Exclusive Panel Discussion with Industry Titans: Antonio Gracias, Gavin Baker, & Bill Gurley!

My name is Bill Gurley. I've been a venture capitalist for 25 years at Benchmark Capital. Before that, I was a sell-side analyst for four years. Someone referred to me recently as an elder statesman of the VC industry, which I didn't particularly like, but perhaps that label will stick. I'm going to ask these two gentlemen to introduce each other. While they're doing it, I'd love for them to talk a little bit about the unique relationship that they have with each other. It's not super common for two different fund managers to spend as much time together as they do, and perhaps they can explain part of that as we go.

Do you want to go first, Kev?

Sure. Thank you, Bill. And I'm just going to say you're a statesman of venture capital. Thank you. You leave the 'senior' off, I appreciate that. No, I would say a few things. Antonio and I met nearly 10 years ago, and we kind of instantly became very close friends. To this day, Antonio is one of my closest personal friends. But beyond that, as a crossover firm, it is very important to think about your partners. Who are the VCs going to be that are on the boards of the companies you're invested in? Something I've realized is I feel safer when Antonio's firm, Valor, is invested and on the board. The reason is that they have built a very unique product. Above and beyond being great friends, I think of them as an insurance policy if something goes wrong, and in venture things do go wrong a lot. The reason they are an insurance policy is because Antonio's firm is very unique. A lot of growth equity firms talk about the value they can add to portfolio companies, and that basically boils down to giving advice, hiring people, and maybe helping you hire people and giving a sales plan. Antonio describes Valor as 'we are the garbage men of business. We solve the very hard problems that no one else wants to solve or can solve.' I've seen him say to a company, 'Hey, what are your three hardest problems? I will solve them.' And it's very, very real. Real operational work, supply chain expertise, sending a team to China to stand up a supply chain. But what convinced me it was real was in the summer of 2018. I wanted to see Antonio, and at the time he was working every night, all night, at the Model 3 factory with Elon. So Antonio said, 'Hey, I'm super excited to hang out, but we can meet at 2 or 3 a.m. That's when my shift ends.' So I go to the Model 3 factory, there's Antonio, hard hat, glasses. I later learned that at Tesla they call Antonio's partner 'the wolf.' If you saw 'Pulp Fiction,' yes, I thought you'd get it, Bill. The wolf comes in and helps. And then they called Antonio 'Gandalf' because if the wolf can't solve it, Gandalf comes. And if you've seen 'The Two Towers,' Gandalf comes at the turn of the tide, and they solve really, really hard things. I would also submit that probably Antonio and Elon are the only two people who have their own plane who would pull all-nighters many nights in a row running a factory line. And I feel very comfortable saying Antonio is the only person running a growth equity firm who can run a factory line and improve it.

So you were supposed to introduce yourself, you just talked about me. I thought I was supposed to introduce you. That was great. I'm Gavin.

Yeah, thank you. Gavin, I'm not going to take the compliment, but yes, thank you. Yes, grateful. So what I was hoping to do, I wanted to hit on public stocks briefly, that's Gavin's area of expertise, and then talk about privates, talk about AI, although that might jump in before we get to that point. And then if we have time left, we'll hit on some other more specific things. So Gavin, my first question for you is last year we had this weird anomaly event, or it felt like an anomaly, which people now have branded the Magnificent Seven. I even talked to LPs at Benchmark, and this was the number one thing they brought up because if you were exposed, it was 100% or 90% with those seven, and if you weren't... But I think there's another question. What do you think happened there? Was it an anomaly? Will it continue? And personally, as a venture capitalist in early stage, we'd always counted on the big companies to get stodgy and slow and for their growth rates to slowly fade, and then we'd laugh about them and take share. If that's not happening, that could be an alarm bell.

Why don't you tell people what RLHF is?

Why do you think the tech companies prior, IBM, HP, DEC, whoever, Sun, why didn't they recognize increasing returns? Is it just awareness of increasing returns happening?

As you look forward to the year ahead, what trends do you think are most important to the public markets, and what's on your worry list?

Are you personally on the side that Google is more threatened by AI or more helped?

To your point about big companies being slow, I mean, they bought DeepMind in 2010. We were investors when they invested. DeepMind squandered their lead. They had a seven or eight year lead over everybody else and just blew it. So I'm no AI expert, but the experts I read would argue that had Google patented the attention window that's in the 'Attention is All You Need' paper, these other companies wouldn't exist. You can't have OpenAI without the attention window. 'Attention is All You Need.' They also had a philosophy of trying to protect trade secrets. They published that paper, but they weren't publishing a lot at that time, and I don't think they knew what they had at the time. That's the issue. The human brain. 'Attention is All You Need.' You can't pay attention, you can't win.

All right, let's shift to the private market. The private markets are always in flux, and I think the thing people want to talk about most is what's in flux. There are changes that come about systematically and changes that come about cyclically.

Fair enough. On the systematic side, since I entered venture, it's always gotten more competitive. In fact, I was earlier today listening to Osman talk to Doug Leone, and he said it went from being this bespoke craft business to a Main Street retail business. It's just way more competitive. There's more money, there's more players, you can get a check from anyone. I don't see that changing. If anything, this AI thing just proves the point. Cyclically, I think we're in a very unique position. I think it's different than '99 and '09. The key difference is these companies raised so much money in the 2020 to 2022 phase that many of them were sitting on three years of cash when the correction happened. Many of them did layoffs pretty quickly, which is kind of interesting because there's systematic learning from the past. So some of these things are just coming to bear right now. It's just a very delayed response. The other problem is in 2020 to 2022, every single data point you would get as a founder and a venture capitalist board member from Wall Street said growth at all cost, doesn't matter what, just grow as fast as you can. The only thing I would just say is I know for sure that Antonio and I many times in 2021 cut burn, said cut burn. No, I'm talking about the markets at large are suggesting that this is the best behavior. If you're in a head-to-head competition with another company where money matters, you could choose to be pragmatic and lose. So you have this game. I always call it the game on the field problem. When you move this dramatically to this new world order, and the new world order not only wants profitability but you have massive multiple compression, it's just very difficult for these companies. The cultural shift you need to go from burning a lot to burning nothing, and then just to stay motivated when you used to think all companies trade at 20 or 30 times revenue, and now you look at the pieces and somebody's coming in and telling you that's probably worth two or three times revenue, it's catastrophic. That's another delay factor. It just takes the founder two or three years to get in touch with that reality, to finally believe it in their brain. It makes these correction cycles so difficult. I wish the venture industry wasn't cyclical. I had this lunch once with Howard Marks. He said, 'Explain the business to me.' I spent 20, 30 minutes with a bunch of graphs and stuff. He goes, 'Oh, that business is horrible.' I'm like, 'Why?' He goes, 'Well, I can play every cycle. I have a strategy for all cycles. This thing's always going to boom and bust.' I find that people take risk on very slowly, the boiled frog component, and risk off is immediate. So I think of it more as a sawtooth than a sine wave.

Yes. So I was going to answer this question a little bit like Bill, but structurally what's happening with our firm is, and I'm going to blame you, Gavin, so that the crossover, the mutual funds and the crossover hedge funds, destroyed the pricing in the venture market. Here's why. There's a bunch of hedge fund people. I'm going to be very controversial. If you're a hedge fund manager running a crossover hedge fund or a mutual fund manager, you can put a private company in your portfolio and it marks maybe once a quarter, maybe once a year. No matter what happens, even if its returns are not accretive to your portfolio, your return, your Sharpe ratio improves, and therefore you get paid more money. This is a joke. Please stop allowing them to do this. It's literally destroying the pricing in the private markets and it's creating the irrationality Bill's talking about. However, if you have a hedge fund that is putting, I'll call it the spray and pray method of let me be in every deal because I've hired a fancy consulting firm. I'll never forget the conversation with somebody with a client when they were, just give order of magnitude, I have about 100 people working in private markets, a third in infrastructure, a third in operations, and a third in investments. So I can today, sitting here today, we have four teams deployed in the field, maybe five. I've got one at Neuralink doing quality, I've got one at K Health, I've got people all over the globe working on our companies to drive value and help your company succeed. We want to make with our operations. The reality is I'm sitting in a meeting and the client is asking questions to two different managers. I won't name the manager, and the manager says, 'Listen, I can outsource my due diligence and operations to these fancy consultants that I pay like $400 million a year to.' I said, 'Well, listen, man, I get it. I guess we're just not that smart. I guess I should actually work at McKinsey or Bain because I can't figure out how to outsource them. It's hard. This is hard work and it's not outsourcable. You have to do it yourself, or people won't go do it.' The reality is that it doesn't work. It just doesn't work. The reason you're seeing these giant booms and busts, I have news for you, is because it actually doesn't work. So please stop doing it. Gavin doesn't do it. He underwrites for principles. But if you look at a hedge fund, ask the question: are these guys actually doing the work, underwriting this investment, understanding the cash flow? It works for somebody if you can get 2 and 20 on $100 million and you don't go on the board. They all have fancy houses down here in Florida for sure, do no work, don't show up, don't do anything. I guess I'm the idiot. Exactly. So that's point one. Structurally, the business has changed. No matter if we like it or not, returns are coming down, so we have to find a way to add more value. That's the answer. But I will say this: it's also the most interesting time in my career. I've been doing this for 25ish years, maybe 30. I actually bought my first stock, Apple Computer, at the age of 13, so I've been looking at technology for a long time. That's a long time ago, by the way. What I'm seeing today, today's calls. I had a call with a company doing artificial intelligence applied to biology that was making a computer that had DNA that could compute, so it could actually go in, measure the gradient of a cell, tell you if the cell was cancerous or not, and then send the bat signal out to the immune system to kill the cell. Unbelievably mind-blowing. Quantum computing company, we're debating what today, photonics versus chip, what kind of photonics. This stuff is mind-blowing. Way past the internet. The internet was, I mean really, in terms of productivity improvement in the economy and how we're going to live in 10 years, what we're seeing today is revolutionary relative to the internet. So be optimistic. The returns might not be good for some managers, but in terms of our lives, it's going to be great. So it's a great time. The structural changes are great. Cyclically, listen, when you have no free money, free money people do crazy things, and we try to avoid that by keeping our disciplines.

As a category, for sure. With this caveat, let me tell you where the bubble is. Our view, I'll speak for Gavin, I think he agrees with us, is we are investing in AI companies that are what we call verticalized. So they have a very specific data mode that's protectable, and therefore they can create a moat that's protectable, often with a hardware integration. The LLM business, OpenAI at a $9 billion valuation, that makes no sense to us because what Gavin said earlier is true: the returns to this business are coming from capital allocation in giant data centers. So that's it. That's the only advantage you have. How big is your data center? How fast is your data center? How many chips, how many GPUs will Nvidia give you? That's it. The models are free, they're open in the world. The data is free, it's open in the world. You need reinforcement learning as Gavin said. If you have enough money, you can do that. Those are all things that can be bought by giant companies, which is why these companies are doing so well relative to the small companies. I think those moats don't survive.

Three years ago. The other thing, go deeper on that, Gavin. Obviously Nvidia has been the most obvious big winner in this picks and shovels, which is a metaphor people love to use, but what other areas?

Harvard, really? Sorry, come on, brother. I think all these firms are being assaulted. Every halo can fall.

And Gavin's right. This is the key problem: how to make infrastructure go faster behind the data center.

Do you see any public winners that take advantage of that?

So going to AI, which I knew we'd already go to, so that's fine. If the standalone LLMs are fast depreciating, commoditized, whatever, who do your vertical successful vertical players end up buying? Are they buying it by the drink, by the hose? Are they running models internally? Where are they getting their LLM type tooling in the long run?

Well, the vertical self-worth investing in, an example is Zipline. They have more autonomous flying miles than any company on Earth because they went to Africa, built a system to deliver blood and drugs in five countries, including Rwanda. They power the entire Rwanda health system. It's extraordinary. They lowered the maternal mortality rate at the edge of their health system by 88% because they deliver a package of blood and drugs to a woman who's had a baby and she's bleeding out. They can coagulate the bleeding and then give her some plasma. They earned those miles and all that autonomy. They came back to the US, the first autonomous system approved in the US to deliver packages. Now they're building another platform, a drone that will be more of a quadcopter, but that is full autonomy built custom by them in Africa. They've got millions and millions of miles. That's a custom data set. K Health, a custom data set. There's a spectrum of this that is fully custom and almost impossible to replicate. Google's trying with Wing, but almost impossible to replicate. All the way to 'I train on the internet and get some humans to do reinforcement learning.' That's the spectrum. We're trying to be on this side of the spectrum, and we have a bunch of companies doing this.

I'm not saying he's right, but I can see the caution. Question from the board. Can ask Peter Thiel, he's coming on next. Gavin, you know this, I have a bit of a pet peeve about an issue that relates to this. I don't disagree with you about how this is going to play out. Does that mean you agree? No, yes, I agree with you. Get rid of the double negative. So I agree with you about how this is going to play out. But some of the players that are running these standalone models, these companies, have organized politically in a way that the only other human that's organized this way early that I've seen was SBF actually. They have like three different super PACs. Politico wrote an article. They're literally trying to talk legislators into doing things that would either restrict open source, and some of them have said specifically out loud you should make open source AI illegal.

I so profoundly think, I mean, it's obviously unethical. And as a human being, what we want most is a multipolar world where there's lots of AIs, where we have our own AI. One reason it's easy to see why AI is different from the internet is the closer you are to AI, the more worried you are about it. It has an extinction level risk for humanity. Nobody thought the internet might lead to the extinction of humanity. There are all sorts of people like Yann LeCun who runs Facebook's lab who says this is ridiculous, but there are a lot of people who are deeply knowledgeable, including Geoffrey Hinton who invented deep learning, was basically the chairman of AI at Google, and left Google because he is so worried about the extinction risk. So what we want to mitigate that risk as human beings is a multipolar world where we have many AIs. The most dangerous world for human beings is one where there's only two or three. So if you were worried about AI safety, we should have, there are racing dynamics, we're going fast, we're not slowing down, maybe we should have, but we're not. You should be in favor of open source. Let me add to this. The internet, I think in 2009, 2001, nobody thought the internet would enable political volatility and revolution and actually allow governments to constrain and manipulate their populations. We all thought it would be a tool of freedom. It wasn't. Be very careful here. This technology, not only is the regulatory capture you're describing unethical, it's un-American. It's anti-American. It's anti-freedom. Why? Because our chief competitors around the world are building the same models, and they're building them and weaponizing them as fast as they can. Trust me, this is happening. If we don't have the best technology in the world, we will not be safe. This technology is so powerful, it makes a nuclear weapon look like a small fry. I'm telling you, and Gavin's right about this, the closer you are to it, the more worried you are. If you want America to be safe and our allies around the world, we need to be competitive strategically. This requires us to have an open platform so we can develop the best models and the best training data and have the best technology. That's kept us safe in the entire post-war period. We should continue with that program.

Yes, of course. And I would add there could be one more motivating factor. On a generic text LLM, so different from the work that Zipline does on their own data center, OpenAI and whatever, just text, a machine that can talk to you. I think the parameter count has diminishing marginal returns, the attention window has diminishing marginal returns, and the data sets, there's no new data sets. Well, I think we are going to see a new data set. I spoke about this yesterday, but Yann LeCun observed that GPT-5 has been trained on the entirety of human content ever created, the entire internet, every book. But human beings, we have an IO problem, input output. Through vision, we take so much more information. An infant by the time it's 4 years old has taken in 100x more data than GPT-5. I actually think synthetic data is going to help scaling laws continue, but I think you're going to see video games be an incredibly useful place for training AI.

But please, before we run out of time, I would love just if you have a moment, Antonio, to talk about Elon. You've had a very special relationship with him. It goes way back. Talk about how you met, why you think that relationship is bidirectional and why it works so well. Maybe you only have three minutes.

Yeah. I first met Elon, invested in PayPal in like '99, 2000, so a long time ago. We've invested in many companies with him over the years, and I've gotten a chance to work with him. It's been in many ways career-defining for me because being near him, and probably true for you too, Gavin, I have this saying: you can only achieve the thing you conceive. It has moved the conception curve of the possible for us for sure, and for everyone probably here. The things that are possible: landing rockets, human brain interface, this is insane. What we have done and what we're good at is making stuff, the old economy things, making a factory run, making a process run, making a sales process run. So when a great engineer, a once-in-100-year engineer like that is building companies, guys like us who are the garbage men, the joke I make, you got to take the garbage out. We cannot be genius engineers, but the garbage got to be taken out, and we're good at that. What makes him special? I'll tell you a couple of moments I've seen. In 2018 in the factory at Tesla, I saw him at about 3:00 in the morning in the body shop. He sat down with the engineers. Our body shop wasn't working. He took about 30 welds out of the car by saying, 'We don't need this window, this one.' He was running the math in his head. We were going to run the cars inventory, the bodies. If we had been wrong, if he had been wrong, we'd have gone bankrupt. 'Nope, don't worry, run it, guys.' The simulation came back, it was right. It was like watching Michael Jordan play basketball times 10. We just had one of these at the Neuralink interface. There is a thing called Utah array, it's been around for a long time, a brain computer interface. It causes scarring in the brain because the mechanical interface, the electrodes, are too big. The thing Elon did there, this is uniquely him. He marshaled the engineers with his mind. They shrunk the mechanical interface to a size and made it flexible that would fit between the synapse, in the dead space in the synapse, so that it would not scar the brain. That's uniquely him. That's the one-in-100-year brain. His engineering mind, material science, mechanical engineering, software, that integration, I've never seen anything like it. It's exceptionally special. At the same time, he's a guy who is deeply compassionate, who cares about humanity and wants to do the right thing. All these things are true. Having all those things in one mind makes him very unique.

Awesome. Well, we are out of time. Thank you, gentlemen. Thank you, Bill. Thanks, everybody.