companies, killed companies, was one of the most disruptive things. Not all companies are even there yet. There's still companies today that are talking about this move. Now we're seeing another pricing change, which is from recurring to consumption basis, and that's going to be a whole massive disruption at the same level of that, and we're seeing that right now.
Yeah. So Martin, I want to flip back to infrastructure. I think you talked about an infrastructure inversion driven by AI and cloud. Is there a contrarian view that you have on enterprise infrastructure that the market hasn't fully internalized yet?
