Venture & AI | Marc Andreessen, Andreessen Horowitz & Jeetu Patel

I apologize for nothing.

Yeah. So, as everybody probably knows, productivity growth is like the key driver of economic growth. It's the thing that actually causes the economy to expand. Economists measure it with something called total factor productivity. They measure it every year. The prevailing kind of myth of the last 50 years, basically my entire life, all of our entire lives, has been that we've been in this era of very rapid technological change, which wouldn't necessarily mean very rapid productivity growth yet. If you actually look at the statistics, basically since the year I was born, 1971, productivity downshifted hard from prior eras. And productivity growth basically for the last 50, 55, 60 years has been at basically historical lows. It's been very low, which is by the way why economic growth has been low, which by the way is why the national mood has become so focused around, you know, zero-sum economics, populism, the sense that if somebody's getting ahead, somebody else must be getting disadvantaged. If you compare and contrast that to the period between about 1930 to about 1970, productivity growth was roughly twice as fast through that period. And if you compare and contrast that to the period of 1880 through 1930, productivity growth was about three times as fast. So we had 3x and then 2x and then 1x. And so this is very not good.

Most fundamentally, I think it's because we decided other things are more important. And in particular in the last, you know, basically since the 1970s, if you just look at the charts of like the number of laws on the books or the number of pages in the federal register or the number of regulations in the economy, it's just this knee in the curve went exponential, which continues. And so we just decided we didn't want nuclear power, right? We decided we didn't want a space program. We decided we didn't want cars that went faster than 55. We decided we didn't want these things. And so what we got in the last 50 years was like hyper acceleration in very specifically basically chips and software. And then what we got was basically essentially stagnation in everything else. And so it's really not good. And then, but correspondingly, of the many reasons to be excited about AI, like put it this way, if either the AI optimists are correct or the AI doomsayers are correct, productivity growth is about to go through the roof.

So this is always one of these kind of questions. Like in a completely deregulated economy, like in sort of Murray Rothbard's dream of just straight basically anarcho-capitalism, you know, at least in theory you could imagine acceleration to I don't know 5%, 10%. I mean, if you believe in kind of either the optimists or the doomsayers, you're looking at such radical, you know, AI representing radical software productivity growth and then robotics coming right behind, right? And robotics of course starting in the form of the self-driving car and the drone, but humanoid robots coming quickly, you could imagine, you know, you could paint scenarios of 10%, 20%, 30%, something like that. I think in practice, you know, that's unlikely again just because like the robots have to agree to all the regulations also. And so, you know, there's a lot of things not allowed to do. By the way, AI, look, I'll give you a great example how this is playing out today. I think if you're just like an ordinary person, I got food poisoning over the... I went on vacation, of course immediately got sick, which always happens. I got food poisoning and so I let, as an experiment, I let Dr. GPT walk me through basically every stage of food poisoning. And I just kept asking, like I had nothing else to do because I'm flat on my back. So I just kept asking like more and more detailed questions about my physical experience and what I should do and what I should eat and how I should recover and like it's just like absolutely incredible. Like it's just like the most amazing, endlessly patient, infinitely knowledgeable, endlessly caring doctor. You know, it doesn't get irritated when I have the same question at 4 in the morning and I'm like, well could you go into that a little deeper and are you sure it's not pancreatitis and are you sure I'm not about to die? Oh no, you're absolutely fine. And it's just amazing. And then of course AI cannot be licensed as a doctor, right? It's completely illegal, right? You cannot actually have an AI doctor. And so you do have this basically massive disconnect. And again, I'm not saying I'm advocating for the Murray Rothbard world. I'm not saying rip up all the regulations. I'm just saying it just factually, objectively...

Yeah. The hyper-optimists and the doomsayers, neither one of them are going to get the world that they think that we're going to get. We're going to get a muddle-through-the-middle thing, which I think by the way is going to go quite well, but it's going to be a muddle and there's going to be a lot of tension between those sides along the way.

So I think this is a really big question. We're professional investors on our side and so of course we think about this all the time. And I actually think there's still more questions than answers on this, right? Because you can paint this picture that says that the AI model companies are going to basically own everything. And by the way, you look at their businesses and they're doing fantastically well. You can also look at it and say, oh no, that whole thing is going to get eaten by open source. And or by the way, or by China or by a combination of open source and China, which in China is doing great. This company Kimi just dropped a very competitive model to the latest Claude at like 95% the capability at a fraction of the price. And so there's a very big open question there. We happen to be at this moment, you know, what everybody believes and if you look at Nvidia's deserved success over the last five years, the reasonable conclusion is like chips all of a sudden, like chips is where the action is. If you look at the stock market, there's like a rotation from software into hardware. And look, it's possible that chips are where all the value accrues to, the chips and the energy, and then the software is all open source. Having said that, every other time in history where we said the chips are where the value is, they commoditize, right? And so there's big questions there. And then there's even more questions I would say at the app layer, right? Which is are you going to have apps that are going to harness AI for example in spaces like medicine where they're going to be particularly tailored and customized or legal apps or business apps of all kinds or are the models just going to do all that? And that's another area. And so I quite honestly, like this is so new, like this approach of... I mean AI is an 80-year-old topic but AI working in a way where this is the question, I think we're only three years into probably a 30-year shift and I actually think we don't know yet.

So we're in a baby-in-the-bathwater moment right now. If you just look at the stock market, it's just like SaaS is just getting demolished. And so if you talk to hedge fund managers, they're just selling all their software just under the theory that they just want to get out of the way of the AI freight train. As an investor, you kind of say, okay, that probably is overdoing it a bit. You probably want to look at different kinds of software. And so, for example, in SaaS, my theory, you want to look at systems of record differently than you want to look at basically just productivity applications. So that's one way of looking at it. Also, look, everybody doesn't change their behavior overnight. And so you definitely want to look at loyalty and stickiness in lots of different ways. And then there's this giant question actually in the tech industry, right, among all the software companies, which is like, okay, if I'm, pick if I'm Adobe just to pick an example, Adobe which is obviously a great company but a question in front of Adobe that they're working on but is a very good question is like, okay, is Photoshop plus AI features an even better version of Photoshop or is Photoshop unnecessary in a world in which AI is just making all the images? And I think I know smart people who will argue both sides of that. And I think you can apply that question to kind of every kind of... We in our business are seeing a bunch of software companies that for sure are not moving fast enough to adopt. And we're enthusiastically funding AI-centric startups to go try to take them out. Having said that, we are also now seeing examples of more traditional software companies that have figured out an AI twist to what they're doing and all of a sudden they've ignited growth. And so I also think we'll probably see a lot of that. I mean, my big conclusion from all this is I think one of the reasons it's so hard to predict or characterize all these things as broad-based trends is that human agency matters a lot, right? And which means leadership matters a lot, which means the CEO, the people building the product have a vote here at every one of these companies, what do they choose to do in response. And optimistically, hopefully a lot of people will figure out how to have this be a plus and not a minus.

Well, I guess you could say, look, maybe start by, because it's like a 2x2 grid, it's like US, China, open source, closed source would be a rough approximation. So like without open source, just start by saying without open source, there is a two-horse race. There's a two-horse technological geopolitical foot race which is US versus China. So again let's assume it's all proprietary for the moment. And both China has been on record for years in their national, their five-year plans and their national strategy and so forth that AI is a cornerstone technology of the future. The US government by the way has been definitive on the record on this in many of its policy areas for the last decade. And so both countries' industries are moving incredibly fast on AI. And so I think by default if everything's proprietary then there's this race underway which basically says, and it's really, right, it's just practically speaking it's only happening in the US and China. And so then you basically say there's a race underway and the stakes are basically what is the world going to run on, right? And so what are eight billion people on the planet going to use? And one of the ways to think about it is kind of the 5G Huawei thing that was in the news a lot a few years ago. It's like that was the preamble opening salvo of what fundamentally is going to be the AI geopolitical race, right? And fundamentally, tech markets being what they are, in the long run, somebody's going to win and the world will either be running on American AI or be running on Chinese AI. And I think it's very important which one wins for a bunch of reasons we could talk about. The open source thing is of course super fascinating because it throws a wrench into all of this. And it raises a third possibility that neither the US nor China are going to be the platform. It may just be open source. Of course, this is what happened specifically in Unix in operating systems. And then to some extent databases and of course the web was open source. And so there are a whole bunch of software markets in which the outcome has actually been open source just wins. Like when I was a kid, when I was in the 90s, it was like there was this operating system war between HP and IBM and Graphics and Sun and all these companies to make proprietary Unix and everybody was making a lot of money on proprietary Unix. And then Linux was an asteroid strike that just completely eliminated all profit and revenue in that industry. And the world benefited by the way from Linux in the fact that everything runs on Linux and it's been a huge turbo boost to every other aspect of the industry. But so yeah, so like it's entirely possible that happens. And then you go back to the 2x2, which is US open source, China open source. The most amazing thing that's happened is China basically pursuing the open source model as aggressively as they are. And there's a lot of theories as to what China's doing here. My, as far as I can tell, DeepSeek was a surprise to kind of China Inc. It was not an anointed sort of Chinese industrial national champion. It was this hedge fund where the founder basically decided to, to his enormous credit, decided to have his engineers build DeepSeek. And so that came out of left field and that came out of left field for the US, but I think it also came out of left field in China. And then it caused a bunch of the other Chinese companies like Kimi and by the way Alibaba and Baidu and Tencent and a bunch of these others to basically, it started this race in China to win open source. And then look, there's also American open source AI. And so there is this new race underway from both sides and it's another thing where I think how this plays out is going to matter a lot. It's extraordinarily hard to predict. I think the people in the big AI labs think that open source can't possibly keep up because of the cost involved. Having said that, again at least so far up until like this week, you just say that like whatever the American big labs do, China figures out a way to do it in open source form.

To some degree. I think it's more that there is this distillation and so you...

There's some for sure distillation. So there's this thing distillation where you basically train the next model on the answers of the previous model. And I think for sure China is doing some of that. And there's a lens on that that says of course that's unfair because you're basically piggybacking on top of work other people have done. Having said that, it's a little bit like, well okay, there's a fair amount of distillation happening in the US also.

Oh, I think they deserve a lot of credit. Yeah, absolutely. And then to your point, they're also really good at optimizing, which means that the thing that everybody, the thing that you think is going to cost a gazillion dollars to run, DeepSeek comes out and you can run DeepSeek on home PCs.

Yeah. So Don Valentine in venture had this old rule of thumb. He said more startups die of indigestion than starvation in terms of the amount of money you put in. And his point was scarcity does spark ingenuity. And so yeah, if you can't get the leading edge chips, you figure out how to hyper-optimize the older ones. And again, this all makes me tremendously excited by this entire space because it basically says right now everybody's trying to do their best. America's trying to do the best, China's trying to do the best. I definitely want America to win, but China's definitely doing their best. And then the open source thing is working. And then the other part on the value chain aspect is open source doesn't have to win in order to remove a profit pool. Right.

And so which is what happened originally with Unix. And so even if open source has the effect of not winning but of keeping the pricing down, that will be bad for the proprietary lab providers, that will be good for everybody else. Yeah.